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Crocs, Inc. (NASDAQ:CROX)

Shareholder Analyst Call

May 23, 2012 2:20 p.m. ET

Executives

John McCarvel - President and Chief Executive Officer

Jeff Lasher - Chief Financial Officer

Dale Bathum - Senior Vice President of Products

Kevin Kim - Investor Relations

Hank Haney - Professional Golf Expert/Instructor

John McCarvel

We are going to post the presentation to the website sometime later today so everything that we are going to cover with you today will be on the website later. So welcome. So, of course, forward looking statements, our safe harbor. I’d like to just frame today and talk about what we think our business looks like over the next three years and answer any questions that you guys have as we go through long-term.

Now we are going to some specific drill downs as we go through the presentation today. Things that I think are concerning in the general market. Things like Europe, what does that mean to Crocs. FX, what is the foreign exchange impact to our business. And so we are going to do some specific drill downs but I would like you guys just to ask questions as things come today. Make this an interactive session as much as possible.

When we think about our business in Crocs, I know we have said this many before and I think it is worth repeating, we think about ourselves as moving from this clog company, which we have been, in which we still have high-40% revenue tied up in clogs, different types of clog products we sell, kids, adults. And how we move ourselves gradually but progressively towards being much more of a casual, lifestyle play. And I think what you are going to see in the products around you, we have our Americas sales and marketing meeting going on right now for spring-summer ’13. So what's going to happen is when it’s an appropriate breaking-point then, probably after Dale presents, we are going to take you into the room. It’s kind of cordoned off there, closed off. And we are going to show you what the line looks like, we are going to show you how it’s going to market. So you are going to get kind of a preview that we wouldn’t normally show until we get into trade shows, but you are going to get a much better perspective here.

So there is about 140 people also on campus this week. Our U.S. sales force, our Canadian group, our distributors from Latin-South America too. But this is something that we are working at hard. We think that it drives us to a far better place in the next three to five years. And we don’t think we really have a lot of natural competitors in this $30 to $60 price point that we really position the brand around today. Balanced international growth. I have spent, of the last three weeks I spent six weeks abroad. Mainly because 65% of our revenue comes from abroad and I really need to be out there and working with on understanding what's happening with the business. And I’ve come back, I will talk through today.

I am really excited about what's happening in Asia of course. But you know actually I left Europe on both occasions very bullish about what's happening relative to our business. Like if they were going to talk about the -- it’s the smallest piece of our business, only 17% of our revenue comes from the European market place. If we think back years ago, Europe was larger than Asia at that time. And we kind of lost our way, we stayed with the clogs too long, we didn’t distribute, we didn’t build out, as you are going to see today in numeric terms, platforms either in retail or in ecommerce that drives our Asian and American business.

We made a mistake on the Q, before our earnings call that we -- the Q1 earnings call, that we didn’t book in this right up front and stay right out of the shoot. We are really happy with where we are at. Not only for the quarter, for the year. This top line growth that we are going to talk about today on a constant currency normalized basis, is driving what we said 15% to 20% top line growth. And we are going to break it out in more granularity than we ever have for you. So hopefully that kinds of gives you a better feeling.

And we are committed to running a good business. We are committed to the consistency that you have seen from us, how we manage SG&A. We are going to going to give you more details today on retail and all that and how that ties to how we financially manage a strong balance sheet here at Crocs. And I think that there is a little bit concern sometimes too about inventory levels. I have said this from the day I became CEO, we will never have an inventory problem as long as I am here. And I am committed to this internally, to the board and to the Street. And we don’t have an inventory buildup issue here. We are going to talk through that in more detail with you today. So we manage maybe at times, too tightly. Maybe we are sacrificing a little bit of top line growth but we are not going to go out and chase business from an inventory standpoint.

When we have our conversations and I did this yesterday with the Americas sales group, we break it down in just simple of a way with them. That 5% of our growth has to come from geographic expansion. So I look at what we are doing in China today, or what we are doing in India, what we are doing in the Middle East which we will talk about during the day today. What we do in Eastern bloc countries. So we are just going into Josie’s favorite homeland. We are just going into Poland now and there is that huge amount, is that fair. Only one person asked me if the website is in Polish. Right, off all of our investors here. Nothing in Polish.

But I think, all kidding aside, I think Central and South America offers us huge growth. All we are asking our sales people, in any region that we talk to, it’s 5% growth. It’s all we ask them. 5% growth in new geography. All we ask them is for 5% growth in ASP. We are not trying to go from a $30 clog to an $80 nice dress shoe. We are inching up the brand, and you see some of things in front of you. The [be bold] or Huarache collection, we are going to talk with you guys about it. Today you are going to see it in the other room.

A whole new place where we can continue to expand our flats, our sandals, our women’s wedge business, into a whole, new more innovative space building on our heritage of molded, cool, innovative products. 5% wholesale expansion. A few more doors and more placements of products in the doors that we have today. We are going to talk with you about our sales philosophy when it comes to adding new accounts versus kind of building and defending the space that we have today.

Once you get space at wholesale, unless you really have a difficult time selling through products, which we have not had the last three, four years, then wholesalers are conservative. They are not going to give up your space to someone else if you continue to do the right thing. 5% is all we ask, whole sale expansion. And lastly, in retail. We are expanding retail doors this year somewhere between 80 and 100 net doors for the year. We continue on this. That’s 25% growth on door count.

If you think about again, our business, just 438-439 retail doors that we have today, generate a significant amount of revenue for our business. And you are going to kind of continue to see that investment in retail as we don’t grow wholesale at a rapid rate, you are going to see a little bit more of a shift to the end direct consumer. So we get the product placements that we want to have in the next two-three years, and we are going to talk in more detail about that today.

So with that I am going to turn it over to Jeff so that he can do the retail review for 2012, and then I am going to come back and talk about channels and regions.

Jeff Lasher

Thanks, John. Welcome everybody. Hope everybody had a good trip down here. Thanks to everybody here, thank you for coming. Just wanted to kind of recap Q1. Set off the tone for the day and then as John mentioned, we have got a busy presentation over the next couple of hours for you, walking through a number of different topics. We will talk about each one of these individually as we go through the next couple of hours, specifically revenue. John will talk about revenue and the wholesale, retail internet as well as our international expansion.

In the first quarter, as John mentioned, we were up 20% on a year-over-year basis. Gross margin, we will talk about that later in the presentation. SG&A as a percentage of sale, we will talk about that, give you a little bit more information on the SG&A aspect of our business. And then overall operating margins for first quarter, 14.6%, improvement of 160 basis points in Q1 versus Q1 2011. You can see that in the bottom line. EPS was $0.31 versus the $0.24 last year.

Guidance for 2012 second quarter, $335 million to $340 million. Tax rate at that time 22%. We will talk a little bit more about taxes later in this presentation as well. And then diluted EPS, the guidance was $0.61 to $0.63. At that time we estimated that euro to U.S. dollars would be $1.131 and that Japanese yen would be about 82.5.

I think the key message today, and you will hear this from all three of us, is that our -- consistent with prior meetings, we believe our long-term sustainable growth story continues as we penetrate international markets. We look at our international footprint, driving a wholesale expansion, increased product portfolio driving ASP, and then finally our retail and internet investments around the globe. Driving overall revenue up about 15% to 20% on a constant currency basis.

We haven’t deviated from that message and we continue to maintain our objective of driving that long-term sustainable growth rate. Let me turn it back over to John to talk about both the international expansion as well as the channel expansions.

John McCarvel

Just real quick, and you know as we sit here today different facility maybe worth noting. You know we were in a building in the Crocs parking lot. Last time you were there, people who came, this building here now is completely ours. We are renovating the back half where product development was, where we met last year. And that will be where marketing and our product development groups are at. And then as you do tour through here today, you are going to see (inaudible) our supply chain management, ecommerce, all in this building.

It’s really quite nice. We are all interconnected today and this is all of our corporate organization here. Crocs parking lot, there is one building that you will see kind of mustard cone colored building in Crocs parking lot. That’s our Americas business over there. That parking lot is not big enough sometimes and at other times it’s too big. But we do try to kind of separate church and state. You know what goes on in the regions is there’s to do. What we do at corporate is much more strategic, much more directed towards strategies, systems, overall consolidation of product development. So there is kind of that separation of the building.

Nice part about this is, this is about 60% this space here that we moved into -- after renovation moving into this, about 60% of the price we paid for the building that we were in. So it’s a nicer space for us. It’s much more conducive as you are going to see. We have a little cafeteria here. 450 people basically on the campus between our corporate and the Americas group today.

You know, Jeff goes through this charade and I think that this is a really good representation of the management of this business. And I know it doesn’t look at the balance sheet side of this but we would also look equally as yet. But when we put this up and we look at this internally, I can't determine what investors think about what this business is doing. But what I can do, and what we as a management can do is control what's within our space and see that kind of revenue growth. And we are going to talk about what that looks like within the channel. To see us have the ability to transform our business from just molded products into other products, holding us margins, driving operating margins up as we go and to control SG&A. Which -- you know we had a little bit of history of issues early on with the SG&A that we have overcome.

I think this is a really nice place to start with. Where this business is at and where it’s going. And I think it’s a testament to the management team that is here, that is focused on this and has delivered these results and are the same group that are committed to continuing to growth this business.

Let's talk about channels first and then we will go into regions after that. And again, as I get into this you may have specific questions and things that you may want to ask, Jeff might jump up and help me with specific things if need be. But if you look at our overall business, if you look at ’11, ’12 and as we go into ’13, yes, there is a gentle shift here as we are putting more retail stores online in Europe. We are seeing an opportunity in specific key locations in the U.S. to add and also in our Asian business where you are going to see we have a high mix of both Crocs stores as well partner stores. And I think the numbers might surprise you a little bit.

We have talked about this before but I think you are going to see it upon the screen today. It kind of goes to show what derives, what is the underlying things that drive our business in Asia. What are the underlying things that drive our business in Europe and U.S., America’s marketplace. So a little bit of shift we see in the next couple of years. A little bit more directed towards retail. But as we continue to try to sell-in and we will talk about our wholesale strategy. If we gain additional doors in wholesale, we don’t over distribute, dilute the brands, which we are very cognizant of what the trade-offs are there. Then we will see what that balance comes back to be. But it’s our preference that we stay in that 60, kind of 40 split, but we are moving a little bit more towards the direct.

If we look about growth, if we just take Q1 as an example of kind of how that growth looks, remember that retail has a 10% comp growth on that year-over-year. In our comp base today, you guys have asked this question before, we have about 72% of all retail doors fall in the comp base. And it’s a question of time how many stores you can set there, is it 80, is it 50. You guys are changing format. You stand them all but you move from a kiosk to a store. You are changing a store size inside a mall. 72% of our retail falls in a comp base and we comped up 10%.

Now, I think we all know and I think this is pretty consistent with what you here. I am in the marketplace today. We do see some pull-forward from April for holiday reasons and just for the weather reasons between April and March. And we talked about this even when we did the Q1 earnings call. That’s why when we talk about the first half of the year, we are very bullish that we are about plan of where we are going to be at the bottom line, and we think that it’s going to equal out a little bit between Q1 and Q2 on the top line revenue.

So a good strong start to the year from a growth standpoint, wholesale, retail and internet business. Kind of showing that there is a good appetite for the brand in the marketplace today. We think about channel sales, we have continued to build doors and I will show certain things that we are doing with some retailers. I did not pull some of the same slides from Europe or Asia. I think sometimes we can relate, investors can relate a little bit more with what's happening with the brand. With U.S. wholesale customers, I am going to show you some specific things that we are doing with key customers today. And how when we talk about building kind of wholesale partnerships, what do I mean. What are we actually doing here to gain more space both in real estate and number of skews that we are distributing in those particular retailers.

And also we are working really hard, and Dale’s going to talk about this again, to continue to build a Q4 business. It’s not going to happen overnight. We never said it would happen overnight. But for us to be relevant we have to continue to design cool, innovative products. You see some products up here, our Mammoth collection comes back this year. You know Dale comes from Nike and Doug Hayes runs or Americas business, comes from Adidas. He was President of Adidas in Canada.

When we look at models and we ask them, how many models in your history in those really key brands did sell 10 million pairs of shoes. Our Mammoth collection of products, we sold over 10 million pair of shoes out. This is a franchise for us not to go past or forget about what to build on in. We took the Mammoth out of the line last year in our U.S. marketplace. It got a little bit distributed broken, it didn’t really have the right, maybe distribution and pricing around it. So by taking it out, coming with a new series of products this year. Little bit upgraded, a little bit different design. And we believe we are kind of building on a franchise that hopefully we will do better.

Cobbler collection in our boot line. We are committed to inching those forward each season. And Dale’s going to give you some specific numbers today so you can see. So what does that mean in terms of flat and boots and how is this kind of coming together for Crocs as a brand. Big debate inside, somebody brought a Mac, other don’t Mac. I am not capable yet of running a Mac so. Any questions at this point? Yeah?

Unidentified Participant

[Question Inaudible]

John McCarvel

Yeah, you know it’s hard to tell, Dave. I mean clearly with Europe, same situation. There is clearly a pull forth on the Europe and it’s nice to rather. You know I hate to say and we are in a (inaudible) we talk about what weather does to the business. It does impact our business. And the fact that Easter came earlier also had an impact on the business. And the fact that it has been cooler since then for both Europe and for the U.S. marketplace. You know it clearly moved some revenue forward in the process. Asia is a little bit different because you just have spring kind of holiday in China, you have golden week in Japan that falls in the early part of Q2, and those don’t fluctuate between seasons. So we don’t see it on the Asian side of the business when it comes to retail or comp store sales. But you do clearly see it on the Americas and the European side.

Unidentified Participant

[Question Inaudible]

John McCarvel

Yeah, it does, yeah. And if we had a storey in mall and let's say we took a smaller space or a larger space, then even though we are in the same mall, you don’t put that in your comp base. We don’t put it in our comp base. Okay.

Unidentified Participant

[Question Inaudible]

John McCarvel

Guidance was for Q2. Jeff just reiterated, right at the beginning of the presentation. He put it up and said here is our Q2 guidance.

Unidentified Participant

[Question Inaudible]

John McCarvel

Nothing is changing.

Unidentified Participant

[Question Inaudible]

John McCarvel

Okay. You know, you got to (inaudible). Ten years in Asia, I am kind of a bit EFL at times. Okay. So English is a second language for me. So you are going to have to -- chances that I might give next time.

Unidentified Participant

[Question Inaudible]

John McCarvel

I know. No. So that’s why we did it right up front. So Jeff kind of putting up guidance for you in advance, hopefully that was clear at that. You know what we are telling you right off and everything you are going to hear from us is nothing is changing for the quarter. Nothing is changing for Q2.

If I look at kind our core business today and I think about the Americas, you know we look at wholesale as a really important part of what we do. And we really look at how distribution works. Again, just to step back a little bit, as kind of history of what's happened. You know in the early days, a lot of our revenue stream came from sporting goods and came from department stores. The bigger box people. That changed. I think everybody understands that all changed three-four years ago and we don’t have a significant presence in department stores today with the exception of kind of that channel that we do with Coles today and kids with Nordstrom.

And this offers us a huge opportunity. But I think we have to prove band relevance for a number of those retailers to stay engaged. Dillard’s business has gone down for us and the department store space significantly over the year as we have transitioned. But we are going to show you today what we are doing with Dillard’s. We are going to show you what we are doing with Dick’s and Academy. Just try to rebuild that space without getting into a distribution problem again and having proper channel segmentation, line segmentation from products that you find.

I think our European business needs rebuilding and I have been there twice now. As I said in the last two months. I am really happy with a group of people that we have hired and we are going to talk about Europe specifically a little bit later when we go through regions. I am really happy with what we have. We had a sales meeting there two weeks ago. The energy, the enthusiasm for what's happening. I know that in the 2008-2009 frame from the outside, we were a little bit in disarray. But mantra inside was really how do we take market share and how do we not waste the recession. The recession is a bad thing to waste. And that’s the same kind of thinking that we have going on for our European scene today.

Recession is a bad thing to waste. So how do we take market share? We are 30 to 60 euro, dollar price point product. How do we stay relevant to people where they are spending is tighter and they are looking for values today, there is no question. We have opened up new outlet stores here in the last two months. Our outlet stores have done extremely well. Foot traffic conversions, the types of products that we are selling, we clearly see that that European consumer today is more concerned about the spending that they are making on consumer type purchases than ever before. And we are kind of that clog product that they go to, how do we become their casual lifestyle shoe. And part of that is the upside for this brand is, we don’t have major partners in the UK, France or Germany today.

We have a lot of independents, we have a lot of smaller chains stuck with us through that period of time. So our management focus in our European business today's is just how we get one or two key accounts back on board with the brand as we go into spring, summer ’13. And so I think a lot of good work is being done there.

Asia, I think [Ket Lee] who is our VP, General Manager for China, said this last week there in the Asian sales meeting, we have the hook well planted in most of our Asian markets today. People are going through the stores, they are looking. Conversion rates in Asia are a little bit lower for most brands but foot traffic is higher because people work, shop and eat. Sometimes they eat then they shop, sometimes they shop then they eat. But basically in that order. And so you get a lot of people that are always looking for what's new and what's fashion. As long as we continue to stay on trend in that market place and a lot of good programs with our key accounts in China, in Japan, in Korea, in our major markets, then I think what you continue to see is activation is building, our business continues to stay strong.

And we have consumers that want to be in Crocs. Sometimes here in the U.S., sometimes we don’t want to be seen maybe publicly Crocs, yet. We are getting closer to that. But I think in our Asian markets we are getting more real estate, we are gaining more placement of product. And you see it when we talk about NPI and what our new product percentages are in those markets and then it carries over to other parts of our business.

This is how when we think about wholesale accounts today, and I am not dropping names in here so please don’t ask me where certain accounts fit here today. Just think about this in terms of general term. When we have gone to market, our main focus is right over here in the right. So we have to go through and say, look there are certain places we just can't be. And those are accounts that just the low potential, the kind of lack of synergistic working relationship. We are a $20-$25 wholesale price point and we can't afford to do pre-book discounts and sack rotation, and the season discounts and cleanup programs. It just doesn’t fit for us and for that products.

So there are certain models that just by the people that work within us in the environment is not going to work for. On the right hand side, you know those places where we have built relationships in any market globally, we want to continue to get a little bit more space. Because those buyers are going to continue to put us in channel, in space, how do we continue to optimize. And looking at product offerings today, much better business than [telling us] about what the sell-through rates are on products. Cross pollinating information, how do we really optimize those key accounts that we have, we are going to get. We are not going to get any more space in certain accounts.

Now how do we make sure we are putting in the best products, the most appropriate products. And as we go up, how do we protect the space that we already have, take additional shelf space and how do we build those really good relationships. And how do we build that kind of connection. So let me show you what that looks like. What does all that look like today? So for two weeks we did most recently a takeover campaign with Famous and I think you guys see what the comps for sales numbers are like. And the growth that we had, the amount of product that they took in store this year was higher than the previous year, which was higher than previous year. Getting more space, getting more mindshare with the major retailer and really five of their top models sold in those two weeks for Crocs products.

So not only did we build this campaign with them from a visual standpoint, from a co-op marketing standpoint, so that they saw the foot traffic and they see the conversions for a wider portfolio of licensed out products. This will be another shot, so you kind of see how the stores were merchandised both in the window as well as in store and kept. You know for us this has been major focus for the last two years with our U.S. wholesale business. Our brand presence in those wholesale account is either put to a rack or two to a small corner. Well, it doesn’t look like that with a lot of our major accounts this year. We have put a lot of time and effort into doing co-op marketing and getting better space.

This would be Bealls. We are the Crocs destination in Florida. That their kind of pitch, where your destination for Crocs in the Florida marketplace. They have given a significant space, kids, women’s and men and end-cap complete rows of product placements. And boxed products here also. If you look at Dillard’s, this is a 85 fixtures and 60 stores they are testing out. We have pulled all the product out of Dillard’s that was there before. Some of the remnants of things that didn’t sell, they really made the brand not look very good last year. And still in some of their stores we are not cleaned up completely yet for this year. So we look much better for kids, for women’s. A much more lifestyle, emotional connection that we have talked about. And as you have seen today, I don’t get people to think about that well, additionally how do we make that connection with the mom, our number one consumer, and with kids. Those are our primary consumers, loyalists of Crocs. They have accounts for about 75% to 80% of what we sell today. So how do we make that connection.

Academy, we always had, for those of you have been in Academy, they have been long-term account. Academy is one of the wholesalers, I think there is only two, that never decreased in business year-over-year with Crocs. So even in a difficult year they stayed connected. This year for the first time we now get end-cap as Academy stores in 2012. So you’re walking down this year you get to see Nike, Adidas, all the different brands and this is the first year we have kind of earned the right to have our own end-cap. Really pushing more sandals and flip-flops in, in this marketplace. They’re a long-term kind of partner for us. And what we are doing this year is kind of a front campaign.

If you guys have ever been I Academy stores, they are the only ones that just have these massive displays Camel. Have you guys seen that? Anything that we -- that will put camel or anything that we are willing to put camel on for them, they buy and they sell. I mean that through their consumers. We are doing a co-op program with them this year. We are giving away Rubicon jeep to all cameod out and so it’s part of a co-op marketing program that we are doing with them.

Dick’s, the conversion rate on product with Dick’s is about 60% higher, once they committed and once they committed and once we committed to doing end-caps. And these were two that we did with the kids program and the spring, kind of late winter there, kind of early spring, February- March timeframe. So what we see the conversion rate when they give us the space and we are able to go in there and merchandize the brand, we see a considerable uplift and with our shop in shop, with an end-cap program let’s fight for the brand.

Unidentified Speaker

[Question Inaudible]

John McCarvel

(inaudible). Dick’s, those three, three spring have really seen significant....

Unidentified Speaker

What does it take to get those end-caps because obviously clearly you want to have everywhere you already have end-caps now, right?

John McCarvel

Yeah, it depends. I think in the case of Academy, it’s just part of that progression of our business with them. And Dick’s is kind of buying us space back in a little bit. Spending of co-op marketing dollars, committing some of our own merchandising people to make sure that product that is one there isn’t getting stuck in the backrooms, it is getting merchandised on the line. And watching internally here. Watching really what fell us through and making sure that they stay in stock. Because nothing hurts you more than being out of stock of kinds of colors and sizes, what's hot. So an internal commitment and some dollars. No question. Same thing for Famous Footwear co-op spend.

Unidentified Speaker

And then how quickly does the retailers when you get a sell-through report knowing what they are selling best?

John McCarvel

Yeah, daily on those. And weekly we look at that with the planning group, the wholesale planning group, if they are out of stock, if they need additional product pulled in.

Unidentified Speaker

Then you will reset to the store, how long that?

John McCarvel

Whatever they pull. It’s kind of up to them. We are trying this year to really push that at once. A little bit harder than we have for probably two-three years now. We have product in this year. We have probably a little bit more inventory than we have in Ontario, all geared towards this is what we think is going to sell-through. Our aisle lining of new products is kind of the cork wedge class. I mean sell-through on that runs anywhere from 14% up into the 30%. That’s been a huge successful product for us. So how do we take that and maybe put that into Famous, into some of the key accounts that will take that product even for the end of Q2, early Q3. So it’s a little bit more proactive approach. That was what it was years ago but kind of rebuilding the business, we shy away a little bit from chasing too much on the track.

Unidentified Speaker

[Question Inaudible]

John McCarvel

No, I just -- I pulled what I thought was the best photography that we have. So there is a marketing deck that comes out on a monthly basis. I mean I think Shoe Carnival is one that we do really good job with today. You know good visual, good presentation. I think DSW Shoe Carnival calls on Famous Footwear, the people that are in the middle there, that are that mid-tier channel. I mean a lot of focus and a lot brand building with them. More space, more style this year than before. Now, I just picked out a couple that we had at Bealls, so it’s kind of in between. Box would also be somebody starting to kind of continuing to work with that. That I know is just what I picked from the deck. Can I try to have a few from different, Dick’s and Academy too. Yeah.

Unidentified Speaker

[Question Inaudible]

John McCarvel

Yeah, you know, some are committed throughout the year others we are still working on, right. So we don’t want to give up the retail space. So how do we convince them that fall product is going to sell in their store. Doug and I go out, we are go out again at the end of June kind of. We are humble, we are happy to go and beg for space and see how we can work with key partners to get them to be convinced that we are going to sell into the fall and even for rain boots. And some of the kind of core products that might fit their consumers that they stay with. Some are committed through the year others aren’t. Yes?

Unidentified Speaker

[Question Inaudible]

John McCarvel

Yeah, I mean as of first date, kind of in that lower left cone, I mean we have this channeling tray and I think all (inaudible), we do want to go back into the over distribution stage again. Nor, and that was on that left hand side, I don’t want to go into that upper left quadrant which means that we are going to go chase something just to take door. So when I talk about this here -- so down here is there is just certain ones that aren’t going to fit the model. And what we would like to do business with, main season some of those, yeah. There is a space of certain products that we would like to put in there to continue to distribute flaps and wedges and Dale’s going to show you that product portfolio. So, yes, would we like to do that? Yes, we would like to open that but same time we go on this left side, there is some big potential growth plays out there.

I don’t know if we are relevant for JCPenney’s as they make remake themselves and I don’t know if they have to rate a place for us to go and grow to. But when we look at this left side, we are not going to sacrifice the right, the people that we have built this with, they are independent and the key people that we have worked really hard at over the last three years just at door count. And you know what, it will pop us for one year, maybe two years. Now we are going to have a problem that we are going to have to deal with it. It’s not our long-term interest to build a healthy brand year. And we could have grown Asia when I was there years ago at a more rapid rate but that’s not my philosophy. It’s do things right. Don’t have to redo them and don’t have to ask your current partners for forgiveness for doing things that impact their business either.

They have been pretty loyal to us over the last three years, DSW famous shoe carnival of all have been good partners. So let's not disrupt that relationship. Just to go up to left side. So we can talk more about course so that kinds of gives you general feeling. I think in our businesses I talked about Asia would be very similar to that in terms of program that we do at (inaudible) and GBO and Pacific in China. Some of the activation program. The amount of space that we have in shop in shop and their stores in those key accounts has been pretty significant and continues to build.

On the retail side of this, we continue to look at our pipeline of stores, relevant stores, proper stores, right location. Not what we did before maybe to take locations because they were available or we thought that was a place where we could play. We have learned a lot about our retail business over the last three years. Retail is up and we are going to continue on path to add 80 to 100 stores this year. What does that look like when we think about growth today? We were doing a lot of transitions as we said this year in the Americas. We are giving up space in kiosks, we are taking space in high traffic outlets. This is the place where we do the best. As we continue to look at this and study the high street stores in New York or Chicago, this is not a high enough traffic for us. We don’t get the branding that we need.

But where we do do well is in those right malls, right locations and outlets. Asia is just a such a large territory. So five or ten stores here, five or ten stores there, all of a sudden it becomes it becomes meaningful and as you can see our commitment in Europe is to continue to build that out. Just in the month of April we opened up stores in Frankfurt, Nice in France, Roppenheim also in France, outlet store, and Swindon in the UK. And then we will open, I will show you what our new retail format is going to look like. We are kind of into phase two of what we are trying to do from a retail branding standpoint. And that we will open in Bluewater in London in about three weeks. So we will see a new format store there.

If we look at partners. So there is always a question, what makes Asia go? What gives us such a growth dynamic in that market place? First off, it’s a very large region. So just remember that we include in our Asian numbers everything from Japan to Australia, to South Africa, and everything in between. So that’s a much larger format than maybe other markets. And when you think about that Asian business this all shows up. All these partner stores, we don’t have any investment. They are not franchises, we have no investment in this. We work with them on branding guidelines. That’s 436 stores there, are built with our distributor partners or others in the wholesale space. So that shows up as wholesale revenue.

So when you look at wholesale revenue and Asia and say, wow, it’s 70%, it’s true. It’s 70 as we sell in to them. But they also realize from a branding standpoint that they have to have retail to get the product distributed. So anyone, I will give you two kind of data points, so anybody who has been to Israel will tell you that he is a marketing machine. And he has transformed his business there, he has been with us for seven years. Two brothers, Michael and [Amis] Horowitz. And they have transformed that business there from wholesale to 59 retail locations. Now he is going to pare back retail a little bit this year. He is going to close five, he is going to open one.

You see and there is 55 retail stores. That’s 436 stores. 55 of these are in Israel where we sells about 600,000-650,000 pairs of shoes a year. So obviously the 6 million-7 million people who live there are not buying all those shoes. But it’s great brand building for us because so many people go through that marketplace. So many people kind of see that breadth of products that he brings into and he is a great partner for us.

The story that I loved best last week in Asia during the sales meeting was, and I have talked about this on the call so this just kind of adds to my enthusiasm, is where we’re at a dinner after the first night and our new Saudi distributor is there. And they brought in two containers for shoes with the intention that they were going to open two stores and start to do some wholesale. And so the first store opened in Riyadh. And in the first week of sales, things just kept getting bigger and bigger. And lot of word of mouth, they are not doing any marketing. There is no advertising out there. They opened up the store, on Friday, which is kind of our Saturday, right, there Friday or our Fridays is Saturday, there Friday they sold 700 pair of shoes in one shop one day. They then determined that the rate of shoes that they are selling is so great they don’t have enough shoes in women’s line to open the second store.

So then they are scurrying to pull product out of Dubai to open the stores. These guys now have two stores open. They are just ecstatic with what's happening and they are committed to open six to seven stores by the end of this year and they are planning to open 35 to 50 stores in that marketplace in the next three years. So when we think about how that business dynamic works, it’s not just the 80 plus stores that we have in Japan with partners, in the southern portion of Japan. And it’s not just the stores in Israel, it’s partner stores really throughout the entire region. And that gives us that huge drive in wholesale and it gives us a huge drive in our retail business.

Unidentified Speaker

[Question Inaudible]

John McCarvel

Massive. Massive. So Santa Cruz, [Waterloo], you know canvas deconstructed casual mens shoes. I mean we are just starting to see some people in Europe kind of start to sell those in any meaningful way. Whereas that’s a million club member, soon to be a million club member of products that we sell. Which are great kind of go to, casual products in the U.S., it doesn’t resonate anywhere in the Europe whatsoever. If you go to Korea, you put any kind of brand message, even for adults, you put Mickey Mouse, Hello Kitty, I mean that market is so licensed kind of thinking driven it’s just total anomaly. Yes, we sell other core products but if you look at the volume of licensed products in that particular market, it’s just a completely different dynamic. You have to try and understand the consumers.

So there is a significant difference. I think sometimes between Asia and the U.S., there is not always that much difference. They kind of look at U.S. trends, but Europeans footwear and you guys have all seen, European’s footwear is a little bit different and we are trying certain products that are little bit more streamlined only or heavily in the European marketplace just for them. It’s a little bit different dynamic, especially men’s shoes.

Unidentified Speaker

[Question Inaudible]

John McCarvel

A little over 40% so far.

Unidentified Speaker

[Question Inaudible]

John McCarvel

Asia would be the last. It would be the last. America would be in the middle and Europe is still about 70% clogs. And so our big push in the European space, and I think we see in our retail stores, let me talk about European retail stores. And I am going to try to reference some slide earlier so I’ll just say it now. I mean 30% of our sales in April in our own stores, getting in and really merchandising, allowing different like popping the story differently is in new products. So that’s one thing to point and that same is the trend. But what we see by doing the right thing in April, all of our stores with new products in them, all of a sudden we see our NPI jump in Europe to levels that we haven’t seen before and not clog on top of that. So it’s encouraging. So it’s that we can't sell a lifestyle product into this space, it’s going to take some work. The moment you have all been waiting for.

Let’s talk about retail metrics, right. Sam, you happy. I know you’re not hard of hearing. When we look at formats today and when we talk about this, we are talking about the general kind of curb. Right. There are things on each end of this. Generally, our average store size in the U.S. today is in that 1500 to 1800 square foot range. In Asia, as I said, Asia is a massive market when we talk about this. We have a store in Hong Kong in the 650 square meet that does more than $2 million a year. You got stores that are 650 square feet that do $350,000 or $400,000 per year. And so on average, you get to an average stores sales of right in the $750,000 to $800,000 range per store. Yes, we have super performers on markets where’s it’s well above that. But it’s all for heavy foot traffic, it’s also kind of different retail dynamic.

The internal metrics, it has to hit 20% or higher operating income per dollar rate before we say, yes, to sign off on it. Are there exceptions to this? Of course there is exceptions to this. When we want to be in specific locations or maybe we don’t feel like the data is maybe just a little bit conservative. We are going to take a look at those particular locations or stores. But in the past when we opened SoHo or when stage 3 Chicago, those were opened more on marketing kind of thinking, that we needed the branding, we needed a position, we needed to be in a certain location. You guys have seen this overtime, those days are long gone. We are not looking for a $4 million-$5 million investment in a location that we don’t think generates that kind of operating income revenue stream for the brand.

So anything that you have seen, almost anything with the 95%-98%, surely we have opened that store. We are looking for places like that in Florida or on the coast, Texas, Southern California which is a market that’s been building for us over the last few years. Our European, Asian locations all fall within the same criteria. We use retail consultants in every market that we operate in today to be relevant. And the Head of our U.S. retail development is in Las Vegas this week for ICFC.

Return on investment, 35% or greater. Payback on some of stores that we opened today, they return, they payback within a year. Some stores pay 2-2.5 years, but anything that we look out when it comes from an adjustment standpoint, that hurdle rate has to be within that one to three year range. Preferably one to two years on most stores that we open today. So hopefully this helps give a little bit more granularity to how we think about retail, how we open retail from a financial metric.

Unidentified Speaker

John, what's happening to that Asia store cost. Is that factoring in some of the inflationary pressures in Mainland China, other markets trending up year-over-year?

John McCarvel

You know on the average store’s cost build out, it doesn’t really change that much. When we go and we build out a store, labor costs are cheaper. All that material, we buy in volume for our stores in Asia, in China. So they can just pull directly out of China to the place when they open a store. So the store setup costs are cheaper. We are looking how we do that same thing for our U.S. and European, as we get to a new format how we buy and get our initial build out cost to be low. The labor cost to build out stores and just that dynamic is just so much cheaper. So I mean that has a huge impact. (inaudible) labor get up, get it quick, it gets done to their in and out where at times it takes a month, here in U.S. you get stores build out.

On rent, clearly in certain markets rent is clearly jumping. Hong Kong is starting to see rents in prime locations, not so much out in the territories but in prime locations, if you want to be down there. Oh, yeah, rents are going 20% to 50% in lot of the locations. More of our rents are there are three years out so we don’t see that rent impact yet. But sell through in margins, you know we have to believe we are going to continue to work to offset some of that impact.

Unidentified Speaker

[Question Inaudible]

John McCarvel

Yeah. It’s a very interesting thing. As I said in a lot of our Asian stores, you are going into a brand new mall that’s opening, everybody wants to go there. Everybody wants to go try the new restaurants, everybody wants to go see kind of see what it’s like. I think that same dynamic, what I saw in the Middle East, that we seen on Dubai, Kuwait, Istanbul. Same kind of feeding frenzy. The bad news is is that you still have year and half left on your lease in the other megamall that were built, and now everybody wants to rush to the new megamall and be part of that dynamic.

But clearly, yes, your first years in in most of your Asian markets are such that they are actually equal to, maybe even higher first year then they are in the second year depending upon how the mall stays and what the flow looks like. Whereas I think for both our European and U.S. business, we see about a 10% to 15% uplift between year one and year two as people come to know that you are there and come shop and that dynamic kind of changes a little bit in U.S.

Unidentified Speaker

[Question Inaudible]

John McCarvel

Jeff, how do we look at that? Maybe you stand up, if you don’t mind.

Jeff Lasher

I think it’s important that people on the webcast here this. So when we look at a new store on a pro forma basis, we look at the first year operating income over 20%, it’s not the guideline that we are looking for. Second year and third year and more, in all those years it will be over 20%. As John sometimes we make an investment in a store where it’s not going to be 20% the first year, maybe it is in the second year because of some issues in the first year it doesn’t hit it. I mean -- beyond the strict rule of 20%. Same too with return on capital employed and return on investment. If you look at it internally, the return on capital employed which includes inventory, is a little bit lower within return on investment, would just appear not the money you are putting in the store.

Unidentified Speaker

[Question Inaudible]

Jeff Lasher

Profitable, profitable.

John McCarvel

And if there are stores, you know if the balance shifts like that in as Asian stores, then we know in years of experience of opening stores there, especially in new malls. It’s going to drive higher than 20%. So the benefit that it usually give us is that when we look at the pool, we look at those 80 to 100 stores together. Yes, we assume, we work on, we talk to, we drive that there is going to be 15% to 20% operating income as a group. And we look at it every money we work with the regions every month. We have a retail team that says why, if they are not hitting those hurdle rates, why is it like that. You get it dodgy, let's face it. You get certain stores that sometime just don’t resonate in market but as a grouping that’s the bulk. Just real quick, Jim, you had a question?

Unidentified Speaker

[Question Inaudible]

John McCarvel

Capital plus inventory.

Unidentified Speaker

[Question Inaudible]

Jeff Lasher

So that return on investment includes just the cost of our four wall stores and return that we are getting on that four wall stores and the investment in to that store. So it would include, it’s on a cash basis so you would knock out the depreciation. (inaudible) an MPB analysis on an IR basis.

Unidentified Speaker

[Question Inaudible]

John McCarvel

Two to three. Two to three in our Asian markets. Basically , three, three, three kind of the European style retail sales you can kick out after three years. In the U.S. we get a wide spec in that way. I mean we get outlet stores that are three years, we get some that are five and we have kind of shied away from really those long-term lease commitments. So we have gone away from a lot of those high street stores, the major kind of retail markets. But you know, Sam, there is always some of that assets that are going to be above five years. Do you want to add anything?

Unidentified Speaker

[Question Inaudible]

John McCarvel

So the question for people on phone, so the question is really do we open stores throughout the world in more warm weather locations. Obviously, we do better in warm weather locations, right. We don’t have that same seasonality effect. When we open up in Woodbury Common, there is a certain cyclicality to that business, right. And people are going to shop at certain times of the year. When we open in Miami or when we are in Orlando, and clearly the dynamics are going to be a little bit different in warm weather. So, yes, I mean to our brand, it’s more beneficial.

I am going to show you in Nice, France, that we have just opened. You know we try to focus in locations like that. Tourist destinations in the Caribbean, in Florida, in California, warm weather. Southern California is better than Northern California for us a from a marketing standpoint. Yes, we are very cognizant of being in the [case]. All that said, we do extremely well in Japan, almost every month throughout the year. Again, it is just how do we continue to build that connection with the consumers in other markets the way we have in Japan, in China. Where if they don’t have as much of our products.

Jeff Lasher

And I was going to say that some of our better performing stores in Europe are north region and in Russia. So a lot of that (inaudible) come to weather issued, (inaudible).

John McCarvel

Yeah, it’s a really interesting dynamic that our highest penetration rate is actually in the Nordics. And our best performing retail today where we have nine stores is in Russia. Again, how do you salvage the brand, how do you make that connection, how do you get consumers to think about us. When I first went to Russia about a year and a half ago, I walked in and said, you guys have got to change this clogs. It’s so heavily clog dominated. That’s that European influence on the Russian model. If you go in the stores today, they are 30%-35% clogs, they have just gone much more lifestyle proliferation of products.

Unidentified Speaker

[Question Inaudible]

Jeff Lasher

Well, you know the target is that 20% is kind of the minimum, a better way to put it then necessarily target everything where in a 10% world we are targeting pretty much higher.

John McCarvel

You know if you look at the four wall returns on some of our stores, they range in the gamut, right. We have some that are very strong performing store. Some of our best markets like Orlando and Hawaii, Hong Kong and those stores do fantastically well.

Jeff Lasher

Yes, I want than to discuss some of that brings the batting average down overall but in general it’s pretty good.

John McCarvel

I think in general we feel if we can run a retail business at a above 20% operating income and we can continuously drive that, that’s a pretty good dynamic and that kind of return on investment capital.

Unidentified Speaker

[Question Inaudible]

John McCarvel

Yes, so the question for the people on the phone is how do we open stores in the U.S. marketplace that just didn’t work very well. I will give you a perfect example. Right here in our backyard. You know we opened in Cherry Creek, higher end mall in Denver, nicer area of town. Our consumer doesn’t shop there. That’s not a place where it’s really relevant. Rents are expensive, I don’t know many people in that mall that make a whole lot of money. Jack’s pulled out of that mall about nine months ago. And we have got, we have become much more understanding of who our consumer is and where they shop. We are not longer aspirational when we think we are going into these higher end or higher end locations and say this is a place where we are going to do well.

So, yes, we shy away from those high-end malls, we just don’t do well there. Okay. So we are not on main street. A lot of times our park is off on the side street, so we don’t get the traffic through the stores to really make the connection. On the other hand if we go into a mall like, Mall of the Americas, you know we get a high traffic area and we already have a good brand presence there and it does fine. That’s the right kind of calibration for us. Okay.

So we tried the initial concept that we showed before which was a little bit woodier, a little bit greener, a little bit different kind of feel to it. And what we come back to this is that the store itself has to have a more female appeal to the store. The greens, the woods, where we like it. Those three stores have done okay since they have opened. So we opened in The Streets at Southpoint in Durham, North Carolina, and Austin and Mall of the America. We have kind of found that towards the brand and for our consumer, we kind of have to lighten it up a little bit. Stay true to kind of what the roots were, kind of having that little bit more outdoor kind of feel to the product. And so what you see, this is the style of store that we are going to open in Bluewater in London here in about four weeks time.

So a little bit more open, little bit lighter, much more user friendly. What you are going to start to see is in the stores there are display racks underneath and these racks will also be merchandized or we can start to put box products into the stores as we move to a little bit higher price. And as we have more boot products, we need to have that kind of merchandizing flexibility in the store. So we are going to see kind of second generation, what that looks like for the brand. But we like this feel a lot better than the initial take.

Unidentified Speaker

[Question Inaudible]

John McCarvel

Lower capital investment on this store, yeah. About $45 per square foot less when we build out like this and the idea that we are cleaning out fixtures and we are going to a more standardized model. So we think it has a big impact, Joe. So first is getting the feel for it and then really then deciding how that cuts in. Our desire is we are going to stay with the existing format till the end of ’12. Any new stores really will be those stores that are in the pipeline that open after January 1, 2013. So again, see how this works.

Unidentified Speaker

[Question Inaudible]

John McCarvel

Yeah.

Unidentified Speaker

[Question Inaudible]

John McCarvel

I don’t know. You know, Jeff. We are going to kind of see how that dynamic works. We took certain things that we like, certain things that worked from the first format. Incorporated that into this. So we kind of get a second generation of learning. I think you know as you guys have chances to meet maybe when we take a break here, we have got some of the other executives here. Maybe we can introduce again, and if better, conversation with Andrew Davison and Becky Gebhardt. They can talk about kind of some of the work behind this. Angy is in Europe this week so she is not here. But a lot of work is going, so we are going to see how the learnings kind of apply.

And then we are going to make those decisions than how we are want to retrofit out stores on a going forward basis. If entirely successful then we are going to be more incentivized to start to make some changes. Now, a lot of times you know we say that, but if you look at mall store data today. If you look at outlets or mall store data, you know revenue per square foot, you guys get this, you see it, we see it. We are usually within the top five and certainly within the top ten. So when we talk about taking revenue per square foot up per store, it’s not like we are sitting in the bottom third trying to figure out how we are going to get to the middle half. I mean we are generally, especially in outlet in that upper quadrant in most of the locations that we are in.

This is not you know -- this is an actual picture, this is not just a rendering. So this is actually the store in Nice, France. It’s on two floors, it’s in a really location. It’s done extremely well out of shoots. But it kind of goes back and gives you an idea of how we can connect especially with tourists in this particular market. They kind of think as a brand in a non-clog way. You know a lot of the products that you see out there are women’s flats, women’s sandals, women’s flip-flops and it’s done really well. And it proves us -- getting back to the question asked, are you opening up in warm weather climates? Yes. And this is a great destination. It’s a great location for us. Why did we not open these stores sooner? We waited in Europe longer to get the right locations and now we are getting better look at locations in ’12 for ’13.

Internet. If we think about what the internet is doing for the business, we have clearly backed off on the internet side in terms of discounting. Have you guys noticed? We have clearly turned off the discount meter and we are really pushing new products, we are taking margins up in both Europe and in the U.S. When it comes to our internet business, volume is not growing at a faster rate but we as a company have set, we are not showing you next, we have lots of people out here. So 277 sites. This shows up as wholesale business in the U.S. that are buying products. Zappos, Shoebuy.com, Amazon, they are all pushing a significant amount of volume and they are turning it on and turning it off. And we also let Zulily and some of those do the discount promo to the brand instead of us doing it ourselves. So we are trying to become much more brand conscious, much more focused in our internet business.

To try and get of this chase revenue at a margin impact. Now I put one caveat in it. That’s all true until we get into the fourth quarter in the U.S. market, right. And this it’s kind of a free flow, you got to kind of go with what the flow is, you will have to go with what that dynamic looks like at the macro level. But significant amount of development in the Americas and Europe with partner sites against what drives the business in the U.S. today. What drives that brand perception. We have got great partners here today that kind of help get that messaging out.

So we think we are happy to see this thing continue to grow at a 10% to 15% rate. We got a jump years ago on the competition when we came in getting the brand now. And so it’s a pretty sizable business for us when you think of $120 million-$130 million through the internet site to date selling only footwear, not selling apparel or other accessories.

So what I would like to do, if you guys are okay with this, how about we give you a ten minute break. How about if at this point before we jump into the regional piece of this, how about if we give you guys ten minutes. It’s 1:30, so maybe we try to come back at 1:40 and I’ll go through regions and then Dale is going into products after.

So did you guys like it? Yes. We have three different video clips for you. The video clips to show of the sales meeting. They get a lot more jazz then financial people do about that. So I would like to may be make that transition over in the regional piece and I am trying since already, going in the top ten or three to five thing. So we focus in on markets. It’s a little bit more expanded on the European piece. If I don’t get enough -- if we don’t get into enough details in here please ask whatever you would like to know on the European piece and I will tell you to the best of my ability of what we think what we see.

Before I jump into the retail piece, maybe, if you don’t mind, maybe we have got some of our executives in the back. Maybe first [Christine Saito]. So Christy is in all this great product that you see around you here and is a key member with Dale Bathum who is going to talk next set of product development and bringing this to life in a lift for product development and merchandizing role. Next to her is the women with the camera eye here, Becky Gebhardt. Becky has been here about 15-16 months. You guys have seen the transformation of our visual, merchandizing piece in conjunction with Andrew, Dave [since] I think stepped out, she has made a huge impact on how we create this emotional connection with our consumer. And Becky runs our creative group here.

Katy Lachky has been here four months. Katy is VP for Communications, Corporate Communications both internal and external. How we go to market and so I am sure you will introduce yourself to Katy while you are here. Dale is going to talk, Jeff you know, and everybody else is out. So if anybody else comes in we will -- they’ve got work to do, they can't be sitting in here all day, so we asked them to kind of bounce in and bounce out. With the sales meeting going on next door they have got other things going on too.

From a regional standpoint, when we talk about next three years, I don’t think this is any surprise. I have said this repeatedly, I think our plans are that the growth rates in the U.S. are good and what we are continuing to do in the U.S. is good. But I think really by the end of the ’13, Asia will be larger than the U.S. And that has various implications on our business as we move gradually towards a little bit more direct as I have talked about earlier. And as we move ourselves a little bit more towards Asia and Asian consumers and it gradually grows, then I think that what you see is a little bit stronger performance at our gross margin and operating income level into ’13 if we drive in this direction. But we think, based on what we see, sell-in-sell-throughs, a little bit on the fall winter. Actually Jeff’s going to go through backlog with you later in the presentation. He will talk with you kind of about what we see it in fall holiday ’12, or the uptake of the lines. Just it’s more dynamic and our brand presence is stronger. We didn’t have the damage that we had in the U.S. in 2007-2008 to recover from, so that’s kind of fast-forwarded us a little bit more in this year.

Regional results again. If we think about the quarter what we look at on our FX neutral basis, it was 18% up in the Americas. Again that growth drive in Asia, 39% up on a FX neutral basis. And Europe year-over-year, what makes me encouraged -- and I am going to talk about this later, what makes me encouraged is actually on a FX neutral basis we are actually up 2% year-over-year in a pretty darn tough environment in Europe, partly because we are doing better in the direct consumer space. We have a little bit more direct consumer space. But even of that we only have three stores, three incremental stores open from Q4 to Q1 in Europe. So we didn’t open as many stores as we wanted. A lot of those stores did open in April and I think what we are going to see is we are going to see some of that start to play itself out through 2012 and into ’13.

So let me talk about the Americas. And again, when you talk to people next door, when you see the energy that’s going on in that room, they are building now on a base of solid wholesale distribution channel. I know we how do we take space, where do we add certain accounts. Product segmentation, you are going to see that when go in the room next door, you are going to hear that. And they are really focused on making sure that we have got the right products. You are not going to (inaudible) in sporting goods, it’s not going to happen. There is a much more directed line assortment that [Christy Saito] is taking control over on a going forward basis, where we have got a much greater focus on where we are placing products than ever before.

Development of accounts in specific channels and additional doors. You know we have got certain accounts that we want to go open up, that maybe we did business with before, that there were some hurt feelings or there was some things that we need to work through with them. Places where maybe they didn’t want to take our product before. But with the assortments that we have now, it opens up new channels. And what we can definitely say and what you see in the numbers is, we ask them, you got to give us greater presence.

In the early days in Japan in 2005 and 2006, we tried to fight these battles with [Marsachi], with [GBO], and with [Beans] and with a lot of our major retailers in Japan, said, if we give you the product for spring-summer, you have to guarantee presence in fall-winter. Because we knew even back then that for us to get the four seasons that we needed their commitment. And even if sell-through wasn’t as good, they were blowing through products in the other six to eight months of the year. There has to be a certain amount of trade-off in there. So as I said earlier, a lot more work in the States to try to keep that brand presence into fall holiday ’12, definitely into ’13, probably is going to have it. So in dynamic in the U.S.

A lot of our marketing as we showed you earlier, is really driving, trying to drive new consumers to the breadth.

Unidentified Speaker

[Question Inaudible]

John McCarvel

Well, I think you have -- I mean this has backed up. You know as inventory backed up so a lot of retailers when they look at what open to buy is based on their in position and brands that they already have in mind, it’s a little bit harder for them wholesale accounts to bring in new brands into the marketplace. I think we have great products and you are going to see it as you go through and we can talk about that further. We have great new products. Our whole Cobbler collection is kind of serious down into the flap. And so for our products last year this Cobble collection in fact didn’t get placement. We are not seeing wholesalers willing to take open to $5 and open up new segment. So that’s for our own stores, what you are going to see is them merchandized with Mammoth, with the Cobbler collection of products and boots and -- I don’t know Christy, have you got that ones arranged for them. Can we get one?

So if you haven’t seen or felt this, and I want you guys to check this out and take the liner out of it. So this is all new technology, all new kind of innovation when it comes to material development, that Dale and his team has gone through years to bring to market. And this fits right into our categories of patented kind of hunter boot, were we think we are not trying to go into technical winter products, what we are trying to do is for you really your go to rain product for kids and for women. So when we look at this from a product standpoint, then this is what we need to place and we need to have some confidence in the line when they arranged that beautiful looking product, and technical it fits and it’s outstanding. And again Crocs comfort, super lightweight on your foot with a whole different kind of feel.

When they first did it, the originals ones were in blue so the internals joke was, that it was smurf skin. So that was....

Unidentified Speaker

What's the price point?

John McCarvel

Price point on the rain flow is $79.99. New retail locations, as we just check you the retail piece of this, I think we are taking larger retail space and I think we are getting better sell-through on the stores that we brought online 2011-2012. I think, as I said earlier, part of what you are going to see is, we are going to get far less promotional, let other people be the promotional arm. From the ecommerce site if we sacrificed a little bit of growth, that’s okay in the short-term. We have got to recondition customers, not to sit back and wait. We condition customers, we condition you. All right, you sit back and wait. Every week we give you some kind of promo, a buy one get free shipping, whatever it was. It’s too discounted oriented. You have to, just like JCPenney in the same space. You at some point of time have to get of this crack cocaine. Since you are on to just continue to try to drive the business. We have got pretty god product placements. How do we do that differently?

Unidentified Speaker

[Question Inaudible]

John McCarvel

We are, just those three, Steve. And only in selected colors and only selected models where, a, the sell-through was good last year, or like kind of on Mammoth, where we are going to put in our own stores. And the little bit which shorted our Q4 revenue in the last two years, we didn’t place strong enough bets on inventory. I am not saying we are going to get crazy about inventory, but we are placing stronger bets for having stock available. Just those three.

Rain flow, which is going through here today, which we think will do well based on the early studies and tasks. Mammoth which I said is a 10 million pair seller, getting that back at in some more places. That’s a $35 -- and kids is $35, adults is $45 price point and I agree with this amount. And then also with Cobbler where, you know most of our Cobbler product was sold out by about the second week in November. We never even got to January with that product. It was pretty well picked over. So we are going to place our bets this year. Yeah.

Unidentified Speaker

[Question Inaudible]

John McCarvel

Yeah, you know I think for second quarter, Sam, I think we have better kind of incentive with sell-through. So that’s not going to move materially. It could be up a little bit or down a little bit, probably up a little bit based on what we have seen in terms of products and sell through and what we are kind of chasing to support wholesale, retail partners there.

On the back half of the year, I think it is too early for us to tell at this point in time how it’s going to play out. You know there is a lot of work going on our part, we got ahead of us. I think there is lot of senior management kind of has to go out and say look, we have done really well together, we need your help on the back half for the year. And to Steve’s point, because we are going to place bets on those, those are carryover products for us. We are not doing anything that is going to be not in the line for ’13, all of those three products are in the line for ’13. So that’s really going out, we’re really working hard to try to maybe get some additional wholesale orders for Q3, Q4

Unidentified Speaker

Can I just follow-up. I mean would you do in situations where you might have some (inaudible) that is faulting a little bit? Say, look give us 30 doors early, let's see how it does and then we can roll from there. I mean that’s the kind of work you are doing?

John McCarvel

Right. Yes. Absolutely. You know in a lot of times it’s they are in between, they are not really the women’s, it isn’t really back to school, it’s kind of end of the summer and you are waiting for fall. So give it a shot.

Unidentified Speaker

[Question Inaudible]

John McCarvel

Yeah. We do. Yeah. Those were all great. So if the rapid sell-through your model stock is added 8% or 10% that when is [Eli] is selling-through some of the 14% to 30%, then those model stock is out of the window pretty quick. Kevin?

Unidentified Speaker

[Question Inaudible]

John McCarvel

For Asia, if there is three kind of key building blocks in or Asian marketplace, it’s really continuing to stay relevant, staying on the ground. In Asia, the brand perception is the strongest. When it comes to how people think about this, in China, we are aspirational. We actually charge a slightly higher price in China than we do in other markets because when we position the brand, it’s the same people that are buying Starbucks. It’s the same people that are looking to say, I want to be this, I want to communicate this. And it’s a whole different kind of marketing dynamic in a lot of our Asian markets, in a lot of our Asian countries today.

How does that continue? Keep it fresh. And how do you continue to use faster retailing in those markets, that’s the key for us. So how we change over stock every six-eight weeks in stores, or with our retail partners. Developing new wholesale accounts. There are certain markets where we are just under-distributed today. If you look at the number of actually doors that we have in Japan, we are under-distributed as brand even though it’s a $170 million worth of business, there is still a lack of distribution in certain locations and in certain areas.

And again, leveraging brand strength and staying in the seasons, all four seasons. You know you guys saw the number of stores that our partners have built. They want to stay in season. They have to stay relevant with the product. They have to slow rain boots and you will kind of see what backlog we expect for Asia for the third and fourth quarter.

Retail expansion, internally and with partners. I talked about this earlier. This is really important to us. It’s really important in this part of brand building and it’s really important in terms of staying connected with consumers as those markets grow and develop. Building ecommerce. The upside here in our business and sometimes we are focused on, the only market that we do any amount of business in today which is about $12 million to $14 million in per year is Japan. And so bring up our new demand-wear site in Japan in the late third quarter. Korea only opens in about two weeks time. So about the first week in June. Taiwan started in the first quarter. We think that these are good markets for us from a ecommerce standpoint where people do shop online. Buy online, not just shop online, buy in a stores.

And the other market that is Australia. When it comes to what we think from an ecommerce standpoint where we continue to sell products. Most of the other markets there, they are going to look at it online and they are going to buy that in-store. They are going to have dinner and they are going to buy at retail. But we think that those can be good platforms for growth in Asia over the next three years.

Unidentified Speaker

[Question Inaudible]

John McCarvel

It should be simple, right. It should be basically simple. When you look at what's happening in the Middle East, when you look at opening up those channels, that’s what gives us confidence that we should be able to drive top line revenue 15%-20%. It’s all about execution at this point, right. And you know, it’s amazing, another $1 million in Korean, getting Japan just to $3 million a month, up from $1.5 million a month, less than $1.5 million a months, that’s key wins for us in the stage of development that we are at.

You know sometimes you guys have to remember that we are about seven years old. This is maybe our eighth year of business. Now we didn’t really do much, if you think about this. 2004, which was our second year anniversary, not much happened. You know we only sold 1.2 million pairs of shoes in 2004. And a lot of that was thanks to Alex Dillard. Alex was river rafting in Colorado, found the shoe, started to put them in his store in the fourth quarter of 2004. We didn’t do much. Most of the revenue all came in the fourth quarter. And the fact the next year we only did 7 million pairs of shoes. Sometimes it is hard to think about this in the terms of us. We have a hard time. As the (inaudible) will tell you, I have a hard time.

You know the fact is in the last five years, we shipped over 225 million pairs of shoes. Here is the little bit phenomena. Open up three channels and be in these markets and be as effective as we are today. I mean I think that’s really a lot of hard work by a lot of really good people. But the opportunity as an investor and as a company exists. It’s about continuing, not being (inaudible) and being happy to hit a billion, to tell you to say, okay, and are you in the next 4.5 years then get to 2 billion. And that’s the internal constant push, yeah. So opportunities are there. All we have to do is to execute.

And why not, Adidas fighting with Nike? You know we don’t have a natural predator in this space that we are fighting over market share with. We are fighting with local brands, we are fighting with smaller niches to be that brand of choice for casual lifestyle products. And you saw some, you are going to more wins when Dale talks. The opportunity is there. You got to execute.

Europe, and I have two slides to talk a little bit about Europe. And I know that there is a lot of questions, so I don’t cover it, please ask. When we think about building our wholesale channel, by far go shop, anything in Europe and tell me where you find Crocs today. And tell me where it’s there in a meaningful way, because even some of the people that have Crocs today, that would be deemed an independent. They are just selling through some of the old products that they have or they stayed connected just to simple racks. One or two racks in a store.

So opportunity for us to build the brand there with the new management team, again, is clearly in front of us. New structure, [Kemo Salmy] was our Commercial Director for Russia and the Nordic is [Finn]. And him coming down and running all of our commercial operations in Europe is a great internal move for us having somebody who really knows how to work. We have taken much different approach in the Europe over the last 18 months. Mike De Bell, who ran Asia, was about six months in Europe last time on restructuring that. Getting a new general manager hired and getting Kemo to move down. And in building that we are really decentralizing out of where we were in the past in The Hague. Not very convenient, not good work ethic, a number of different dynamics there.

We have now moved the office closer to Amsterdam, so we are [office] was about 6,000 miles from Amsterdam. Really six minutes from the airport. They are in Schiphol. That dynamic changes, we pared down our headquarter operations in [home], we have moved out jobs into Germany, into our France and into our UK, London offices so we get a little bit more decentralized. The fourth point is the one that we are working through that will chance fire, I can't really probably tell you more than what I am about to tell you because we don’t know any more than that. But we have been working on the Benelux marketplace that would transition back to us in January of ’13. And we have already said that’s coming back to us a direct market.

But because we are now selling in spring-summer ’13, they have kind of comeback and said, you know we would be -- it would be better if we transition this out some time maybe in early Q3. So as we know more, as that finalizes and crystallizes, then we will talk about it in the next earnings call. So that means we are going to take back about nine stores. So in that partner list, they had 11 stores. We are going to take back 9 stores in the process. And we will than take back the Benelux month to get on a direct basis. So it’s pared off some of our Holland staff. They have been working on this for about nine months now to put in our systems and to hire over staff and to make that transition.

Spain, is just kind of recent occurrence, where it’s clear that they are struggling. The distributor-partner that we have there is struggling financially. And it’s probably something better that we come to, we have got long-standing relationship with them, and they have been there since 2004. But it’s just I don’t think it’s not going to work for the long-term. So again, we will update on that. That will probably comeback as a direct channel to us. Only two stores that they have. They carry Speedo and six or seven other brands. So they are going to take some of the existing stores, convert those to multi-brand stores of their own. Our existing distributor is going to continue to carry those brands but for us we have two dedicated stores. One in Madrid, and one in Barcelona.

So we will tell you more about that picture. You know to put in terms, 70% of our business in Europe, less than 1% is in Spain and like 0.3% is in Greece. There is a lot of questions about what's happening in the European markets, but in those kind of key markets there is not much movement and there is not much impact to our Crocs Europe business.

Unidentified Speaker

You said on the Q1 call [Question Inaudible]

John McCarvel

No.

Unidentified Speaker

And kind of 1% of the European business is Benelux?

John McCarvel

What percent of the European business is Benelux?

Unidentified Speaker

[Question Inaudible]

John McCarvel

Yeah.

Unidentified Speaker

[Question Inaudible]

John McCarvel

Yeah. I got to say, it’s in the 5% to 6% range. But maybe, just can come back so that gets that number and then we can.

Unidentified Speaker

[Question Inaudible]

John McCarvel

Yes. So if I think that, Mike, is the wholesale piece of this, ecommerce, I mean we have again taken that same step back, so we are maybe not comping up on our European ecommerce business but from a margin standpoint we are doing better. And so what we have done is we have traded off being promotional every weekend with some kind of campaign to try to do more brand building, selling and new lines. Getting consumers to think about this differently. Today we have about 1.5 million people in our European CRM database. So who do we kind of create that tipping point there when it comes to how people think about the brand. More like sell us clogs. And just really quickly enough if I answer to this in the next slide, when we think about then retail, we are going to basically double almost, the number of the doors year-over-year. We are going to go from roughly 31 to 60 doors in Europe in 2012. And again, opening up 5 or 6 in Russia and we just opened up in Stockholm and opening up doors and Germany and outlet store in France.

Each one of these makes up a much bigger investment from a Crocs standpoint but it’s clearly what we have should have done two-three years ago go get the brand message out there. And we are just significantly behind the rest of the company. What I say here is as we do the right thing, as we get merchandise in the right way as those stores become open, the consumer looks at this 30% of our revenue came from new products for spring-summer 2012. We think we should be able to sell women’s flaps, we should be able to sell wedges, we should be able to sell kind of our core products globally and, yes, there is some color nuances and a few changes really that’s consistent.

And just doing a better job of it. Working harder, asking for the business that we have and had before. And outlets and high traffic areas I have showed you for those retail locations. Last we think, we have said today, having gone and spend time with them myself five days in or European sales meeting, I talked to every possible group. I sat with one of the group at lunch, another group at dinner and just really kind of getting the feelings for it. I mean the energy that’s there, yes, the market is struggling but I don’t want to say that we are recession resilient but we are a good price for a guy. And now we just have to kind of get that message out.

So like in the total scheme, we are going to be on budget, on plan. This year we don’t see a decrease to 2011 levels. And we think based kind of on weather out today on some of the things, that we are not seeing real time that they are going to be, maybe even slightly up year-over-year. That’s (inaudible).

Unidentified Speaker

So clearly a little bit of wholesale shifting?

John McCarvel

Nothing that you are going to see until really in a meaningful way until ’13 on the wholesale side. But I like the fact that we are trading off revenue at a higher margins and getting new consumers into the ground.

Unidentified Speaker

Once you get the (inaudible) situation pickup in Spain, do you see to be longer-term allocating more capital resources at that market? Because it seems like you have for the product (inaudible)?

John McCarvel

Yes, for Spain, yes for Italy. Those two markets there are both places where I think where we do much better for having some of our own retail stores in the right location. And let's face it, I mean rents are coming down in those markets pretty significantly. So we are opening up outlet in Italy in two locations this year. So we are going to start to build a little bit of brand presence. We have said this before, we took back our retail rates last year in Italy. Now he is going to open some stores in ’13, our existing distribution partner. But he is a not a -- he is a wholesaler. He carries other brands, he carries Tabba. And so he is more focused on building out the wholesale.

And the Italian situation is the one that is interesting in that, actually our revenue to our wholesale -- to our distributor in Italy is going to go up this year mainly because he was over inventory last year. He didn’t buy a lot of product last year. So one of the internal dynamics is, yes, the market is struggling but for us, he is so low on inventory that he is actually going to buy more in ’12 then he did in ’11, just because of where he is at as a business.

Unidentified Speaker

[Question Inaudible]

John McCarvel

So we had Deloitte and Touche do work for us in their European consulting business, and the number of stores that we look at in location, anywhere between 30 and 40 stores over a five year period. And in Italy, slightly higher, that is 40 to 50. Interestingly enough that quiet market that I referred to earlier, that Poland market, they are going to have 50 stores of their own. People don’t understand the spending in kind of footwear marketplace, that are forward (inaudible). Some brands do. Some brands are actively going into that space. And so for us, we think that this also offers a good potential to growth either directly or with our partner there.

Unidentified Speaker

[Question Inaudible]

John McCarvel

I think we are going to find out, so we are putting more work in there, as I said earlier, into those mid-tier kind of chains. Like we did here years ago. So you know we don’t have a strong presence in shoes in Europe. Even though we do some work with Genesco here in the U.S., we don’t have a strong brand presence in a lot of those mid-tier footwear brands. We should have a better presence. Just like we didn’t -- three years ago we had hardly any presence at the mid-tier, right. And so that’s a big focus for our team there, as far as getting product placed and then now continuing to build confidence as we sell through this year with existing, independent kind of lower, smaller kind of chains that we have. So we are going to test for example, of the (inaudible) in France. So we start this 50 store test with them just to see kind of how that’s going to work. That’s a good mid-tier for us. Kind of a sports retailer. This segment is the right kind of product into that space that offers an opportunity that we haven’t had before.

Unidentified Speaker

And so those are commitments already with (inaudible)

John McCarvel

That’s for ’12 and then we work with a number of different key retailers today to try to kind of get ourselves back in. Pre-books are just starting, so they are just taking the line out now in Europe. There sales meeting was 2 weeks ago, so one of that work is being done. And I think by the time we get to the end of July, we are going to have a much better feel for what that is. I mean more pre-book still coming all the way through the end of the third quarter. We are going to have some indication of whether they are going to give us a look in some of the other retailers in Europe for ’13. I mean we had a much bigger distribution, it just imploded so much in Europe, now it’s how to go back and build that.

Unidentified Speaker

When you think about the wholesale distribution in the U.S. or in the Americas and in Europe, who much of the growth is going to come from (inaudible) assortments, deep-broader or deeper assortments versus new distribution?

John McCarvel

Now I think what we have said this year is we are going to see about 50% of our growth come from ASPs and about 50% of it comes from the internet. And I think we have got to continue to work at that unit growth. So ask that again?

Unidentified Speaker

New distribution, new channels. Like how [Question Inaudible]

John McCarvel

Yeah, it depends upon the channel. Like we are not looking for any additional mid-tier footwear players. We just want to continue to build in our existing relationships in that space and just have better products, it’s better for their consumers. I don’t think you are going to see significant door growth in the U.S. in ’13 if that’s, kind of where that question is. I don’t think, we think that we need that much more distributions. We need certain -- in certain markets we need more. And in certain doors that we are in today, we need to engage them better, they need to have the right product in their stores.

Unidentified Speaker

[Question Inaudible]

John McCarvel

Maybe, Jeff, can we hold that. Jeff’s going to go in to it and talk a little bit about that we can mix that into kind of what the numbers look like there. Okay.

Unidentified Speaker

[Question Inaudible]

John McCarvel

Jeff is going cover that and he is going to you guys -- I know this is a big day today, guys. So you are going to get actually backlog by region to and Jeff is going to talk about profitability by region today too. So this is worth hearing, worth your trip. So any other questions on regions or kind of channels before Dale shifts over.

Unidentified Speaker

[Question Inaudible]

John McCarvel

What we would like, is we would like it to be incremental days. You know I don’t know what the curb, we don’t know what the curb is going to look like where so much of it is clogs there. I mean is that going to stay strong channel for us and that we are going to add to it as we do in other markets today which drives the top line growth. But we are going to see a consumer coming and say, well, I am not really interested in your existing models, I am going to go with the new retro runner product. I don’t know, we don’t know yet how much trade-off we are going to see in Europe with that consumer.

So we never push this hard to get them to think about us in a different way. Will they trade up for clogs for flat? I mean it seems like a different application, it seems like intuitively it should be an incremental sale. I came in to buy a clog, I found this really cool, new women’s flat. And so I am going to buy this flat and it should be incremental. We are going to say. Okay.

Dale Bathum

Hi, everyone. I am Dale Bathum, Senior Vice President Product, and I am going to talk to you -- I am going to be pretty brief, how we think about product and how we think about diversification. How we have been doing on that efforts in diversifying and then just what the future looks like in this fall and next spring a little bit.

So back in 2002 we started with our core classic clogs, nothing new or different for you there. But as try to think about this in 2007-2008, we want to think about how we could start to diversify from that known clog, so that we still want to protect our core. We still want to protect that clog and our market share there and try to grow that, but we also want to just start to diversify. So we identified four new areas to think about plan of the core. Casual in the upper right hand corner, stylish styles up there in the upper left, lower left active category, and the lower right, how do we start to think about winter as a program.

So if you start to look at the product line and you look that whenever we line the clogs, very simple, with Mammoth. And John spoke to that already and I think, was it 10 million pairs or 5 million pairs? Sorry, I forgot how many pairs, maybe it was 10 million pairs Mammoth that was sold. Santa Cruz was launched in 08, casuals, men deconstructed shoes. They are part of our lines, real big seller and well into the over a million pairs. Malindi, women’s flat style. And flats have become a very a product -- like a base product line. And then we started to look at how do we get in this active category and we looked at post-activity, so Prepair series, after working out.

And that’s really how we looked about it. How we started to think about diversifying. Then in 2009-2010-’11, we started to look about how can we go to next level. We have build these four new pillars around core and they all contain the same DNA of the original Crocs product, but how do we start to look at this in a way that we can look at new channels, new markets, how do we start to segment our products. How do we find new consumers. And that’s how we really started to look at this program, and following that same thought process, going out in the Santa Cruz, we looked at sneakers. Sneakers is the biggest category of shoes available out there. We have to look at what the Crocs opportunity and take it in the sneaker category.

Now in the upper products we actually made a specific sneaker for the European market place. They like their silhouettes a little slimmer, a little bit tighter around the foot. So we are starting now to not only sell men products by channel we are starting to make specific products for a particular region. When we in ’11 introduced the Translucent series with the Adrina Flat up there, a new injection molding material, in this case TPU, thermoplastics, and started to take our leadership in injection molding to new places. And starting to use new materials and software materials. And what this material allowed us to do is to make a the shoe a lot sleeker on the foot, a lot sexier. And more colorful in different ways that can match with different outfits.

We continue to build on wedges and heals. We had had luck with ’08. And then we looked at the toning category in the active area. And finally, we introduced our first boots in ’09 and ‘010 and started to get a little bit of placements out there. Started to get a little bit of a foothold in the winter time. So now how we look at it going out, in this new season which you are going to see a lot of these products, is we are continuing to build that sphere around that original core. We are continuing to maintain that same DNA. We are continuing to stay in those same four new pillars, but do it in a more innovative way.

How do we do it in a new way that excites the consumer, brings innovation to the brand and brings a little bit of a cool factor to what we do. And changes the perception to Crocs and brings the new consumers. And that’s where we feel like we have, when you look at the lines, that’s where we really feel like we are going to doing ‘13 with this product line. So we have a new sneaker up there. And a lot of these products are in and around the room but you will also see them in a minute when we go into the other room. So the lightest sneaker, possibly ever built. It’s got our DNA, it’s fun, it’s colorful, it’s lightweight. And at a recent Asia sales meeting they just went crazy over this product. It’s a combination of a casual, Santa Cruz, that we progressed from and yet it brings in that Crocs DNA with a Crocs light-bottom and lots of fun colors.

So very exciting new project for us. I would think it’s incremental to new customer, new consumer for us that had never thought about Crocs before. And then the retro series which you see on the wall here. Instead of just building off our traditional core clogs in retro, we actually now are launching the retro with a flip, a [Merry Jane] and a wedge and launching it altogether as a complete collection. First time we have taken our core products like that and launched it as a complete collection. So we can to into a retailer and sell them the whole product line. So this is your wall, this is what it’s going to look like. This is the story. This is the marketing. It’s all integrated and it’s all launching at the same time in a very effective way. And that’s new for us to be able to have launched products in this type of way.

Huarache, new flat right here, and back to the innovation, when you get a chance to feel this product it’s incredibly lightweight, very soft and malleable, it forms to the foot. And it’s an over-molding technology that’s proprietary to us. It’s been a lot of time developing this. This is from one tool. And you can actually see on that product that there we have four, five colors, all from one tool. So it’s all injected. What that means is a very cost effective to produce this product. But, yeah, you get bold, colorful, fun product that no one else in the marketplace had. It’s very unique and it’s uniquely Crocs. And then it’s fun the sun dress and different outfits and if you look at it again, you wouldn’t imagine that’s a Crocs. It’s very slim and sexy on the foot and it goes with lots of the outfits that are being on trend right now. So this is very project to us not just from that it’s great looking and comfortable, but just the pure innovation of it is just fantastic.

Unidentified Speaker

[Question Inaudible]

Dale Bathum

60? 45. There is different versions, yeah, 45 and 60. It’s very cost effective to make it with just the one tool, fantastic. And as you can tell I am very passionate about this. It’s really great. And then another fun thing is, this company by three guys on a boat. You know just boil it down to the simplest denominator. There are a lot of stories around those three guys around the boat and what was going on in their heads, but it was founded by three guys in a boat. We belong in this boating space. So we had to think about it in a little bit different way. We have the shoes that I am wearing which is a kind of traditional leather, how do we compete with our competitors there? How do we think about this in a Crocs way? And if you think about boat shoes, they had never really changed Fred Sperry launched them in the early 1900s. They were leather with hand sewn, with a bottom on it and you merely tweaked it a little bit.

But we have been able to come up that way and you will see in there some molded products and bringing these cues with the leather lacing and the slight outsole bottom and different other cues that make it a boat shoe, but in a Crocs way. So it’s really revolutionary within the boating category and to try to go back to again our heritage of three guys on a boat. So we feel like this is a fantastic new category for us. When you go into the other room, you will see on display. They float, they are colorful, they are fun and they are right in our DNA. So we are very excited about this product line.

And we haven’t kind of grouped in there in the active category because it has got this slight bottom that you could actually use these on the boat and use them around, for both. And then also we launched a new category in golf. And for you who know my background, Crocs brought my company Bite Golf back in ’07, and so this is particularly fond to my heart. But it is a great opportunity. And what it does, is it brings a new consumer to Crocs that never would have considered us before. They here about comfortable that golf shoe is and it’s associated with a big name in golf, they try to think about Crocs in a different way. They start to think as not so much versus this, they start to think about it as something that can be an effective category because it’s so comfortable, and fresh, and different and new.

So we are really excited about the gold category and what's it’s going to help us do with the men consumer that we don’t have right now. They are going to think about it in a different way now. And then finally the winter category and John alluded to this already. But we are serious now about being an all-year around brand. We got main boots, you got more warm, functional boots so we are bringing the man who is down in here. So we had lots of collections and really great products that are at a great value. Fantastic product category, value. And you can see how fun and colorful it is. Particularly the rain flows I feel strong about because it’s right in our DNA.

It’s light weight, it’s made from our material, flexible, easy on and off. And then what's really neat is how you display these out and spread them out, the color just pops. It’s just fun and you just want to grab it and go check it on, particularly with the rain flow product. And you see that out there. When we put it out there in our initial [recce] to get on a test, people just want to touch it and feel it and see what this product is all about. Just a fantastic opportunity for Crocs again to find new consumers that we couldn’t have gotten, and I believe new channels. Because you start to look at where you can place products like that. It’s a new channel for Crocs.

So does that road map resonate with everybody, does that make sense around the way we think about things? Any questions on that?

Unidentified Speaker

When you show retailers the product (inaudible) what is the pushback you get?

Dale Bathum

You know, I don’t make that many sales calls so it would be a lot conjecture for me to give you that answer. I think I have been in this business for a long time. It takes persistence and consistency, they need to know you are going to stay at this. That you are going to be an active and it’s kind of why I so the clock in the counter on this too is that we are going to plug away at this and we are not going to give up and we are going to keep showing that, hey, we mean it to be in this business. I think this one we’re going to get a placement but some of the other more expensive type products, it’s going to take us sometime to build out that business. If you think about one of our competitors in sheepskin, they ordered the hockey stick. They were here and they were staying there and then something triggered and in this case it was [over] entry, triggered that and then it shot up, you have to be there you have to be persistence and consistent. And we will be. We will pulling on at this and we will get our inch by inch as John put it earlier, we will get our space.

Unidentified Speaker

[Question Inaudible]

Dale Bathum

You know that’s certainly a great question. So if you look at this map, where would you by Crocs fit? It’s stylish so it goes up in that category. But then it’s not really in our DNA real house, right. So we are not there yet as a brand to go there. But we have learnt that we can get that consumer because the product that’s on the marketplace now does sell. Just doesn’t always sell to our expectation. And we are just not there yet as a brand that we can start to talk about higher-end leathers and fashion and heels and wedges, we are just not there yet. But it doesn’t mean that, our circle as it starts to expand, we can get there in the right way. Does that answer your question? Anything else.

So Jeff’s going to go into a lot more detail but another way of looking at this is by silhouette too. Mostly silhouettes would fall into one of those four pillars outside the core. So clogs obviously is our core business. So even though we talk about expanding away from the core, we don’t want to not go the core. We want to protect that and maintain it and actually grow it and stay very strong at it. But we want to start to grow more aggressively or factor outside on those other pillars. So you can see boots. So it has a very nice [rotor] very manageable, very steady boots. They are flat. They have been very strong for us in growth.

We started with flats before we started with boots. So it grew and not it may be starting to plateau a little bit. But I think it will continue to grow. Sandals will be a big growth area for us in the future, as we develop that new product and particularly I believe, this is my opinion, but the huarache series particularly will particularly will start to really help us drive in sandals. Casual sneakers, again nice steady growth there. I think casual shoes has been real nice. So Jeff will get into more detail into that. But the point is is that it’s working. Point that as we move into these other pillars and silhouettes outside of that core clog, we are growing our clog business but we are also growing outside of this, in those four pillars.

Unidentified Speaker

[Question Inaudible]

Dale Bathum

You know I can't really say because I am not out selling in all those different regions. But, yes, some products you know, as John mentioned earlier, clogs are still stronger in Europe. I just believe we are in different areas of maturity. And so right now Europe is a little bit more immature, so they have a lot of opportunities to start driving, in this case sneakers. And particularly the sneakers that if we design for them, it’s still more slim. Because that is a trend and it’s just one of the biggest categories.

Asia right now is more open to all kind of different possibilities of Crocs could be, particularly China. And in Japan, they are looking for ways to expand the line. They are aggressive in their mindset and they view Crocs as a very comfortable, easy on and off brand. And so they are looking to expand outside the clog. In America, it’s very competitive, sneaker type business. So we are focused on casual sneakers. More of our lifestyle type product and I think we have a lot of opportunity there. We just have to persistent and consistent, keep telling that story that we belong there. You know when you try it on, it’s so comfortable and so lightweight that it really does have a unique position. We just got to keep working at it and keep plugging away and it will come.

Unidentified Speaker

[Question Inaudible]

Dale Bathum

Clogs is a really profitable business because it’s easy to make it. It’s simple to make. So when you get into this are where there is a lot of competition, it gets more challenging to try to maintain that type of margins. But they do have a higher dollar value for a pair of soles right. Does that answer your question?

Unidentified Speaker

[Question Inaudible]

Dale Bathum

We look at it aggregate. We make sure that we maintain our aggregate gross margins depending on what the model mix is between sneakers, clogs, flats and other shoes that we maintain, and overall aggregate gross margin. Anything else. Okay.

So then the future. We are going to continue to hit this drumbeat and stay at it and keep driving into these new pillars. So you will see the Crocs span when their boots come out this fall, you saw the earlier version, it’s an update version with the new material. It’s really scrunchy and comfortable, we call it warm and toasty, and fantastic colors too. The new Mammoth Evo because it’s an evolutionary product. It’s not revolutionary for us but keeping that, that’s protecting our core. That we make that Mammoth, that line clog, and it’s a very fantastic product.

Rain flow, we have already talked about. They are purpose built. First time for us really to after a specific category being purpose built. In this case, rain boots. And as I said earlier, it really feels like this should be our sweet spot. We really feel comfortable here. So we have a lot of fun products in rain boots. And then John already pulled out the Cobble clog, (inaudible) we pulled out within weeks of dropping it into our stores. So it’s very stylish and it’s comfortable and it’s a great value.

And it comes in an EVA version, a flat version and then a good, better, best with a higher end leather version that we can segment to different channels and different customers. So when you look at it, we really do have a great story for fall-winter and it’s filled off of that core. And for spring ’13 which you are going to go see here in a few minutes in the other room, we talked about the boat shoe series already, but it’s very emotion -- it’s emotive, it’s back to our heritage and it’s lot of fun colors and it’s very simple in design but it’s very difficult to execute, but it’s just a fantastic product. You put it and you throw it in your hands, it’s so lightweight. It floats on the pool. So if it falls of in the water it’s going to float and it’s just got a lot of neat dynamics about it. It’s just a fun story to tell.

Huarache, again we talked about very innovative. The retro series, which is very much uniquely Crocs is taking our core DNA with that clog, putting on a retro bottom from the 1970 type Nike gear, Adidas type original shoes, which is right on trend again. You start looking at the magazines, you will start to see retro originals starting to come back into the trendy lexicon. So we are going to be right there on trends. And the A-Leigh series which we talked about already but for us it’s our first array in sandals with leather uppers and a little bit more stylish and fashionable bottoms. And John already gave you the sell-through numbers but they are fantastic, 10% to 30% depending on where they are located.

So we feel very strong about the future. We have been diversifying. We have been successful at it and we are going to continue to beat that drumbeat of those four new pillars outside of our core and are just going to keep working and working it, and I think as, by far I believe, our product line and we are just really excited about the future. So any questions. So we are -- yeah, we are going to go out this door, we are going to the sales meeting room. There we are going to have evaluated hopefully and you will see all the different stations of the new product lines and we will be there to answer questions.

Jeff Lasher

So some highlights on the finance side and then we will have a special presentation, a special guest to present to you. And then we will take some Q&A and then we have got some gifts for you guys before we break-over to the Boulder store and enjoy dinner together. So some investment highlights.

As John and Dale have taken you through, we are really feel confident about our product driven international growth expansion. You know the key message is again, casual, lifestyle footwear brand, balanced international growth, long-term 15% to 20% sales growth on a constant dollar basis. And then resulting in strong balance sheet with strong financial results. So you can see on this slide we have added tax rate and EPS, we are going to talk about each one of these particular six categories over the next 30 minutes or so, and then open for questions as well as we go through them. Talk a little bit about revenue, talk a little bit about operating margin and then we will talk a little bit about tax rate and then the effective tax on our business.

So again to reiterate 15% to 20% long-term sustainable FX neutral revenue growth. We think we can get that from a combination of increased ASP units, you can see those are Q1 numbers. Our new products which represent 38% of total revenue in Q1, at the same time we shouldn’t miss that clogs space continues to grow for us. So we still, even in Q1, even if the percentage of clogs went down from 51% to 49% versus prior year, the overall revenue increase in clogs was still 12%.

When we look at the product categories. We see that’s still seven product categories generating over $30 million in sales. And so our sales had, let me talk a little bit more about the investments that we have made around the marketplace we can see in total the pie chart kind of breaks out. 48% of our sales for 2011 were clogs, 14% were the other category but specifically 4% were sandals, 5% casual sneakers and around the wheel to the 12% of our business that’s flats. And you can see on this particular chart, you can see the flats business that I just talked about, it doubled since 2010. Now represents about ’12 -- or sorry, 11% of our total revenue in 2011. We will be about $122 million business in 2012.

Our boots category. A couple of years ago we were really excited about our fall holiday 2010 sales success in boots. Came back in 2011, $47 million, in 2011 was 5% of our total sales generated out of the boot category. And this year that business will be a $74 million business. So we have kind of quietly growth this boot category which includes all the rain boots behind me, all the winter boots over on the left side, into a $75 million business.

At the same time the casual sneakers, casual shoe marketplace. Now $155 million business, up from only about $60 million a couple of years ago. So terrific growth in all those categories. Sandals $43 million to $86 million, a doubling of our overall sandal business. Again, from a clogs perspective, even as all these other categories are growing, we are still seeing the clog sales growth from $520 million last year to $585 million in 2012. These are our projections for 2012. The 2011 numbers are obviously actuals.

So what does it mean to our investment community. We think that the strength of our new products, the continuing growth of our molded products which you saw in spring-summer ’13 category, over here in the [bebold] section, all of those products. The translucents that we came out with. All of our strong spring-summer ’12 product line. Together with the operating leverage from higher ASPs, strong international growth, all those factors together should help us drive gross margin about 100 basis points up to about 100 basis points improvement from 2011 level.

As we look at SG&A, it’s been a lot of questions over time. So what does our SG&A look like from a direct versus indirect. This chart was 2011 and we will show you 2012. You see in 2011 we spend about $185 million in the direct channel. That was broken out, 46% of the spending was in rent. 23% was in other which includes marketing costs, credit card fees and other promotional aspects of running our retail stores, as well as our internet channel which utilizes all of the bloggers and the Googles of the world, where that’s driving some of our revenue and accelerating that revenue online. And then labor, 31% for 2011. Indirect spending was 48%.

So where we do we think we are going in 2012. We think we are going to be able to leverage our indirect spending, drive that percentage down to 52%, at the same time our direct spending going up to about 48%. How does that breakout for 2012 SG&A costs? Rents are 43%. We still think labor is going to be about 31%. You see rent’s a little bit higher as a percentage of revenue. As we move into Europe in a bigger way, Asia shop in shop and more rent structures, dilute a little bit as we add retail stores around the globe in other markets where the lease is a little bit more expensive. The other category however, we continue to drive efficiencies and leverage that other spending, that marketing spend across the broader portfolio of stores. You guys were raising, so I will to Steve, first?

Unidentified Speaker

[Question Inaudible]

Jeff Lasher

No, rents in the U.S. after the kiosks are completely closed down will mostly be fixes. The kiosk model is a variable model.

Unidentified Speaker

[Question Inaudible]

Jeff Lasher

Over time we expect that we will be able to grab some leverage on our rent base. Joe?

Unidentified Speaker

[Question Inaudible]

Jeff Lasher

This is relatively new. I think what we said after the first quarter we were up 70 basis points in the first quarter results. Last year we were slightly better than the prior year. We have always kind of thought that we will be kind of in that same ballpark as the last year, but we have got some confidence because of all these different factors. So now I will call out that we think that our cost to goods sold structure is going to be able to generate a bit better improvement in margins next year up to about a full point. So it’s somewhere between zero and 100 basis points. Overall we should be able to see a positive improvement on margins.

Unidentified Speaker

[Question Inaudible]

Jeff Lasher

Yeah, as you know this is a -- there is a lot of variables behind the gross margin line whether it’s that discounting that goes in the retail space. The growth in that walk on the wholesale space. Our returns that we have, the returns reserve assumptions, all of the different variables that go in. When we put it all together, Joe, and we kind of run it through all of the different algorithms, cost to goods sold we think overall is going to be about 100 basis points. Zero to 100 basis points improvement. So kind of a little bit of everything to answer your question. A little bit less discounting, a little bit more improvement on our supply chain. A little bit of leverage on ASP. A little bit better product margins internally. All those things are going to be a little bit better, offset by some minor things going the other way. But we think overall we will be able to grow.

And so what does the SG&A leverage look like at the consolidated level. Again, we think we will be able to leverage our SG&A expenses somewhere again from zero to 60 basis points where we think we should be generate some positive leverage on our SG&A line. Again because of the indirect SG&A, the direct SG&A leverage over the other cost, labor cost being held flat, we expect -- this is offset by, again, in the fourth quarter, I just want to head off a question, fourth quarter we do expect that the SG&A as a percentage of revenue will be I the low to mid-40s. Similar to last year because of the lower revenue numbers in Q4. Questions on SG&A?

Unidentified Speaker

[Question Inaudible]

Jeff Lasher

This all excludes that.

Unidentified Speaker

[Question Inaudible]

Jeff Lasher

Yeah, we took all that out of this analysis. So what Jim’s referring to is last year we had a credit last year in the FX gain/loss as we used the account for those gains. In SG&A we moved those down into other income. Because of our hedging strategy those are going to be netted out in the other income lines and overtime we think that more relevant to show as other income than to show you guys as a net credit to SG&A.

Okay. So moving over to operating margin. Obviously the math is fairly simple. Gross margin minus our expected SG&A. We think we will be able to drive our operating margin improvement up to about 160 basis points. We think we will be somewhere between 14% and 15%. We as a management team are still focused on driving a 15% return on sales of the operating margin line over the long-term and we think get that in the near term. So we are focused on that as a management team. Questions on that. Go ahead.

Unidentified Speaker

[Question Inaudible]

Jeff Lasher

Yeah, we haven’t set a longer term. Obviously, once we get to 15% then we will come back and say you know we would like to get to ex, I think the next logical goal would be to move that goal back two point, and drive to 17%. But at this point we are just focused on getting this 15%.

So some other financial information. I think there was a lot of questions about backlog. And I could take you through a little bit about backlog by region. This is how its split between Q2 and second half. You see Q2 represents 11% growth, second half also represented 11% growth. Americas, at that time we told we you Americas was up 12%, Asia was up about 18% and Europe was down 13%. But when you look at it on a constant currency basis, let me go back one step. Sorry, so these are all the same information we gave at the end of Q1. So there is no new information there.

So on the backlog by region. Breaking this out, you can see Americas at the end of Q1 2011 was $89 million. At the end of Q1 2012 was $100 million, up 12%, basically flat for the constant currency going to 12% as well. Europe $42 million last year, $37 million U.S. this year, a 13% nominal reduction, but on a constant currency basis it was down 6%. Asia 129 to 152, up 18% in both nominal and constant currency. At the bottom is the key information, right. So last year Q1 2011 was that euro was at $1.41, this year the euro is $1.33. And the last year the yen was 82.87, this year the yen is 82.42.

Last year we benefitted in Q2 as those pre-books and those backlogs -- that backlog revenue rolled into Q2 at a higher average rate. You can see both the euro and the yen both expanded relative to the dollar and we benefitted from that on the currency, on the revenue line. In 2012, we will see a little bit of that because the yen has improved significantly from the 82.42 at the end of March, but the euro has gone back and actually today it fell even further down to $.46. So we are exposed to the euro line on that particular book backlog but on the yen line we should benefit.

So how does that look when we look at foreign exchange overall. How does that look to you as an investor? You can see our total sales, 36% of our total sales are in U.S. dollar. 15% of our total sales are in the yen, about 17% is in the euro and again this is last year’s numbers. The Korea was 3%, the Brazil real is 3%, the Canadian dollar was 3%, and the other category was 23%. The other category includes many currencies that are actually tide to the U.S. dollar or basically float together with the U.S. dollar. Hong Kong dollar, Chinese RMB and other light currencies that move together with the dollar.

So importantly, although from a yen and other category, 15% of overalls sales of Japan, 23% other. About 50% of our operating income comes from Asia. 34% of our operating income comes from Americas, 16% comes from Europe. This excludes FX gains and it’s just a pure operating income line. So you can see we are highly profitable on the Asia marketplace and as a percent of revenue versus operating income, Europe also generates some significant returns.

So we lifted this right out of the 10-K, just to walk you through effect of FX on our business. So we have a little bit of a education for you about how the euro, how the yen and other currencies effect us as a business. If you see our revenues in America is 448, 381 in Asia, 171 in Europe. Operating income $77 million in America, $126 in Asia, $38 million in Europe, it came right out of the 10-K. Importantly though, for the first time we are showing you what our local currency cost is as a percentage of our total cost base. So 8.7% of that $371 million that we spend in the Americas associate with product costs, SG&A and other costs of sales. 8.7% of that total cost base is local currency. Brazilian Real, Canadian dollar, Mexican peso.

In Asia, 56.2% of our total cost structure is in local currency. Chinese RMB, Japanese yen and other currencies like that. In Europe 54.7% of our cost structure is in local currency. So importantly, the operational cost are impacted by the currency movement but they move in the opposite direction of revenue but it’s not a 100% to 1. So when we look at it and we say, how does the key currencies impact the overall business, you can see the Brazil real. 6% of our overall Americas business, 6.5% of Canadian dollar is in foreign currency. Then in Asia, 41% is Japanese yen, 9% is the Korean Yuan, 92% is euro of the Europe business with 3% of our Europe business being denominated in British pound.

So importantly on the bottom, if we saw a 10% movement in the key currencies like Canadian dollar and the Brazil real, we would see about a $2.5 million operating income impact off of $5 million of revenue. In Asia, plus or minus 10% of those key currencies equates to about a $17 million revenue impact, 11.7% operating income. And then finally in Europe, plus or minus 10% results in a $16 million improvement or $60 million impact on revenue and a $9.6 million operating income impact. That thing that is really important to you as investors to understand, how we benefit from the Japanese yen, getting stronger relative to the U.S. dollar, and how we face some headwinds associated with the euro getting weaker against the U.S. dollar. Questions? This will all be available -- yeah?

Question-and-Answer Session

Unidentified Speaker

[Question Inaudible]

Jeff Lasher

Yeah, because we don’t sell to the Mexican distributor in pesos but we do benefit, but ironically, we actually benefit from a stronger U.S. dollar relative to the peso, because we do manufacture in Mexico. So we benefit by having lower labor cost in Mexico, as the U.S. dollar gets stronger.

Unidentified Speaker

[Question Inaudible]

Jeff Lasher

Well, we think that, as John mentioned in his particular conversation, there is some opportunities for us to get that once business in Q2, that once business in the second half, especially in Q4. So we are obviously not stopping our sales efforts, you can see all the sales meeting going on around us. We are driving for a wholesale activities to increase to 12% over time. You know in the near term, this is probably the way it is going to roll out, but we are still hopeful that in the second half of the year we can drive some additional revenue there.

Unidentified Speaker

[Question Inaudible]

Jeff Lasher

Well, Sam, I think -- no, it’s fine -- the direct answer was, we were focused on 15% first. And then we will reset the target once we get to 15%.

Unidentified Speaker

[Question Inaudible]

Jeff Lasher

We are always going to be driving for additional operating improvement. So that the message from John and I is that we are never going to stop trying to drive the overall improvement in the organization. So once we get to 15% we will have a new target and it’s logical that will be.

Unidentified Speaker

[Question Inaudible]

Jeff Lasher

I want -- the message is, we are trying to get to 15%.

Unidentified Speaker

[Question Inaudible]

Jeff Lasher

13.6% and then about 0.6% of that was FX gain, so about 13.1% was our operating margin in 2011. So w are striving for about 2% improvement between this year and next year to get to that 15%.

Unidentified Speaker

[Question Inaudible]

Jeff Lasher

Well, as you know, as we talked about the end of Q1, there was big issue last year about, in Asia about $3 million, about 129 from last year was Japanese. Volume that slipped into Q2 because the tsunami, and that’s not repeating and so the best way to look at Asia is coming off of 126 days to 152 and not necessarily 129 to 152. Those are kind of the big call outs.

Unidentified Speaker

[Question Inaudible]

Jeff Lasher

Great question. I mean if you look at this particular chart then you can see Japan is at 15%, Europe is at 17%, but we, as John talked about, the Asia rate of growth is significantly better than the global. So we wouldn’t actually anticipate that 12%. We have a little bit stronger Japanese yen on a pie chart basis. And then some of that other category would also grow significantly as well. We seem -- as John was talking about -- we have seen fantastic growth opportunities in the Middle East and distributors throughout South East Asia has revenue opportunities for us.

Unidentified Speaker

[Question Inaudible]

Jeff Lasher

That is an 11% representation. Straight out of the 10-K.

Unidentified Speaker

[Question Inaudible]

Jeff Lasher

Probably not. I mean nothing like a headline number, one way or the other. So we are not moving all Dale’s product development team into local market. Other questions for tax. So I think in the past we have always said, we have anticipated our tax rates to be somewhere in the 22 range for 2011. We have done a lot of work around the globe moving our -- putting our structure together and then frankly, the fact that the rest of the world is making a lot more money as you saw on these slides earlier. Even more so than we anticipated for 2012. We actually anticipate their tax rate. We are getting a little bit better for 2012, we should be in the 19% to 21% range overall. That will be different quarter by quarter. Most of the benefit will come in the second half of the year as we drive our tax structure down.

Unidentified Speaker

What was the original guidance?

Jeff Lasher

22. Okay. So what does that mean to you a organization if you put all the pieces together. We see revenue growth 15% to 20%, we see gross margins 53% to 54.6%. We think our SG&A somewhere between 40.2% and 39.6%. So therefore we think our operating margins will be somewhere between zero and 160 basis points better. Tax rate now at 19 to 21, we believe our EPS for the year about $1.47 using all those mid-points. Importantly, that’s based off of a currency as of 331, again we are seeing a little bit of pluses and minus around the globe, yen getting better euro getting weaker.

Unidentified Speaker

[Question Inaudible]

Jeff Lasher

I just did, yeah. So the yen was -- it’s all based on those 331 numbers that we did. 132, sorry, I have to go back. 131, thank you, and 82.5.

Unidentified Speaker

[Question Inaudible]

Jeff Lasher

Yeah, when we look at hedging, we look at it kind of in two prongs. One is, we go after the balance sheet first and you can see in the Q1 we were kind of surprised by the sudden movement by the yen. When it moved back we were able to grab some off the table and kind of some of that exposure on the balance sheet side. Move that other income line. We think at the end of the day, we will be able to offset most of that throughout the first to the next three quarters. So a little bit of noise will still flow through. On the other side that we do, we are actively in the marketplace, hedging some of our operating income on a quarter-to-quarter basis. Just to protect ourselves once we tell you guys, this is what we think we are going to be for the quarter, we will go out and protect ourselves in the operating income line. And those hedges actually this quarter will generate a little bit of revenue for us. And you will see that in the other income.

Unidentified Speaker

[Question Inaudible]

Jeff Lasher

You mean in the U.S. market? Yeah, In the U.S. market as John talked about on the call, you know there is some risk aversion going on in the channel that we hope to be able to overcome as we get closer to the actual quarters. We do have the capability of fulfilling orders for the second half at this point. So we are still hopeful that we will be able to drive that a little bit further. But as far big headlines, customers that drop out or we drop them, there is really no big headline number there.

Unidentified Speaker

[Question Inaudible]

Jeff Lasher

Yeah, I guess I should let Mike speak to that. Mike De Bell has just joined us here to do over in Europe, he was in Europe for all of last and I am calling him to kind of help us out here. Mike heads up our global sales initiatives.

Unidentified Speaker

[Question Inaudible]

Jeff Lasher

Yeah, so the question for those who are on the call still, what's the flow-through of an additional revenue increases, is basically what you are asking for. We don’t see those kind of correlated directly. There is that category of other in the direct channel where we talk about credit card fees and other kind of variable expenses. Labor cost. So there is a little bit of variability on our SG&A that’s associated with revenue. But the major variable is the product cost associated with that additional revenue.

Unidentified Speaker

[Question Inaudible]

Jeff Lasher

You know they are kind of disconnected components. So if we were able to see additional product cost savings, yeah, those would flow through. There wouldn’t be any additional directed investment so to speak, that we would take off. We might do other things that are not correlated to that but directly with would come through. You asked a question?

Unidentified Speaker

[Question Inaudible]

Jeff Lasher

So, I mean one of the kind of things about running a multinational company as you guys all know is that the more money you make in the U.S., the higher your tax rate. So whatever your income in the U.S., that’s below your tax rate, in general. I mean that’s the same for if anybody in S&P 500 still up here. So the real game here is how much do we think next year’s revenue and income will be in the USA. So as the rest of the world is growing faster, that’s generating additional tax savings. And that’s what you are seeing this year. As we get in closer to next year, we will be -- we will try to continue to be as transparent as possible about tax rate. So this is real time information. We are driving this for, we are doing forecast and we are coming back out to you guys where we think we are going to do.

Unidentified Speaker

[Question Inaudible]

Jeff Lasher

12.

Unidentified Speaker

[Question Inaudible]

Jeff Lasher

I said we are benefitting from our structure that we have changed in 2011 and that small change we have made in 2012. It’s not real big headline changes to our structure, if that’s what you are referring to.

Unidentified Speaker

You lid out a pretty good story and something was better than other. Where are you now with repatriating some of the cash?

Jeff Lasher

God, you are quaint Scott. You should come to all of these. We are going to talk about cash next. We can talk about cash next. So I think when we look at our balance sheet we are not ignoring the balance sheet component of our financial statement. So here is some information about our cash structure. We do think that our cash will be about 40% higher at the end of 2012 then was it 2011. We do think that we are going to be able to hold our inventory in line with our sales growth. We are going to have a little bit of modification for those of you that are aware of things that were not in the past. We actually take delivery of our products at the distribution centers. And when we look out into 12/31/2012, we will have a little bit more in our distribution centers then we have on the water at 12/31. The way we are planning it this year. So we will have a little bit less in transit inventory that does not reflect on our balance sheet at year-end versus as we changed some terms with our plans.

So by the end of the day we think our inventories about inline with our sales growth. As John talked about at the beginning of his presentation, this management team is committed to not running to an inventory problem. And you see our inventory is kind of flexed overtime, kind of moving along with our revenue growth.

Unidentified Speaker

[Question Inaudible]

Jeff Lasher

It’s our best probability of all of the different factors we put in. And yes, there are some assumptions in there that we are going to be able to close some sales. So it’s the way we look at our crystal ball right now. And we think that our revenue at the end will be about 15% to 20% constant growth and this is what it looks like with all the mid-points of all the different points we put out there.

Unidentified Speaker

[Question Inaudible]

Jeff Lasher

So as you know, the vast majority of our cash is overseas. We are watching the marketplace as far as what’s the best usage of that cash. Whether it’s dividends or stock buybacks or one time dividend or some other usage of our cash. We are constantly reviewing the landscape for that. At this point in time with all of our cash overseas, we still think that the best thing for us to at this point in time is to continue to reinvest in our business and have a strong balance sheet for any future investments that we want to make

Unidentified Speaker

There are no limitations based on (inaudible) tax jurisdictions on how could flow your capital or your investment (inaudible)?

Jeff Lasher

One of the cash impact of us repatriating cash is we would have to pay taxes. There is potentially some tax weight impact if we started to repatriate money. There is some cash that’s held overseas that is constrained by our ability, specifically China and other markets around the globe, where we are constrained in our ability to flow the cash out. So it’s not like we could take all of that money back in to the U.S. today even if we wanted to. We also have constrained on our debt coverage, our debt covenants, associated with how much we can buyback, and that’s $25 million.

Unidentified Speaker

[Question Inaudible]

Jeff Lasher

And then we would not -- no, I mean those are, those are 37 plus 28, plus we wouldn’t want to bring all of the cash back and drain all the working capital required in the local markets either way. So that’s why we think, when we look at the overall business and where its invested around the globe, it’s important for us to have a strong balance sheet in those local markets as well.

Unidentified Speaker

But the $27 million in theory if you brought all the cash back, you have to a pay tax rate on that?

Jeff Lasher

Correct. That’s the cash impact of us bringing, repatriating the money.

Unidentified Speaker

[Question Inaudible]

Jeff Lasher

Well, we have had conversations like that internally and we continue to look at the best ways to bring that back. We have the capability of doing that fairly quickly. We haven’t really stress tested it at $10- $100 million level, but we have stress tested as $25 million, for example. Because that’s our loan covenant path.

Unidentified Speaker

So why did you -- I am assuming that -- for example I saw you tap into the revolving credit recently. Is that basically because you haven’t cash needed to date but cash is in other jurisdictions?

Jeff Lasher

Yeah, that’s exactly right. We ended up in the Q1 with a line of credit balance because of the AP associated with the United States business. And then as Q2 rolls out that cash comes in from collections as well as from intercompany settlements, and that will go back to zero by year-end.

Unidentified Speaker

So just to understand what's possible [Question Inaudible]

Jeff Lasher

Well, our intention is to continue to manage the balance sheet and that’s where our debt position to start with. So there was a kind of two, you know separate conversations. We do intend on having a debt free balance sheet here in the near term. So that’s kind of one focus. Second focus is if we decided to do anything on the stock repurchase, we could do something subject to constraints around the globe about repatriation and tax benefits and tax impacts of that, as well as that loan covenant.

Unidentified Speaker

Yeah, I was just getting at it. Is it not what you plan to do but is it actually possible to do?

John McCarvel

Jeff, I think you have to cut it. The answer Jeff, we are not going to be (inaudible)

Unidentified Speaker

[Question Inaudible]

John McCarvel

And so this is where the bakery thing starts to happen. And so he is asking for the answer, the answer is we are not going to buy back stock.

Unidentified Speaker

I am not asking that John, I am asking if it is possible as opposed to, I mean I didn’t know --

John McCarvel

Jeff, that is kind of hypothetical theory (inaudible) at the end of the day for cogs, when we look at yesterday, we think if we are bring (inaudible), we are bringing back $25 million then we are going to buyback a million shares in stock (inaudible) we are not going to do a thing to the company.

Unidentified Speaker

John, I never even asked that, I am just asking...

John McCarvel

I know, and I am just trying to be clear, Jeff. Just because where we have got in trouble, we just have got in trouble with this two quarters ago. When we got in conversation and Jeff was trying to answer a question on a conference call and trying to dance around it and talk about hypothetical, then what happened it. What happened to (inaudible) investment base is, Jeff, they got confused. Why are you -- what is your say Jeff, I am not trying to change the subject. I am telling you, you know our conversations with the board and we look at the company today, perhaps to buyback a million shares of stock and take a million shares out or 2 million shares of stock right now, we are not going to do it. And I just wanted to be clear.

Unidentified Speaker

But I just wanted to be clear, I never asked that.

John McCarvel

I understand, I understand.

Unidentified Speaker

[Question Inaudible]

John McCarvel

I understand that (inaudible). And the answer is, a, you can do all sort of things. The problem with it is that if you change the way your tax structure work and how we are doing tax planning, we have to drive cash in to the U.S., which you can do over a period of time. Once you set that in motion, you are done. This is what it’s going to be for years to come. Because you can't go and change tax strategy that impacts cash otherwise (inaudible) kind of look at business, playing games, this isn’t fundamentally right for your business. (inaudible). So no, it’s not realm of possibility. And I think he is trying to be nice in trying to answer your question and I am just telling I had conversations with the board and our internal discussions -- and I don’t want you walk out of here going, I don’t if they are going to do or they said the thing. We are going to buy the best possibility if there is a door open. There is no door open. There is no door open at this point in time. It’s not in our long-term strategy to buyback shares (inaudible). It is in our long-term strategy to continue to build cash and when possible then we will go look at how we are going to invest it. Right now we are investing it in retail stores, in ways that we think that drives top line revenue, bottom line profitability. But what we really love is, we really love is government to change and open up a window then we bring in cash. Then, Jeff, it would be possibility. Till then happens, it’s not a possibility. It’s not a possibility.

Unidentified Speaker

So the primary rationale is not to permanently change the tax structure?

John McCarvel

Because you can't. To drive cash in you have to do things that would impact and then go out. So the amount of work (inaudible) millions of dollars, kind of figure out if that’s comfortable to do that and then what it would mean how that was looked. Today, what we have done is we have put years into (inaudible) and in fact we are making more money in the Middle East today, you know than more than what we thought. More money in Asia. And I said that (inaudible), the answer to your earlier question was, if you want to make a gross margin you make it to the bottom line here. And it’s happening because Asia becomes a larger piece of our business structure. We make more money. Jeff. Showed you, we make more money in Asia than anywhere else. That’s going to drive gross margin, that’s going to drive operating income. And in that it’s going to drive more cash outside the U.S. And it is not (inaudible) or is it management’s interest to do this and I think better just to be (inaudible). It’s not. It’s not a possibility. (inaudible).

Unidentified Speaker

[Question Inaudible]

John McCarvel

It’s not material. I mean we see bookings coming in, but I think to the question that [Zen] asked earlier, you know there is a certain amount of at once business that, yes, we are depending on. Yes, we expect based on history and whether that materializes or whether we lead that, and as we get close into third and fourth quarter we will give you more visibility. But where we sit today, we have a point on talking about top line revenue, talk about profitability our in the previous line. That’s where we are at. If it materializes then we (inaudible) potential. If it got even weaker and we had some kind of recession leading towards elections, things start to look (inaudible) and as we have talked about as of the end of last quarter, the earnings release, I think we feel comfortable enough to say that is where we are on a global basis versus the top line (inaudible).

Unidentified Speaker

[Question Inaudible] when you think about that on mid-point guidance that you brought on the slide, what would you say if you are, what are the couple of things that say this is what it could take to (inaudible) the trajectory (inaudible). Would it be something that you are not being here (inaudible).

John McCarvel

(inaudible) could probably have the biggest impact for all companies. (inaudible) is telling the truth. (inaudible) you cannot become some kind of attention there to change consumer behavior. I don’t think that that dynamic -- you know the Asian market (inaudible). And I think we have such low down side risk in Europe today that’s why we said what we said. So there is very little downside in (inaudible).

Unidentified Speaker

Brazil is currently a small part of your overall business though. With all the events coming up there in the next two years and become of the different hemisphere [Question Inaudible]

John McCarvel

The challenge for us really for Brazil comes out of pricing. The reason that is just not growing faster. The number of products that we built either in Brazil or bring in bottoms from China, Vietnam, have those products assembled and sold into that market. It’s pricing issue for brands that are imported and the [daily] comparison is just so high it’s limited our growth their a little bit. So building shoes in Mexico in our own factory. Now adding more capacity in Vietnam, so we are shifting capacity to Vietnam. That can go in duty free and to Brazil. And that opens you the opportunity to grow a little bit more.

And we are opening up our own retail stores and we have opened up our own ecom site now in Brazil. So that’s starting to add the omni dimension, omni channel dimension to what we are doing. But I don’t think it’s fair to say we are not happy with 3% revenue in Brazil and part of what we are working on while they are here this week is how that grows at a more rapid rate. Really, Chile, Argentina and Brazil should be one of those 5% of that (inaudible) 5% growth from all those emerging markets. So opportunities out there, it’s not a last. $15 million with all those channels.

Unidentified Speaker

[Question Inaudible]

John McCarvel

We have. For 3.5 years now we have our own operations in Sao Paolo. And we sell into agents and distributors in Chile and Argentina but we have our own people on the ground in Sao Paulo. (inaudible) and just perhaps to be clear, when you got (inaudible) it’s 15%, it’s not 17%. So, Jeff, is trying to be nice and he is trying to say, okay, he has a direct question and the answer is 15% is the number that we would love to have. And there is 17%, there is other ideas about how you get to in your gross margin goes a little bit more and more ships to Asia. And, yes, Jeff, back to your point here, is the hypothetical is at 17%. Now you have the 17 things floating there. So, no, it’s not 17% it’s 15%. That’s what you should think about, that’s what we think and that’s pretty good for us when you look at the beginning and what we talked about directionally for our business to get to $1.2 billion, close to $1.2 billion this year in revenue. And get those incremental increases in gross margin, SG&A down, driving up 2 points in terms of gross margin.

That’s a good year, operating income, sorry. 2% operating income this year, that’s a good year for us. And if we can continue to do that year-over-year, then we will cut those expectations accordingly. But we have to be pragmatic and we have got to be honest. That’s what’s reasonable. And if other things fall in our favor, then okay. If other things don’t fall in our favor, that’s different. And did you guys also, was that clear when Jeff went through tax rate change. Did you guys all understand what we said? $1.47 is baked at 22% tax rate. Right. So the $1.47 EPS assumes the mid-point of all those ranges that we gave. So I will walk you back to, including tax. 20% effectively. Because we did an absolute number based on.

Unidentified Speaker

[Question Inaudible]

John McCarvel

Yeah, actually the surprising part is year-over-year marketing goes down because if you remember last year we talked about how much money we spent outside with [cramer castle]. And that money wasn’t generating this kind of visual. So bringing it all in house, bringing in Becky Gebhardt and a small team people that develop that with better brand control. We have far better visual, far better kind of emotional connection at a cheaper price. So actually our corporate marketing year-over-year, corporate marketing cost for people for us costs us almost $1 million year-over-year. All by just doing it better, doing it in house and having better control over it.

In different markets they invest differently. So in the U.S. they have about 30 visual merchandisers that work for both the retail and for the wholesale channel that are out her working with our wholesale partners. We are trying the same, working with them, trying to pull in at ones business. That’s not up that much her over year-over-year. So that’s the really the only major market where we put any money like that into visual merchandising people. And in the spend part of that savings for a million dollar and people casting outside, on services cost is, yes, is going back to -- you know we are doing more ads this year in magazines. We are doing more things visually in the market place then we have before. So actually we think we are getting more impact for the same amount of money.

Unidentified Speaker

[Question Inaudible]

John McCarvel

No. You know you think about what we did two years ago. That was $8 million in the first half of the year and $5 million in the back half of the year. About $13 million in to a market which at that point in time was $350 million. So that was a huge spend, just on television alone. And how many brands of our size, when you think about this being a smaller market, do that amount of advertising? Just they don’t. They don’t do it. They do it in other ways. And I don’t think television for us is going to be an effective medium going forward. If we have opportunities here and there yes, but not that kind of brands now.

I would like to maybe shift gears real quick. We have a guest here who has got to read out today, if there is such things can read out. Hank’s with us, Hank Haney is here. So maybe Hank could come up and say a few words.

Hank Haney

Well, I am glad to be everybody here. It’s my pleasure. I just came in for next couple days so it’s a little cooler here and a little wetter then it is in Dallas, but I am glad to be here anyways. I am Hank Haney and I am the one that they thought about when they thought about doing some golf shoes and I was really excited about the whole opportunity because obviously, I have been I golf for a long time. And everybody like to be more comfortable.

Crocs is known for making comfortable shoes and there is a kind of a segment in the golf business that just evolved in the last couple of years. I mean for years golf shoes were made where there was a lot of structure to them and they are basically very uncomfortable. And Fred Couples, who plays on the PGA Tours and as a former masters champion, one year he wore these comfortable looking golf shoes at the masters. And all of a sudden it just spun this kind of whole new look in golf and also feeling golf too. And everyone is coming out with comfortable looking golf shoes, especially as always these companies that in the past had very uncomfortable golf shoes, with a lot of structure to them.

And I never really thought that you needed quite that much structure in a golf shoe. You know technically speaking, I don’t think if you really -- as I have taught golf for 35 years and it’s not something I have really ever thought about, was how much structure you needed in your shoe. But when Fred Couples wore these shoes, all of a sudden everybody started making more comfortable shoes. But they really weren’t that comfortable. They are just kind of comfortable looking. And Crocs is known for making comfortable shoes, so when I talked to John and talked to Dale, and we talked about the idea of doing golf shoes in Crocs and would I be interested in being involved. It was very exciting for me.

So I came here to Boulder and I think it was probably about a year and a half ago, and we met with the whole design team and everybody was kind of worried that I was going to be like little too conservative or anything for Crocs is where as you know. The guys, you know, they show me some samples and I picked out all the ones that I thought that were kind of stepping out the most or the ones that I liked the most. But I am kind of a casual guy, so just it could fit right in with what I like and what I like to see and feel and I don’t golf shop myself, I have done more than just teach golf. I run golf operations. I have four facilities that I own and operate myself in Dallas. I have another golf course in East Texas and I have a junior academy with a 150 kids from 31 different countries in Hilton Head. And I have another academy over in China, that I just opened there.

So I see a lot of golfers. I have given so many lessons in my life, it’s amazing. But I see a lot of golfers and teach a lot of golfers of different ages and it was fun to work with the guys because they really wanted my inputs and I think I drove them crazy with all my emails. I don’t think -- they didn’t quite know what they are giving into when they ask me to be involved. So I have been deeply involved in the design and giving them feedback and just telling them what I thought. And they send me sample after sample after sample and it was exciting process for me being a golf professional to be involved with them.

And I knew we were on the track when we went to the PGA Merchandise Show and we had just kind of gotten our samples. And the PGA Merchandise Show in Orlando is the biggest merchandise show in golf by far, it’s not even close. And I think the Orlando Convention Center is the biggest convention center in the United States. And the whole thing was full with all golf companies. And some of them have incredibly big booths. And just massive displays and we had this -- we had a wall that was a booth that was like 10 by 20, so it was more like the back wall here. And we had our display up and it looked really nice but we were just kind of sticking our toes in the water, a little bit down there as the PGA Merchandise Show and we just had our samples

And then in the second day of the show they came up and they said, you have won the best new product of the show. And we were like, you mean the best new golf shoe or if they should know you on the best new product of the whole show. And that was just really an affirmation of the fact that we had a good idea and that Crocs is great company and their guys have done a great job with the design. So we were like, we are on the right track. So it’s fun for me to be involved and I have a golf show on the Golf Channel called the Haney project and there have already different celebrities that I teach and it’s given me a kind of a platform to be able to promote Crocs and wear the logo. And people are always asking me now what's Crocs got and I tell them we have got shoes and gave us some good publicity. And it’s been really nice and really fun and it’s something that I am very excited about.

So I am really excited about what we have coming out in the new shoes and all the new ideas that guys have and I am going to do a little golf clinic for those of you that will be there tomorrow and if you are in golf I would try to help you out a little bit with that. But the one good this is I know nobody will be as bad as Charles Barkley. He needs more than just comfortable shoes to help him playing in the golf. But the best thing that ever happened about helping him is that now nobody ever tells me, Hank, you have never seen a swing like mine because nobody could be as bad him.

But I am more interested in how people look now. I am just as interested in how they look and how they swing. It’s just been really really good for me and fun. Is there questions that I can answers for my advice. I haven’t been updated because I just walked through the door. But from my understanding I think June is where they are supposed to be delivered.

Unidentified Speaker

[Question Inaudible]

Hank Haney

Yeah, and it’s a good point. Because you know golf -- I mean we have been doing really-really well in Asia, especially with our initial (inaudible) but golf in the United States hasn’t been growing. I mean it’s been kind of declining ever so slightly for a couple of years now. Now it’s pretty much leveled out since last year. So obviously you are kind of stealing market share if you are getting into it. But only to a certain extant because this is kind of a new category if you will. So we are not only taking market share from other companies but you are taking market shares from the other styles of shoes which you know, probably since we are not the only one that’s doing that. But I feel like we really have the edge because we do have the most comfortable shoe. And there is shoes that are made out of different materials. Some shoes are really, really messy if you will. So it’s kind of hard to really categorize but I think just in general we have the lightest golf shoe too.

So what I have seen so far is that the acceptance has been very good. I mean when people just try them and we did a day at -- I did a clinic at the Golfsmith which has a huge -- and they are the biggest retailer in the United States. They have, I think 85 stores and they are expanding. And then they have a big presence online and I also have a relationship with Golfsmith too. So we are in there stores. And I did a double date for them, just a clinic at their Austin location and they have a big big demo day with a lot of people with stands and everything. And on that particular day, and with every brand of shoes they had in there, I mean I think they sold like 45 pairs of shoes that day and over 20 pair were ours.

So it was really exciting to be there and just be a part of that. So it’s been really good so far. And Golfsmith was just acquired by Golf Town which is the biggest retailer in Canada. And I think they have total 50 stores in Canada. So that’s going to also be obviously very very good for us. But just getting in with Golfsmith and being able to get in those stores and have a presence and start to see some sales I think it’s going to be really, really good.

John McCarvel

I think in terms what Hank has (inaudible) with the brand and really promoting, you get people like Academy now, who would have never given us space but because of Hank and because of what they see, and people are asking for the shoes now. So they are testing the cross-sell (inaudible). And I think this year what we said going into the stores, we will be happy if we got into the (inaudible) and so it’s only actually 15 month when Dale (inaudible). So when we launched that shoes (inaudible), it was really only nine months really of development timing. (inaudible)

Unidentified Speaker

Do you think you will ever see a player wearing Crocs on tour?

Hank Haney

You know it hasn’t been part of our discussion now more touring pros in their own casual shoes. Like Matt Kuchar who just won the TPC tournaments were a more casual style of shoes. So it is changing because at first (inaudible) now is not enough structure but now guys are coming, getting over that, and they all wear these shoes when they practice, a more comfortable shoe if you will. But part of, to my connections with the entertainment industry. I do something at the American Century Celebrity Classic. We are going to have a boot there. We are going to outfit everybody with shoes. I would also obviously have my show on the Golf Channel called the Haney Project and we have different celebrities on there. And then I am going to China to do the tournament called the Star Trophy which is a big tournament on Hainan Island in Mission Hills there too. So we are going to try to do something there.

So a lot of what our thought was going in was more celebrity placement if you will. And really that’s kind of, I think a better way to go, then necessarily the pro. So we have got a lot of celebrity friends of mine who are in the entertainment and sports and music industry. So that’s kind of what we have been doing, is placing the product with them and getting them into the shoes and let them the kind of word to mouth grow from there. But I wouldn’t put it out of their own possibility that we might do something like that. But I think that we worked on a market that we see and that we are after. I think we can get there with a lot of the celebrities more efficiently to be honest.

Unidentified Speaker

[Question Inaudible]

Hank Haney

Well, we have a kind of company that is called H2 and they carry a couple of different lines. So it’s a group or private distributors and sale people and they are disturbing product for us. So they are calling on the golf shops. And for the spring buying, if you will, we were actually a little bit late with getting some of our samples in everybody’s hands or I made some of them calls here. But they have been doing very very good in terms of keeping them in the shops. I mean we kind of started off with a goal that when they called on those shops they would still be selling it to a rate of just say 25%, and we were -- I haven’t been updated yet again, like I said, but from what I have heard in the first month that we were going, we are already selling it at 75%. 75% of the shops that we are calling in were placing orders for the shoes. So it’s been very good.

Unidentified Speaker

[Question Inaudible]

Hank Haney

So you could tell, I am not just a celebrity endorser. I actually got to know some by what we are doing.

Unidentified Speaker

[Question Inaudible]

Hank Haney

You know that’s a good question. I mean I am not exactly sure when we won that award, what enabled us to be there. I don’t really know. And I think just a little bit of what you said, both of you know that it is -- they are looking for something different. They are looking for something new. You know not just a gimmick but something that is truly different and I think they are also, people are enthused that Crocs is in golf shoes too. Because you are looking -- Crocs has such a great reputation for making comfortable shoes and this is something that really -- this has really been avoided in the golf business. I mean it’s amazing, everyone is scrambling to try and make comfortable shoes right now in the gold business. Because it’s taken a pretty big portion of the golf shoe business. And frankly, I mean a lot of the shoes that you look at, they look comfortable, kind of in this category. But they are really not. So I think that was, you know people -- I will make a go by, we were just holding the shoe and looking at it and feeling it and how light it was and how comfortable it was when they try it on and how crisp it was. And I guess all the above just let us be fortunate enough to get that award.

Unidentified Speaker

[Question Inaudible]

Hank Haney

Yes, I mean that’s good point. I mean I don’t think there is any doubt about that that everything is shipped in the golf. I mean it’s getting -- I mean you have to give a lot of credit already to Rickie Fowler. I mean he is young guy that’s got you know, he’s got the look, he only wears bright colors, he is from California and he is kind self produced kind of thing although he was a motor cross racer. But it’s definitely changing. You see it with the kids. And I think it’s having a big influence. I mean you know they talk about Tiger, and Tiger brought a lot of interest to the game, and a lot of people watch gold that hadn’t watched golf before. But you didn’t see -- just because Tiger was in the game you didn’t see like a lot of minorities playing golf. I mean that didn’t happen like people kind of thought it would happen.

But you are definitely seeing like with Rickie Fowler, you see so many kids that come out the term ends and they kind of dress like him and casual. And the whole golf business is changing that way. I mean I belong at a few discover land properties. And they are very very prestigious properties. I live at one in Dallas and I have another place that I (inaudible). It is really really nice and expanding, incredibly exclusive, but yet super casual. So the whole deal is like casual all again. And it’s really kind of shift in golf. I mean golf you know, the more exclusive the club, the more prim and proper it was. And now you see this shift in golf that’s really occurring, and because there is a big focus on trying to growth the fame of golf. And part of growing just making it more fun for people. And I think that’s one of the things you see with Crocs. Crocs is a fun company. I mean they make fun products. People like to wear them and it says something different when you wear it. So I think we fit right into that whole movement in golf. All right. Thanks.

Unidentified Speaker

[Question Inaudible]

John McCarvel

Well, I don’t think 19% is (inaudible). And if you look at the number of pair of shoes that we have in distribution centers today coupled with what we have in retail store today, we are doing the right thing. And we are staying at (inaudible). You know your model is, we can build 8-9 million pair of shoes only in Mexico. So our ability to go ahead and build products and ship it in a region within four to six weeks, really doesn’t say that we have an inventory problem. You know the issues than how we plan, retail and retail kind of collections for outlet, that was kind of ruled that whole thing. It wasn’t our core business, it was outback sales of really, basically discounted products. So I think we have put corrective action in place to do that. But I don’t think when you look at the -- in terms of the shoes that we have in inventory today, that we had a shortage.

I am saying, if you think about our business model today, that it was just on an average about 55% of what we shipped to wholesale is direct shipment now, it’s prebook. And you don’t think that only 40%-45% is going to go to market. They are spinning throughout the year in outlets business. Do we have (inaudible). When I have already taken all the prebook out. Means that for other doing close to three should have adequate pairs of shoes to have inventory plus what I can full, where we had from factory if we need to. So we sold to (inaudible) in tremendous rate, so we are filling in another 1000 pair shoes. One inventory days that we can still all the way 2Q to Q3. That goes back to kind of thinking about shoe manufacturing and product management a little bit different.

You know that ability for us to (inaudible) factory, it’s the really basis when we first started and said we can be different. We can have a different supply chain management in this space. And when things tougher that stuff kind of shows and we went into more traditional, less peak, more standard in the industry to make sure we are on time under (inaudible), to make sure we get a pre-book. (inaudible) let’s not go, hey, we are not going to do any pre-books in 2005-2006, to really a prebook that we are not interested in kind of thinking about that right now. Of course it’s kind of getting it back in center. I mean in my opinion, to management’s opinion, they should have adequate product to support. I did want to again hear what you asked Jeff, so we aren’t getting out huge. We didn’t talk inventory in Q4 because of the change. (inaudible) you know what's going to be on our inventory, at the end of year we are going to explain this. So when you get to the end of the year you don’t feel like is that essential. It’s just product for Q1, it has to be in transit at the end of the year, it’s going to be reflected differently at the end of the quarter.

Jeff Lasher

So just to your point, that’s not a real change in inventory. It’s just a matter of where it’s showing up.

Unidentified Speaker

[Question Inaudible]

John McCarvel

Because we don’t chase them like last year in Q3. I mean when we went to our stores at the end of June and early July, product was already sold. So Kohl’s wasn’t chasing a replenishment. And so they are going to buy a certain amount of product. They are going to sell through it and those mid-tier channel isn’t chasing us in to June, July and August, hardcore to bring in additional product. And then you have it end up in (inaudible). So you know that wasn’t really the issue. The issue more was that we could have or should have more outlets business in that June, July, August timeframe if we can get them to continue to place orders. Keep it in stock. Last year they were pretty much out of stock. If you went into the stores in July, they didn’t have a lot. And that’s like they are too down their sell-through rate this year. It’s a little bit more in Q2 and really Q3, you are going to (inaudible) and there is not going to be a lot of credit left. (inaudible). Any other questions. Thank you.

So thanks for coming today. And for those of you that are staying, we are doing nice happy hour, (inaudible) and everything. We have to send you in here I think 5:30. Hank if you want to come out and hand out for a while so you can talk to him tonight. And anyhow he is very humble. Dave will tell you he is very humble. I mean he worked extensively with us on the product scheme in here multiple times. I think (inaudible) bit of a blur for the two months. And the time he spent with us, he had the perfectionist nature of golf, you know kind of transformation of shoes and he has done great performance for ourselves. And we are happy to have him here. For those of you that are going to play golf with him tomorrow, you are going to get lots of pointers. So that means when you are done with, when he is done with you tomorrow you will be (inaudible). Good luck with that.

Kevin Kim

So couple of administrative things. We do have a gift package in the back. We have clogs classics in honor of our tenth anniversary this year, we thought it was appropriate that we have those available for each of you to grab a pair of our original classic shoe that set this ball in motion ten years ago. As John we will have a happy hour and some entertainment and some food at (inaudible) at 5:30. Hank will be there. For anybody who is not planning on playing golf tomorrow or who would like to play, please tell us now, we do have some slots available. So if you are planning to change and you do want to play, we do have some slots available for tomorrow. So thank you all for coming.

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