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Crocs, Inc. (NASDAQ:CROX)

Q1 2012 Earnings Call

April 25, 2012, 5:00 p.m. ET

Executives

John McCarvel - CEO & President

Jeff Lasher - CFO

Analysts

Jeff Klinefelter - Piper Jaffray & Co.

Jim Duffy – Stifel Nicolaus & Co.

Mitch Kummetz – Robert W. Baird & Co.

Sam Poser – Sterne Agee

Reed Anderson – Northland Capital Markets

Scott Krasik – BB&T Capital Markets

Corinna Freedman – Wedbush Securities

Operator

Good day and welcome to the Crocs Incorporated first quarter fiscal 2012 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. I would like to remind everyone that this conference is being recorded.

Earlier this afternoon, Crocs announced its first quarter fiscal 2012 financial results. A copy of the press release can be found on the company’s website at www.crocs.com.

The company would like to remind everyone that some of the information provided in this call will be forward looking, and accordingly are subject to Safe Harbor Provisions of 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. Crocs cautions you that these statements are subject to a number of risks and uncertainties described in the risk factors section of the company’s 2011 annual report on form 10-K filed on February 29th, 2012 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 its forward-looking statements to reflect the impact of future events.

Now at this time I’d like to turn this call over to Mr. John McCarvel, Chief Executive Officer of Crocs. Please go ahead, sir.

John McCarvel

Thank you. Thank you for joining us this afternoon. With me on the call is our Chief Financial Officer, Jeff Lasher. In a moment, Jeff will go through our first quarter financials in detail.

I’d like to begin with a review of our highlights from the recent quarter and then discuss some of the factors that we see impacting our business over the remainder of the year. And then finally, having just spent a good deal of time on the road, I would like to give everyone more insight into our global operations and the state of our business in international markets.

We are very pleased with the strength of our first quarter results. Retailer and consumer response to our expanded spring line is very positive, driving sales gains across our three distribution channels in Asia and the Americas, combined with increases in our European consumer direct business.

In total, sales increased 20% in the first quarter of 2012, on top of a 36% increase in the same quarter a year ago. From a product perspective, sales continue to be very broad-based, with new introductions representing approximately 38% of first quarter sales, while non-clog silhouettes made up more than half of the quarterly volume.

Our top-performing styles included our A-Leigh collection, women’s flats and wedges including our new Springi product, Duet Sport line and our Crosmesh series of products.

As I just mentioned, our retail and e-commerce channels were up in all three regions. We are pleased to share our retail store sale on a global basis in more detail starting this quarter. Comp store sales increased 10% in Q1, and our direct-to-consumer channel is providing an avenue to showcase our lifestyle products to new and existing consumers. They are obviously voting yes.

Jeff will go into more detail in retail metrics in his portion of the presentation.

Our top line results are certainly a good start to the year, and where we expected to be when we developed and sold in our most comprehensive line of footwear ever. In addition to securing more shelf space with several key wholesale partners and selectively expanding door count, we are confident that we are gaining important market share and mind share with consumers. This is also being noticed by our wholesale partners.

Our new Crocs inside marketing campaign has been successful, connecting with existing customers who are adding more Crocs styles to their closet and new consumers are being drawn to the brand for the first time by the wider selection of great-looking, casual lifestyle footwear.

As we move deeper into our busiest selling period, we are very comfortable with the overall pace of our business and very pleased with how the first half of the year is shaping up. We’ve evolved our business model to be less at once, but still have the culture and abilities to support our wholesale partners and direct-to-consumer channel with additional products.

International expansion is on plan. Some new product selections are exceeding expectation. New stores are performing well and the global expansion of our internet sites are almost complete, with Japan, Korea, Poland and Brazil slated for completion this year.

Looking to the back half of the year, we remain encouraged about our ability to expand the brand’s relevancy at retail in fall-winter. We’re cognizant of the near-term challenges facing the footwear sector with a short selling season in the fall holiday ‘11 season and the carry-over of high inventory level in the wholesale channel. We continue to contend with additional impact of a stronger U.S. dollar.

With such a large percentage of our business in foreign markets, there will be an impact starting in Q2. The dollar strengthening against the yen and the euro, on a constant currency basis, this impacts Q2 revenue growth by about $10 million or 3%. Jeff will further outline potential further FX fluctuations and their impact on our results for the remainder of 2012 later in the presentation. Let me take a few minutes and talk about our fall bookings.

Overall we’re up 11% year-on-year. We’re up 12% in the Americas, 18% in Asia, while we are down 13% in Europe. The warm winter in 2011 in both Europe and in the U.S. has created a tough selling environment for our fall 2012 line. While feedback from accounts on our Spanish selection of shoes and boots were very positive, it unfortunately has not translated into the level of bookings we anticipated. We continue to hear that retailers in general have more limited open-ended dollars for established cold weather brands, and even then only top performing styles. We do expect that our fall and winter collections will have an improved presence with several key wholesale accounts versus last year.

Despite these external issues, nothing has changed with regard to how we are thinking about the full year. We feel comfortable with the street consensus numbers for 2012 revenue and profitability. We are confident that we are well-positioned to achieve our near and long-term goals based on our compelling product assortments and pipeline, our international growth and channel expansion strategies and the experience and strength of our global leadership teams. With that, I’ll turn the call over to Jeff.

Jeff Lasher

Thank you, John. Hello everyone, and thanks for joining us. This afternoon, I’ll be discussing first quarter 2012 results. Revenue for the quarter increased 45 million, or 20%, to $272 million. This is against a 36% top line increase from a year ago. Gross margins improved to 53.3%, up 70 basis points compared to Q1 last year. Operating income grew 34.6% to 40 million, or 14.6% of sales. Operating margin improved 160 basis points compared to the same quarter in 2011. We also generated increases in both average selling prices and units sold during the quarter. These factors contributed to the $0.07 increase in EPS to $.31 during the quarter, an increase of 30% versus last year.

Strong sales growth in the Americas and Asia were partially offset by a slight decrease in Europe. Sales in the Americas increased 17% to $117 million. Asia increased 40% to 102 million, and Europe decreased 3% to 52 million. On our first quarter earnings release, now includes a table that highlights both geographic as well as channel sales in each of our regions. Importantly, on an FX neutral basis, total sales were up 21% and up across all regions. Sales in the Americas increased 18%, Asia increased 39% and Europe increased 2%. Unless otherwise noted, the following data for the remainder of my prepared remarks are on an as-incurred dollar basis.

With the Americas region, we generated growth in each of our three channels. Direct-to-consumer continued to drive growth in the quarter, with increased sales of 25% and 28% for retail and internet respectively. Turning to store count in the Americas, we ended the quarter with 190 locations, up from 189 locations last year. The 25% increase in retail sales in the Americas results from a combination of larger locations, product breadth, higher average footwear selling prices and same-store sales growth. In the U.S., revenue increased 19% for the quarter and represented 34% of total global sales. We announced earlier in the year our plan to close 20 to 25 kiosk locations in the U.S. We remain on track with this plan, as we closed 11 kiosks during the first quarter. During the quarter, asset impairment charges and other costs associated with retail closures resulted in a $1.3 million pre-tax expense, or about $.01 negative impact to EPS. For the full year of 2012, we continue to expect to open about 25 to 50 stores in the Americas before the kiosk closures. Sales from wholesale increased 12% as we fulfilled deliveries from our backlog heading into the quarter.

Sales in Asia were strong across all channels. Japan, our second-largest revenue generating country, grew 43% during the quarter. For Q1 2012, the Japan year-over-year increase was significantly enhanced from the tragedy that struck the country last year when $3 million of revenue was delayed until Q2 2011. Consequently, that comparable is expected to be reversed in Q2 2012. Asia retail sales increased 46% during the quarter, as we ended with 211 stores, up from 156 from a year ago. In 2012, we are on track to open 25 to 50 stores in Asia. Asia internet sales increased 57% during the quarter off of a relatively small base.

In Europe during the quarter, a 7% decrease in our wholesale channel was partially offset by growth from direct-to-consumer channels. During the quarter, retail and internet sales increased 52% and 3%, respectively. In the retail channel, we ended the quarter with 38 locations, up from 26 a year ago. All of these new locations are in Northern, more economically healthy countries. Macroeconomic issues in Europe continued in the quarter, and going forward the region faces additional challenges of a weaker currency and more difficult selling conditions.

Globally, the retail channel revenues in the first quarter increased 33% to 61 million, while retail locations increased 18% as we ended the quarter with a total of 439 company-owned retail locations globally, up from 371 last year. This includes 198 full price stores, 99 storage stores, 96 factory-direct stores or outlets and 46 kiosks. As disclosed in our press release, global same-store sales for the quarter increased 10% during the quarter on an FX neutral basis. Accounts were positive across all regions, with Americas up 9%, Asia up 9% and Europe up 21%. Our accounts were in part positively affected from the shift of Easter to earlier in April, and for the year we continue to execute on our plan to open 80 to 100 net stores during the year.

Moving to product data. Our percentage of first quarter revenue derived from the clog silhouette fell from 51% to 49%. Also our new product introductions globally represented about 38% of our Q1 unit sales. We continue to grow the iconic clog silhouette, while diversifying into other important categories. Average selling price in Q1 increased $1.84, or 11%, to $19.22, compared to last year in the same period. Global footwear unit sales in the period were up 8% to 13.6 million pairs. Gross profit for Q1 2012 was $145 million, up from $119 million in the first quarter of 2011. Gross margins were 53.3% in Q1 versus 52.6% in the prior year. We benefited from key initiatives and controlling our costs of goods sold, leveraging infrastructure costs and improved economics from new product introductions.

First quarter 2012 SG&A increased 18% to $104 million, compared to $89 million in Q1 2011. As a percentage of sales, SG&A was 38.3%, down from 39.1%. The SG&A dollar increase were driven by investments in our direct-to-consumer channels as we were able to leverage our non-direct portion of SG&A. Consistent with prior commentary about fiscal growth and SG&A, the non-direct portion of SG&A increased at about two-thirds the rate of wholesale revenue growth during the quarter.

Overall, Q1 operating income increased 35% to $40 million. Losses on foreign currency transactions had a negative impact on Q1 results by $4.3 million. These losses are comprised of foreign currency gains and losses from the remeasurement of certain balance sheet items, and inter-company settlements net of the impact of foreign currency derivative instruments. Losses on foreign currency transactions increased by $2.9 million compared to the same period in 2011. Net income for Q1 2012 improved to $28.3 million, or $.31 per diluted share, on 91 million shares, compared to $21.5million, or $.24 per share, on the prior year.

Our balance sheet continues to be strong. We ended Q1 with $207 million in cash, a 79% improvement from 2011 levels of 115 million. We end the quarter with inventory of $169 million, up 10% from last year. As of March 31st, 2012, potentially all of the cash reported on our balance sheet was held in international locations and subject to certain restrictions that constrain our ability to move cash back to the U.S. without tax expenses and payments.

We ended the quarter with a backlog of $289 million, which represent about 11% growth over last year. The consolidated 11% increase is against a 27% increase from a year ago. Of the backlog, orders for Q2 deliveries are up about 11% to 151 million, orders for second-half deliveries are also up about 11% to $138 million.

ASPs in our backlog are up $4 to $20.50, compared to $16.50 last year. Also keep in mind that the events in Japan last year caused us to shift $3 million of orders from March into April.

Moving on to guidance for the second quarter of 2012, we expect to generate revenues in the range of $335 million to $340 million. We estimate EPS in the $.61 to $.63 per share range. Currency estimates used for the quarter are $1.31 U.S. dollars to euro and 82.5 yen to the U.S. dollar. We estimate currency swings will negatively impact sales by 3% during Q2 compared to last year. As a reminder, Q2 2011 earnings results included a one-time tax benefit of $3.6 million, and an effective tax rate of 14%. Our guidance for 2012 second quarter includes an assumed effective tax rate of 22%. And now I’ll turn the call back over to John.

John McCarvel

Thanks, Jeff. I recently spent about three weeks visiting our various international operations and I’d like to share some of my thoughts and observations with you today. After meeting with country managers, visiting with their own stores as well as partner stores, wholesale accounts, and speaking with consumers, I came away with an even greater sense of optimism about how our global business plan is being executed and our long-term prospects. In Europe, which is now under the direction of Vince Gunn and a new management team, we are making positive progress, regaining the market share we once enjoyed. The difference now is that we are developing a more sustainable business through the distribution of a more comprehensive product line and cohesive brand message, which wasn’t feasible through our original distributor model. Today, we work through distributors only in Spain, Italy, Greece and Eastern European markets. While wholesale growth is being impeded by the overall economic issues in Europe, we believe the investments we are making in building new wholesale relationships, targeting new consumers and expanding our retail infrastructure will be even more beneficial once recovery takes place. As I said on our last earnings call, one of the benefits from the weak European economies today was the increased availability of affordable retail locations. We are taking advantage of this opportunity to significantly expand our modest footprint throughout the continent, with plans to open approximately 25 to 35 stores in 2012.

Asia remains our best-performing region. Since being launched in Asia in 2005, the growth of the business in Asia has been managed methodically, with new products and new distribution steadily added each year to support the ongoing evolution of the brand. This spring 2012 collection has been very well-received by consumers this year. With our more comprehensive product line in recent years, we’ve added more retail locations in key markets like Japan and China, to complement our established wholesale business, and the expansion of partner retail stores in the region has outpaced our own internal store development. Brand marketing has been strengthened in 2012 with our new Crocs New You campaign.

In the Middle East, I had the opportunity to visit Dubai, Abu Dhabi, Kuwait, Istanbul and Israel. In every market, we are growing the brand through new wholesale accounts, building stores directly or with our partners in the region. We opened our first store in Saudi Arabia a little over two weeks ago in Riyadh. I also spent four days in Israel with our distributor partners there that have been with us for seven years. In contrast to our European distribution partners, they have 59 stores in Israel and have made a major personal investment in building a world-class organization there. It was amazing to feel the energy and the excitement in the region when I was there.

Here in the U.S., the brand continues to rapidly evolve from legacy styles to new, casual lifestyle products, flats, wedges, sandals and the more trendy styles we’ve introduced this year. The channel mix is weighted more towards wholesale in Q1, and by all reports the sell-in and sell-through has been very strong. We have built solid relationships with our key wholesale partners over the past three years. This year, we are working more closely with them to educate consumers on the casual lifestyle products in our line. Some examples of active marketing programs include, we launched the Chameleon line of shoes with DIX in Q1. We’re currently operating a store takeover program with Famous Footwear that will run two more weeks. New shop-in-shop concepts were launched with Dillard’s in 82 stores, and next month with Zappos at the Denver International Airport. This year we have launched our Get Crocked Inside brand program, aimed at changing the perception of Crocs from a one-shoe company to a four-season, everyday lifestyle brand for multiple wearing occasions. Get Crocked Inside embraces our signature heritage and celebrates the fact that every pair of shoes we make has our DNA. We continue to focus on consumer targeting and reaching markets that we are excited about, and new product styles and core offerings. We are investing in reaching consumers through new marketing campaigns that feature national print campaign in the United States in publications such as “O Magazine,” “In Style,” “Real Simple” and “Shape,” combined with market activation through direct mail, out-of-home, experiential and social efforts.

As I remarked earlier, our business fundamentals remain strong.

Our first quarter results ended up slightly better than projected, due primarily to improved comp store sales performance, and the second quarter is striking pretty much on plan, even when we incorporate the year-over-year changes in FX. At this point we are being somewhat conservative about the second half of the year, given what appears to be the furthest slump in the E.U. economy and the volatility of the foreign currency market. That said, we look at our business holistically and we still expect full-year sales on a currency-neutral basis to increase 15 to 20% over 2011.

We’re pleased with increased backlog growth in the Americas and Asia. Based on where we are today, we feel comfortable that we will exceed the current first call diluted earnings per share consensus of $1.43 for 2012.

Operator, we’re now ready for questions.

Question-and-Answer Session

Operator

(Operator instructions).

Operator

Thank you. (Operator instructions). And the first question will come from Jeff Klinefelter with Piper Jaffray.

Jeff Klinefelter - Piper Jaffray

Thank you, thanks for all the detail today on the call. Hey, John, I just wanted to start off with a general question. You finished your comments here with your outlook for the year, your confidence in, you know, exceeding the EPS consensus estimate – you know, that’s despite the fact that you’re getting some, you know, some push back from the channel on second half bookings. Can you just talk a little bit more about where that confidence, you know, comes from in terms of your ability to drive profit growth, you know, even with those headwinds. Is it efficiencies in the business, is it more Q3, Q4? I mean, any more color on the line items and the income statement that you see opportunities for the year?

John McCarvel

Sure, you know, I think when we break the year down into halves, our feeling is that we had a very good first quarter – a little bit of cross over year-over-year between Q1 and Q2, which Jeff alluded to and I think we try to bring everyone’s attention to. So when we look at the complete first half of the year, you know, we’re going to be on plan for top line revenue growth. We like how new products are selling-in, selling-through, what’s happening in our own retail stores as we launched the product out globally. Building a more solid retail foundation allows us to grow the perception of – the brand perception with consumers as well as revenue growth.

As you can see, our retail direct-to-consumer channel is out stripping growth in wholesale, and that’s an important factor for the back half of the year. So we like the way the first half of the year is rolling up to be. We think this puts us, bottom line, anywhere between $0.01 and $0.03 ahead of guidance estimates coming out of the first half of the year.

I come back to, you know, the fact that, you know, when we try to grow a brand like this where we are so strong in three quarters, and the back half of Q3 and then into Q4 as difficult timing, it’s not going to come in large pieces. And the fact that we are placing rain boots, and we are building on some good product collections from 2011 that sold well that will be picked up with a broader distribution, it gives us a lot of confidence on that there is a place for the brand to play in. And as I said, with more of our revenue being driven by the direct channel in the back half of the year, you know, we have shown the ability to be able to merchandise lines in more effective way to engage with consumers that will carry over these and overseas and have the halves from fall/winter ’10 to ’11, and now into ’12.

Jeff Klinefelter - Piper Jaffray

Okay, thank you, that’s helpful. In terms of a little bit more on the back log. So up 11% you – it sounds like, you know, the real, you know, shortfall, if there is any relative to your expectations in that back log would really be the second half. Last year about this time I think you said, you know, about half and half, you know, first half versus second half. Jeff you gave us a little more clarity on that, 151 million for Q2 – up 11%, 138 million, up 11% for the second half. So would you say that the second half – the second quarter bookings are essentially where you expected them to be, and you would have expected the second half to be at more meaningfully?

John McCarvel

Well, I think on the second quarter we’re above where we were last year, and so we feel that we’re in a position, you know, to really be able to execute on the out one business, where the – you know, last two months of Q2.

When we look at Q3, quarter by quarter, you know, both Q3 and Q4 deliveries are up. It’s a little bit, maybe, lighter on the Q4 deliveries at this point in time, it only kind of give them the fact that we think not all orders have been placed. We know in some markets right – you know, that we have not actually booked orders for November and December deliveries. So we are still expecting that we are going to see orders come in for the fourth quarter and we will give you an update when we give the next earnings call, or when we have the investor day here in Colorado in late May.

Jeff Klinefelter - Piper Jaffray

Okay, and just as a recap, I know this gets somewhat confusing by quarter, but bookings – how bookings should be reflected in the following quarter’s growth rates. You know, in the first quarter, booking should have aligned very closely with actual wholesale growth given that the vast majority is pre-booked, whereas the second quarter, about 70, 75% of second quarter wholesale revenue would be reflected in your book?

Jeff Lasher

Yes, this is Jeff. I think it’s important to remember a couple of things when you look at the backlog. Number one, when we do the backlog, we are actually doing it at a spot rate, so, the average rate during the quarter last year actually increased the revenue that came from those re-books that were recorded, you know, in the call, and we’re translated at the spot rate at that point in time. Second thing is it’s important to remember that second quarter – in the fourth quarter, for that matter, is crucially more at one quarter, and a higher percentage of direct to consumer. So, it’s not as reliant as the pre-books as we head into that of those particular quarters.

Jeff Klinefelter - Piper Jaffray

Okay, two other just quick questions. One on Europe, John, can you – you’re probably a little bit more color there – you know, your bookings were down 9% in Q1 and your 13 now, I know your retail performed well on a small base. You know, what’s happening there in terms of the kind of anticipation for At One’s business? Seasonally, you know, any sort of weather factors – you have inventory availability to chase if the demand does materialize?

John McCarvel

For the first half of the year, yes, we’re positioned to provide, you know, inventory for at one’s orders. And you know, we see it given the weaken, and kind of given, you know, what the economic, you know, thinking is and how retailers are responding to that, you know, we see some good weeks in terms of At One’s orders today.

And like I said, I think rebuilding relationships there is also going to take some time, but it kind of starts with some opportunistic things that we’re doing – right now there in the first quarter, second quarter working with new retailers, or retailers that we have worked with in the past and had, you know, dropped the product a couple of years ago.

You know, for the back half of the year, I think, as we’ve said, you know, we have pretty solid pre-booked numbers for Q3, and we don’t really see a significant decrease year-over-year. I think Q4 is still yet to be determined, Jeff, I think people are still kind of looking and trying to make those final determinations on, you know, what additional products they are going to carry – what additional orders that they are going to place later into the season.

Jeff Klinefelter - Piper Jaffray

Okay, just lastly, you’re giving us comps now at retail, does this suggest that you’re – the majority of your sort of conversions by format are complete, or nearly complete? You feel confident now that that’s a, you know, a metric that kind of makes sense for the business globally? Can you just add some color on the timing on releasing that data?

John McCarvel

We do. I think, you know, we’re still as Jeff outlined in his portion of the presentation, we’re still going to see the conversion of – probably half of the remaining four to six kiosks that we have this year either in full price stores or, you know, just eliminating kiosk locations. And hopefully, you know, that’s not going to cause, you know, much turbulence in the numbers, but I think we feel like we’re place rate now, we’re – it’s more meaningful to share that with you.

Jeff Klinefelter - Piper Jaffray

Great. All right, thank you very much.

Operator

Next questions comes from Jim Duffy with Stifel Nicolaus & Co.

Jim Duffy – Stifel Nicolaus & Co.

Hello everyone, good quarter. Thanks for the additional detail in the press release. A couple of questions. I think I heard you say that you’re comfortable with the ‘12 revenue estimates yet the 2Q revenue guidance was below the consensus estimate which seemingly implied a more optimistic view then consensus for the second half. Is that coming from the direct-to-consumer side, or some view of the At Once Business, or some combination of both? If you could help me through that, that will be great.

John McCarvel

Okay. I’ll maybe take a shot at this first and Jeff might want to add a few comments to it.

You know Jim, I think when you look at Q1 and Q2 together, you know, we’re pretty close to the topline guidance that we’ve given you and what the street estimates were for revenues. When we look at the first half of the year, versus the two quarters together, we’re feeling that’s relatively close.

The back half of year with backlog up and with a larger retail footprint that we all continue to build in Q2 indicator there, we think we’re in a better place to execute in the back half the year then we have been before. I think it’s a combination of factors, but I think you have to look at the first half of the year together from a revenue and EPS standpoint.

Jim Duffy – Stifel Nicolaus & Co.

Okay that’s helpful. And then John, how are the inventory positions that you have to execute that once opportunities, particularly in the Q2 and early Q3?

John McCarvel

You know, inventory’s up about 10% quarter-on-quarter, year-over-year. So, I think we feel, you know, we’ve worked through a lot of the inventory issues of the past. We have adequate outlet channels now built up to be able to kind of work through inventory levels that we do have of older product. And so we feel that the quality of inventory that we have, and where it’s positioned today, in Asia in Europe and here in the U.S. and also in our manufacturing facility in Mexico, you know, we’re well positioned to capitalized for Q2.

Jim Duffy – Stifel Nicolaus & Co.

Okay, good to hear. And Jeff, I think you gave Q2 pre-book growth and back half of the year pre-book growth. Is there a way that you can split the back half to orders for delivery in Q3 versus orders for delivery in Q4? Seemingly retailers are placing those Q4 orders a bit later this year?

Jeff Lasher

Thanks Jim. You know, I think when you look at the Q4 component of the second half, it’s really not as important to us on a quarterly basis as Q3 is. You know, at this point in time, versus last year Q4 only makes up about 20% of the backlog that’s in our system right now. It’s well over 180 days out for the delivery cycle. So, you know, at this point it’s still a little too early to breakout the Q4 numbers for you from the Q3, but in general it represents about 20% of our backlog as of March 31st.

Jim Duffy – Stifel Nicolaus & Co.

I see, okay. A couple of detailed questions on the income statement. Tax rate in Q1 came in a little better than you had expected. You’re talking about 22% for the second quarter. Is that a good number to use on a go-forward basis for the remainder of ’12?

Jeff Lasher

Yes. We’re comfortable with the original projections for the year at 22 to 24% rate.

Jim Duffy – Stifel Nicolaus & Co.

Okay. And then it looks as if you move the FX gains and losses in the income statement, apparently below the EBIT line. Am I correct in my interpretation of that?

Jeff Lasher

Yes, Jim. We did that to be more consistent with our peer group. We moved that FX out of the SG&A line down to other income. We think that’s more consistent with the peer group.

John McCarvel

I also think it also gives you better visibility and helps these kind of conversations with people looking at the business trend to understand what’s happening as a more clear call-out with so much of our business being international and FX being a larger component for many global companies today. We also think that that increases visibility and transparency.

Jeff Lasher

I think Jim, it’s important to note that in Q1 we did see that loss, but in April a reversal at the end other currency compared to the end of March [inaudible] has opened up a window for us to settle our hedge positions already this quarter so [inaudible].

Operator

Our next question comes from Mitch Kummetz with Robert W. Baird.

Mitch Kummetz – Robert W. Baird & Co.

Yes, thank you for taking my questions. Let me start with the comps. So a few things here. First of all, I was hoping you could tell us how many stores were in the comp base for the quarter. I was hoping you could maybe address what the comparison was to a year ago. And then, kind of how you’re thinking about comp in terms of your second quarter guidance and maybe what the compare is there. Is it tougher, easier than Q1? And how are you thinking in terms of a pull forward. Was there any pull forward that maybe benefitted the First Quarter in expense of the Second Quarter? And then I have a follow up.

John McCarvel

Let me see if I can go through those, Mitch. And if I miss one of those questions, just maybe could you follow up.

So maybe last portion first. I think, yes, all retailers with a March 31st cut off benefitted this year by having Easter earlier. Two weeks earlier this year, than last year. So I think comp performance in conjunction also for our brand for Spring Break and people getting away surely was a benefit for Q3. Exactly how many stores were in the comp base today, I cannot tell you what the total comp base was, but it’s something that we can do maybe when everyone is here for the investor meeting at the end of May. Maybe get some more granularity about what is exactly included there.

As far as how we think about Second Quarter in terms of comp store growth, right now we think it’s about the strength of the new products. What we’re seeing in locations globally with new styles and making sure that we stay as merchants fully in stock, on product, in our retail stores that meets the demands of the customers is going to be a key to that comp store growth. So, it’s easy to come out of the chute fully loaded, you know, with all styles and colors. As the quarter goes on, we have to really focus on being really good merchants at keeping product available, real time, to consumers.

Mitch Kummetz – Robert W. Baird & Co.

Okay. And then, just a follow up on the comp. Is Q2 – I don’t know if you can say this – is Q2 a tougher or easier comparison than Q1?

John McCarvel

Yes. I think maybe when you look back at Q1 of 2011, you know as we mentioned in the script, there was the tragedy in Japan that did have an effect on our sales. In Q1 last year, Easter was later in the month of April; this year it was earlier in the month of April. That allowed up to have a little bit of ramp-up during Q1 towards the closing days of that quarter. So there’s some, you know, calendar and macro issues as to why things are going to move around. And I think we’re still – Q2 is still going to be a good retail quarter for us. It represents a very large percentage of our sales in Q2.

Mitch Kummetz – Robert W. Baird & Co.

Got it. And then, let me ask you on the at-once for Q2. Could you maybe address what the at-once trend is, quarter to date for Q2. You know, what kind of outlook is embedded in your guidance. Are you talking up five, up 10, up something in terms of your wholesale projections. And maybe you could just talk about kind of how the at-once trended last year. I’m guessing you are in a better at-once position this year just given the early start to Spring and retailers being a little lean on inventory and starting to fall into chase mode. So maybe you could talk a little bit about that.

John McCarvel

Yes, Mitch. I think, you know, primarily Q1 and Q3 are delivery quarters based on the pre-books that we enter into the season with. You know, Q2 and Q4 are traditionally more at-once quarters. As you mentioned, they are more heavily weighted toward direct to consumer. You know, we are optimistic that because of the NPD data that you’re seeing that we will see some additional demand in Q2. You know, at this time, I think it’s important to note that this is primarily a DTC and at at-once quarter for us. I think the other thing I mentioned earlier in this call was we do get the benefit last year of revenue growth. About $10 million of revenue last year versus this year as associated with the stronger local currencies last year. All of that – you know, at lot of that I should say – is associated with the pre-books as well.

Jeff Lasher

Maybe one other point there, Mitch, to what you’re asking. You know, when we look at revenue for Q2 for 2012, we’re depending less on at-once business than we were last year at this point in time. So I believe that gives a little bit of context around the quarter. And there may be potential upside if product sells well and we’re able to work closely with our wholesale accounts to provide additional at-once business for them.

Mitch Kummetz – Robert W. Baird & Co.

Okay, that’s helpful.

John McCarvel

It’s just that time will tell.

Mitch Kummetz – Robert W. Baird & Co.

Got it. Let me ask one last question. On the gross margins, Jeff, could you maybe run us through what the puts and takes were in terms of the big buckets on the quarter that resulted in the 70 basis point year over year improvement. And then maybe how you’re thinking about those puts and takes for Q2.

Jeff Lasher

Sure. I think we benefitted from the expansion of our new products and the strong new product introductions that we had. We benefitted from controlling our infrastructure cost (inaudible) leveraging the additional ASP on that existing infrastructure that we have. We also benefitted from controlling our product costs during the quarter and we worked really hard with our factory partners in controlling both their labor and their production costs in working with them on how to design the products more efficiently.

We’ve also improved our overall economics on the new product introduction so those are going smoothly, and in general, we’ve seen a little bit less on the discounting in the retail and internet side as well. And then we also have the strong reception of our March mailer for our Spring product line which all of that was at full price.

So we’ve done a lot of good things on the cost of goods sold line.

Mitch Kummetz – Robert W. Baird & Co.

Okay, great. Thanks and good luck.

Operator

And the next question will come from Sam Poser with Sterne Agee.

Sam Poser – Sterne Agee

Good afternoon. Thanks for taking my question. All right, you talked about the first two quarters being basically around the expectations, so you know, the back half of the year now, I mean, you sort of gave guidance to the full year. Can you walk through the specifics of that guidance as far as the overall tax rate, as far as the overall tax rate, as far as the gross margin and how we should think about that and so on and so forth, especially given the impact of the currency and so forth?

John McCarvel

Yes, thanks Sam. You know, I think specifically on the tax rate, again, you know, I think it was about 22 to 24%. We did benefit last year in Q3 as we talked on script from some tax favorability that got us to a 14% tax rate last year. This year we think it’s going to be into 22, 24 range.

The other particulars as far as the margin, you know, I think we are optimistic that we’ll have nominal favorability in our gross margin line and that will continue throughout the year. You know, as we mentioned, the backlog, the ASPs are strong relative to last year, up $4, so that’s – those are some insightful numbers for you.

Sam Poser – Sterne Agee

Okay. And then you talked – I mean, I'm going to follow up on that. I’m going to ask the same question again. If 80% of the backlog for the – is Q3, can you tell us what Q3 is currently up as as far as the backlog goes. And do you have less on a percent – at a 20% run rate, do you have less in hand for the Q4 backlogs than you did at this time last year? So is Q4 down as of this date or as of the end of the quarter, and what is Q3 up even though it’s a smaller percentage?

John McCarvel

Well, I’m certain Jeff can add in. Q3 is up about 8% on a relatively larger number. Q4 is up 24.6% [inaudible] relative to backlog on a much smaller number. So like we said, we think that the backlog in whole, the product portfolio that we have, the accounts that are booking and taking product today with the opportunity for us to grow the brand and establish ourselves in this rain-boot casual indoor footwear space and the fact that we’re re-introducing the mammoth product which we sold over 10 million pairs in the first five years of selling that product that we took out of the last year is going to give us some kind of lift in the back half of the year.

Jeff Lasher

Yes, I think the other point I want to make about the Q4 versus Q3 is to recall that in Q4, 37% of our revenues comes from retail, you know, 12, 13% of our revenue comes from Internet. The wholesale business in Q4 only represented about 50% of our sales in Q4 versus, you know, 60% for the average year. So it’s significantly underweight in the Q4 period. The success of Q4 will really be determined by the success of our resale and Internet channels.

Sam Poser – Sterne Agee

Okay. And thank you. And then as far as other growth opportunities, I mean, you know, we’re coming up on some big stuff that’s going to happen down in Brazil in the next couple of years. I know you’re doing some production at your Mexican facilities there. But I mean, are you – do you have anything in the works right now to crank up that business and then you could have basically – it could be an endless summer kind of situation?

John McCarvel

Well, you know, I think we’ve talked about this in other meetings and on other calls. You know, we continue to believe the last channel market including Brazil offers significant opportunity for us. We not only build product in Mexico, but we also have a partner that assembles shoes with us in Brazil today. And we have an organization on the ground for almost five years now in Sal Palo. We’ve opened our own retail store in Brazil now. We’ll open shortly in Chili and Argentina. So we look at the South American market as an opportunity as we did China and Vietnam, Korea and Japan; all those other markets in Asia five years ago.

So we think it has a significant opportunity. We’re pretty excited about the Olympics this year and London has got some pretty cool marketing ideas for the upcoming games there. A lot of that learning will be transferred over to the World Cup and the Olympics in Brazil. So yes, we see the opportunity is there and we continue to focus on growing our business globally in all international markets.

Sam Poser – Sterne Agee

Thank you. And then lastly, with the, you know, you said you’re happy with the street estimates, you think you can beat them by a little bit, if I’m not misquoting you, for the full year. Does that include the revenue number, not only the earnings? So is that 15% revenue number take into account the full impact of the full-year currency? And I guess as a follow up to that, how would you look at the currency effect in the back half of the year from what you know right now?

Jeff Lasher

Sam, I think what John said was that on an FX neutral basis, 15 to 20% is still kind of where we’re going. As you know, there’s a lot of fluctuations and variability in the currency markets right now and those need to be factored in the models that you use. But the business, that’s 65-plus percent international business, so that’s important to remember.

Sam Poser – Sterne Agee

I understand. I guess I understand, but like the street right now is looking for one point, just under 1.2 billion in sales. Is that a reasonable number from what you know right now with the, you know, given all the puts and takes that you know right now on the currency and so on and so forth?

John McCarvel

So what we said was that we expect topline growth to be in that 15 to 20% range, which would be close to where consensus is at. If you think about the FX impact on revenue growth, which may be factored into everyone’s models, there’s a complete year, it’s close to $20 million. So when we think about achieving $1.18 billion for ’12 and we have a $20 million, or 2% in a kind of maybe shortfall in investor’s minds, on a relative basis in terms of the units and ASPs, year over year it’s being impacted adversely with the stronger dollar. So we believe, as Jeff said, you know, given what we know today with FX rates and where we think we’re going to be through gross margins and SG&A, we think we’re close on the topline and we think we’re going to exceed the bottom line EPS guidance.

Sam Poser – Sterne Agee

All right. Well, thank you very much. Good luck.

Operator

And moving onto Reed Anderson with Northland Securities.

Reed Anderson – Northland Securities

Good afternoon. Thanks for taking my questions. Just a couple follow ups. Back to the kind of the discussions on revenue and I'm just kind of looking more at the Europe piece or looking at kind of growth, near-term growth expectations on a geographic basis. But in Europe, specifically, you know, if you look at the first quarter, the weakness you saw more on the wholesale side, obviously, the direct, you know, was the nice offset there. Over the near-term, is that sort of what we might see play out, whether it’s due to the web business or comps, or new store and growth timing where a lot of the direct mitigates the weakness you’ve seen in wholesale? Does that make sense or is it probably going to get a little bit worse than what we saw in the first quarter?

John McCarvel

It will be consistent, we think, for Q2, and for Q3 where there’s a give and take. I think rates is going to be a little bit hard to tell where Q4 falls for Europe. I mean, we’re going to have, as we said on the call today, 25 to 35 new stores. If you think about the fact that we only had roughly 30 stores there at the end of last year, this is a pretty significant investment and growth in our retail business and in Europe. What kind of impact that’s going to have when we get to the fourth quarter and having not gone through that yet, it will be a little bit harder to apply the amount of wholesale revenue that right now looks like it has not materialized. It is going to have more of an impact on us, but I think we’ll give you more updates on what that looks like in future calls.

Reed Anderson – Northland Securities

That makes sense. And the store openings on that 25 to 35, those would be kind of second quarter, third quarter most of those open?

John McCarvel

Right. Three opened in Q1 but a number of those also opened in the early part of April and you will see a significant uptick in retail store openings when we do the Q2 call. And yes, it will be more Q2, Q3 on the launch of the new stores.

Reed Anderson – Northland Securities

Okay, makes sense. And then, Jeff, back to the margin, specifically gross margin comments, you talked about product cost and cost of goods, I mean, is that piece, that component of that, is that actually get easier for you as the year goes on? I mean, you’ve got the worse piece of the cost impact or whatever it might be, early on and you actually get more benefit as the year goes on or would it be fairly even throughout the year?

Jeff Lasher

I think when you look at our major cost savings, it’s going to come out kind of evenly throughout the year. We had some comps that are easier than others during the four quarters, but for the most part, that the leverage on our infrastructure, the benefit of selling higher priced products and the work that we’ve been doing with our factories to reduce our product costs, that’s going to benefit us all year long.

Reed Anderson – Northland Securities

And lastly, on the comments you had on SG&A, I think you said 2/3s – on the non-direct piece, the growth rate was 2/3s that of the wholesale growth. Is that a sustainable type of number? Is that kind of where the business is positioned now or is that – was that some anomaly to the first quarter?

Jeff Lasher

Well, I think what we said in the script was that Q4 we said we wanted to hold our SG&A for indirect at about 2/3s of the revenue growth. We were able to achieve that in Q1 and there’s no reason to believe that we can’t continue to drive our leverage on our existing cost base going forward.

Reed Anderson – Northland Securities

Great. Thanks. Good luck.

Operator

And next is Scott Krasik with BB&T Capital.

Scott Krasik – BB&T Capital Markets

Thanks for taking my questions and thank you very much for all the extra disclosure on the release, it’s very helpful.

A couple questions on the comps. If you look at the comps in America and Asia, you know, how much of that was unit versus price?

Jeff Lasher

One-third is unit and about 2/3s is price.

Scott Krasik – BB&T Capital Markets

Okay. And in terms of the comp expectations for the rest of the year, especially like Q3, are you going to continue to be able to price the way you have been for the last couple years?

John McCarvel

You know, I think, Scott, the only real challenge in our business really comes in the fourth quarter when it comes to pricing. And especially in the U.S. and to a lesser extent in Europe when it becomes far more promotional. So our communication, or internal directive is really that we’d like to see 50% unit growth this year, 50% ASP growth as we continue to innovate and create and relax our products that are a little bit more sophisticated in the early legacy, 100% [inaudible] that we get. So that’s been kind of our stated objective when it comes to growth.

Scott Krasik – BB&T Capital Markets

Okay. And then just a couple on the backlog. You know, is there possibly anything in last year’s backlog as of March 31 that has to do with Europe, that may have never shipped or shouldn’t have been in there to begin with that makes the comparisons look less impressive?

John McCarvel

No.

Scott Krasik – BB&T Capital Markets

Okay, and then you have an 18% backlog at the end of Q4 and you probably pulled a little business forward, as you say, which might explain the Q2 backlog coming in below where people were looking for it, but has – were there any cancelations relative to what you saw a couple months ago for Q3?

John McCarvel

We had no meaningful or material cancelations. I think more hesitation with most of our key wholesale customers, but we haven’t seen cancelations anywhere.

Scott Krasik – BB&T Capital Markets

And then just from, remind me, how much did you benefit from the warm weather in Q4, at least relative to the comps in your own stores or because you were set up for cold weather and it didn’t happen, you were dinged as well?

John McCarvel

Yeah, I don’t know that there would be anything, Scott, per se, if we pointed to the insights for Q4. I think a lot of the questions, [inaudible] asked us earlier too, you know, with the shortcoming earlier and the U.S. having such a mild winter, as did Europe, as did, for that matter, Japan and China. So a lot of our – in our larger markets, we saw a much shorter winter period. You know, does that mean that consumer buying preferences shifted more? Are we going to continue to see people buy at the rate that they have been, you know, for footwear into Q2? Our opinion today and early indications are that this will be another good year for footwear for especially spring, summer ground play.

Scott Krasik – BB&T Capital Markets

Okay, and I guess this isn’t that big of a question. What is your comp implied in your Q2 revenue guidance?

Jeff Lasher

We didn’t break that out.

Scott Krasik – BB&T Capital Markets

Something below Q1 though I would assume?

Jeff Lasher

We didn’t break it out for the call.

Scott Krasik – BB&T Capital Markets

Okay. Thank you, guys.

Operator

And the next question will come from Corinna Freedman with Wedbush Securities.

Corinna Freedman – Wedbush Securities

Hi, guys. Congratulations on a nice beat. Just following on Scott’s question, what was the comparison last year for first quarter and then could you give us the last year’s number for second quarter, third quarter and fourth quarter just so we know what the – what we’re going up against?

And then secondly, if you could talk a little bit about the mailer that went out to 1.7 million households, what was the ROI or the response rate? Is there anything planned for second quarter or for the balance of the year that would also drive traffic similarly? Then that’s it. Thanks.

John McCarvel

Yes, I think on the catalog that you’re referring to that we mailed out, we’re really happy with the ROI and the response rate of that particular mailer. We did send it out to a broader audience, including some names that traditionally were not in our email or mailing list before. So we used it to generate long-term demand rather than just measuring it off of one catalog. We like to measure it off the overall success of the brand going forward. So – but we were individually happy with that particular catalog.

As far as the retail comps from last year, I don’t know if you need the specific retail numbers; last year in the second quarter 2011 we did 91.7 million of U.S. dollars in retail. What we didn’t have provided was the comp number that’s coming off of that 91.7 going into Q2 2012, but – is that what you were referring to?

Corinna Freedman – Wedbush Securities

Yes. If you have – the percentage comp.

John McCarvel

Yes, we don’t have that. We’ll have to get that to you offline or include something in our May 23rd investor day.

Corinna Freedman – Wedbush Securities

Okay, great. Thank you.

Operator

And the final question will come from Jeff – and that does conclude the question-and-answer session. I’ll now turn the conference back over to you.

John McCarvel

Thanks, everyone for dialing in today. Just as a reminder, we will be hosting an investor day here at our campus in Colorado on May 23. If you did not receive an invitation, please contact Kevin Kim or one of the other contacts that are listed on our press release. Thank you all for joining today and have a pleasurable evening.

Operator

And that does conclude today’s conference. Thank you for your participation today.

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