Crocs, Inc.Q4 2009 Earnings Call Transcript

Feb.25.10 | About: Crocs, Inc. (CROX)

Crocs, Inc. (NASDAQ:CROX)

Q4 2009 Earnings Call

February 25, 2010 5:00 pm ET


Jennifer Almquist - IR

John Duerden - President & CEO

John McCarvel - COO, CEO

Russ Hammer - CFO


Reed Anderson - D.A. Davidson

Jeff Klinefelter - Piper Jaffray

Jim Duffy - Thomas Weisel Partners

Jim Chartier - Monness, Crespi and Hardt



Good afternoon, ladies and gentlemen, thank you for standing by. Welcome to the Crocs, Inc. Fiscal 2009 Fourth Quarter Earnings Call. At this time, all participants are in a listen- only mode. Following the presentation we’ll conduct a Question-and-Answer session. Instructions will be provided at that time for you to queue up for questions. I would like to remind everyone that this conference is being recorded. This call will end no later than 6 p.m. Eastern Time.

I will now like to hand the call over to Ms. Jennifer Almquist, Crocs' Director of Investor Relations.

Jennifer Almquist

Thank you. Good afternoon and thank you for tuning into our fourth quarter earnings conference call. On the call today with me are John Duerden, Crocs' President and Chief Executive Officer, John McCarvel, Crocs' Chief Operating Officer and newly designated Chief Executive Officer and Russ Hammer, Crocs' Chief Financial Officer.

Earlier this afternoon, Crocs announced its fourth quarter 2009 financial results. A copy of the press release can be found on the Company's website Reconciliations of the non-GAAP measures mentioned in the press release and on the call today have been provided and can be found on the Investor Relations section of the Crocs’ website and in this afternoon's press release.

Before we begin I would like to remind everyone that some of the information provided in this call will be forward looking and, accordingly, are subject to the safe harbor provisions of federal securities laws. These statements concern plans, beliefs, forecasts, guidance, projections, expectations and estimates for future operations. Crocs cautions you that these statements are subject to a number of risks and uncertainties described in the Risk Factors section of our 2009 Annual Report on Form 10-K, filed today with the Securities and Exchange Commission.

Accordingly, actual results could differ materially from those described on this call. Those listening to this 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 Exchange Act of 1934. Crocs is not obligated to updates its forward-looking statements to reflect the impact of future events.

I would now like to turn the call over to John Duerden, Chief Executive Officer of Crocs. Please go ahead, John.

John Duerden

Thank you, Jennifer and welcome everyone. I’m sure by now you’ve probably read the announcement that I’ll be retiring from the company and the John McCarvel the company’s Chief Operating Officer will be replacing me of CEO.

Many of you are already know John was being with the company through out its short history and has played key role in Crocs’ recovery over the past 18 months.

John and I worked closely together during the past year, as we have completed the critical first stage of this turnaround. I believe that John's experience and history in the company uniquely qualified him for this new appointment and provide the essential continuity to complete this next stage of the Company's development.

He also has the benefit for being somewhat younger than I am and is well equipped of leading a truly global enterprise. Congratulations John and good luck in your new appointment. Before handing it over to Russ and John, I’d like to briefly review the highlights of the last quarter and some of our 2009 accomplishments.

Now looking back, it’s hard to believe on the one hand, that I’ve already been here a year, on the other hand when I think about where the company has come from since that time it's hard to believe that only one year has passed.

The company is undergone and is still undergoing significant change. And some of the fruits of our labor have manifested themselves in our Q4 results. Let me cover some of the highlights.

Our Q4 revenue was up 8% from the fourth quarter year ago. Demonstrating I think continued strength of the brand despite a difficult economic environment and lingering legacy issues for the company at wholesale. I should add that we achieved this growth without making any significant new investments in marketing during the year.

The retail and internet channels worldwide were absolutely key in driving this growth and with these consumer direct channels growing at 24% this quarter compared to quarter four of the previous year. This is an outstanding achievement. Those channels will play a key role in our strategy going forward. And John will speak more to this in a minute.

SG&A costs as our percentage of revenue declined significantly even excluding foreign exchange and despite growing our retail operations during the year. We have continued to reduce our fixed cost infrastructure and we’ll continue to aim for industry best standards without compromising our ability to drive the top line and strengthen our brand identity.

Our liquidity is improved, working capital has increased by $34 million, our cash is up 50% since a year ago and we are better managing our receivables and inventory. The reduction in inventory alone has had a very positive effect on the business with inventories down 65% from an historical high in March 2008. We are no longer incurring the carrying cost of that inventory and we’re able to reduce our global warehouse footprint significantly, which has had a very favorable impact on our cost of goods.

Our GAAP reported loss was $0.13 per share and our non-GAAP loss per share was $0.04 exceeding guidance, our earlier guidance to the loss of $0.15 to $.20 a share. I'm very pleased to say that the growing concern opinion has been lifted from of our financial statements and Russ will speak about that more in a minute.

As you saw in the news today, we received a favorable ruling from the U.S. Courts of Appeal for the Federal Circuit related to our ITC Litigation. We are extremely pleased with the Court's decision and are actively assessing our next step.

These quarterly results when compared with quarter four one year ago, demonstrate that the measures we took to stabilize the company in 2009 are working. But there is still much work to do and as I explained in our earlier calls, our strategy was never meant to be a one-year strategy. And 2009 as well as 2010 must be viewed as part of our continuum to first stabilize the company and then bring it back to profitability before embarking upon a path of sustained profitable growth.

During the past year, we put in place many of the key building blocks to provide the foundation for that future growth. We’ve strengthened the product line and the process by which we bring product to market. We have refocused the brands, reasserting its core values and opening up the possibilities of future expansions of the brand. We’ve cleaned up our distribution and taken the necessary steps to strengthen our wholesale business. We have put in place many of the processes and systems necessary to deliver world class service and we have tact the cost base. Finally, we’ve strengthened the management team.

John McCarvel will speak more about our forward strategy in a minute. I would simply like to close by saying that this has been one of the most rewarding as exhausting experiences in my working life. I feel privileged to have touched this great brand and to have helped steer it on a new course for the future. This is a great team, which will serve our customers and our investors as well.

I will now let Russ walk through the Q4 and full year numbers in details. Russ?

Russ Hammer

Thanks, John. Good afternoon everyone and thanks for joining us. Before I get started, John just mentioned with the filing of our 10-K today, we officially no longer were going concerned opinion of test our financial statements. As you know the order is only a pine once a year and we’re pleased with this year’s opinion does not include that disclaimer.

We believe this to be the results of considerable efforts by the Crocs team to clean up the balance sheet, better align our costs and stabilize the company, because this quarter marks the end of our fiscal year, I will be providing Q4 and full year results during the call today. As I’ve done in the past, I will provide year-over-year comparisons to context and were appropriate, provide some sequential comparisons as well as a channel breakdown to provide additional clarity.

You will note that we began breaking out our geographic segments beginning with the 10-K we filed fire today. I'll include some segment discussion today as well. Now for a quick overview of our financials. Revenue for the quarter came in ahead of expectations once again at $136 million this is an increase of nearly $10 million or 7.9% over Q4 of last year.

Full year 2009 revenue was $645.8 million compared to $721.6 million for the full 2008 fiscal year. Provide clarity and better understanding of our business, our review both channel and geographic revenue performance. I’ll start my revenue discussion by first looking at revenue by channel, which includes Crocs’ consumer direct retail and Internet channels as well as our wholesale channel.

On a consolidated basis, revenue generated by our company owned retail stores in the fourth quarter was $43.8 million, a 26% increase over the fourth quarter of last year. For the full 2009 fiscal year revenue from our company owned retail stores increased 44% over 2008 to $180.9 million, as a matter of housekeeping, we ended the quarter with 317 company owned retail locations worldwide up from 279 locations at the end of 2008, but only slightly higher than the 310 we reported in Q3 2009.

As we said previously, we’re being very selective as to where we invest the new stores and have established internal return hurdle rates, which required much shorter releases and significantly less CapEx to build out. As we previously communicated, we’ve began to close certain key assets that does not need our financial hurdle rates and our location strategies and our selectivity opening more branded stores as a result we lower than number of key house locations and average retail and outlook stores this quarter. Dropping down into store type we had 96 key house, 74 store-in-stores, 63 outlet or factory direct stores as we like to comment and 84 full price retail locations as of December 31, 2009. This represented slight increase in full price and factory direct stores and slight decrease in key house in Q3 2009.

Now revenue generated from our Internet channel was $15.3 million during the fourth quarter and 20.6% increase from Q4 2008. Full-year 2009 Internet revenue was $60.4 million up 35% from the full-year 2008. Combined our consumer direct retail and internet channels accounted for $59 million in Q4 sales and represented 43% of Q4 revenue for fiscal 2009 consumer direct channels represented $241.3 million or 37% of total global revenue. We have very pleased with the healthy growth we've seen from our consumer direct channels as well as the guaranteed direct access to our consumers these channels have reported us. Accordingly, these channels are an essential part of our strategy going forward.

Now revenue from our wholesale channel was basically flat declining 2.1% or 1.7 million to 77 million during the fourth quarter 2009 compared to Q4 of 2008. This basically flat Q4 performance indicates an improving trend, however, in wholesale revenues in comparison to earlier quarters this quarter, we saw declines of 45% in the first quarter, 28% in the second quarter, coming down to 15% in the third quarter and only 2% fourth quarter.

We see broad acceptance of key new styles and collections and our healthy pre-books are represented in our year-end backlog of $165 million, which represents a 46% increase over year-end 2008. A few more housekeeping notes, footwear sales accounted for roughly 95% of our revenue in the fourth quarter and full year of 2009.

Footwear unit sales were 7.2 million during the fourth quarter of 2009, bringing total footwear sales to 36.8 million pairs sold globally for the full 2009 fiscal year. Average selling price for Q4 2009 was $18.27 compared to $19.7 in Q4 2008. Sequentially, our average selling price increased from $17.69 in Q3 ‘09 to $18.27 for Q4 ‘09.

For the full year 2009, average selling price was $16.60 versus $18.35 for the 2008 fiscal year. Excluding impaired units, full year 2009 average selling price was $18.49. Please note our new products represented 36% of our Q4 ‘09 units. I will also provide the percentage of core and classic sales. But first, I would like to note that the Cayman will soon be renamed Classic. I will use that vernacular here, so core products which include Beach Classics, Kids Classics, Athens, Kids Athens, Mary Jane, Girls Mary Jane, Mammoth and Kids Mammoth represented 28% of our unit sales and sales of our classics, which include our beach and classic models represented 11%.

These trends continue to indicate the consumer preference for both our new product portfolio, as well as our core and classic products. Gross profits for the fourth quarter of 2009 was 60.3 million up from 56 million in the fourth quarter 2008. Gross margin was 44.3% in Q4 2009 versus 44.4% in Q4 2008. Included in cost of sales in Q4 2009 was $1.3 million in restructuring cost related to closure of the warehouse space in Europe, as we discussed on the third quarter call. This had the effect of decreasing our gross margin and thereby subduing the year-over-year increase during the fourth quarter of 2009. For the full year, gross profit increased to $301 million in 2009 from $234 million in 2008.

As I recall, during 2009, we executed on a strategic plan to thoughtfully reduce inventories some of which have been written down, because we’re able to sell much of this inventory at price that were higher than what we have previously anticipated, primarily for our own consumer direct channels. The effect of these sales was accretive to our gross profit during three quarters of the year by $41.5 million.

Also as you may recall from that Q3 earnings call by the end of Q3 ’09, we had disposed off more than 90% of our previously impaired units. Because this brought our end of life and impaired units down to more normalized levels, we will not break out the effect of the sales of these units on our Q4 results, either in total are in aggregates, as we believe the revenue margin from those sales in Q4 is substantially repeatable and at normal levels.

In addition to the effect of the impaired units during the year, we realized some benefits from our cost savings resulting from the consolidation of our warehouse space in the U.S., supply chain rationalization by sourcing higher [ph] import duty products from our company owned NAFTA duty-free manufacturing facilities in Mexico and favorable changes in product mix primarily driven by our consumer direct channel.

Compared to Q4, 2008, our Q4 2009 SG&A declined 27.4% to $70.9 million compared to $97.6 million in Q4 of 2008. In 2009, we experienced a slight gain in foreign currency exchange versus the $25.4 million loss on foreign currency exchange in 2008. In addition, during Q4 2009, we discovered that Equity Edge, the software program that we used to calculate our stock-based compensation expense was incorrectly accounting for forfeitures in its calculation of stock-based compensation expense due to a bug in the software version that we were using. When we applied the patch that Equity Edge issued to correct the bug, we discovered that the timing for which we had recognized stock-based compensation expense was incorrect.

As a result, we recorded $3.9 million in additional compensation expense in Q4 2009 to correct these timing issues. It is important to note that this was simply a timing issue and did not affect our cash or the overall cost of stock-based compensation. Likewise, we are not the only company have been affected by this issue. We have included this in our GAAP to non-GAAP reconciliations for Q4 since it was clearly not anticipated in our guidance.

Compared to the full year 2008, full year 2009 SG&A declined 15.7% to $310.9 million. As a percentage of sales, SG&A for the full year 2009 declined to 48.1% of revenue to 51.1%. Full year SG&A included a favorable impact of $0.6 million in foreign exchange gains versus the $25.4 million loss for the full year 2008. Included in 2009 SG&A was $13 million in additional stock-based compensation expenses resulting from our April 2009 tender offer, as well as stock compensation adjustment discussed a moment ago. Included in our SG&A was $25.3 million and $97.3 million of retail related cost for Q4 and the full year of 2009 respectively. Please note our retail cost includes salary, rent, occupancy cost and other retail related cost.

During Q4 of 2009, we also recognized an expense of $214,000 included in operating income related to shoe donations we made through our Crocs Cares program with the corresponding gain to this donation of 330,000.

For the full year we’ve recognized expense of $7.5 million of corresponding gain of $2.2 million we can see from the tables in our earnings release for regulated expenses reported item of operating income, but the game is reported global.

As fair to giving back as carried over into 2010 when Crocs’ actually in local community giving efforts to Haiti donating more than 100,000 pairs of shoes to those affected by the January quake. We incurred of 639,000 impairment charge related primarily to closure of a warehouse facility in Rotterdam in Netherlands as we continued to look critically at our business assets and their future value to our ongoing business. Impairment charges for the full year totaled $26.1 million.

The fourth quarter of 2009 yielded an operating loss of $13.4 million versus an operating loss of $43.5 million in the fourth quarter of 2008. For the full year we reduced our operating loss from $189.5 million in 2008 at $48.6 million in 2009, while the year-over-year comparison show some improvement and are indicatively improvements we made this year we’re obviously not satisfied these results when if continue to attack our cost base as we move into 2010 and maintain our longer-term goal of operating margins in the mid teams.

Net loss for the fourth quarter of 2009 was $11.5 million compared to net loss of $34.7 million in Q4 2008. Net loss per share was $0.13 during Q4 2009 compared to a net loss of $0.42 in Q4 2008.

During Q4 2009, excluding the impact of foreign exchange losses the stock-based compensation adjustments I previously mentioned restructuring charges, asset impairments and net charitable contributions, our non-GAAP loss per share was $3.5 million or $0.04 per diluted share exceeding guidance of loss of a $0.15 to $0.20 per diluted share.

For the full year, we reported a net loss of $42.1 million compared to a net loss of $185.1 million for the full year 2008. Net loss per share for the full year 2009 was $0.49 compared to a net loss per share of $2.24 for the full year in 2008.

As I mentioned previously, this quarter we began reporting operations by segment, these segments report our operations geographically similar to how we’ve broken our geographic revenue in the past. However, by having reportable segments we also disclose operating margin measures for those segments in our 10-K. Because of the operating margin shown in the 10-K exclude corporate allocations are refrained from quoting margin numbers and stick to the business up-ticks.

By operating segment, Q4, 2009 sales in Europe increased 51.2% to $16.5 million over $10.9 million in Q4 2008. This was driven by better than expected sell-through of (inaudible) easy comparisons from last year. For the full year sales in Europe declined 29% to $106.9 million from $150.8 million in the previous year. We still face significant challenges in this region expect recovery to be gradual but are confident on strategic actions we are taking here will benefit the company in the long run.

Revenue generated in Asia show continued strength in Q4 increasing 15.5% over Q4 2008 to $50.5 million. Notably sales from our Asia segment were strong across all channels demonstrating the strength and resilience in this market. Japan represented 33% of the Asia market Q4 revenue. For the full 2009 fiscal years our Asia segment generated $237.5 million in revenue, an increase of 15.9% over the full year 2008. Asia region continues to show a tremendous promise particularly as we consider additional possibilities in China.

Revenues from the Americas segment were down 3.5% in Q4 2008 to $68.8 million in Q4 2009. Americas Q4, ‘09 sales represented 51% of our global revenue. In addition, before I mention improving wholesale outlook, we continue to see healthy growth from our consumer direct channels, which represented 58.7% of the total Q4 America segment sales.

Notably our America’s same store sales were up 4% during Q4 and we were positive for the full year 2009, an encouraging sign as we looked into this growing part of our business which provides guaranteed direct access to our global customer base. For the full year 2009, revenue generated by the America segment decline 17.6% to 298 million led by declining wholesale sale.

We continue to invest more strategic initiatives, we believe will benefit our relationship with our wholesale customers, including the in-store merchandizing team we discussed last quarter, which has received a very variable response from our wholesale customer base. In 2009 our merchandizing team has made 7300 visits to the wholesale locations in the U.S. and Canada. We will also be launching our major consumer focus marketing campaign in the U.S. market in mid 2010, as well as some co-operative advertising campaigns beginning in the April 2010.

Now turning to the balance sheet, we continue to execute strong asset management and leverage the strength our balance sheet. As John previously mentioned, 2009 was a year dedicated to stabilization and one of our first priorities is to stabilize and better manage the balance sheet. We were tremendous of successful on these efforts this year. Increasing our cash balance while paying off bank debt, better managing our receivables and dramatically bringing down our inventories on hand.

I will share some of these details with you. We ended the year with $77.3 million cash, a 50% increase from $51.7 million at December 31, 2008 even after paying off the $22.4 million in bank debt during the year. Cash generated from operations was $13.1 million and $61.1 million in the fourth quarter and full year 2009 respectively. As of December 31, 2009 our accounts receivable balance was $50.5 million, up slightly from December 31, 2008 due primarily to timing of sales. Day sales outstanding at 34.1 days.

I am very happy report today that our total inventory balance at the end of 2009 was $93.3 million down 35% in December 31, 2008 and down blow the 100 million mark for the first time since March 2007. Our dedication towards better managing our inventories has allowed us, now reduce our holding cost, but it’s also allowed us to bring down our global warehouse footprint, whereby increasing our future gross margin potential. Please note our inventory turns were 2.9 during Q4 of 2009. As of the end of 2009 year-end our bank debt remaining effectively at zero, we are in compliance with all our covenants.

Net capital expenditures, which includes cash paid for fixed and intangible assets net of asset sales for the fourth quarter, totaled $9.6 million, brining 2009 total CapEx to $29.8 million compared to the full year of 2008, we reduced capital expenditures in 2009 by more than 60%. 2010 capital expenditures will likely be marginal higher as we grow our global consumer debt business and invest in the IT process improvement necessary trust and more effectively provide quality and improving customer service. With these reasons we expect 2010 CapEx to be in the range of $30 million to $40 million.

Now turning to guidance. We expect to generate between $155 million and $160 million of revenue during the first quarter of 2010, and expected diluted earnings per share of approximately breakeven excluding any one-time charges, charitable contributions and FX changes. Please note this guidance assumes a 30% tax rate, which is our expected full year tax rate as well.

As an additional data point we experienced an increase of 46% in our backlog from a $130 million as of December 31, 2008 to $165 million as of December 31, 2009. As a reminder, backlog consists of all pre-booked orders and outstanding at once orders as of that date. We considered this to be an encouraging sign for our Q1 revenue, our higher than consensus guidance as a reflection of the strength of our backlog.

As a reminder, our business has historically been weighted more heavily towards spring and summer from a seasonality perspective given the design functionality of the majority of the footwear styles. While some of our products shipped during Q1, we expect the majority of the revenue from the spring summer footwear line would be generated in the second and third quarters.

In summary, 2009 was a year of considerable progress. We exceeded our sales expectations every quarter this year, due in large part to healthy growth in our consumer direct channels. We made substantial improvements in cost of sales and SG&A, but we are far condemned with those changes.

Our balance sheet is healthy with zero bank debt, strong cash levels and a track record of disciplined inventory and receivable management. Our CapEx is down 60% and our disciplined strategic approach to our global retail expansion is showing promise. And last but certainly not least, our auditors look to their growing concern opinion on our company. Steps we took in 2009 will provide the basic building blocks for becoming profitable for the full 2010 fiscal year.

I will now turn the call over to John McCarvel, who’ll sprinkle more to company’s 2010 strategy and operational excellence. John?

John McCarvel

Thanks, Russ. I will give a quick strategic and operational update and then will open up the call for questions. 2009 was a turning point for the company, we successfully executed the initial phases of our strategic turnaround plans and we believe we have stabilized many aspects of the company.

Most notably, we strengthened the balance sheet, improved our liquidity position, attack our cost structure, exited marginal distribution channel. We also made significant strides in expanding our product line, improving the process by which we bring products to markets and growing our consumer direct business.

We ended the year ahead of schedule in our turn around efforts and in January, we announced that we expect to be profitable for the fiscal 2010. Solid progress and a critical first step in securing the solid foundation for the Crocs brand.

Our primary focus in 2010 will be restoring profitability. I see five primary objectives from getting to that goal. First, we must bring compelling new products to the market. Second, we must continue to find innovative ways to engage the customer. Third, we must keep the top line moving again, especially with our wholesale partners and especially in the U.S. and Europe.

Fourth, we will continue to focus on our business structure and need to further improve margins and effectively manage our SG&A cost. Finally, we will continue to invest in our enterprise wide business system, technology and people necessary to become a leader in the casual, comfort shoe market.

Success against these objectives hinges on our ability to manage four key elements, product design and development, channel development, regional development and the operating model to which we drive the company. I’ll start with product development. Crocs is clearly a product driven company the vitality of the Crocs brand has always relied on us not just being a product company, but a product company with attitude.

This fall, the management team outlined a new mission for the company, simply stated, it is to bring profound, comfort fund and innovation to the world [seat]. Executing that mission, we’re reinforcing the brands core values repositioning classic designs and simultaneously introducing new products which extend the brand and bring on the brands unique DNA.

We have spent a considerable effort in attracting top designers whose effect on the products is already apparent in the 2010 collection. Pre lines with our key customers globally went very well and our backlog number reflects the enthusiasm for our new products.

The Crocs brand Clog, our latest reinvention of the Clog was pre-launched in limited quantities and a sell through of retail has been solid. Additionally, we developed a Crocs brand collection around and for spring summer of ‘10, the Crocs brand Flip and the women’s Crocs brand Flat, primarily those two.

We have a term portfolio of new designs for women, men and children, a shoe for every occasion, a shoe for every youth. We also have begun designing around other key events, notably this thing, the world cup event this year we have designed some (inaudible) capitalized on the fever of soccer fans worldwide. Our back-to-school and fall winter tenth collections have been well received by key customers.

To play effectively in this market we must move the company progressively to a three seasons footwear company, augmenting our ability to develop successful home run products, our million impaired club is now growing to 21 with understandable and product focused collection.

The key is not just to produce great products, but to combine great products to a great merchandising and memorable advertising. And as a combination of these three factors that will generate the energy in the marketplace for our consumers and our wholesalers. We realized the opportunity to grow the brand is by simply educating our current and new Crocs customers, consumers about the breadth and depth of our product line.

John Duerden spoke about our new marketing plan in our representation at the ICRX exchange conference in January and I won’t repeated it here except to say that our new Feel The Love campaign will be launched in the U.S. in March to support the launch of our new Spring/Summer collection.

The campaign aims to reinforce the unique features of the Crocs products comfort, color and fun. And at the same time educate the consumer on the benefits of our technology and on the breadth of the Crocs line. Considering we ended 2009 with revenue of $645 million and less than desirable advertising and marketing spend we believe this high profile strategic marketing plan will be essential ingredient in positioning the brand and achieving our 2010 sales targets.

Proper channel development. In each quarter in 2009 our retail and internet channel exhibited strong growth, while we were very encouraged by recent success in these channel our long term strategy is to have a balanced development across the retail internet and wholesale. Consumer buying habits are changing rapidly and this in turn is having a profound effect on the global distribution channel also. We continue to believe that that maintaining the proper balance between these channels offers us flexibility greater direct access to consumer and an opportunity to try new ideas and showcase the brand.

We will continue to make selective investments in retail worldwide in support of this strategy, in the short term we are taking advantage of lower cost short term retail leases in the U.S. market and using this tactic as a way to merchandize our full product portfolio.

Our Internet business has the potential to become a greater portion of our business long term. In 2009 we grew the number of sites worldwide to 23 and with recent technological upgrades we are now capable of reaching new customer and new places with consistent and powerful brand message.

The Internet is a natural medium for Crocs and it is already reflected in our 2009 sales growth in this channel. 2009 was a critical year for us for reengaging with our wholesale partner. We made significant progress in this area and are introducing compelling product collections offering improved service levels, cooperative advertising programs, direct merchandizing assistance and improved segmentation in all global markets.

For regional development, one of the undeniable strength of Crocs is a worldwide distribution with more than 50% coming from markets outside United States, but while we continue to see tremendous potential from Asia and European business we are mindful that the U.S. business must remain a solid foundation for our brand. We made significant progress in the U.S. in 2009 and we will continue to focus on rebuilding our wholesale channels with key customers.

We are investing in those programs, we see being beneficial to our relationships to our customers and wholesale also. We’ve strengthened our major account management engage the family channels and have reengaged with the important independent channel, which is helpful for the Crocs brand in the early years.

The European market is complex but continues to present a significant opportunity for volume growth. We have worked through channel issues that have affected our business in 2009 and we some real opportunities to grow in the U.K., France, Germany and other key markets in the regions in 2010.

Asia has embraced the Crocs brand and continues to be a solid market for us. We believe the large agent market continues to offer significant potential growth. Latin America especially Brazil has emerged as a key growth opportunity in 2009 and we foresee this will continue into 2010 and beyond and we will play an important role and it will play an important role in our global strategy.

On our operating model, as we’ve said before, at the end of the day this is the product end marketing business. In my view this remains what the primary focus of this company should be on design development of great product, brand development and servicing our customers. The company needs to move progressively towards for three season footwear company model capable of providing full service at the wholesale business and to our own direct retail business.

As we transition this company towards the new business model we need to preserve those critical elements of low cost fast to market production, which underpinned the company’s spectacular growth in the early year. The artful combination of these two business model as well I believe provides Crocs with the unique competitive advantage.

The key strategic challenge in 2010 is to reinforce and refresh the character of the brand with our core consumer, while simultaneously extending the appeal of the brands to broader base of consumers. In this progress on this task from a design perspective to our marketing programs and direct to our consumer channels.

As we have shown you, we believe Crocs is well position for global growth in 2010. Based on consumer reaction to our new products globally we are confident the momentum that began in 2009 will continue through 2010 and beyond. The position for top line growth full year profitability, we look forward to updating you throughout the years we progressed towards this storm.

With that John, Russ and I would be happy to answer you questions.



(Operator Instructions). We’ll take our first question from Reed Anderson - D.A. Davidson.

Reed Anderson - D.A. Davidson

A couple of questions, Russ on the gross margin piece, we saw last quarter certainly a much better margin, obviously it’s a different quarter seasonally, et cetera. But just given where the mix went in terms of direct business, I was struck that it wasn’t higher gross margin, I’m just wondering whether what are the factors who were playing there? And then secondly, how should we think about 2010 gross margins relative to what we’ve seen here recently?

Russ Hammer

As I said, we had some impairment particularly the Europe warehouse in the fourth quarter. We still had some inefficiencies that were hurting us as we were closing down those warehouse facilities. As we think about 2010, I think that we will continue to see progress from all the actions that we took in 2009 and you will continue to see improving margins as we move towards our longer term goal of the low 50s in our margins.

John McCarvel

It is fair to add there that I think we all saw a very competitive landscape in the U.S. for retail in the fourth quarter.

Reed Anderson - D.A. Davidson

Okay, so that was probably a contributing factor versus may be what we might have thought a few months back. And then related to that, obviously, when you look at the perfect mix you talk about, the direct piece of your business, it should look like this on a normalized basis going forward does continue to grow every quarter. And I guess is it your thought that at some point in 2010 we hit an inflection and that will then start to level off or should we think about that based on what you are doing for initiatives will continue to grow as a piece of the mix in 2010 as well?

Russ Hammer

Reed, we think that our retail business as we’ve said will continue to selectively grow globally, primarily in the U.S., a little bit in Europe and in Asia. We are being pretty selective there, so we are not going after extremely high growth there, but we also see our wholesale business recovering. As we mentioned, we have a very strong backlog as we enter into the first quarter and second quarter here from our wholesale customers as a result of our pre book program. So we think that that mix on average will stay in that 60:40 range. We are global business and would be around that 40% mix and our wholesale business be about 60, that could swing a little bit, but that should be the right mix.

Reed Anderson - D.A. Davidson

Just a couple more, I know you don't want to give exact numbers like you did in third quarter Russ, but was there discontinued impaired product sales in the fourth quarter, was there any of that?

Russ Hammer

There was a little bit, but very small.

Reed Anderson - D.A. Davidson

Okay. And then in terms of the store base, moving away from the kiosk, et cetera, I think last quarter you talked about roughly maybe 40 or 50 kiosk probably at some point should be shuttered maybe in the next 12 to 18 months, what’s the update there? Have we done much on that, is that still kind of out there?

John McCarvel

So, our kiosk have gone, just to give you a flavor on that Reed, from 116 at the end of Q3 ‘09 to 96 at the end of Q4 ‘09. So we made progress on it and we’re again going to keep watching each location globally, whether it’s a strategic geographic location, whether we are putting a branded store in there or an outlet store and continue on the focus of having our own branded store in front of the consumer.

Reed Anderson - D.A. Davidson

Okay, one last one I promise. Then in terms of you’ve talked -- everyone sort of mentioned that advertising marketing, you’ll invest more there this year, just curious what was if you looked at just however you want to classify it, whether it’s marketing or advertising, year-over-year what was the decline you saw in 2009 and what's the reasonable expectation as we look at '10 in terms of that going up?

John McCarvel

Our advertising in 2009 came down about $15 million advertising and promotional over 2008 and our advertising should be pretty flat to slightly up in 2009 in dollars.

John Duerden

But I think, Reed, what’s you’re saying is that it's a major shift in how we’ve spent that money, so in 2009 we still had the final year of the AVP sponsorship and so there was a significant spend in sponsorship; most of that goes away in 2010 and it ships all to pure advertising brand building co-op marketing dollars with our key wholesale partners. So in dollars it’s roughly the same, slightly up, but it’s a shift in spend.

John McCarvel

And I think, Reed, that’s again an important point John brings up, as we said in the last call and at ICR, our focus is to shift that investment more to consumer direct marketing.


Your next question is from Jeff Klinefelter - Piper Jaffray.

Jeff Klinefelter - Piper Jaffray

First off just I think congratulations to John Duerden for your accomplishments here, your leadership in helping the organization accomplish a lot in the first year, so congrats on that. Second would be, Russ many be digging in a little bit more to the backlog again can you share the numbers, again in the backlog this year versus last year and then could you provide a little bit more context on how we should differentiate the two numbers. Because I believe there was a pretty healthy increase in the amount of pre-booking as you’ve mentioned. So it's not necessarily directly comparable to last year, but can you help put that in context and how we should view the two?

John McCarvel

Our backlog at the end of 2009 is $165 million versus, it’s about a 46% increase over 2008. If you think about our backlog which is as you said, primarily a reflection of our pre-book program in 2009 for our spring and summer deliveries is in the first half. I think you can think of backlog maybe to help you guys to model is about 70% of that is first quarter and 30% of that is second quarter as far as how it’s scheduled to ship to our customers.

Jeff Klinefelter - Piper Jaffray

Okay. And then in terms of, Russ, I think this one is for you, but in terms of Q1 we have been talking a lot about breakeven points as you have been marking your way across to this recovery path and I thought that around a 150ish million was sort of a breakeven point, is there something else going on in Q1 that would prevent you from delivering a little bit higher earnings per share?

John McCarvel

No Jeff, we think that we will have pre-tax operating profit in the quarter. As you know our tax rate is dependant on the countries where we make our profit in as well as provisions where we have loss carry back. So when you get into small profit dollars in millions by country, you could have a pre-tax profit and a tax expense which could exceed it depending on where your profits are made. So for modeling purpose we said, use a 30% tax rate, that could be different by 10 points depending on where our profit is made. But we do see that we will probably have an operational profit in the quarter, and then the tax rate could swing that close to a break-even, but our breakeven point is within the range of what you were talking about there may be a little higher.

Jeff Klinefelter - Piper Jaffray

Okay, couple of more things, in terms of a full year outlook, maybe for Russ and John, how do you want us to be thinking about this in terms of a top line growth rate, I mean you have a healthy, it looks like almost kind of high-teens growth rate here in top line if you take the upper end of your guide for Q1 with a healthy pre-book profitable for the year I think as you mentioned John, but also we’ve talked about trying to achieve profitability for all four quarters. At this point, given what’s happened even in Q1 so far to date, how do you feel about a top line rate of growth for the year and potential leverage points in your margin for the year?

Russ Hammer

Jeff, I’ll take that, it’s Russ. I think John and I’ve discussed this and we believe right now we will see a modest top line growth probably in mid single digit top line growth. We see our gross margins continuing to recover as we benefit from our cost actions, which will bring us closer to our long-term goal of the low 50s in our margin as I mentioned previously. And in SG&A as a percent of sales, it will continue to come down, we still have work to do to achieve our long-term target of that mid to upper 30s as John mention and in there SG&A obviously the mix of our retail coming into there we have all of the occupancy cost, et cetera, but higher margins will come into play there. And I guess for the full year for modeling purposes we are expecting a tax rate of approximately 30% if that helps.

Jeff Klinefelter - Piper Jaffray

Okay, maybe then for John McCarvel as well, congratulations to you too, taking on the new role. In terms of your view of having run Asia really from the start, how do view that market in terms of ongoing growth potential, pockets of growth, and then how will you attempt to translate some of that momentum into the rest of the global regions?

John McCarvel

Maybe I’d make one comment first on Q1 just to think about as you view our business and that’s something that I think John and Russ have talked about in the past and that is that we do believe that as we transition from sponsorship based marketing into more advertising and consumer based marketing, that spend is going to come more in the first half the year and maybe we’ll spend more money in SG&A Q1 and Q2 than we may in the back half of the year to really energize the brand. We think we have a very good marketing campaign coming in conjunction with very good new products that in my position have been very well accepted.

So, I think our breakeven point there is you alluded to and Russ talked to, space [ph] in that range could be better going forward, the variable aspect of that is going to be what John’s worked on over the last year in really rebuilding the marketing and advertising visions for the brand. Sort of to comeback to your second question here is, I think over the last year, I’ve run all of our regional businesses from sales all the way through profitability and we’ve taken a lot of the lessons that we’ve have learned in Asia about the brand and some of the good things that we have in other markets and we’ve built a very good business strategy in how we go to market and how we take products to market and I think that will impact our businesses in each region more accretively.

On the Asian piece of our business, as you know, you’ve seen some of the things that we are doing, we continue to be aggressive with our distributor partners, they continue to build out retail stores in their markets in Indonesia, Malaysia, Thailand, you see a number of Crocs franchise type stores that have sprung up and they’ll continue to invest in the brand and so we think that the brand portion of Crocs in Asia will continue to expand both through our own investment and some internet growth in the region this year which we haven’t build in on the past and with the our distributors really continuing to get behind and build the brand.


(Operator Instructions). Next question comes from Jim Duffy - Thomas Weisel Partners.

Jim Duffy - Thomas Weisel Partners

Thank you. Let me start by complementing on the progress made on the balance sheet and the expense structure over the course of the year, a big year of accomplishments. Speaking to the CEO transition question, is the business plan for 2010 at this juncture baked, or John, given some of own personal bias as to on the call, do you see some elements of the business plan what you consider to be in flux?

John Duerden

I think that because John and Russ and I and Dan had to work very closely on the strategic plan for 2009 into ‘10 and ‘11 and how we see it executing in ’10, I think you know there will be different variables that can help the business grow at a more rapid manner than what we have projected. And it really is as we talked around the acceptance of our new products and the power of the new advertising campaign that we launched first in the U.S. in March and very closely behind that in April in Europe. So I think that will really help us look at some kind of growth or development in (inaudible) talk about.

Jim Duffy - Thomas Weisel Partners

Okay, and then may be for Russ or John, specifically on the SG&A line across (inaudible) can you tell us some of the puts and takes, some of the areas for further savings and some of the areas where you see increased investment?

John Duerden

We do see that we’ve leveraged down as I’ve mentioned before both legal and incorporates partnership, trade show expense and we have signed upon the other areas consulting agency fees et cetera, et cetera. I think whereas some of the areas we are going to focusing on the going forward are the back office area as we look at more efficiencies back office opportunities to give more best in class service at best cost quality and service. So, those are some of our other opportunities.

Jim Duffy - Thomas Weisel Partners

Okay. As you kind of net the two against each other looking at the SG&A line for 2010, is that a line item that can be down on a dollar basis year-to-year or is there incremental investments, which will make us chase a growing top line?

John Duerden

Jim, what we are going to see is we are going to see a reduction in our non consumer direct support costs. As I said on back office that can be in finance, accounting, IT order entry et cetera et cetera. On the retail side of the house we are going to be making some more selective investment. So, overall it will be pretty flat to up as a present and I mean at the dollar amount and then we will leverage that down with our growth in volume.

Jim Duffy - Thomas Weisel Partners

And then John, you mention some shift in timing of the advertising spend more towards that front half of the year as you evolve the business towards a three season business model, are there any other notable changes in timing of shipments or seasonal influences that we should be considering as a model?

John Duerden

No, we’ve just finished the pre-booking process for our fall winter of 2010 line and we don’t see in our pre-booking any significant shift from more we would shift Q3 and Q4 of for 2010 over 2008 or 2009.


Our final question will come from Jim Chartier - Monness, Crespi and Hardt.

Jim Chartier - Monness, Crespi and Hardt

Few questions. Just following up on the last question. Can you tell us with the pre-books are looking like for fall and winter so far?

John Duerden

Our fall winter pre-books, I’ll give you a little bit of flavor in the U.S., our pre-books were up about 70% for the third quarter and so which is primarily our wholesale business in the U.S., it’s looking very strong. We are quite pleased with the progress that we’ve made on our pre-books there.

Jim Chartier - Monness, Crespi and Hardt

And then the backlog for the first half of the year, can you give us breakup?

John Duerden

Pickup by region?

Russ Hammer

No, we don’t have that to breakout right now, but we will provide some color on that on our future calls.

Jim Chartier - Monness, Crespi and Hardt

And then can you discuss comp sales in the fourth quarter?

Russ Hammer

Sure, that’s a great question, thanks. Our U.S. comps as I mentioned on the call were up 12% and we were very, very pleased with that performance. Also I think on a down year we comped up 1% for the year overall in our retail business, so I think that’s a reflection of in a difficult environment the consumer still see as a great value and quality in the Crocs product which is why we’ve seen the comp up in our retail operations.

Jim Chartier - Monness, Crespi and Hardt

In terms of store growth, can you give us an idea of where you expect 2010 in terms of numbers of kiosks or price doors, Shop n’ Shop and outlets?

John Duerden

So we have said we are going to see modest growth in our retail business in all three markets in the U.S. in Europe and in Asia we continue to evaluate all of our existing stores was a very rigorous process and we will continue to see a slight shift down on the kiosks and a little more shift towards our branded store and little bit outlets as well. So I think the shift that you saw in third quarter you should continue to see that shift as we go forward.

Jim Chartier - Monness, Crespi and Hardt

Okay and then the expected the growth in the retail, is that going to come primarily from comp sales or from new store?

John McCarvel


John Duerden

I was going to say about half and half to be honest.

John McCarvel

Okay I think our expectation for retail this year is somewhere between 40 and 50 stores globally were in 2010.

Jim Chartier - Monness, Crespi and Hardt

Great that’s helpful. Finally, can you give us an idea in terms of rebuilding the domestic wholesale business? Have you added any major new accounts that may be you had lost year or how many independent doors you’ve added year-over-year, just give us a flavor there.

John Duerden

I think may be the way to look at that from our perspective is that we have worked diligently to rebuild our relationships with all of our key customers in all different channels for this department for sporting goods or other channel. We have gone back really to the independent channel that started with brand not existing but some of the more trend forward types of retailers that would have carried our products back into 2007, 2008 and may be left us during the time where we were a more less discriminating about where we put our product. And then I think the other way to look at this is, and I mentioned is that, we look at the family channel with the type of key retailers there, the famous footwear, DSW and others that are really the perfect market channel for us to sell product and so we’re building I think good relationship their, emerging relationship there that will help us as we go into ‘11 and ‘12.


At this time, I would like turn the call back over to company management for any additional our closing remarks.

John McCarvel

I’ll just sign off I guess (inaudible) one. I think that we’ve had a good year, a really interesting year, I think the management team has come together. I really believe that the handover should be smooth. I see absolutely no reason, we are committed to the plan here and I think entire management team develop the plan has committed to the plan and we will work specially on putting that together and I am confident frankly that Crocs is going to be successful this year. And I am looking forward to observing that from far. So, John, I wish you congratulations and all the best of luck.

John Duerden

Thanks, John.

John McCarvel

Thank you all and thank you for following us.


Ladies and gentlemen, that does conclude today's call. Thank you all for your participation.

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