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Crocs Incorporated (NASDAQ:CROX)

F3Q07 Earnings Call

October 31, 2007 4:30 pm ET

Executives

Ronald R. Snyder - CEO

Peter S. Case – CFO

John McCarvel - COO

Analysts

Jeff Klinefelter - Piper Jaffray

Jim Duffy - Thomas Weisel Partners

Elizabeth Montgomery - Cowen

David Furth - Provident Investment

Shawn Boyd - Westcliff Capital Management

Robert Samuel – JP Morgan

James Maher - ThinkEquity Partners

Operator

Welcome to the Crocs Incorporated third quarter fiscal 2007 earnings conference call. (Operator Instructions)

Before we begin, I would also like to remind everyone of the company’s Safe Harbor language. Please note that some of the information provided in this call will be forward-looking statements within the meaning of the securities laws. These statements concern Crocs’ plans, projections, expectations, estimates and objectives for future operations.

The company cautions you that a number of risks and uncertainties could cause Crocs’ actual results to differ materially from those described on this call. Crocs has explained some of these risks and uncertainties in the risk factor section of its annual report on Form 10-K and its other documents filed with the SEC and you are encouraged to read that section and all other disclosures appearing in our filings with the SEC.

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 update its forward-looking statements to reflect the impacts on future events.

I would now like to turn the conference over to the President and Chief Executive Officer, Ron Snyder. Please go ahead, sir.

Ronald R. Snyder

Good afternoon and thank you for joining us to discuss our third quarter results. With me on the call today is Peter Case, our Chief Financial Officer, and John McCarvel, our Chief Operating Officer. We are very pleased with our performance during the quarter as we once again exceeded our financial targets and posted strong results.

Importantly, we are increasingly well-positioned to execute our strategy while our opportunities for growth have never been more compelling. Let me begin with a few financial highlights. Sales increased to 130% to a record $256.3 million versus $111.3 million last year. Gross margin rose 240 basis points to 60.6%, and our earnings per share increased 144% to $0.66 versus $0.27 in the year ago quarter.

The strength of the quarter was once again driven by robust global demand for our brands and products. Consumer response to our expanded footwear offering has been excellent both in the United States and international markets, highlighted by Europe and Japan. At the same time, our Jibbitz business is rapidly expanding with more SKUs and more doors being added each month.

To keep pace, we are continuing to make important investments in our infrastructure. During the third quarter we opened a new much larger distribution facility in Europe, increased our production capacity, upgraded our worldwide IT systems and added personnel in key areas around the world.

To review, with all of our various footwear brands that we now have 14 manufacturing facilities, including five third-party operators in China and one each in Italy, Romania, Bosnia, the Ukraine and Florida -- and as of October, Vietnam -- along with company-owned plants in Canada, Mexico and Brazil. We also have three Jibbitz facilities in China as well.

Production currently stands at approximately 6.8 million pairs per month with the ability to increase capacity to beyond 7.5 million pairs quite seamlessly. We now have 15 company-operated distribution centers around the world serving our key markets and our headcount is now approximately 5,700 employees.

During the months of July, August and December we shipped 13.8 million pairs of shoes. This compared to 6.8 million pairs shipped in the same period of 2006. Importantly, as we look out toward next year we are confident we have the bandwidth to meet the projected increases in demand and execute at an even higher level.

I will now review our results in more detail before turning the call over to Peter, who will discuss the financials. Domestically we saw a continuation of the positive trends from the first half of the year combined with very strong demand for our new fall products. Sales of our classics, Mary Jane, Athens, Cleo and Capri performed very well throughout the quarter, as did our Kids Croclings and Disney Mickey Mouse Crocs.

The Mammoth, our new fleece-lined Crocs arrived on the shelves in mid-August and reactions from consumers was exceptionally strong with initial shipments selling out in key sizes and colors very quickly. As we have moved into fall, sell-through on the Mammoth has continued to gain momentum and we believe it will be a great performer for us during the holiday season and the years ahead. In fact, it has been our best-selling shoe over the past two months.

Since the end of July we have added roughly 500 doors, ending the quarter with the domestic door count of about 12,500. Looking ahead, as our assortment continues to broaden, we now believe we have a bigger opportunity to expand the distribution of our Crocs branded footwear here in the U.S. than previously thought.

In the first quarter, we will open in FootLocker primarily with new Crocs product offerings and not classics, underscoring the success we are seeing with our product segment distribution strategy.

Also contributing to our record third quarter results was the performance of our licensed business, which continues to grow the category and diversify with the retail launch of numerous sports and entertainment licensed products during the summer. We have significantly expanded our Disney line with more characters and additional footwear styles while also increasing distribution both domestically and overseas.

Similarly our collegiate programs has recently grown and now features the Athens model along with newly designed Beach and Cayman in more than a 100 school colors. Again our portfolio with high profile licenses helps mitigate the impact of knock-offs in the marketplace.

Turning to our international business, revenues increased 220% to $130.9 million for the first time, representing more than half of our total sales at 51%. Our performance continues to be driven by increased distribution and higher sell-through of our products. We are now in 16,000 doors internationally, up from 15,000 approximately three months ago many of which are just now beginning to carry a much broader assortment of our offerings.

In Europe we are seeing a growing awareness and increased acceptance of the brand by consumers and this has translated into phenomenal growth throughout the continent where sales are up over 375% from last year. We are now in many of the leading retailers in the U.K, Benlux, Germany and Scandinavia to name a few, and we have made great progress successfully penetrating most of the continent, even some countries in Eastern Europe.

Towards the end of the summer, we began introducing many of our spring ‘07 styles into the market like the Cleo, Capri and Sassari and the reaction was very promising. As we move into 2008, we will be rolling out the full assortment from the spring of ‘07 along with new offerings from our spring ‘08 line and we expect this market to continue to grow significantly in the years ahead.

As mentioned earlier, we moved into a larger distribution facility in the Netherlands during the quarter. While the process was time-consuming and disrupted approximately $20 million in deliveries, most of which will now shipped in Q1 due to the fact that it was spring and summer products, we are now better-positioned to support our aggressive expansion plans throughout the regions.

We are also witnessing similar results in Japan with sales up 50% for the third quarter from the second quarter. Like Europe, Japan’s growth has been fueled by demand for our classics and our 2006 offerings where our new styles only began shipping late in the season. We are very encouraged with the acceptance of our brand in Japan and we are optimistic about our prospects there as we move into 2008. Additionally, Jibbitz is also gaining momentum in this key market.

As a result of the summer-only product assortments and the newness of our brand in both Europe and Japan, we are experiencing some expected seasonality in these markets like we did in the U.S. a couple of years back. Therefore, as expected, we have seen a slowdown in sales as the weather has turned colder throughout Europe and in Japan. Needless to say we are working hard to mitigate this seasonality much the same way we have done here at home.

More importantly, based on our exceptionally strong pre-books, we will anticipate sales to be up significantly again in 2008, particularly in the first half of the year. This is reflected in our strong growth targets for next year.

Now to the emerging markets. As you probably recall, we opened Brazil late in the second quarter and we have been very pleased with the initial results there. Being it’s a southern hemisphere, summer is now approaching and we are very optimistic about our growth potential this season and beyond.

In China, our investments in sales and marketing are beginning to yield positive results with the number of pairs sold up meaningfully year over year. We continue to execute numerous brand-building initiatives to further heighten awareness of Crocs throughout the country in order to maximize all of our opportunities leading up to, during and after the Olympics in Beijing next year. We are also continuing to increase our presence and infrastructure in India and have very high hopes for this market going forward.

With regard to our retail operations, we now have over 26 Crocs company-owned stores around the world, including 19 in Asia, five in the U.S., two in Europe and one in Canada. There are also approximately 30 franchise stores throughout Europe and Asia as well as another 30 large format shop-in-shops in Asia. Additionally, we have over 130 kiosks around the world to help build our brand in key regions.

Here in the U.S, in addition to our full-priced store in Santa Monica, we will be opening two additional stores next month; one in New York and the other one in Boston, with another store in New York and one in Chicago planned for early 2008. In addition, we have opened four outlet stores today with plans to open two more by year end.

Not be overlooked, we do have a number of exciting things going on with our other brands and categories, which I will quickly touch on. First, Jibbitz, which continued to gain momentum around the world. We increased the SKU count over to 1,200 up 100 from three months ago and compared to approximately 300 when we acquired the company late last year. We now sell through a retail network of over 13,700 stores versus 2,000 at the beginning of the year. While we do break out sales contributions from this business, I will say it has been growing very nicely while at the same time continuing to positively impact sales of our footwear.

At ASR in September we debuted a new line of Ocean Minded sandals that incorporate Croslite in the foot bed and announced the introduction of a limited line of apparel, both of which will be available in the first half of next year. Similarly, we will be introducing Croslite in a handful of Bite Footwear products mainly the Adventure 3-in-1 Series sandals.

We will also be launching a Crocs golf shoe collection, which will incorporate our proprietary Croslite material integrated with Bite’s golf shoe and sandal designs.

While still small, we are very pleased with the early performance of our Mambas in You By Crocs footwear lines as well as the recent launch of our limited apparel offering.

Peter will now review the financials, and I’ll come back for some closing comments.

Peter S. Case

Thank you, Ron. Sales for the third quarter increased 130% to $256.3 million, compared to sales of $111.3 million in the third quarter of 2006. For the quarter, domestic sales rose over 78% to $125.4 million and international sales increased to $130.9 million from $40.9 million a year ago. Revenue for Canada and Mexico was $11.4 million; revenue for Europe was $58.1 million; revenue for Asia was $53.9 million; and the balance of $7.5 million was from elsewhere in the world.

Footwear sales accounted for 87% of revenue and represented 13.8 million units for an average selling price of $16.29. Sales of our classics represented 35% of footwear sales. Gross profit for the third quarter of fiscal 2007 was $155.4 million, or 60.6% of sales, compared to $64.8 million or 58.2% of sales in the third quarter of 2006. The increase in gross margin was primarily driven by higher percentages of total sales in Europe, Asia, Jibbitz and also through our global direct sales operations.

SG&A for the third quarter was $77.2 million or 30.1% of sales compared to $33.3 million or 29.9% of sales in the corresponding period last year. The increase in the SG&A as percent of sales is a result of increased global marketing spend and our sensing additional opportunities in Brazil, China and India and deciding to aggressively increase our investments in both personnel and infrastructure to position for strong growth in 2008. We feel it is important to move quickly in these important countries to establish our brands.

Income from operations for the quarter was robust $78.2 million or 30.5% of sales, which is above our stated goal of between 26% and 28%. Net earnings were $56.5 million compared to $21.5 million a year ago and diluted earnings per share was $0.66 versus $0.27 in third quarter of 2006.

Our EPS was helped by our improved year ending forecasted tax rate of 30%, which pushed our Q3 rate down to 28.6%. The decrease is due to the continued implementation of our sophisticated tax structure.

With regard to our balance sheet, as of September 30th, we had cash and cash equivalents equal to $76.6 million. Our accounts receivable increased 165% to $160.6 million at September 30 from $60.7 million this time a year ago and our DSOs are 58 days.

With the third quarter, our inventories ended with 195.3 million compared to 49.1 million at the same time a year ago. Most of our increased inventory position from Q2 resides in both Europe and Japan where we struggled to keep up with their torrid growth in orders early in the quarter. In addition, we also built inventory in our Southern hemisphere distribution centers as they are just going into their busy season. We plan to continue to build inventory in Q4 to provide better global customer service, which leverages our high-velocity, high-margin products.

Now turning to guidance, for the year ending December 31, 2007 we are raising our guidance. We now project net sales to range from $820 million to $830 million and net income per diluted common share of between $1.94 and $1.98. Consistent with last year, we are introducing initial guidance for 2008. As Ron mentioned earlier, we are witnessing strong spring year-over-year bookings, which gives us confidence that next year is shaping up to be another period for breakout growth.

We are currently forecasting both sales and earnings per share to increase between 35% and 40% with the growth weighted in first half.

I will now turn the call back to Ron for some closing remarks.

Ronald R. Snyder

Thanks, Peter. Through the first nine months of 2007, we have reported exceptionally strong financial gains with sales increasing 157% to $622.6 million and earnings per share increasing 188% to $1.55. Clearly, we are experiencing rapid growth with several markets, namely Europe and Asia, developing even faster than we had anticipated. The demand for our brand and acceptance of our products continues to reach new levels, which gives us great confidence in our future prospects and is reflected in our robust growth target for next year.

Domestically, our diversified product offering which now totals more than 90,000 footwear is selling well across the board while at the same time providing us with new distribution possibilities in broader target market. Overseas, we are in the early stages of rolling out many of our recent footwear introductions and as the process ramps up in 2008, we are confident that the product segment distribution strategy we have implemented in the U.S will deliver similar success in our international markets.

We have also created a solid portfolio of complementary growth vehicles, including Jibbitz, Ocean Minded, Fury, Mambas, You by Crocs, Bite Apparel and Accessories, CrocsRx, and Crocs Work product that further diversify our operations and take the company in new and exciting directions.

Today we are more bullish than ever on the outlook for our company, and we are confident that our infrastructure investments over the past 12 months have created a stronger platform that will allow us to maximize our opportunities that lie ahead.

I will now turn it back to the operator to open it up for questions.

Question-and-Answer Session

Operator

We will take our first question from Jeff Klinefelter - Piper Jaffray.

Jeff Klinefelter - Piper Jaffray

Congratulations guys on another great quarter. First of all, getting a little more into guidance, 35% to 40% for next year is your preliminary guidance. Peter, you mentioned that it would be stacked a little bit more towards the front end. Could you expand on that more, specifically with respect to Europe and what it sounds like are fairly strong bookings in that market. How should we think about the seasonal flow of earnings as we as we move into next year?

Ronald R. Snyder

Jeff, I would say that we will see more of the uptick in Q1and Q2 because we come off of a fairly low quarter from last year and our bookings in both Europe and Japan we were not able to fulfill the demand in the latter part of the summer; we were only shipping about 50% of the orders in those areas, which have now essentially gone out into Q1. So we are fairly bullish on Q1 and Q2 of 2008.

So without giving you a real clarity there, I would just skew your models more into the first part of the year than the second.

Jeff Klinefelter - Piper Jaffray

Specifically, what was Japan in the quarter revenue? You said Asia was $53.9 million, what was Japan of that total?

Peter Case

It was very close to $30 million.

Jeff Klinefelter - Piper Jaffray

Turning to the inventories, given that the inventory build took place in the third quarter and you had this delay of shipments, may be a little bit more specifically on that, is it that the orders were there and it took a little longer to ramp up to manufacturing so the inventory ended up there and it was too late to ship the orders at that time?

Ronald R. Snyder

That is what happened to a little bit of the build in inventory. We very consciously have been aggressive in building inventory because we just haven’t been able to catch the wave of demand for our products, primarily in some of the new markets in Europe and Japan, in China, in Southeast Asia; and even some of the Middle East. We just haven’t been able to get enough products into these other markets. We even missed some opportunity here in the U.S as we went through a very strong summer season.

We consciously built our inventory up in order to give us capacity for some of the new styles and actually it’s a good thing we did because we are now having to divert some of the capacities to the Mammoths, to the Alice, to some of the other very strong models that we have designed and are introducing in Q4 and Q1.

Jeff Klinefelter - Piper Jaffray

So this is similar to the end of last year, Ron, you went through the same thing where you built up your inventory of basics to open up the capacity to produce style?

Ronald R. Snyder

Yes. This is a build of basics, it’s high margin products, it’s very high velocity products that we have got, we felt that we needed to put more on the shelf. And then as you noted, some of that would have shipped the end of the third quarter and however, it’s difficult getting it through some of our channels there at the end of Q3.

Jeff Klinefelter - Piper Jaffray

If we were to look at that inventory composition in total, you would say that the vast majority of it is in basic inventory or any other breakdown of composition we can look at?

Ronald R. Snyder

A majority of it is in the high velocity classics and some of the other high velocity models that we have.

Jeff Klinefelter - Piper Jaffray

In terms of the fourth quarter, there is seasonality in the business and also I think in Europe there is a little bit more seasonality in the order flow, but if there were to be upside potential, do you think you have the inventory to chase the business? Where would there be upside in terms of category or global regional segments if it does materialize?

Ronald R. Snyder

As I think you’ve noted we are an at-once business so if the demand is there, we have product, we don’t have probably as much Mammoths as we’d like, but we are working on that.

We see good potential in Asia, good upside potential in Asia. We have upside in our licensing business if we can get the product out; that’s been very strong as we go into the fall season. Also like I mentioned with the Alice and some of the other products we’ll see how they sell as we approach the Christmas season. We do have inventory in most cases, in most places around the world to hit any upside. So we will be ready for that.

Jeff Klinefelter - Piper Jaffray

FootLocker, that sound like a Q1 ship, a new domestic account. Is this an all-door program that you will be starting in Q1 or how will we see that ramp up? Because they have several thousand doors.

Ronald R. Snyder

Yeah, it will be an international story, it is not just domestic. We will obviously not open all of their multi-thousand doors in one month. We will roll them out. We have designs to open a good number of their doors as we roll through Q1 and Q2, including we’ll have our licensed products in Champs, which sells I think more licensed product than anybody.

Operator

We will take our next question from Jim Duffy - Thomas Weisel Partners.

Jim Duffy - Thomas Weisel Partners

As you look out to the guidance for ‘08, can you speak to the component of it which will be growth in domestic market versus growth in international? How do you see that split shaking out?

Ronald R. Snyder

We will obviously be much higher in the international markets, that’s where there is nice upside. We didn’t hit nearly the demand that we had in Europe and throughout Asia, and really now in Brazil, we are fairly new in that market. I would say you could skew it much more heavily towards international growth.

However, with the addition of FootLocker and some other doors that we will be adding here in the spring, late this year and spring in the U.S., we are going to continue to see nice growth here. We will probably have about a 15% door add; at least 15% to 20% here in the U.S. next year.

Jim Duffy - Thomas Weisel Partners

FootlLocker is notorious for being demanding on terms with their vendors. What type of margin will those sales come out with your business with FootLocker?

Ronald R. Snyder

They will be the same as all of our other accounts so a very good relationship here to start with, and we are excited to get started with them next year. Remember, it’s primarily our new products. We are not even launching the classic line into FootLocker. So we have all of our new products for some of the spring stuff from last year, new spring stuff from this year and some other exciting new SMUs, we will be bringing out there.

Jim Duffy - Thomas Weisel Partners

So there is some inline products but you are also doing some SMU stuff?

Ronald R. Snyder

Yes.

Jim Duffy - Thomas Weisel Partners

Is that mostly color lays or will there be some new products specific to FootLocker?

Ronald R. Snyder

They will have some new products that will initially be specific there, a model or two.

Jim Duffy - Thomas Weisel Partners

On the inventory growth, I’m a little bit perplexed by it. You have been talking about being an at-once business and having a manufacturing platform that allows you to chase business. There seems to be a disconnect with the build that we are seeing in the inventory. What am I missing here?

Ronald R. Snyder

Jim, I think you are missing the fact that with the large global distribution system that we now have, and we had to get product into the various markets and the 15 some odd company warehouses and probably count all of our distributors around the world, there is probably over 70- 75 warehouses; the builds are obviously on our books but we had to build for some of those warehouses as well that we will be shipping in late Q4 and Q1.

So what we felt this year, we’ve never caught the demand. Our supply has never really caught the wave here. We have decided that with our higher margin product, we are just going to put more on the shelf to make sure that we do have the capacity to build more of our new styles. With some of new styles, we are thinking could be fairly large contributors for next year, and they are more complex products. More complex to manufacture and they take more capacity. So, we wanted to have capacity available for that.

Jim Duffy - Thomas Weisel Partners

Can you speak to what the growth of the U.S. inventory was, just to give us some sense for what’s going on this side of the ocean?

Ronald R. Snyder

It was probably only about 10%.

Operator

Your next question comes from Elizabeth Montgomery - Cowen.

Elizabeth Montgomery - Cowen

I have two questions, and I apologize if I missed some of these. First related to inventory. Aside from the $20 million of European products that didn’t ship because of the Netherlands DC, did you expect to see some upside in this quarter in terms of revenue that didn’t happen because of the logistical challenges of getting all of the product out to the various DCs and distributors in some other way?

Ronald R. Snyder

We also missed some shipments in Japan and China as well and to a lesser extent in some other markets. So that’s probably another $10 million or $15 million on top of that that we missed.

Elizabeth Montgomery - Cowen

With the number of stores that you guys already have in the U.S., and then plan to open another 15% to 20% next year, what feedback do you get from some of your retailers, especially maybe some of the mom-and-pop family retailers that I think actually do a pretty big kids business and moms business with you guys, in terms of continuing to expand the distribution, while a lot of them say they are struggling to still get product?

Ronald R. Snyder

Obviously, one of the reasons we have taken a little bit of a more aggressive approach in our inventory builds is to make sure we can service all those. I think with the number of products that we have now, I mean with over 90 and we are coming up with a number of products really every month. We have got SMUs out there, we have got a lot of licensing product. So frankly, we just needed more distribution capacity out there.

We have got some new styles that would be very hot and some of the stores that we have just aren’t big enough to carry this many products. So we actually needed more capacity in our channel, and that’s why we opened them up. We haven’t heard much yet, because what we do in all cases is to our long-term strategic accounts, we take products to them first. If they can’t handle that additional load, then we obviously offer it to others.

Elizabeth Montgomery - Cowen

Have you seen any deceleration in terms of the core style sell-through in the U.S. in the past two months?

Ronald R. Snyder

Certainly, we have seen deceleration, expected and the same deceleration we have seen in every year we have been in business, which I guess isn’t that many years, but mid-September to say mid-November have always been our slowest months. We have shoes with holes in them, like we have always talked about, which is our classic line.

One of the things we did very well with our spring products, the flip flops and some of the other totally open shoes, slides and such that we would expect those to slowdown. Now that’s being offset here in the U.S. by licensed product and Mammoths and the Alices and some of the other products just introduced for this fall.

But in our foreign markets, we are still new. We had launched with primarily our classics and some spring product. So we totally expected to have a downturn in those markets, and it’s been in our plan the whole time as we have guided to.

Operator

Your next question comes from David Furth - Provident Investment.

David Furth - Provident Investment

Congratulations on the quarter. When is the international that was delayed on the shipments going out? Is it going in the fourth quarter or the first quarter?

Ronald R. Snyder

Since it was primarily spring and summer product as I said, it has been moved into the first quarter for the most part, that’s why we are very excited about our prospects as we move into next year. Both in Europe and Asia, we pretty much stopped opening accounts which we’ve now begun opening accounts now in those markets for shipments in Q1. I thought we were pretty bullish on that.

David Furth - Provident Investment

That basically explains the slight difference between consensus and your guidance for this fiscal year?

Ronald R. Snyder

I think our guidance is up just a little bit over our prior guidance for Q4.

Operator

We will take our next question from Shawn Boyd - Westcliff Capital Management.

Shawn Boyd - Westcliff Capital Management

On the fourth quarter and given the guidance now for the full-year, I am wondering if there is anything special going on with respect to the margins? To look at that guidance for the full year and what it implies for the fourth quarter we have got to bring the gross margins down a bit here or the operating expenses up. So anything that you can tell us about the build, maybe going on in the fourth quarter on the expenses?

Ronald R. Snyder

One of the things that we are doing we are expecting a pretty nice upside for next year, so we are continuing to invest in some of the emerging market that we talked about including, I guess even Europe and Spain are still emerging for us, but when you look at China, India, Brazil and Southeast Asia some of the other markets were continuing to put investment and infrastructure in to grow that.

We are continuing to invest in a number of the other businesses that I talked about, some of the new brands that we have, we’ve taken that approach all along, we have invested in the future of this company. So, we are continuing to do that and that impacts fourth quarter a little bit.

Shawn Boyd - Westcliff Capital Management

So most of that would be more on the SG&A line than in any significant pick up in cost utilization?

Ronald R. Snyder

Yes.

Shawn Boyd - Westcliff Capital Management

On the license revenues, can you just give us a feel for roughly how much licensed product was in revenues for this quarter and for the past few quarters? Because I know anecdotally we have spoken about a big ramp to come, and I am just wondering where we are at now versus the last couple of quarters?

Peter S. Case

This is a stronger quarter, but we actually don’t break that segment out at this point, but this obviously, end of Q3 and Q4 are the strongest quarters for that business for us. So, it’s contra seasonal to the rest of our product line.

Shawn Boyd - Westcliff Capital Management

But just in general, are we looking for license to be 10% of the model, 50% at some point out? Anything you can give us on that would be helpful?

Peter S. Case

We are not breaking that out right now.

Operator

Your next question comes from Robert Samuel – JP Morgan.

Robert Samuel – JP Morgan

You did mention 15% to 20% door growth in the US next year. What’s that growth number look like overseas?

Ronald R. Snyder

Much higher, we would see in probably in the 30% to 40% range.

Robert Samuel – JP Morgan

With regard to FootLocker, would you be adding Jibbitz as well?

Ronald R. Snyder

Of course.

Robert Samuel – JP Morgan

Finally can you just talk a little bit more about China and opportunity that you see over there specifically related to the Olympics?

Ronald R. Snyder

I just got back from there last week and we now have about 200 sales and marketing people there. We are probably doing about 20 events a month of various sorts, some are around the Olympics, some are around festivals, the types of things we did here in the US. We are very excited about the prospects that we have in China. I mean it’s a great opportunity because there is so much of focus on the Olympics coming.

We think that we probably underestimated our opportunity there early this year and that’s one of the things we are ramping up right now; we are making sure that we have the infrastructure in sales and marketing and warehousing and logistics to get product from China; to China is not the easiest thing in the world to do, interestingly enough, but we have put a bunch of infrastructure in place and are continuing to do that to take advantage what we think could be a pretty nice upside for next year.

Operator

Your next question comes from James Maher - ThinkEquity Partners.

James Maher - ThinkEquity Partners

Gross margins, we have been talking about longer-term you have been guiding to more like the mid 50s; we have been in the high 50s lately and now in this quarter above 60%, can you elaborate a little bit more on that and what might be the components of bringing that down and when we might start to see that or if that is still what you are thinking?

Ronald R. Snyder

It is still. We are still guiding in the mid 50s as a longer-term model. I think I have already said in the short term that we might have upticks if we sell more of our molded products; it has a little bit higher margin than products that are sewn and glued and such. So, as we launch new styles I would say that margins would trend down over time, however in the short term, we are probably fairly comfortable for being a little bit higher than our guidance.

James Maher - ThinkEquity Partners

I am assuming that the growth of Jibbitz is sufficient; that has been helping the gross margin in the short term as well. Would you agree with that?

Ronald R. Snyder

Jibbitz helps the gross margin and that’s somewhat offset by investments we are making in development in lot of these other businesses that we don’t expect big upside from until by midway through next year or so.

Operator

With no further questions, I would like to turn the conference back over to the speakers for any additional or closing remarks.

Ronald R. Snyder

Thank you very much. We’re excited about the quarter, we’re especially excited about our prospects for our fall product for the end of this year and very bullish as we move into next year. If anybody has any further questions, Peter and I will be available. Thank you.

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Source: Crocs F3Q07 (Qtr End 9/30/07) Earnings Call Transcript
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