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Crocs Inc. (NASDAQ:CROX)

Q4 2007 Earnings Call

February 19, 2008 4:30 pm ET

Executives

Ronald R. Snyder – President, Chief Executive Officer

John McCarvel - Chief Operating Officer, Executive Vice President

Russell C. Hammer - Senior Vice President of Finance, Chief Financial Officer

Analysts

Jeff Klinefelter - Piper Jaffray

Mitch Kummetz - Robert W. Baird

Jim Duffy - Thomas Weisel Partners

Jeff Mintz - Wedbush Morgan

Reed Anderson - D.A. Davidson

Jay Seoul - Morgan Stanley

Sam Poser - Sterne Agee

Karen Legate

Adam Comora - EnTrust Capital

Operator

Good afternoon, ladies and gentlemen and thank you for standing by. Welcome to the Crocs Inc. fourth quarter and fiscal 2007 year end earnings Conference Call. (Operator Instructions)

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

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

Crocs intends that all of its forward-looking statements in this call will be protected by the safe harbor provisions of the Securities Exchange Act of 1934. Crocs is not obligated to update its forward-looking statements to reflect the impact of future events.

I would now like to turn the conference over to President and Chief Executive Officer Ron Snyder.

Ronald R. Snyder

Thank you, operator. Thank you everyone for joining us. With me today on the call are John McCarvel, our Chief Operating Officer and Russ Hammer, our Chief Financial Officer. As we just stated, this will be on the web at www.Crocs.com and I’ll give everybody just another second to load up.

We’d like you to follow on with the script on the website. Starting with slide 3. Our fourth quarter results capped off a very strong year of growth for Crocs as sales increased 99% to $225 million and diluted earnings per share rose 73% to $0.45 a share. We are proud to report that we have had record sales in EPS each quarter since going public in February 2006. Our fourth quarter top line exceeded our original average projection by approximately $22 million and was driven by strong consumer reaction to our fall styles including the Alice, the Troika and of course, the Mammoth – slide 5 you should be on -- our new fleece-lined Crocs which performed very well in every market where it was introduced, including the US as well as parts of Europe and Asia.

I think it is important to note that because of the planned inventory build up during the third quarter we were able to dedicate a large percentage of our manufacturing capacity to the production of additional Mammoths during the fourth quarter. After initial shipments to retailers filled up very quickly, we were able to capture a significant portion of reorders in time for the holidays and shipped over 3 million pairs during the last few months of the year. Once again, due to our unique manufacturing model and flexibility, we were able to meet the substantial upside in demand in the market.

Slide 6. At the same time, we continue to experience solid sell-through of our core styles such as the Beach, the Cayman, the Athens and the Mary Jane both domestically and in all foreign markets, including those located in the southern hemisphere like Brazil, Australia, South Africa, and Southeast Asia.

As expected, we did see some cannibalization of our core products in cold weather markets due to the introduction of the Mammoth. However, as we head into the warmer selling season the pre-book for the core styles are quite strong. Additionally, because of the incredible popularity and sell-through of our fall collection, many new consumers have been introduced to Crocs. We think this will bode well for the brand as we enter the strong spring and summer season.

To meet the higher-than-expected demand for the Mammoth during the holidays, we did air freight in a good deal of products and as a result, we did see some gross margin pressure. Slide 7. That said, we were still able to grow our diluted earnings per share 73% to $0.45 a share, which was above our original guidance range of $0.39 to $0.43 for the fourth quarter. As we move into the spring and summer selling season, the need for air freight will come down as we now have the appropriate inventory level on hand in our distribution centers around the world.

Now to the full year. 2007 was marked by many important accomplishments that have improved our organization across the board and created a stronger foundation for the future.

Key takeaways from the past 12 months are:

We have delivered strong financial gains since our inception and 2007 continued that trend. Our sales for the full year increased 139% to $847 million, up from approximately $355 million in ‘06.

At the same time, our gross margin expanded 220 basis points to an industry-leading 58.7%. Our operating margins improved to 28% versus 26.9% in the prior year and our earnings per share rose 147% to $2 a share from $0.81 in 2006.

We have become a global company. We now sell in over 90 countries through 19,000 doors outside of the U.S., up 1,000 doors since I reported the number a month ago, which represents an increase of 11,000 doors or 137% over this time a year ago. We’re very encouraged with our account growth and we expect to continue to grow doors significantly in 2008. As a result, our international revenues accelerated in 2007 and for the first time accounted for approximately half of our total business.

The growth we witnessed overseas in 2007, particularly in Western Europe and Asia, was very similar to what we saw in the U.S. the past few years as the Crocs brand achieved more mainstream notoriety and demand for the Beach, Cayman, Athens, and Marie Jane gained considerable momentum. We introduced only a handful of new styles from our spring ‘07 collection into the international markets late last summer and the response from retailers and consumers was very positive. This gives us confidence as we head into our strong selling season and are re-launching our entire 2007 collection along with our new spring ‘08 line in most international markets. We see this reflected in our strong international pre-bookings for the first half of this year.

In emerging markets like China, India and Brazil we are gaining important traction and capturing key shelf space with our core products and establishing Crocs as a leader in affordable, casual footwear. We believe that with our average price points these countries, along with other regions like Russia, the Baltic States, Eastern Europe and the Middle East, provide us with a tremendous opportunity for continued growth well into the future.

Remember, we are investing significantly in these markets, which we believe will begin to pay dividends later in 2008 and beyond. Crocs offices and infrastructure in these markets will be a tremendous asset as we launch new products and new brands globally.

We have also become quite diverse in terms of product offerings. Under the Crocs brand, which includes YOU by Crocs and our new Bite collection, together with our core surf brand Ocean Minded, we ended the year with over 250 styles. Some of the standouts from the spring collection include the Cleo, the Capri, the Crocling and Sassari, while the fall collection was led by the Mammoth and not to be overlooked, the Alice, the Celeste and the Troika.

Equally important as the performance of our new footwear was the ongoing demand for our core products which continued to grow at a solid pace.

Slide 15. Also contributing to the increase in styles were several high profile entertainment and sports licensing agreements signed during the year. We have been very successful partnering with many of the top names in these fields such as Disney, Marvel, DC Comics, Nickelodeon, Warner Brothers, NFL, Major League Baseball, NHL and NASCAR and more recently Gaelic and Australian Football overseas.

Not only is this business quickly growing in terms of size and importance, it also serves as a great way to further defend our position and differentiate ourselves from knockoffs and competition in the marketplace. For spring 2008 we have added several new styles including the Adara, the Cyprus, the Malindi and a canvas version of our Capri and Crete models. We are encouraged by the reception that we have received in all markets where we have shown these products.

Slide 16. We’re also diverse in terms of distribution. We ended the year in approximately 13,000 domestic doors, an 18% increase from 11,000 doors at the end of 2006. Our distribution channel is fairly evenly balanced between sporting good retailers, department stores, shoe stores and specialty retailers.

Slide 17. In 2007, we unveiled our first full-priced Crocs retail stores in the US, opening four locations including Santa Monica, New York, Boston and more recently Maui. Additionally, we opened six outlet stores. While our kiosks continued to do a great job promoting the brand in high traffic areas our stores are a tremendous platform for showcasing the full breadth and depth of the Crocs product line.

This year we have more than doubled our retail presence by increasing our company-owned locations with more than 200 retail points worldwide, including the U.S., Asia, Europe, Canada and now Brazil. We now have 35 company-owned brand stores and have approximately 40 partner stores in Europe and Asia. In 2008 we will continue to explore opportunities for additional locations both domestically and overseas and expect to open approximately 90 new stores globally.

We have a diverse portfolio of complementary brands in additional categories. Beginning with Jibbitz, since acquiring this company in late 2006 we grew the business from 309 to approximately 1,500 today. We now sell through more than 16,000 doors, up from 2,000 doors we had at the beginning of the year. We expect to add more than 10,000 doors in 2008.

Not only did we see revenue increase significantly during the past year, we witnessed a direct correlation between the introduction of Jibbitz and higher sales of Crocs at many retail locations. In addition, we have leveraged our cost structure by consolidating back office operations with our existing platforms.

Slide 19. Ocean Minded has grown, particularly outside of California, in terms of doors and products. This includes styles that are now enhanced with Croslite, which happens to be Ocean Minded’s top pre-book for this spring. Our Ocean Minded brand is honored to welcome Bethany Hamilton, one of surfing’s brightest and most inspirational stars to its team of athletes. Hamilton who lost her arm in a shark attack is world renowned for her determination and courage and lives her life with purpose and spirit that is unparallel.

In August, we purchased Bite Footwear. Since that time, we have leveraged both companies’ core competencies to produce new sports sandals featuring Croslite and the first ever Crocs-branded golf shoe which will be on the shelf this spring. Additionally, we have doubled Bite’s distribution for spring to over 2,000 doors.

We have been busy organically growing our business. We launched YOU by Crocs, our line of fashion footwear for woman. Not only does the product look great but it is extremely comfortable and provides us entry into a new segment of the market. We developed new models for our CrocsRX line that have broadened our market both domestically and internationally. We partnered with world-renounced Chef Mario Batali on a signature Crocs at Work shoe and we created [Mombas] our new brand of foam-based footwear that targets value-based retailers.

Slide 21. We have established a highly recognizable global brand through our increased marketing and branding activities. These include numerous sporting sponsorships in the U.S. and now around the world. Sports marketing activities, media buys in both print and television, as well as joint campaigns with some of our licensed partners.

Slide 22. And of course, our recent appearance on Celebrity Apprentice show which we believe was a tremendous success. In the two-hour special we publicly launched the solesunited program, asking for our customer’s participation to bring back their used Crocs. We’ll recycle those shoes into new Crocs for people in need around the world. This is a tremendous program that you’ll be hearing quite a lot about as we launch it around the world.

I will now introduce John McCarvel, Executive Vice President and Chief Operating Officer to discuss how our global infrastructure is well positioned to meet the rapidly expanding global demand.

John McCarvel

Thanks, Ron. We have built a sophisticated global infrastructure. Our global business is growing steadily in all markets, especially international markets. In 2007, we grew 296 million and 264% year-over-year. Our international door growth in 2007 was 11,000 new doors, up to 19,000 total doors. This is a 137% growth from 2006. To support this rapid expansion of our wholesalers, retailers, company-operated retail stores and Internet sites, we have made and continue to make substantial strategic investments in our global manufacturing and distribution platform.

Let me take this opportunity to discuss some of the initiatives in operation. In 2007, we added significant capacity throughout our global manufacturing base. This included:

Opening a brand new 10 million Crocs-only factory on the campus of our second-largest partner in China.

Expansion of our compounding operations in Mexico and China to improve the supply chain and reduce the costs in 2008.

Adding additional third-party manufacturing in Vietnam and Bosnia.

We have increased our current global production capacity by 80% and can make approximately 7.2 million pairs of shoes per month versus about 4 million this time a year ago.

To keep pace with this global demand we have continued to invest in global distribution infrastructure. Distribution of our sales in 2007 was 52% in the U.S., 20% in Asia, 21% in Europe and 7% in other markets. We’ve invested in 15 distribution centers worldwide to service our customers in these regions, thus positioning ourselves better for anticipated demand for the first half of 2008. We are in the early stages of opening several major markets such as Brazil, India, China and Russia and we are positioning ourselves operationally to service those markets.

We continue to invest significantly in our Global ERP, Retail POS, Internet, distribution and planning system. To meet the demands of our global business we have invested in additional talented employees. We have added approximately 2,400 new employees to the Crocs team in 2007, ending the year with a headcount of approximately 5,300 people. We’ve added senior management talent globally in key areas such as finance, IT, sales, marketing, manufacturing led by the recent appointment of Russ to the CFO position.

At the same time, we have strengthened our growing retail division with the promotion Peter Case to the newly-created position of Senior Vice President of Retail. In addition to Russ and Peter, we have added a CIO and a Head of Global Distribution.

I will now turn the call over to Russ who will review the financial highlights from the fourth quarter, year, and 2008 guidance in more detail.

Russell C. Hammer

Thanks, John. For those of you following along on the webcast, we’re going to start on slide 27. 2007 was a very key year for Crocs as we truly became a global business with approximately 50% of our annual sales coming from international markets. For the eighth quarter in a row, Crocs delivered industry-leading financial performance in revenue growth, net income growth and EPS growth. I’ll first address the fourth quarter performance followed by our annual performance. Please note that all numbers are split adjusted.

Sales for the fourth quarter increased 99% to $224.8 million compared to sales of $112.9 million in the fourth quarter of 2006. For the quarter domestic sales rose approximately 47% to $116 million and international sales increased 221% to $109 million.

Our approximate 221% international fourth quarter revenue growth versus prior year was highlighted by 141% growth in Asia to $53 million; a 255% growth in Europe to $39 million; and the rest of the world grew from $1 million to $17 million. Fourth quarter footwear sales accounted for approximately 9% of revenue and represented 12.2 million units for an average sales price of $17.19.

Gross profit for the quarter was $125.8 million or 56% of sales compared to $65.1 million or 57.7% of sales in the year-ago quarter. The decrease in gross margin was primarily driven by an increase in air freight shipments. As Ron mentioned earlier 4Q demand of the Mammoth, our new fleece-lined Crocs, far exceeded our forecasts and required significant air freight to meet customer demand for the holiday season.

Slide 31. SG&A for the quarter was $71.9 million or 32% of sales compared to $34.9 million or 30.9% of sales in the corresponding period last year. The increase in SG&A as a percent of sales is primarily driven by our strategic focus to increase our brand spend globally. We increased our brand spend over 200% in the quarter. Some of the focus areas of increased brand marketing and development are licensed and sports sponsorship activity including NASCAR, NCAA, PGA Golf and license arrangements with Disney, Nickelodeon, NBA, NHL, NFL, AVP Volleyball and Warner Brothers.

We also launched our solesunited program where we donated over 1 million pair of Crocs globally to those in need. We are humbly grateful for the opportunity to give back to our communities.

Additionally we, have aggressively increased our strategic investments in both personnel and infrastructure to position for strong growth in 2008 as we enter into new markets including Brazil, China and India. Fourth quarter income from operations grew 78% to $53.9 million or 24% of sales compared to $30.2 million or 26.8% of sales in the fourth quarter of 2006. Fourth quarter net earnings improved to $38.3 million or $0.45 per diluted share compared to $20.8 million or $0.26 per diluted share a year ago, a 73% increase.

I will now address the full year financial performance. For the full year, sales increased 139% to $847.4 million compared to sales of $354.7 million in 2006. For the year, domestic sales rose approximately 82% to $440 million and international sales increased 264% to $408 million from $112 million a year ago. Our approximate 264% international annual revenue growth versus prior year was highlighted by a 480% growth in Europe to $174 million; a 202% growth in Asia to $163 million; and growth in the rest of the world by 154% to $71 million. Annual footwear sales accounted for approximately 90% of revenue and represented 46.9 million units for an average sales place of $16.50.

Fiscal year 2007 gross profit was $497.6 million or 58.7% of sales compared to $200.6 million or 56.5% of sales for fiscal year 2006, representing 148% dollar growth. The increase in gross margin was primarily driven by higher percentages of total sales in Europe, Asia, Jibbitz and through our global direct sales operations.

SG&A for the year was $259.9 million or 30.7% of sales compared to $105.2 million or 29.7% of sales in 2006. The increase in the SG&A as a percentage of sales is a direct result of our strategic decision to increase our global marketing spend and are focused on additional opportunities in Brazil, China, Russia and India. We have decided to aggressively increase our strategic investments in both personnel and infrastructure to position for strong growth in 2008 and 2009 in these markets, as we feel it’s very important to move quickly in these countries to establish our brand.

Income from operations for the year ended December 31, 2007 was $237.8 million, or 28.1% of sales compared to $95.3 million or 26.9% of sales for the year ended December 31st, 2006 representing 156% dollar growth.

Net earnings for fiscal 2007 improved to $168.2 million or $2 per diluted share compared to $64.4 million or $0.81 per diluted share a year ago, representing 147% increase in EPS year over year.

With regard to our balance sheet at December 31, 2007 we had cash and cash equivalents equal to $36.6 million. This reflects our November repurchase of 524,000 shares for approximately $25 million. Our accounts receivable were $152.9 million at December 31, 2007 compared to $65.6 million this time a year ago and our DSOs are 62.6 days, primarily driven by the increase in international sales mix where some of our standard terms are longer.

We ended 2007 with inventories of $248.4 million compared to $195.3 million at the end of Q3. We have historically chased demand since inception and we believe we are properly positioned on a forward-looking turns basis to meet our first half forecasted customer demand.

As John mentioned, we also invested in inventory to better meet the demand in our multiple points of distribution in thousands of accounts around the world for our rapidly growing international customer base. In our high-growth business model, we calculate our required inventory levels on a forward-looking turns basis. We believe this represents a more accurate quantitative analysis of proper inventory levels. Based on our forward-looking analysis, we believe we are properly positioned to meet anticipated demand.

I will now turn to guidance. Crocs has enjoyed robust growth since its inception. At this time, our longer-term business model standards for the next three years call for sales and EPS growth between 20% and 30%, still well over the industry average. For 2008, we expect to enjoy growth levels above these long-term standards and well above industry average. While current U.S. economic projections indicate a slowing of retail and consumer spending, our discussion with customer indicates sell-through to-date of Crocs products continue to be among the fastest sell-through items as they are attractively priced.

As we stated in the earnings release, we continue to be comfortable with our previously issued growth targets for fiscal 2008 and expect revenues of $1.16 billion, representing approximately 37% growth over 2007 and net income per diluted share of approximately $2.70 representing approximately 35% growth over 2007.

We want to take this opportunity to outline the first quarter for 2008. We currently expect revenues of approximately $225 million and net income per diluted share of approximately $0.46 which represent increases of 58% and 48% respectively over the first quarter of 2007. In addition, we expect revenues in the first half of 2008 to increase approximately 50% over the first half of 2007.

I would now turn the call back to Ron for some closing comments.

Ronald R. Snyder

Thanks, Russ. We ended fiscal 2007 in a very strong position but more importantly begin 2008 excited about the many near and long-term opportunities still in front of us. Domestically we are introducing several new styles of footwear this spring and fall, both traditional Croslite products as well as footwear incorporating other types of material such as leather and canvas.

We’re opening new accounts such as Foot Locker Finish Line and some additional independents; again, expecting domestic door count to expand approximately 10% to 15% which does not include the potential new doors we could open with our other brands like Bite, Ocean Minded, YOU by Crocs and of course, Jibbitz.

We’re expanding our shop-in-shop program. Currently we have shop-in-shops in key retailers like Dick’s, Dillard’s and BonTon and Forzani and we expect to grow this over the course of the year. We’re opening more company-owned retail stores with a wide range of Crocs products. Our stores typically offer a much greater range of products than a typical wholesale account.

Internationally we are introducing a number of new products into our international markets. Europe and Japan, for example, will be expanding their product offerings to include all of our ‘07 as well as our new ‘08 collection. Newer markets such as Russia and the Baltic States will begin selling our core products -- Beach, Cayman, Mary Jane, Athens and Mammoth. We’re also opening additional retail stores, both company-owned and third-party operated in our foreign markets. This will continue to build our brand and solidify Crocs as a global footwear company.

As you can see, we have a lot going on all over the world. To ensure we are best situated to capitalize on our many prospects and properly service our retail partners we plan to continue to make the necessary investments in our operating platform and global infrastructure. We are very focused on improving our execution across the board while at the same time growing our business and further evolving our position as a leading global multi-product consumer company.

Thank you very much and operator, I’d like to now open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) We’ll take our first question from Jeff Klinefelter - Piper Jaffray.

Jeff Klinefelter - Piper Jaffray

First on your guidance, looking either at first half, first quarter or the full year, can you give us a sense for what role international is playing versus domestic in that guidance? For example, out of the 50% first half, what sort of rate are you looking for domestically versus international and if there are any particular callouts in key international markets that would also be helpful.

John McCarvel

Jeff, the international market will begin to grow a little bit larger than the U.S. as we go through the first half of the year. We’re not going to give exact breakouts yet because we’re not sure how fast some of those markets will evolve. Just starting to get into the warmer season in Northern Asia. We’re hearing in Europe they’re actually having some good weather now which bodes well for us. But should the weather not breakthrough in March, it could be slower. So right now, we’ll say we’ll be a little bit larger in the international markets, but probably closer to 50-50.

Jeff Klinefelter - Piper Jaffray

In terms of the year-over-year growth rates -- of course off different bases -- you’ll experience faster year-over-year growth out of Europe?

John McCarvel

Absolutely.

Jeff Klinefelter - Piper Jaffray

In thinking about the domestic business in terms of the growth you are expecting there, whatever that ends up being, are you looking for that to come more from new styles versus new doors? I mean, if doors are up 10% to 15%, would you anticipate revenue growth exceeding that? Is that going to come from new styles in existing doors or comp door growth? How do you think about that?

Ronald R. Snyder

Well, we’ve given you the door growth, which was about 18%. The remainder of the growth would be we have expanded our presence in any retailer that had the room to expand throughout the U.S. So in many of the department stores we’re in much larger section or we are now in multiple departments. So we would think that probably half of the growth would continue to come in door growth and the other half would be in expansion in both product and space.

Jeff Klinefelter - Piper Jaffray

Do you still have the same plans for store-within-store shops, or can you give us an update there with your key retailers?

Ronald R. Snyder

We have 44 today in shop-in-shops and we’re going to continue to aggressively grow that. Some of our larger retailers are having some really good success with our shop-in-shops and want to expand that program in ‘08. That’s both domestically and abroad.

Jeff Klinefelter - Piper Jaffray

Second is on inventory. Could you give us a little bit deeper dive into inventory in terms of how you anticipate managing inventory levels through 2008 given that it has been a sticking point and a cause for some anxiety in terms of that build? Now it’s a little higher than some had modeled going to the end of the year, but in terms of how we can track that versus revenue growth going forward, what would you expect and when would you expect that to normalize?

Ronald R. Snyder

As we said and as Russ indicated in his talk that we put what we felt was adequate inventory in place to meet the expected demand for our products as we go into the spring season. We don’t really know that because we’ve never had enough in place really probably in any market around the world. So we were aggressive in making sure we had the right inventory both of our core models and of course the pre-books for our spring ‘07 as well as our spring ‘08 collections around the world.

We will monitor that going through the first quarter. Depending on bookings for Q2 it could go up a little bit, it could come down a little bit. I would expect by the end of Q3 it would be down a little bit depending on our pre-bookings then for Q4 and ‘09.

So we’ll continue to monitor it. As we said, we feel very comfortable right now. We’ll continue to monitor it.

Jeff Klinefelter - Piper Jaffray

On your manufacturing, just remind us again, percent owned versus contract of that total 7.2 million capacity? For your contract, do you have true flexibility in terms of shutting off that volume, if and when necessary?

Ronald R. Snyder

To date 74% is third party and we have flexibility in both our internal plants as well as third-party plants to be both flexible in terms of what they’re building and how much they’re building.

Jeff Klinefelter - Piper Jaffray

There have been a lot of questions regarding products showing up in discounted channels, whether that’s Costco or Sam’s Club. Could you just address that in terms of what your policies are for channels of distribution? Frankly, how you’ll plan to get rid of excess product when you do have it?

Ronald R. Snyder

We haven’t sold to any of those channels. We’ve had some diverter problems that we think we’ve now got corrected. As I think we’ve said, in the past we haven’t taken our product into other channels or into discount spaces anywhere. What we have done to ensure that we’re positioned well as we move forward, we’ve opened six outlet stores by year end. We just opened actually two more, and we’ll probably have about 20 outlet stores in North America by the year end. We’re also opening some of those stores in Europe and Asia. So, we are positioned to take care of any off-price products, should that arise.

Operator

Your next question comes from Mitch Kummetz - Robert W. Baird.

Mitch Kummetz - Robert W. Baird

Let me just start by following up on the inventory. Can you give a little more color on the inventory? Can you talk a little bit about where the increases are coming from or break out the increases geographically, U.S. versus international, or maybe by product core versus non-core and then talk a little bit about how your inventory levels stand at retail right now?

Ronald R. Snyder

First of all, your question about where the inventory is, we think we’ve done a pretty good job now of positioning the inventory in the right parts of the world as we get into the spring and summer season. We’ve matched our forecasted demand in Europe, throughout Asia, southern Asia, Australia, down in Brazil, really all over the world to make sure that we have the right amount of inventory of our Crocs-branded product, any of the new brands that we have that we’re now receiving orders for.

We’ve increased our Jibbitz inventory to make sure that we have enough of that. We were starved last year as we got into the strong selling season but Jibbitz demand very closely follows Crocs demand.

We have very strong indication from our retailers that there is not an overabundance of inventory in retail. They are well-positioned in January. We had very strong sell through as you can see by our numbers through Q4. So we’ve continued to ship through January, February and pre-books are increasing as we move into the spring and summer season.

Mitch Kummetz - Robert W. Baird

Gross margin in the quarter, how much of the deterioration from last year was due to the Mammoth on a basis point number? And then the Mammoth itself, what was the volume in the quarter? Ron if you could speak to that?

Ronald R. Snyder

We said that we did over 2 million pairs in really the end of Q3 and through Q4 so a substantially higher output. We had expected, just to show how our model works, we had entered the season expecting to ship about 100,000 pairs. We saw in our July shows that there was pretty nice demand for the product. We increased that to 250,000 or so and ended up shipping close to 3 million.

There’s no question that we cannibalized a little bit on our core models but we actually see that as a positive. We’ve introduced a lot more people to the Crocs brand and they come in now in the spring season to buy some of our core classics and some of our new styles.

Mitch Kummetz - Robert W. Baird

How much of the gross margin deterioration was the Mammoth?

Russell C. Hammer

Almost the entire amount was due to our air freight in the quarter.

Mitch Kummetz - Robert W. Baird

A little help on the guidance. Starting with Q1, I haven’t had a chance to run the numbers really yet, but I would think that you would be expecting sort of flat operating margin, maybe a little deterioration to operating margin in the first quarter, I’m trying to reconcile that with the comment that you would be air freighting fewer goods than a year ago, or may be that was just versus Q4.

Can you talk a little bit about what your gross margin SG&A assumptions are for Q1 and then maybe for the year as well?

Russell C. Hammer

Our gross margin assumptions for the first quarter are about flat to a little bit of improvement off the Q4 primarily driven by less air freight. We should see less air freight.

Mitch Kummetz - Robert W. Baird

How about for the year and then a quick comment on the SG&A for both periods?

Russell C. Hammer

For the year we see our margin improving slightly year over year and for the SG&A, as we said before, we are going to increase intentionally or brand spend globally; that is a very strategic, key objective for us. We see SG&A flat to a slight increase.

Mitch Kummetz - Robert W. Baird

Tax rate for ‘08, where do you see that coming in at?

Russell C. Hammer

Tax laws right now have a lot of changes in the works. We’re working with our tax auditors and our tax partners on looking at our tax rate. Our current tax rate is at 30% and we’ll obviously go with however our calculations follow by country that we do business in and the regulations as they apply. So at this point in time, we see them pretty flat to a slight increase due to international mixes.

Mitch Kummetz - Robert W. Baird

Ron, I think you made the comment that you’ve re-released your spring ‘07 line to retail. I don’t think a lot of that product was at retail last year. There seems to be more of it at retail now. Can you comment on how some of those styles have been retailing through the first month-and-a-half of the year?

Ronald R. Snyder

Anything that we’ve gotten out there already seems to be selling quite well but it’s still very early. It’s just getting on the shelves. I mean, the department stores are just putting spring stuff up here soon and independents are more close to season and so we wouldn’t expect those to be getting into stores until March or April.

We had, through the show season both last summer and most recently, we had a lot of indication from retailers across the board that they just didn’t get enough; they had tremendous demand for the spring ‘07 product and they just didn’t get enough. So we’ve got good pre-books on those and we’re pretty optimistic.

Operator

Your next question comes from Jim Duffy - Thomas Weisel Partners.

Jim Duffy - Thomas Weisel Partners

As you contemplate Q1 and first half revenue, how much of the business do you expect to be pre-booked versus reorder in both the first quarter and second quarter? How does that flow through?

Ronald R. Snyder

We’re getting a little bit better on requiring more pre-books. We still have an at-once business and we’ve gotten our major retailers are used to that and so for a lot of the core stuff while pre-books are good, we still get a lot of at-once business as well. So it’s probably gone from 20% a year ago to maybe one-third or 40% now.

Jim Duffy - Thomas Weisel Partners

In the first quarter?

Ronald R. Snyder

I mean just on an ongoing basis. Europe is higher, much higher and Asia would be even lower than the U.S. so it averages out to about that. But Asia, we have a lot of retail over there too. We don’t count our own store bookings as pre-book.

Jim Duffy - Thomas Weisel Partners

Looking forward to your one to three year revenue growth outlook, 20%, 30% are very healthy expectations. What are some of the key opportunities that give you confidence as you look out beyond 2008?

Ronald R. Snyder

We still have tremendous growth potential internationally. Some of the emerging markets I think the story here that sometimes people miss is we’re putting in an awful lot of money, time, effort, expense into growing China and India and Brazil. Now we’re into Russia with direct folks and the Baltic States. We’re putting a lot of money into those markets which should begin to pay dividends down the road certainly, impacting our financial performance now.

I mean, if we were thinking short-term, we’d have simply gone to distributors in those markets, sold the product and enjoyed a near-term success and foregone the long-term potential in those markets we feel. So like I said before, we think those are tremendous assets as we go forward.

So there’s an international piece. We’ve got a lot of new products as we go into even next fall season, our Mammoths were hot. We’ve got some other products that also did very well. We’re going to expand those lines pretty significantly for next year and launch them globally, where it was mostly a US story this year for those products.

Also Jibbitz, we’re still very bullish on Jibbitz and we have a lot of products that we’re adding to that line. I invite anybody that’s going to be at the show later this week to come by and look at all of the opportunities we have for Jibbitz and I think they’re quite significant. As I said, we’ll grow at least 10,000 doors in the Jibbitz line in 2008.

We’re seeing nice traction beginning for our Ocean Minded brand. Last year we pretty much picked them up after the season was over, really in the spring we bought them and so we now have the first year of that launch. We’ve got Bite, we’ve got great product. We’ve already designed probably six or seven new models for Bite since we bought them just a few months ago that will be launched in the spring. The pre-books for our golf shoes are fantastic and so we have some opportunities there too. We haven’t really taken Bite out to our international markets yet, but we intend to do that as we become more successful.

Bite will emerge as more of an outdoor brand for us. It’s going to be a Bite collection of more outdoor shoes, more performance, hiking, some level of running, fishing shoes, boating shoes, a lot of specific shoes for sporting events outdoors, so a lot of opportunities.

We continue to monitor our apparel business. We launched a very limited launch for holiday of spring product and now we’ll have a spring launch of our men’s and kids line and we’re selling bags, so we have a lot of stuff going on. As we’re successful in any one area we’ll take it out to the world very quickly.

Jim Duffy - Thomas Weisel Partners

At the end of ‘08, where would you see international as a percent of the overall business?

Ronald R. Snyder

I would say it would range between 55% and 60% would be a good guess. It could go higher with the fact that when we were growing the U.S. markets we really were capacity constrained all of the time. The advantage of our foreign market is that we do have ample inventory as we go into the season to meet the demands from all of the increased doors so we think they have a better chance of maybe catching the demand in those markets.

Jim Duffy - Thomas Weisel Partners

In terms of operational improvements in your international distribution network, have you made progress since -- I’m sure you’ve made progress. Can you highlight some of the progress that you’ve made since third quarter of 2007?

Ronald R. Snyder

Sure. We exceeded our expectations in both the European and Japan markets last quarter. So I think that maybe got confused. We did better than we thought we could do. We didn’t meet the full potential and demand that was in those markets. We’re now in a position that we feel that hopefully we can meet the demand.

I would say that we are well positioned now as we’re going in to this season to be able to shift through our distribution. We have a brand new distribution center in Europe, very highly automated, new systems that have gone in. We’ve added talent over there. We’ve improved our third party in Japan and we’re going to be bringing that in-house in 2008. So we just made a lot, we continue to invest in a global infrastructure that can get product through the most efficiently in the world. So that’s our goal and we’re continuing to strive for it.

Operator

We’ll go next to Jeff Mintz - Wedbush Morgan.

Jeff Mintz - Wedbush Morgan

Can you talk quickly about CapEx spending in 2007 and what you anticipate that to be for 2008?

John McCarvel

We’ll get that in just a moment.

Jeff Mintz - Wedbush Morgan

In terms of the retail stores, you said you might have about 20 outlet stores by the end of the year. What is your anticipation in terms of the full-price stores and are you starting to take advantage of any of the real estate we’re seeing coming up from store closures to maybe accelerate your plans there?

Ronald R. Snyder

We’re certainly looking at those opportunities. We don’t plan on having a significant number of stores in any of the markets in the U.S. These are brand-building stores. They complement our retail base. So we’ll have more stores in the U.S., but it’s not going to be the big story. We are adding quite a number of stores in Asia every month and we’re also opening some key stores in Europe as well. We’ve got a number of franchisees as I’ve said. We’ve got some 40-odd franchise stores now and we’ll continue to grow that fairly significantly, both in Europe and Asia.

Our outlet store strategy, we want to be well-positioned as we have products that we should sell in outlet stores, we want to be well-positioned to do that, to do that ourselves rather than sell them in other channels. We feel that 15, 20 is the right number, it looks like the right number to have in North America and we’ll look at what we need in our other market as we go forward.

Jeff Mintz - Wedbush Morgan

You talked a little bit or briefly about the share buyback. If I remember correctly, the total authorized shares was 1 million and I’m wondering how you’re thinking about the remaining 475,000 shares and what may be your plan in terms of exercising those buybacks?

Ronald R. Snyder

We’re just continuing to look at it. We don’t have any current plans right now. But we’ll continue to look at it. If it makes sense, we’ll pull the trigger.

John McCarvel

To answer your CapEx question, we had about $25 million in 4Q and about $75 million for the year.

Jeff Mintz - Wedbush Morgan

Any plans you can give us for ‘08? Is this going to be in the same range?

John McCarvel

It will be the same range to a slight increase.

Jeff Mintz - Wedbush Morgan

Finally, in the one to three-year growth numbers you gave, should we take those to include the slightly faster growth in 2008, or should we take those as being 2009 through 2011 or so?

Ronald R. Snyder

That’d be a longer term, 2009 and beyond.

Operator

Your next question comes from Reed Anderson - D.A. Davidson.

Reed Anderson - D.A. Davidson

Curious about Europe. Ron, what percentage of the European business is just the UK?

Ronald R. Snyder

It is the largest market for us there, but not a huge percentage because there are so many countries. I’m guessing here but I would say it’s not more than 10%. What we do see, interestingly, is that the German market is probably the most interesting market as we go into 2008. We’ve gone from 200 to close to 2,000 doors there and we’re very bullish on that. It’s a direct market for us too so we have salespeople around the country in Germany and the German customers are really starting to accept the Crocs brand there.

Reed Anderson - D.A. Davidson

UK ballpark, back of the envelope, maybe 10%?

Ronald R. Snyder

It’s less than that.

Reed Anderson - D.A. Davidson

Less than that?

Ronald R. Snyder

It’s roughly about 7% or so.

Reed Anderson - D.A. Davidson

On the licensing side, I know you’re probably reluctant to give what percentage that is of your overall mix, but is it safe to assume it’s growing faster than the overall company or is it maintaining where it’s at in terms of proportion?

Ronald R. Snyder

It’s growing much, much faster than the US growth shows and a lot of it is US business. Actually that is not true. We’re growing that in foreign markets too. So, it’s growing a bit faster than the overall. It’s a very nice business for us and there’s a lot of opportunities going forward in that space.

We’ve gone from really just a few products in Disney and just a few launches on our entertainment side to now like 20 to 30 products for 2008 we’ll have and some of the new properties are really starting to book nicely for the spring.

In sports licensing, we’re going to continue to grow that. We’re negotiating international deals all the time there and we’ll have announcements there as we get them. The sports licensing business with both our classic core lines and then some new products that we’re developing for that space should be an interesting market for us.

Reed Anderson - D.A. Davidson

Lastly on the direct side you’re owned, retail and Internet and everything like that can you share with us either a percent of what that’s at this year versus last year, or else give a sense of growth rate?

Ronald R. Snyder

Our Internet business is still not much more than say 5%. Our retail business has grown a bit because we’ve now added almost from zero retail business a year ago in Asia and Europe and now it has become somewhat significant. Let us get that to you offline.

Reed Anderson - D.A. Davidson

Okay, that’s fine. All right, that’s enough from me. Thank you.

Operator

We’ll go next to Jay Seoul - Morgan Stanley.

Jay Seoul - Morgan Stanley

I just wanted to step back for a second and ask a bigger picture question. I think from the very beginning people have asked is this a fad? Is Crocs a fad? And then people said, is this just a supply chain company that sells footwear? But some of the things we’re talking about in this call, 5,000 employees, 200 SKUs are we maybe not appreciating how much this company is a footwear company that can identify trends and make products which is why we saw so much growth in non-core styles in 4Q? What you can share with us about the organizational structure that’s changed in the last year that maybe people can appreciate just because we’re not inside the company?

Ronald R. Snyder

Yes. I think that probably has been missed a bit. We put this substantial infrastructure around the world with even the direct offices in some of the emerging countries. They’re very difficult to open. We have to deal with a lot of regulations and such and we’ve now done that in just about every major market in the world and now we’re just going to continue to improve.

We’ve got north of 250 models now with our various lines with Crocs, with Bite, with Ocean Minded, YOU by Crocs. We continue to develop very exciting new footwear. We just had our whole engineering design teams in last week and some of the new styles coming out for ‘08, ‘09 some of the early indications for ‘10 are really exciting.

What we think we’re putting together here is an infrastructure whereby when we come up with good products like the Mammoth we can launch 100,000 and ship 2 million to 3 million, maybe more than that, to hit a trend in the season and then come into next year and do it again.

So we’ve actually done it now with the Athens. We did it with the Mary Jane, in similar magnitude. Athens, with the Mary Jane, with some of our spring styles last year did well we just didn’t have the capacity because we had to go back and build more of the core styles right in the middle of the season last year so we missed upside on really all of the hot spring styles.

But I think you’re right, we’re putting together a very sophisticated team here. We have top talent from around the world. We’ve added some top managers in Europe, throughout Asia, down in Australia, in Brazil, we have a top-notch team. So we’re putting together a global company that’s going to be here a while.

Jay Seoul - Morgan Stanley

Sounds great. Let me just follow-up with one more thing. You made the acquisition, the XO acquisition I think it was about a year-and-a-half ago and that was just a design company as I understand it. Have you added to that organization? How you built out? How many more people now are doing design and are doing the engineering compared to maybe a year ago or a year-and-a-half ago?

Ronald R. Snyder

Lots more. That was really a core base. That is a tremendous part of the world in Italy. We’ve added a tremendous number of engineers and design people in China, here in the U.S. We have some design activities going on in Japan. We probably have 50 people now just designing footwear and bringing products to the market. So that is now a pretty sophisticated organization within the company and we have the proper tools so we can share files and bring a product up in five manufacturing locations around the world in a very short amount of time.

As an example, the Crocs golf shoe we just started the design here probably a month or so ago and we’ll have plenty of products on the shelf for the spring.

Jay Seoul - Morgan Stanley

Great. That’s very interesting. Let me ask you just one last thing if I can. Just looking out to 2008, if things go according to planned, you should have a lot of cash on your balance sheet, maybe as much as $150 million or so. What are your latest thoughts about cash uses, what you might think about doing with that cash as it starts to build?

Ronald R. Snyder

I don’t think we have anything specific that we’ll talk about today. We look at all of the things that you do with cash. We, right now continue to look at interesting acquisitions, not as I said before, not huge ones that wouldn’t integrate well within our global system, but ones that we can take really, really nice product, well designed, having some success in a given market and take it to the rest of the world. Those are the kind of things we’re looking for and we’ve got a few we’re working on now.

Jay Seoul - Morgan Stanley

Okay. Great. Thanks so much.

John McCarvel

Let me follow back on the retail question. We did approximately $50 million in the US for calendar year 2007 was about $20 million of that in the fourth quarter. We see our growth from that business at around 50% to 60% for next year and international growth is faster.

Operator

We’ll go next to Sam Poser - Sterne Agee.

Sam Poser - Sterne Agee

Good afternoon. I just had a quick question about the inventory again. I’m sorry to beat this one up. But is your average selling price on the inventory at $16.50 pretty much as well based on what you sold, can we assume that it’s pretty close to that amount?

Ronald R. Snyder

It’s probably a little bit higher than that, but yes it’s close.

Sam Poser - Sterne Agee

Have you really knocked out the seasonality of your business to the degree that Q1 and Q4 would be equivalent to one another or going into spring with the new products that you have and that you missed so many sales last year and with the growth, doing $227 million in the fourth quarter, then guided to $225 million, has the thing really leveled out to that degree? That seems somewhat extraordinary.

Ronald R. Snyder

No. We still expect to be seasonal in Q4 and Q1. That’s the number of products that we have now. We have a lot of summer products and as we launch them and become even more and more successful with them it makes it seasonal. So we’re tasked with coming up with great products for the winter months, if you will. Right now, the best look we have at it is that we’ll be flat from Q4 to Q1 in ‘08. We see obviously nice growth as we move into Q2 and Q3.

Sam Poser - Sterne Agee

Then your inventory that you’re carrying would be about 14 million to 15 million pairs and you can make 7 million a month. It appears because you have maybe a month’s flexibility in these levels to be able to respond to give you the wiggle room to respond. Is that the right way to look at that? That also would allow you to bring your inventories down at the end of a quarter and position those inventories correctly.

Ronald R. Snyder

We feel that right now, we have our inventory positioned correctly. We’ve got some real nice potential in some of the new markets that we’ve moved into just last year so we have a fairly large mix of product. In order for our products to sell well at retail, we need to get the whole color palette out on the stands and then it drives sales like crazy. So obviously we’re hoping that we’re a little bit off in our inventory calculations and we’ll need some more.

Sam Poser - Sterne Agee

Has that assumption been put into your guidance or would that assumption be gravy?

John McCarvel

That would be gravy.

Operator

We’ll go next to Karen Legate.

Karen Legate

I’m not sure I really understand the air freight part of it. If there’s so much inventory and it’s in the distribution centers, what is the need to air freight for?

Ronald R. Snyder

The air freight was to meet the demand for an incredible product that we had in season. So we have our core product and we have our spring launch products that we obviously had to get built by the year end and get into markets around the world, but at the same time, we were air freighting in some of the very hot -- the Mammoth, the Alice, the Troika -- some of the styles that did extremely well in the winter. So that’s the air freight story. But we’re saying now as we go into the spring, we have more of a spring product in now and we’re continuing to build of course. But we should see air freight continue to decline as we go through our now busy season this year.

Operator

Your next question comes from Adam Comora - EnTrust Capital.

Adam Comora - EnTrust Capital

What percentage of the business in the fourth quarter 2007 were kids and is there any way you can help us understand maybe what the professional usage of Crocs might be as a percentage of your business?

Ronald R. Snyder

The kids market is still under 30%. We think it’s about 27%, 28% it’s hard to tell in some sizes, but from our best guess. It’s really not easy to tell the work environment. You don’t know if somebody buys a pair of shoes at Nordstrom whether they’re going to go to work at a hospital, whether they going to go out to dinner. So that’s a tough one. We think we now have a work shoe division within the company. That is growing significantly from less than say 100,000 pairs in ‘07 to close to 1 million pairs in ‘08. So that’s a nice growth area for us, and that is work-specific shoes.

Adam Comora - EnTrust Capital

Is there any way qualitatively you can help us understand the different categories, how they’re growing? How quickly you see kids growing in ‘08 versus ‘07 and maybe just also touch upon men’s and women’s?

Ronald R. Snyder

I think, we have so many new models now in all the categories. We have men’s models, more men’s models maybe that don’t look as funky to some men as the first classic Crocs. So we see nice upside there. We have a lot of women’s shoes that we’ve come out with, with all of our entertainment license products. We’ve got a lot of kids coming out. With our sports licensing, of course, we’ve added a lot more male and female consumers so we’re adding, we’re trying to make sure that we take care of all of the markets that we’ve been strong. So in work, in hospitality workers, in casual footwear, every category we’ve now gone out very specifically and designed shoes where we think we can be successful in each of the markets that we started in.

Adam Comora - EnTrust Capital

I’m sorry, kids, you said 30%, is that the same domestic as international or is that growing faster or slower than the overall?

Ronald R. Snyder

It’s under 30% and it’s growing at about the same pace.

Operator

We’ll take our final question from Jeff Klinefelter - Piper Jaffray.

Jeff Klinefelter - Piper Jaffray

On key retailer segmentation, it seems everyone is very focused obviously on the demand side of this equation and what kind of visibility you have there and you’ve been through a few trade shows already, you’re going into another one this week. Can you give us some sense whether it’s highlighting one particular retailer, or one particular type of retailer where you’re seeing an expansion of the styles they’re bringing in or an expansion of floor space or what is it that you gives you that confidence in the bookings you are looking at right now for Q1 and for the first half?

For Russ, just a quick one, you’ve been there a short time but you’ve come from a global manufacturing company. Any quick thoughts on initial ways that you see opportunities for you to improve the productivity or some of the financial management of the company?

Ronald R. Snyder

Let me take the floor space first. We’ve actually had meetings with some of our major retailers over the last few weeks and we’re continuing to add floor space and add models. We now are in a position where we can give different models to a department store channel versus the sporting good channel versus the shoe store and even some of the independents we have might get some the special models that the others wouldn’t get.

So I think we’ve done a pretty good job and that’s really only US now. As we continue to bring out more models in Europe and in Asia we’re seeing the same thing. We’re beginning to tier our markets more.

I think overall that there is a fear out there in the market as we move into a potential recession we’re hearing that we’re one of the better sell-through items now in the stores in the footwear category, so we’re pretty encouraged by that; we’re just hoping it continues as we move through the season.

Russell C. Hammer

Thanks for noting my four-week birthday here. I’m actually quite impressed with the speed and efficiency that we roll out to new markets as we’re expanding so rapidly here. So I don’t have any four-week old epiphanies to state improvements. I’m really quite impressed with the operational efficiency here.

Operator

At this time we have no further questions in the queue. Mr. Snyder, I’d like to turn the conference back to you for any additional or closing comments.

Ronald R. Snyder

Thank you very much. We’re very pleased with our quarter and very optimistic about the outlook as we move forward. I will be at the WSA show later this week for those of you that are going to be attending. We’ll take any follow-up calls if anybody wants to call. Thank you.

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Source: Crocs Inc. Q4 2007 Earnings Call Transcript

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