Crocs, Inc. (CROX) CEO Discusses Q2 2013 Results - Earnings Call Transcript

Jul.25.13 | About: Crocs, Inc. (CROX)

Crocs, Inc. (NASDAQ:CROX)

Q2 2013 Earnings Conference Call

July 24, 2013, 05:00 PM ET

Executives

William Kent - Senior Director of Investor Relations

John McCarvel - President, Chief Executive Officer, Director

Jeffrey Lasher - Chief Financial Officer, Senior Vice President - Finance, Principal Accounting Officer

Analysts

Erinn Murphy - Piper Jaffray

Jim Duffy - Stifel

Corinna Freedman - Wedbush Securities

Taposh Bari - Goldman Sachs

Scott Krasik - BB&T Capital Markets

Sam Poser - Sterne Agee

Steven Marotta - C.L. King & Associates

Operator

Welcome to the Crocs Second Quarter 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session instructions will be provided at that time. We ask that in the interest of time, participants limit themselves to one question each. I would like to remind everyone that this conference is being recorded.

It is my pleasure to turn the conference over to William Kent, Senior Director of Investor Relations. Mr. Kent, please go ahead.

William Kent

Thank you, Melanie, and thank you all for joining us for our second quarter 2013 earnings conference call. Participants from the company include John McCarvel, President and Chief Executive Officer; and Jeff Lasher, Senior Vice President and Chief Financial Officer.

Earlier this afternoon, we announced our second quarter 2013 financial results. A copy of the press release can be found on our website at crocs.com. We would like to remind everyone that some information provided in this call will be forward-looking, and accordingly are subject to the Safe Harbor provisions of the Federal Security Laws. These statements include, but are not limited to, statements regarding future revenue and earnings, backlog and future orders, prospects and product pipeline.

We caution you that these statements are subject to a number of risks and uncertainties described in the Risk Factors section of the company’s 2012 report on Form 10-K, filed on February 26, 2013 with the Securities and Exchange Commission. Accordingly, actual results could differ materially from those described on this call. Those listening to the call are advised to refer to Crocs Annual Report on Form 10-K as well as other documents filed with the SEC for additional discussion of these risk factors.

Crocs intends that all of its forward-looking statements in this call will be protected by the Safe Harbor provisions of the Securities and Exchange Act of 1934. Crocs is not obligated to update these forward-looking statements to reflect the impact of future events. The company may refer to certain non-GAAP metrics on this call, including adjusted net income. Explanation of these metrics can be found on the earnings release filed earlier today.

I will now turn the call over to John McCarvel.

John McCarvel

Thanks, Will. Thank you for joining us on our second quarter earnings call. With me today on the call is Jeff Lasher, Crocs’ Chief Financial Officer.

I’ll begin the call today with commentary on the second quarter followed by Jeff who will review the financial results for the second quarter and walk through our third quarter guidance. I’ll then add some additional insight to our ongoing business before we take questions.

Turning to the quarter, the second quarter turned out to be more challenging than we had anticipated during our last earnings call. While we are very pleased with the performance of our Asia-Pacific and European segments, we were impacted by lingering challenges in Japan and the overall performance of our Americas business.

Revenue for the second quarter was $364 million or 12.5% growth versus the second quarter 2012 on a constant currency basis. Our first half revenue growth for 2013 is in line with our plans and prior communications. Revenue for the quarter was near the middle of our revenue guidance and is the highest quarter in the history of the company.

I would like to share with you our perspective on the quarter and some of the decisions that we made and the thinking behind those decisions. In our second quarter guidance, we projected revenue at $360 million to $370 million and EPS at $0.60 to $0.63 per share. While revenue in the Americas and Japan were challenged by lower than anticipated at once business from our key wholesale partners, our direct-to-consumer business generally delivered strong growth through expansion and comp performance in the quarter. It is important to understand the impact of the one-time charges and external factors in the quarter versus our prior guidance.

Let me list three key items for you. First, the Brazil statutory tax audit was a $0.07 EPS charge. The additional FX expense, non-related to the yen, was also about $0.01 EPS charge. And then unfavorable tax rate which Jeff will go through later in the presentation, was a $0.02 EPS charge. Without these unanticipated factors, EPS from ongoing operation was 50% -- $0.50 per share.

Now, let’s walk briefly through the regions and channels to better understand what transpired as each market has different nuances and an impact to the business. Starting in the Americas, whether it had a significant impacts on the cadence of buying activity in the quarter and we experienced very different weather patterns from the second quarter of 2012.

Sell-through of products early in the quarter was slower than anticipated, but accelerated quickly in latter half of May and throughout June. Due to the late spring summer buying season, many of our wholesale partners did not place additional at-once order for delivery in the second and early third quarter. You can also see this impacting our backlog at the end of the second quarter.

Our retail business follow the similar patterns throughout the quarter. Slow sales early in the quarter due to the weather was reversed by a very strong sell-through in June. Retail comps for the quarter were a positive 1%.

We made a few key decisions later in the quarter to sell some products in the wholesale and retail channels with the higher level of promotional discount than we would have normally, inventory that had been purchased to support a higher level of one’s business in wholesale in the quarter was sold at a discount later in the quarter through both our wholesale and direct-to-consumer channels in the Americas and Europe.

It was our decision to reduce inventory and not carry over products to the back half of 2013 and the spring summer of 2014. Our balance sheet reflects stronger liquidity, lower inventory levels, which resulted in a very healthy inventory returns of 3.8 on an annualized basis.

Our key new product introductions in spring-summer 2013 have done very well while satisfying our core Crocs loyalists, our new products to bring new consumers to the brand. Innovative, fun, comfortable and new models are connecting with consumers. Sell through at our major wholesale partners have been strong through the quarter, resulting in lower inventory levels at many major partners, at one point in the quarter, 23 of the top 100 footwears sold on Amazon were Crocs.

In Europe, our business continues to grow in strength and in all three channels in a generally difficult economic and retail environment. Our wholesale business is up 2%, retail increased 96% driven by new store openings and a positive 1% retail comp and e-commerce is up 5% all on a constant currency basis.

We are transforming our European business from being primarily wholesale and clog oriented to better balance of wholesale and direct-to-consumer business offering wider portfolio of lifestyle products. New product now make up 19% of revenue in Europe, up significantly from prior years and quarters.

New retail stores in a larger retail presence is achieving our long term objective of connecting European consumers to the broad lifestyle portfolio of Crocs products. In Japan, the consumer market remains challenged at a macro level and we see the impact on our business too. However, the brand remains strong in the Japanese market. New product introductions have done extremely well. Notwithstanding the macro market pressures, our distribution partners remain bullish on the brand and have continued to build new partner stores in various parts of the country.

Our wholesale business was down 3%, but retail was up 14% and e-commerce up 1% on a constant currency basis. Retail growth was driven primarily by new store openings and comps were a negative 19% for the quarter.

Lastly, our Asia-Pacific region continues to show strong growth. The strength of our casual lifestyle footwear brand can clearly be seen in this market. Consumers look for us to deliver fun, colorful, innovative products and our spring-summer line for 2013 has done extremely well. New products account for over 50% of the revenue in the quarter. Wholesale growth is up 22%, retail up 15%, on the back of a 6% improvement in comp store sales, and e-commerce about 50%.

E-commerce business in the region is small, but after a significant long term potential growth as it includes China, Korea and Taiwan all markets where e-commerce is emerging and growing at a rapid rate.

With that, I’ll now turn the call over to Jeff.

Jeffrey Lasher

Thank you, John. Hello, everyone, and thanks again for joining us. What I’d like to do, first is to go through the factors that impacted our second quarter results compared to our prior guidance. I’ll then provide additional detail on the second quarter and our guidance for Q3.

In the second quarter, we had various challenges that impacted our results that we did not expect when we had the Q1 call guidance. These include non-recurring expenses and impact of lower margins from three identified areas and higher than anticipated tax rate. Separately, and included in guidance, we continue to be impacted by unfavorable foreign exchange rates, macroeconomic forces most notably in Japan, and our ongoing expenses associated with SAP and marketing investment.

As you saw in our release earlier this afternoon, we recorded a non-recurring charge of $6.1 million related to a resolution of the statutory tax audit in Brazil during the second quarter. In addition, our actual Q2 tax rate was 29% versus guidance of 21%. The Brazil expense was non-deductible and our operating profit shifted not provide any reduction in global tax expense. Combined these increased rates as a percent of pre-tax profit.

Now we expect our full year effective tax rate to be 22% to 25% after adjustments for the above mentioned Brazil issue. This is higher than previous levels as our operating income in Japan has declined in our mix of international profitability has shifted from low effective tax rate jurisdiction.

Together, these two items reduced EPS by $0.09 per share in the quarter. The remainder of the EPS shortfall versus our guidance for the second quarter was primarily the result of lower gross margin as we ended the quarter with gross margins of 55.2% compared to 59.3%.

From a high level, margins were down due to several factors with mostly balance waiting. One, we were more promotional in the Americas than in Europe in response to softer sales trends primarily due to challenging weather. Two, revenue in our high-margin Japan business was lower than expected, notably in the retail channel, which has high profit margins. Three, we saw U.S. dollar strength in some additional foreign market, outside of Japan, impacting our margins in the second quarter.

Next, on a year-over-year basis, we were impacted by planned additional marketing expenses, SAP investments, unfavorable Japan foreign exchange rates and other macro forces. Specifically, with the yen declining 18% versus the U.S. dollar in the quarter, year-over-year reported revenue was reduced by 2%. This had an approximately 150 basis point impact on our overall gross margin and similar impact on our operating margin as a company.

Overall, with the lower translation of our Japan yen-denominated operating income and ongoing lower purchasing power of the yen relative to dollar, we saw a year-over-year decline in consolidated net income of $5 million or $0.06 per share. In addition, the macro forces impacted at-once orders in same-store sales, which declined 19.5% for the quarter.

Also on a year-over-year basis, our global SG&A expenses increased $26 million or 21% to $150 million. This consisted of $72 million in indirect expenses, it’s inclusive of increase year-over-year marketing expense of $3 million and $2 million for our SAP project.

Direct SG&A expenses totaled $71 million. Our retail channel SG&A was up $12 million, as our store count increased from 484 locations in 2012 to 575 locations in 2013. Including those items in the non-recurring Brazil expense, total SG&A expense was up approximately 3% for the quarter.

Other notable items for the quarter, revenue increased $33 million, up 12.5% on a constant currency basis from Q2, 2012, driven by increased sales volume as units increase 16% to $16.3 million. This was partially offset by a 4% or $0.81 decline in ASP, which was $21.65 in the second quarter of this year.

Clog represented 44% of unit sales in the quarter down from 46% last year, while non-clog ledges, loafers in women’s casual shoes increased as a percent of overall unit sale. Overall, our retail revenue increased 18% over 2012 level as we added 91 net new locations since the end of last year’s second quarter. Global retail same store sales increased 1% over last year with Americas up 2%, Asia-Pacific up 8%, Europe was up 1%, and Japan was down 19.5%. Our global outlet stores had a same store sales increase of 16%.

In summary, for the second quarter, while we had various challenges that impacted our results that we did not expect, when we had the Q1 call. The fundamentals of the business remained as strong as the balance of the revenue around the globe and the strengthening retail performance outside of Japan solidify our long-term sustainable growth expectations for revenue.

Our healthy balance sheet continues to be a source of notable strength. We had global cash reserves $289 million with limited debt, and believe that we will continue to grow cash balances from operations. In addition, we lowered our inventory to $161 million. This lower inventory positions us to run our supply chain more efficiently in coming quarters.

Moving on to Q3 guidance. In the third quarter, we expect revenue of $300 million to $310 million and EPS of $0.20 to $0.23 per share. This includes slightly positive comp growth in the quarter. We expect gross margins in Q3 to be consistent with prior year, as discounting in Q2 was primarily the result of late spring in weather conditions.

We plan to open approximately 25 more retail stores globally by the end of the quarter and in the year with 600 company-owned location. Backlog at the end of second quarter is down 7% from June 30, 2012. Total backlog as of June 30 is $161 million, down $11.6 million from 2012. However, on a constant currency basis, backlog is down approximately 3%.

Our third quarter outlook takes into consideration the late spring in North America, currency headwinds from the yen and European macroeconomic issues. In the third quarter, we expect revenue of $300 million to $310 million, and EPS of $0.20 to $0.23 per share. This includes an assumption of 2% comp growth in third quarter. Currency expectations are now ¥100 for the yen and $1.30 for the euro.

Thanks. I will now turn the call over to John for some closing comments before taking questions.

John McCarvel

Thanks, Jeff. I would like to summarize for you again our overview of the business. First, Crocs is a global brand with 66% of our revenue outside of the United States and this continues to provide us with the diverse revenue base and long term growth potential. From a Crocs perspective, what we see going forward is an improving Europe, a stabilizing Japan, a growing in strong Asia, and an opportunity for us to improve our going forward business in the Americas. Secondly, while gross margins are down in the second quarter from historic levels, this due to management decisions taken to be more promotional and aggressive in reducing inventory in selective markets. And as Jeff said earlier in our guidance, our gross margins for the third quarter of 2013 will be consistent with Q3 of 2012.

Third management remains committed to aggressively managing SG&A cost as it has in the past both direct and indirect. And fourth we expect to grow in the continued second half of 2013, but at a slightly lower level due to the at-once levels of business in the Americas and Europe wholesale in the third quarter.

With that we would like to turn the call back over to the operator, and we will take our first call now.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). We will go first to Erinn Murphy with Piper Jaffray.

Erinn Murphy -- Piper Jaffray

Great. Thank you and good afternoon. I appreciate the context around the second quarter and some of the (inaudible) parts. John, I was hoping you could spend just a little bit more time on really the pattern of sales from the beginning of the quarter to the end of the quarter. You did kind of indicate the improvement, but what would be interesting is that you could speak a little bit more about any regional callouts if there was more improvement maybe in Europe you’re kind of closing remarks talked about your perspective on Europe starting to get a little bit better, just kind of helping us understand really the cadence as we progressed throughout that quarter.

Jeffrey Lasher

When we look at both the Americas and European cadence throughout the quarter, first on weather patterns were very similar where we had cold March and April, that really led to slower consumption both at the wholesale level and at our own retail level that continued on into the first half really of May, so looking at less than the historic sell through with our wholesale accounts and within our own retail operation. It was really in the late part of May after the Memorial Day weekend that we made the decision to move to a little bit more aggressive BOGO program, a promotional program in two specific markets, in Europe in our retail stores and in the United States.

In both markets we saw double-digit comp performance during the month of June, whether it’s down specifically due to the promotional nature of the business or whether it was that the sun came out starting Memorial Day weekend and started to improve in many parts of the U.S. It’s hard for us to discern what portion of the growth or comp performance comes from those two elements. But promotional activities specifically geared towards the U.S and the European markets. We don’t see promotional activity, very little promotional activity throughout Japan and our Asian markets, hence stronger margins and significant comp performance. As I said, Asia up 6% on the back of over 50% new product introduction sales in our retail stores.

Erinn Murphy -- Piper Jaffray

That’s really helpful, John. I guess just maybe thinking about Japan as well then throughout the quarter, I mean the comp fairly weak on top of the weak comp last year, I think (inaudible) probably a little bit better for a lot of retailers, but clearly the market still not very strong overall right now. Could you just talk a little bit about kind of how you feel like you are performing in the context of that market? And then secondly just, if you think about the evolution in Japan being much more of your established or much more of an established market kind of the channel, if there is any channel conflict between both retail and wholesale as we think about that as we head into the back half of the year?

John McCarvel

So I think for the Japanese market, difficulty for them also kind of exists through that early golden week period in early May where weather was not good again there, shopping, consumer behavior was restrained clearly what we saw also through the last part of May and then in through June on a much more even comp store sales basis. When we look at the impact of the yen on the business, and Jeff can kind of share his views on the impact that that has, and he mentioned some of this in his commentary earlier, it on a yen-to-yen basis is fairly flat quarter-over-quarter. And so we still see good demand for the products traffic has remained strong throughout the second quarter, but a better conversion in the June timeframe.

We think based on what we have seen through the June period and into July, gives us confidence both in the sell through with our key wholesale accounts there, as well as what we’re seeing within our own retail accounts. It appears that that market is solidifying, it’s getting to a point where we think we have some confidence in the back half of the year that that’s going to continue to trend in a more positive way, to more positive being that it’s not going to negative comp as the past. If you do remember last year in the third and fourth quarter in Japan, we did start to see a slowdown from our standpoint in the consumer behavior to buy products.

I feel that during a – I also wanted to just remind you that, that business even at its impacted levels still remains one of the most profitable parts of Crocs today even with a yen depreciation that we’ve seen an even with a little bit slower retail market.

Erinn Murphy -- Piper Jaffray

Okay. And then just last question. On the product line perspective, you’re obviously in a much linear position from an inventory perspective getting into the back-to-school season, but there’s also a lot of new innovation heading this fall and its actually been hitting over the last four weeks. You’ve got the busy day collection at Retro sneaker, can you just give us an assessment on how any kind of early reason how these are tracking, how they were received in the wholesale community as well? That’s just an obviously you’ve got them in your retail stores are coming there now. So just kind of help us frame up some of the product innovation that you guys are excited for the back-to-school season?

Jeffrey Lasher

From the first half of the year, I mean I think A-Leigh, the Retro, Huarache came a little bit later in the quarter and Molded Boat, all did extremely well and hopefully what we want is our wholesale partners who have done quite well with all those products have sold through. Many of our top U.S. wholesale partners are less than 12 weeks worth of inventory. Some of our key partners are at four, five weeks worth of inventory at this point in time. They’ve sold through. They did not reorder. We’re hoping that that’s going add confidence in sales of our spring-summer products we’ll carry over, which is too early for us to give you a read at this point in time as products are just slowing, most of our products are slowing to wholesale starting now in early July. This is a little bit early for us to give you read. New products that we have hit our retail stores continuing to do well, but we are early in the third quarter to get that kind of read. We don’t have a lot of product that goes to retail anyway wholesale for back-to-school. That’s not a strong period of time for us. And so it’s a smaller part of our overall revenue plan.

Operator

We’ll go next to Jim Duffy with Stifel.

Jim Duffy -- Stifel

Thanks. Hello. Question on the backlog. Can you speak to the composition of the backlog, maybe the split between quarters for expected shipments, and also the split between seasons? To what expect – I’m sorry. To what extent does the year-to-year decline reflect perhaps cautious orders for next spring season?

Jeffrey Lasher

Well, I think first it’s important to note that our fall holiday pre-book is not down on a year-over-year basis, it’s basically flat on year-over-year basis. What we’re really seeing in the backlog going into Q3 is lower spring-summer 2013 backlog going into the second half of the year, and that’s really been the decrease, as we saw weather-related patterns that didn’t materialize into at-once demand during the summer.

William Kent

I think given the thing that we would normally see through the years of experience here is that we would see more sales of our products in the March, April, May timeframe. We would see more wholesale customers placing orders in May and June for delivery, June, July and early August. And that impacted as we talked about on the call today, our at once business, especially in the United States and to a lesser extent from a dollar impact standpoint, Europe. But then that carries over into our backlog for the third quarter revenue, which is why we’ve taken guidance down. We think the impact year-over-year looks to be about $10 million of Q2 orders that would be shippable normally to a wholesale account in the first half of the third quarter, which didn’t materialize. It was just the backlog remains fairly consistent year-over-year for fall winter products.

We have not started to book any spring-summer 14 products yet. Booking deadlines come later in the third quarter. And Jeff can give you the split between Q3 and Q4 backlog at total of the 171.

Jeffrey Lasher

Yeah, 114 is our Q3, and the balance would be in subsequent quarters. So 114

Jim Duffy -- Stifel

So, but John, a year ago had you started to book orders for spring 2013?

William Kent

No.

Jim Duffy -- Stifel

There’s some of that that’s in the compare.

John McCarvel

No, normally our booking date, we don’t book anything for 6/15 day per delivery in 2014. So our first real booking dates are 8/15 and 9/15 in the quarter. So, no we don’t, we’re comparing an apples-to-apples situation. We don’t have spring-summer products for either year in, in June 30 backlog.

Jim Duffy -- Stifel

Got you. Okay. And then based on conversations with retailers, do you have a sense that they’ll be conservative in booking for spring next year, and perhaps given the challenging spring this year, if you want to take receipts later?

William Kent

Hard for us to tell. I think what the wholesale thinking will be, Jim, early on in 2013, a number the major wholesale partners that we have, and especially in the mid-tier family channel, were actually looking at, because of the lack of fall winter season for almost two years running, they started to come to us and talk about maybe taking some of the spring-summer 2014 products in the fourth quarter, products that they would sell all the way through.

And I think because of the late winter period that we had, we have seen them go back and rethink that a little bit trying to look at what they think the weather patterns are going to be going into 2014, like 2013 and into 2014. So we haven’t seen many of them come forth with any kind of merchandising plan that would roll out spring summer products in their southern stores or warmer weather locations in the fourth quarter of this year. So I think from our standpoint, many of them did take products earlier this year.

So we did see a little bit of that shift into the first quarter as we talked about on the last call, where pre-bookings were a little bit higher with February-March delivery. I don’t know enough to tell you. That now maybe, as we go through the bookings season, we’ll get better indication from our key wholesalers in the U.S. and globally.

Jim Duffy -- Stifel

Okay. Sounds good. And then, you talked about incremental marketing spend planned for this year. Do you continue to plan to spend the total of that, and related I’m just wondering given the difficulty of predicting the business if you are confident you’ve been sufficiently conservative with the outlook for the third quarter?

William Kent

I think you followed stock for a long time – number of people and followed this for a long time. We’ve committed to managing the SG&A business according to the level of the business that we (inaudible). Jeff and the finance group have been working with the rest of the executive team, both at a corporate level and a regional level to manage down expenses in the back half of the year.

Yes, we will take down some of the anticipated marketing spend, additional marketing spend that we had in the plan where we can and where we think it’s prudent to do so, but as you know a lot of times your pre-booking, out launches the products we’re pre-committing to advertising programs and marketing programs that are timed to promotional calendars, both internally and with our wholesale, key wholesale customers.

And so, we’re not in a position to take a step back from that. So yes, you will see SG&A management in the back half of the year, you will see some reduction to marketing expense.

Jim Duffy -- Stifel

Okay. Thank you.

Operator

We’ll go next to Corinna Freedman with Wedbush Securities.

Corinna Freedman -- Wedbush Securities

Hi there. I wonder if you could quantify or clarify your comments about the outlet stores, I think you said they comp up 16% or maybe I misheard that?

William Kent

Okay. Can you expand, maybe Corinna, just a little bit on the question? So I think Jeff’s comment...

Corinna Freedman -- Wedbush Securities

The comps, the comps at your outlet stores?

William Kent

Right. So Jeff’s comment in his section of commentary was that when we look at different segments of our retail channel, what we saw was strength in the outlet channels. We’re developing an outlet strategy and fleet of stores in Europe. We have a fairly significant outlook presence here in the United States. And what we have seen in this is that our consumers who continue to be challenged by employment issues, both in Europe and in the United States, when you look at the payroll taxes, you look at all the factors that we’ve all talked about the macroeconomic conditions, we still see the strength in consumers looking for shopping a brand.

The people are constantly looking for a good deal, looking for products that are reasonably priced. And what we see in our outlet stores is that we felt older models are still core products, like Crocs, at a fairly significant rate. And when we offered the promotional programs that we did in June and into this first part of July, we see that really resonating with our consumers. These are people that make $65,000 to $75,000 per year as the household income, and they’re looking for value today.

Outlet stores are placed for them find value as well as through our e-tailer, which as I said in my part of the presentation, was a pretty significant accomplishment. We feel that 23 of the top 100 selling stalls in Amazon where Crocs products at one point of time in early June.

Jeffrey Lasher

I think the other key think to add, Corinna, is that we are looking at outlet stores as the green-space opportunity for the company. If you look at our outlet openings in the quarter, on a year-over-year basis we have opened 34 net new locations. So out of our 90 total locations, 34 of those were outlets and that’s the segment that continues to perform well. And we did call out comp for outlets in the first quarter as well, because it outpace the overall average as well.

Corinna Freedman -- Wedbush Securities

Okay. And then if you could give us a timing on the SAP testing and implementation and just layout, when those initiatives are going to occur this year?

Jeffrey Lasher

I don’t – we don’t see anything in 2013, Corinna, relative to SAP. That will continue on into the early part of 2014 with an estimated go live somewhere about the middle of the year at this point.

Corinna Freedman -- Wedbush Securities

Okay. That’s all I had. Thank you.

Operator

We’ll go next to Taposh Bari with Goldman Sachs.

Taposh Bari -- Goldman Sachs

Hey. Good afternoon. I wanted to focus on SG&A. So I could appreciate the weather volatility. But SG&A, I would imagine, given the fact that you are actually your sales plan, is something that I think you guys could control. So I think originally, Jeff, either last quarter or the quarter before you had SG&A being flat as a percentage of sales. Year-to-date, it looks like SG&A is de-levering about 200 basis points.

And then as we look at our third quarter guidance, you’re saying 305 midpoint on sales, flat gross margins. So in order for me to get anywhere near your guidance, I have to put in about 500 basis point of deleverage on SG&A. So that actually gets worse. Can you just walk us through why SG&A is de-levering 200 basis points year-to-date and why the third quarter guidance calls for that number to get worse?

Jeffrey Lasher

Yeah. Like I said, to put on the prepared remarks, we saw in the quarter about $3 million increase associated with marketing, $2 million out of SAP on a year-over-year basis. Our retail channel expenditure was up about 20%, with a similar rate of growth in our store count. So our SG&A expense continues to go up in correlation with our retail store count. And that was up $12 million in the quarter and included in our SG&A expense is the $6 million for Brazil associated with the resolution of the sales ex-audit there.

So when you look at it and you strip away those issues, our SG&A from kind of a core controllable SG&A was up 3%. So when you look out into the future quarters, the year-over-year increase in SG&A for the direct channel is going to be in correlation with the overall revenue growth associated with the additional retail stores. And our overall growth in indirect SG&A for Q3 is still around about the rate of overall revenue growth, if not a little bit lower in our internal models for 2013.

Taposh Bari -- Goldman Sachs

Okay. And then maybe I mis-asked the question, I mean was the original guidance for SG&A could be flat this year or was that, did I mishear that?

William Kent

Well, we never said that our SG&A was going to be flat this year. We said that our direct channel SG&A would grow in correlation with our revenue and our retail store count. We said that our indirect store or indirect SG&A or kind of a overhead SG&A would grow around about half the rate of overall revenue growth. But we were going to make an investment in SAP to the tune of about $1.5 million to $2 million per quarter. And we were going to make an investment into marketing for the year. Those are specific callout that we made back in February of this year.

Taposh Bari -- Goldman Sachs

Okay. I wanted to ask a questions just about the relationship between backlog and wholesale growth. So if we went back to the last quarter, your backlog was up 1%. Historically, there has been a relatively comparable pretty tight correlation between backlog and future quarter wholesale growth. But this past quarter, if you look at backlog, goes up 1%, yet this quarter whole revenues were up 7%. Yet you’re saying at-once actually missed your expectations. Could you just walk us through that dynamics, what’s happening there?

William Kent

So on the quarter, first that you have to look at the impact of the Asian business on the strength of wholesale in the Asian market and in the quarter I think to get a perspective as far as what happened relative to wholesale growth. In the third quarter, we, as Jeff walked through the numbers, see a – we have taken down the expectation for at-once revenue during the quarter. Today, I think if you look at this, we expect still about 20%, 25% of our revenue for the quarter still to come from at-once orders in all markets, which we’re comfortable with today, given the diversity of the brand globally.

So in the past, I think our at-once orders have been more significant percentage in dollar amount in Q3, Q2 and Q3. And I think right now we’re trying to understand exactly what our key wholesalers are going to do in the third quarter. So being conservative in what we think, we are going to expect to see from them.

Jeffrey Lasher

Yeah, I think finally, finally we thought, as we said earlier to Jim’s question, pre-books going into the quarter was $114 million for Q3 and historically our pre-book revenue as a percentage of total wholesale revenue for Q3 has been about 75%.

Taposh Bari -- Goldman Sachs

Okay. Thank you. And just one last question for you, John, kind of more theoretical, just wanted to get your thoughts on this. And Crocs, looking at Crocs on paper it’s – it seems very well it’s achieved stock, the return metrics are great, great margins, global brand. Yet quarters like this, there is this record of inconsistency in terms of just execution. So and I get that there are external factors at play. I was hoping you could perhaps give us some thought as to what you think contributes to this level of inconsistency just historically. And what the management team is doing to reduce that degree of volatility going forward?

William Kent

We’ve had many conversations over the last couple of years. When we look at quarterly guidance with the use of this company, the global diversification, I think if you are operating in one single market it’s really easy to be able to forecast and control the business. At the young age of this company and with the growth of the business, I think we, for a number of years, did not miss guidance on any quarter. In the last two years, we’ve seen quarters where we missed top line guidance by $5 million and bottom-line guidance not inclusive of one-time charges to be $0.02 to $0.03.

And I think that that’s kind of where we are at in the business. We try to be as conservative as we can when we go into our quarterly process in giving guidance to the Street. I think when we looked at their core, given the strength of new products, the enthusiasm that our wholesalers had and our own enthusiasm for the products and what the sell-through looks like once the sun came out, I think it’s really hard for us to have forecast the level of consumer and of conservativism in the first six to eight weeks of this quarter in two major markets.

We do try our best to be conservative when we going in and we give guidance for the quarter. So I know that this creates a huge amount of concern on Street and we continue to work with this to do our best to hit the numbers that we give from a guidance standpoint. I unfortunately just something that there is anything this quarter, given what happened weather wise that we could have forecast even when we gave guidance at the end of April.

Taposh Bari -- Goldman Sachs

Okay. Well, thank you, and good luck.

Operator

We’ll go next to Scott Krasik with BB&T Capital Markets.

Scott Krasik -- BB&T Capital Markets

Yeah. Thank you. Hi, everyone. Thanks for taking my question. So you talked about the global outlet comping up strongly and talked about the excellent results after you went through a BOGO event. And ASPs I think you said were down this quarter. Is there a chance that even though a big part of the strategy is to introduce higher priced product that may be this stuff is just a little bit too expensive to drive the volume you’re looking for?

Jeffrey Lasher

Scott, I think you have to look at it on a global basis, right. So that’s not what we see in markets like Japan and in markets like Asia. I think if you look at Asian comp at 6% in the second quarter based on last year, we comped up 5.2% in the quarter. And in some cases, we even sold the products at a higher level, higher price than we do even in the U.S. domestic marketplace.

Pricing isn’t an issue in those markets. If we look at European priced products where we’re at relative to the competition, where we’re at with comparable products, US$ denominated company like us and products like us, we don’t see that as to be a barrier. And so, we come back and we look at what the issues are as we said throughout the call today being heavily in an America-centric issue.

What our marketing data tells us what we see in the feedback that we get is when we’re in the price point between $25 and $60, $25 and $70, we still see consumers not having a problem with buying products with the Crocs logo on it, with Crocs brand of products, because they know the quality of the comfort that would come. When we get above that $60, $65, $70 dollar kind of price point, then we do see that to be an area from both our marketing standpoint and from a consumer standpoint that we don’t believe that right now the brand can take products up above that price point.

But, we don’t have many products to go above those costs today. And so, we don’t see ASP for the majority of the products we sell today to be the issue. Most of our men’s products run anywhere between $45 and $65 price points on a comparative basis. People are buying similar products anywhere from $70 to $90. And so, we don’t see pricing to be an issue in our core business.

Scott Krasik -- BB&T Capital Markets

Okay. And then in terms of just reporting the numbers going forward, is it possible, I think you’d talked previously about maybe putting out the quarters that show a breakout in Japan and Asia. Can we get that for Q3 and Q4 before you report the numbers if possible?

William Kent

Yes, it is possible.

Scott Krasik -- BB&T Capital Markets

Does that ever happen?

William Kent

Yes. We’ll get that to you.

Scott Krasik -- BB&T Capital Markets

Okay. Thank you.

Operator

We will go next to Sam Poser with Sterne Agee.

Sam Poser -- Sterne Agee

Thank you. Thank you for taking my call. I’ve got a few – I’ve got three things. Number one, what were you assuming the at-once business in Q2 and how, and what are you looking for at the back half, especially in the fourth quarter. And then secondly, you guided through 600 stores at the end of the year. Have you – and that’s less than the 90 store openings you planned on doing originally. So can you talk about that? And then I have one more thing.

William Kent

I’ll let Jeff take, Sam.

Jeff Lasher

Okay. So, for at-once orders which was your first question....

Sam Poser -- Sterne Agee

Right.

Jeff Lasher

We did assume in that one about a year-over-year increase globally and we did have some issues with at-once demand in the quarter. As we looked at the quarter unfolding especially in the later part of the quarter. We have not seen the at once (inaudible) that we expected and frankly when you look at the data coming out of the wholesale accounts where they have relatively low inventory level, we would have expected more aggressive ordering patterns from our wholesalers based on this information. The wholesalers are taking conservative positions and that gives us hope for Q3, but we have a very conservative approach to Q3 guidance and an assumption of at-once demand that’s relatively moderate for Q3.

William Kent

Yeah, normally I think we would be in the 30%, 35% range for at-once business for both Q2 and Q3. And what we have seen and what we are carrying over in backlog, we are forecasting 10%, 15% lower at-once business now for the quarter. And then your second question about retail stores. We are up 91 stores June 30, 2013 versus June 30, 2012. We opened stores in the second half of last year at a fairly healthy club especially over in Europe, when we opened stores in Q4. This year our plan is to open a very modest amount of second half stores, only 25 in Q3 and only a handful in Q4. So when we look at the year-end, we are looking at 600 versus a starting point of 537. So the year-over-year December 31 versus December 31 is where the 60 comes from.

Sam Poser -- Sterne Agee

Right. But I mean, but for the full year you said you are going to open like 90. So your number is going to be lower than the 90 at the end of the year? Your original plan, correct?

William Kent

Our estimate right now is that we’ll be at 600 stores.

Sam Poser -- Sterne Agee

And are you going to, and when you look ahead into next year, are you going to put that down or are you going to keep, are you going to work more to get your current stores working better rather than opening new stores in the general sense?

William Kent

I think you have to go region-by-region. I think if you look at the Asian business today, for example, we have 50 of our own stores in China. And our partners have 650 stores. So we will continue to add certain number of stores. And in the Asian market like that. We anticipate that our partners will add another 150 stores in China going into 2014. So today, when we look at our pipeline of stores for next year.

We still feel that we are in the same range, 75 to 90 stores with 25 to 30 stores in each geography. Most of our U.S. pipeline looks like outlet stores today in markets where we feel we need the presence. And you are going to still continue to see certain amount of growth in warmer weather locations and in France and Germany and Europe for next year. So I think you see a little bit slower, maybe growth in terms of stores in the pipeline. I think we are feeling with the retail systems in place – better retail systems in place now with the Oracle planning in place going in to spring-summer 2014.

We are in a better system standpoint on how we merchandise, allocate and manage our stores on a global basis. The organizational construct is better. We’ve added count throughout the world. We have a new head of Asian Retail now for six months who came from Levi Strauss from the region. We’ve done that in other parts of the business in our retail business, so. And we’re feeling people wise, systems wise, product wise second year is generally better. People weren’t too sure about we’re actually going into the season. People weren’t too sure about molded boat. People weren’t too sure about Ely . But second years are generally better for us, so we are maybe our of calls, but we’re eternally optimistic that we think that this is – we’ve got the right products in the right place at the right price point going into the next year.

Sam Poser -- Sterne Agee

And then last – okay. Lastly, I mean, to the other question about the guidance and the global brand, the young global brand with all the differences – and I mean, we’ve talked about this in the past. I mean there is guiding conservatively and guiding conservatively and guiding conservatively. Clearly, the eternal optimism seems to be overtaking, adding some too much optimism to your conservatism. So the question is, are you guiding the balance of this year, are you thinking about guidance for the balance of this year the same way you thought about at the beginning of the year?

Well, I’m saying the same way you thought you were guiding at the beginning of the year because, I mean beat and raise is, guide and beat is good, guide and miss is not, and I don’t – it’s very, very difficult to try to figure out, should we listen to your guidance or should we just cut it by 10%, 20% because despite how conservative you say you are, it’s very hard to figure out what’s going on. I mean are you taking, when you said you’re cutting your at-once expectations I guess down to – cutting it down by 10%, 15%, does that – is that enough, or should you be guiding your at-once expectations down 40% and then beat that?

That’s I mean – have you changed the way you’re thinking about the way you’re delivering the message here, because your business is – you’re running good increases and stuff like that but you’re setting a very high bar for yourself, and you’re not always jumping over.

William Kent

I think we are more conservative as each quarter goes on. I know maybe that doesn’t feel like down today. I think when we step back and we look at this business for the first half of the year revenue growth has met expectations, has met our expectations, has met street expectation. I think the unfortunate part of this and look, we’re not the only brain that suffers with seasonality of consumer behavior, when we didn’t have many winter seasons there for a couple years, brands that were heavily fall winter based.

They had to go through the same dynamic to move product to move inventory and to do the right thing for their business. And we felt this quarter, first quarter we’re very close, in line. Revenue was in line with the expectation. We had a choice to make whether we would kind of forego the promotional activity, take a chance on June being warmer and letting that come to fruition and we made the decision in this quarter that it was going to take a hit on profitability. You have to take out all those other one-time charges. And it is what -- the ham that we got doubt where we try to be conservative for the third and fourth quarter this year. We’re giving guidance for the third quarter, we feel is conservative based on what we see for at-once buying patterns for the third quarter. So we hear it loud and clear. We see it. We’re working really hard, meeting, beating and...

Sam Poser -- Sterne Agee

Hello.

William Kent

Did I get cut off?

Sam Poser -- Sterne Agee

I don’t know. You’ve cut off for a second there. But anyway, one -- I mean, let’s talk about SAP, and then I’ll get off and I’ll let everybody else ask questions. But I mean, SAP, almost every company we have seen that does SAP hiccups while the implementation. You said publicly that you think that you’ve got a simplified version on SAP, and when you put the switch, the lights are going to shine and it all be good.

Again, that may happen. But historically, we have seen even the biggest companies in the world, like Nike have significant problems as they’ve converted to SAP. So shouldn’t you guide to be to say, look, we hope that the lights shine but we’re going to, we’re going to temper that a lot. I mean, again regardless of how well you planned it, because it’s a difficult situation. I mean, again maybe the HP optimism just really needs to be tempered more than you are currently tempering it.

William Kent

I don’t think, Sam, that we’ve given any guidance towards 2014 at this point in time. What we think that impact could be or what it’s going to look like. What we have said is that where Nike did a lot of customization to the SAP solution that they implemented, we’re going with the straight APS solution with no customization to their, to their apparel footwear solution. That’s what we’ve said so far.

As far as impact of the business, of course you’re going to have some kind of impact of the business. What we’ve said is, it’s our goal to minimize this to do this judiciously. We’re not going to implement SAP until we’ve gone through proper testing globally to determine the impacts that it may have. And we can’t give you any more guidance than that at this time. We’re still somewhere (inaudible) 9 to 12 months away from implementation. So, we’ll continue to give you updates, but all we’ve said so far is that we’re not doing customization and we’re working plus with SAP to be as vanilla as possible.

Sam Poser -- Sterne Agee

Well, thank you. And good luck.

Operator

And we have time for one question. We’ll take our last question from Steve Marotta with C.L. King & Associates

Steven Marotta -- C.L. King & Associates

Good evening, everybody. You mentioned the delta in marketing spend in Q2 was $3 million. Can you offer that delta for Q3 and also remind us what aggregate spend is for this year versus last year’s marketing?

William Kent

Yeah. The $3 million was for Q3. We anticipate, as John said, the second half of the year will be up slightly in marketing costs. So when we look back on the full year, we’ll be up about 1.4 percentage point in revenue at the end of the year, which is about what we said at the beginning of the year for our incremental marketing spend.

Steven Marotta -- C.L. King & Associates

Okay. And lastly, you mentioned in the prepared remarks that you endeavored to clear inventory by the end of the quarter, the inventory levels on the balance sheet would imply that you did it, but I just want to verify that was entirely successful that you are happy with where the inventory is and that there is no material carryover from Q2 to Q3.

William Kent

No material carryover Q2 to Q3 Lot of what we did during the quarter was to notice- as I said in my remarks, a lot of what we had procured for at-once, a business that we thought would materialize in the quarter and we move through a significant number of all small numbers of styles that in our LA, D.C. warehouse.

So we took the number of SKUs in the LA, D.C. warehouse down about 8,000 SKUs. So we’re happy with the clean-up activity. It should be beneficial to the business going forward in terms of a supply chain management being more efficient and effective. We’ve made also significant improvement in the quality and level of inventory in Japan. We reduced the amount of warehousing and distribution cost in that marketplace also. So we feel good about the progress that we made during the quarter.

Steven Marotta -- C.L. King & Associates

Okay. Thank you.

John McCarvel

Operator

We would like to turn the call back over to you. And thank you to everyone for joining us on our second quarter earnings call today.

Operator

This does conclude today’s conference. We thank you for your participation.

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