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Crocs, Inc. (NASDAQ:CROX)

Q2 2012 Results Earnings Call

July 25, 2012 5:00 PM ET

Executives

John McCarvel – President and CEO

Jeff Lasher – Chief Financial Officer

Analysts

Erinn Murphy – Piper Jaffray

Jim Duffy – Stifel Nicolaus

Corinna Freedman – Wedbush Securities

Sam Poser – Sterne Agee

Scott Krasik – BB&T Capital Markets

Mitch Kummetz – Robert W. Baird

Reed Anderson – Northland

Jonathon Grassi – Longbow Research

Jim Chartier – Monness, Crespi, Hardt

Mike Schwartz – SunTrust

Steven Marotta – CL King and Associates

Operator

Welcome to the Crocs, Incorporated Second Quarter Fiscal 2012 Earnings Conference Call. At this time, all participants are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time. We ask that in the name of -- in the interest of time, participants limit themselves to one question each. I would like to remind everyone that this conference is being recorded.

Earlier this afternoon, Crocs announced its second quarter fiscal 2012 financial results. A copy of the press release can be found on the company's website at www.crocs.com. The Company would like to remind everyone that some of the information provided in this call will be forward-looking, and accordingly are subject to the Safe Harbor Provisions of the Federal Security laws. These statements include, but are not limited to, statements regarding future revenue and earnings, backlog and future orders, prospects and product pipeline.

Crocs cautions you that these statements are subject to a number of risks and uncertainties described in the risk factors section of the Company's 2011 annual report on form 10-K filed on February 29th, 2012 with the Securities and Exchange Commission. Accordingly, actual results could differ materially from those described on this call. Those listening to the call are advised to refer to Crocs' annual report on form 10-K as well as other documents filed with the SEC for additional discussion of these risk factors.

Crocs intends that all of its forward-looking statements in this call will be protected by the Safe Harbor Provisions of the Securities and Exchange Act of 1934. Crocs is not obligated to update its forward-looking statements to reflect the impact of future events. The Company may refer to certain non-GAAP metrics regarding currency on this call. An explanation of those metrics can be found in the earnings release filed earlier today.

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

John McCarvel

Thank you. Thanks for joining us this afternoon as we discuss our second quarter results. I'm joined by Jeff Lasher, Chief Financial Officer. After I share few opening comments, Jeff will review our second quarter financial results and provide further detail on our guidance.

Before we jump into review of the quarter, I'd like to review a few of the key points we shared with many of you during our Institutional Analyst Day in late May. This is an opportunity for us to the discuss in detail how the Crocs brand has evolved from one iconic product into a true casual lifestyle footwear brand by diversifying into other relevant categories such as sneakers, flats, boot, sandals to name a few.

Typical to our global expansion as a casual lifestyle footwear brand is product innovation. This will help drive balance, challenge geographic growth as we focus on the identical long-term growth drivers we discussed at last year's Analyst Day.

These four organic growth drivers are as follows; 1) sustained growth in all regions; 2) products driven with the ASP expansion; 3) wholesale expansion; and 4) investments in our direct consumer channel in retail and the Internet.

We are halfway through the year and are very pleased with where we are today in a far more difficult environment than 2011, we are on track to deliver a third straight solid year of top line growth driven by global Omni-channel operations.

The new products in marketing campaigns are driving new consumers to the brand. All this coupled with strong management of the business. We have exceeded our EPS targets as we delivered on our commitment to profitable growth to our shareholder.

Now to the second quarter, sales increased 12% to an all time record $331 million. This was achieved through three of the four growth drivers, I just listed. New products with higher ASPs, wholesale growth and the expansion of a consumer direct channel.

[Realized] sales fell short of our expectation and this came primarily from the inability to drive growth in all regions with the European market becoming increasingly more challenging over the past couple month.

In addition, sales growth in a US retail stores fell short of our expectations in the second quarter. While we're disappointed, sales were slightly below plans, I am pleased with the restraint we showed in limiting discounts, mark-downs on products in order to proceed for improved margins.

That's not to say we won't be promotional at times, we'll continue to utilize this lever going forward. However, our plan is to be more strategic in slow end of life product throughout (inaudible) price channels market in a manner that has had the least impact to the bottom line and it doesn't damage the brand's image.

Getting back to what drove sales in the second quarter starting with new products. We continue to see our commitment to innovation pay off in newer collections of wedges, sandals, sneakers, boat shoes and flats. Most of which in aggregate carry higher price points. In the second quarter more than 54% of the volume came from new styles and non-clog products, well less than 46% was generated by clogs. This trend should continue in the back half of the year has boots and other new colder weather products increase as the percentage of our overall mix.

Wholesale expansion came from a combination of higher pre-books and an increase in (inaudible) driven by demand for a new spring summer product lines. This year the breakdown between pre-books and [out-ones] was approximately 80% and 20% respectively compared to 77% and 23% respectively last year.

In US, we continued to gain momentum shelf space from a family footwear channel and mid-tier department stores, which have emerged over the past years as the brand's sweet spot.

In Asia, we were acceptance of new stuff is consistently outpaced our other regions, wholesale gains are primarily coming from Japan, China, and throughout the Middle East were our distributor partners continue to aggressively open wholesale accounts as well as their own stores.

And finally the economic situation in Europe has made it more difficult to turn around this one sizeable business, and the recent wet weather in several key markets has compounded our issues in the second quarter.

With that said, we are optimistic that our current efforts to rebuild key wholesale relationships to a more complete product offering and improved execution, will yield positive gains beginning next year.

Turning to our direct-to-consumer business, retail sales increased 23% over a year ago, fueled by the addition of 87 net new locations over the past 12 months. Over this period, we have closed 21 kiosks, including three in the second quarter, as we are focused on opening larger, more productive store formats.

Year-to-date, we have opened a net of zero net retail locations in the United States, 35 in Asia, and 19 in Europe, and we remain on track to open 100 net new locations in 2012.

With regard to comps, as we expected, our momentum slowed from the first quarter due to the Easter shift in the United States, and the warm start to the season, which we believe pulled some sales [forward] out of Q2, versus our expectations, comp sales were a little light in the Americas region as I mentioned.

Looking at the Americas region, comps for the first six months, which we think is a more accurate picture of the channel's recent performance are up 3%. Asian comps continue to outperform the company average of 7%, while Europe was up 13%, which is a very encouraging trend, under that current circumstances there.

With that, I will turn the call over to Jeff.

Jeff Lasher

Thank you, John. Hello everyone, and thanks for joining us. This afternoon, I will be discussing second quarter 2012 results, and then we will start with some highlights before going into some detail.

First, revenue for the quarter increased $35 million or 12% to $331 million, and this level represents a record volume for any quarter in the company's history. Constant currency basis, revenue grew 15%. Same-store sales on a constant currency basis increased 2% globally in our retail channel, and Internet grew 10%. We also generated a record average selling price at $22.46 during the quarter.

Second, we were able to focus on enhanced profitability as we generated improvements in our operating margin, driven by gross margins, which expanded 170 basis points to 59.3%, compared to Q2 last year.

Third, we continue to focus on building up a strong balance sheet, as we ended the quarter with cash of $279 million, and inventories up to 6% on a year-over-year basis.

These factors combined, contributed to the $0.07 increase in diluted EPS to $0.68 per share during the quarter, which exceeded our quarterly guidance.

Looking at the results in more detail. With the Americas region, we generated growth in each of our three channels. The direct-to-consumer channel grew during the quarter with increased sales of 9% in retail. We ended the quarter with 197 locations, up from 192 locations last year.

At the end of the quarter, we operated 22 less kiosks in last year, as we continue to open full line in kiosks in allied locations. Same store sales in Americas were down 1% on a constant currency basis, compared to the same period last year.

As we said in our Q1 call, we anticipated an impact from the earlier Easter and an early onset of warm weather. So the six months of the year are American same store sales have increased 3%. Internet sales in the Americas improved 13%, and wholesale revenue improved 12%.

Specific to United States, revenue has increased 11% for the quarter, and represented 33% of total global sales.

Sales in Asia were strong across all channels. Japan grew 6% during the quarter and was our largest revenue generating country in the region, representing 38% of sales in the Asia region and 17% in total global sales. Recall that last year, in results for Japan, last year it grew to $3 million of revenue shift from Q1 to Q2 after the tragedy last year. Excluding this shift, sales would have been in the low teens range.

Asia retail sales increased 39% during the quarter, as we ended with 233 stores, up from 175 a year ago. Same-store sales in Asia on a constant currency basis increased 5% from 2011, with strengths in same store sales located in China and Korea. Internet sales in Asia continue to experience strong sales, generating a 44% increase off of a relatively small base. Our China business grew 55% over the last year, and our Korean unit increased 53% over last year.

Turning to Europe, total sales increased 5% on a constant currency basis during the quarter. A small decrease in our wholesale channel and internet channel was more than offset by growth from retail.

With the additional stores and a 10% constant currency, same store sales increase driven by results in Germany and Russia.

In the retail channel, we ended the quarter with 54 locations, up from 30 a year ago. In the second half of 2012, we will acquire 10 stores from our former Benelux distributor, and we have plans to open 20 to 30 additional locations throughout Europe.

Wholesale sales on a constant dollar basis were about flat. Internet sales were down for the quarter, as we decrease the promotional cadence and deeply discounted freight in return.

The weakening Europe currencies, primarily led by the Euro, was offset by strength in the Asian currencies during the Q2, as compared to our expectations for the quarter.

Globally, retail channel revenues in the second quarter increased 23% to $112 million. While retail locations increased by 22%, as we ended the quarter with a total 484 company-owned retail locations globally, up from 397 last year.

This includes 220 full-priced stores, 108 store-in stores, 111 factory-direct stores or outlets, and 45 kiosks. Globally, same store sales for the quarter increased 2% during the quarter, on an FX neutral basis. On a year-to-date basis, same store sales had increased 5% over last year, with Americas at 3%, Asia at 7%, and Europe at 13%.

For the remainder of the year, we plan to open an additional 45 to 55 stores. At present, we project our full year store openings to be 100 to 110 in net additions. This is broken down by region with Americas net openings of about 10, Asia of about 40, and Europe of about 50 to 60, including the 10 acquired partner stores.

Turning to product data, our percentage of second quarter revenue derived from clog silhouette fell from 49% to 46% in the quarter. Also our new product introductions globally represented about 35% of our Q2 unit sales.

As we highlighted at our Analyst Day earlier in the year, we continue to grow the clogs, by diversifying into other important categories. A few product highlights are in the quarter, included strength from the Duet product, women's wedges, and our translucent collection.

Average selling price in Q2 increased $2.50 or 13% to $22.46 compared to last year in the same period. Globally, footwear unit sales in the quarter were down 1% to 14.1 million pairs. For the first six months, total unit sales were 27.7 million pairs, up 3% from 2011 first half.

Gross profit for Q2 2012 was $196 million, up from $170 million in the second quarter of 2011. Gross margin was 59.3% in Q2, versus 57.6% in the prior year. We benefitted from key initiatives in controlling our cost of goods sold, lower promotional activity, improved economics from new product introduction, and a continued overweight growth of our Asia business.

Second quarter 2012 SG&A increased 15% to $125 million, compared to $108 million in Q2 2011. As a percentage of sales, SG&A was 37.7%. The SG&A dollar increase was driven by investments in our direct-to-consumer channel, as we continue to build our retail network globally. Our indirect SG&A increased 5% comparing to last year.

Overall, operating income increased 15% to $71 million, or 21.5% of sales, primarily driven by improved gross margin and increased revenue. Additionally, gains on foreign currency transactions had a positive impact on Q3 results by $1.6 million. These gains were comprised to foreign currency gains and losses from the remeasurement of certain balance sheet items and intercompany settlements, net of the impact of foreign currencies, derivative and (inaudible).

Net income before taxes for Q2 2012 improved $9 million to $74 million on $35 million of additional revenue. Income tax expense for the quarter was $12 million or an effective tax rate of 17%, slightly below our expectations as our country profit shifted to lower rate locations in the quarter.

Net income as $61.5 million or $0.68 per diluted share on $91.1 million shares, compared to $55.5 million or $0.61 per diluted share in the prior year. Recall that last year, we had a onetime $3.6 million tax benefit or $0.04 per share.

Our balance sheet continues to be strong. We ended Q2 with $279 million in cash, a 55% improvement from 2011 levels of $180 million. Inventory was $166 million, up 6% from last year, and at the end of the quarter, we had essentially no bank debt.

Moving on to backlog, backlog at the end of the quarter increased 3% from the same period a year ago to $173 million, with ASPs of $20.21. This is up against 2011 backlog increase of 42% experienced last year.

Regionally, Americas backlog increased 12%, Asia was flat, and Europe was down 11%. In constant currency, our backlog grew 6%. In June, the company made the decision to replace our current enterprise resource planning system.

We have selected SAP as our platform and (inaudible) the new system will launch in 2014. The incremental costs in 2012 associated with this project are expected to be approximately $0.01 per diluted share per quarter, and is included in our full year guidance.

Moving on to guidance, for the third quarter of 2012, we expect to generate revenues of $300 million. We estimate diluted EPS in the $0.42 to $0.44 per share range. This compares to diluted EPS of $0.33 last year.

Currency estimates used for the quarter are $1.24 to €1 and JPY79 to $1. Our guidance for Q3 2012 includes an assumed effective tax rate of 19% to 20%. We expect that in Q3, the relatively strong dollar compared to the same period in 2011 will represent a 5% headwind overall.

In Europe, we expect that the stronger dollar will represent a 14% headwind in Q3. This stronger dollar will also impact our gross margins slightly, but we estimate that our cost control and leverage will offset this impact.

Back in May, during our Analyst Day, we provided full year guidance of $1.47 per share in earnings. Our year-to-date EPS of $0.99, combined with these Q3 estimates total $1.41 to $1.43 per share through the end of September.

For the full year 2012, we project EPS to be between $1.50 and $1.54, which includes the benefit from Q2 and ongoing cost leverage that will offset our above mentioned $0.02 per share from the new enterprise system. This guidance assumes an effective tax rate at the low end of the 19% to 21% for the full year, and continued exchange rates mentioned earlier.

We estimate that full year growth in U.S. dollars will be about 14% over 2011, but in constant currency dollars, we estimate overall growth will be about 17.5%, right in the middle of the range we provided earlier this year.

Thanks, and now I will turn the call back over to John.

John McCarvel

Thanks Jeff. We are very pleased with our bottom line performance year-to-date, as diluted earnings per share are up 16% compared with the first six months of 2011. This was then driven by record revenues, coupled with meaningful gross margin expansion from higher product margin and supply chain efficiencies. Based on our revised guidance, we are expecting on improving our profitability trends to continue over the second six months of 2012.

With regards to topline trends, given the ongoing challenges in Europe, including currency headwinds, coupled with a tough selling climate for fall products, as a result of last winter's mild weather, we are encouraged by our backlog.

We are optimistic about a wider portfolio of new fall winter products, and expect it will generate excitement at retail, help further establish Crocs as a four season brand, and give us good momentum heading into the year.

Early indications on our spring summer '13 line and various markets around the world have been very positive. We are just starting to take orders for spring summer '13 now, and we will able to give you more detail during the Q3 call.

Operator, we are now ready to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) We will go first to Erinn Murphy with Piper Jaffray.

Erinn Murphy – Piper Jaffray

Thanks for taking my question. John, I just had a question for you actually at first. It sounds like unit sales were down about 1% in the quarter and in the second quarter. I thought maybe it'd be helpful if you could put this in context for us as with the comment that you made earlier on in your prepared remarks about just restraining some of that discount product, as you focus [too] and the profitability in the margin. So, will it be helpful maybe to look at that unit sale in Q2 you commented on versus maybe in the first half in aggregate, and then potentially your plans for the second half, as you really focus on driving that profitability? Thank you.

John McCarvel

I'd be happy to. So the way that we look at our business in the first half of this year, Crocs is -- we sold 27.7 million pairs of shoes in the first six months versus 26.8 million pairs of shoes the previous year.

Our stated objective has been, and we have talked about this in prior calls and during the investor meeting, is we'd like to see 5% of our growth come from unit volume expansions, and in the first six months on a comparative basis, we are up 900,000 pairs of shoes, or 3%.

There are two factors when you think about growth, that are impacting that unit volume growth, and that is, that in 2011, we sold 520,000 more pairs of shoes into the discount channel, the TJXs, the big loss into people to move our end of life product, which in this year we have cleaned up our inventory and we continue to focus on our supply chain management systems. We have not taken product into the end-of-life kind of channel to dispose off that product. That's 520,000 pairs of shoes that we didn't carry over comp year-over-year.

If you look at the impact to our European business, we are down roughly 14% in the unit volume in Europe or about 700,000 pairs of shoes. But Europe would have been neutral, had we sold the same amount of products into our kind of discount channel retailers, coupled with the 900,000 shoes growth, we would have actually seen a growth of 2.1 million pairs of shoes, which would be closer to about a 8%, 9% growth in the units.

So what does that tell us, it tells us that really today in our own existing channels, what we see at both wholesale, globally, with the exception of probably some markets in Europe and with our own products that (inaudible), our new products continue to resonate with customers.

This transition from, what we once were in the clog space to truly being able to get new consumers to think about us for flaps, for wedges, for other men's products, casual lifestyle space, are resonating, and we are growing actually unit volume with those consumers.

Erinn Murphy – Piper Jaffray

Thank you, that's very helpful. Just a quick separate question actually on the European macro environment. If you could just speak a little bit more to, maybe some of the specific regional trends you are seeing, you have started some country management structures, and kind of U.K. and Germany, how are you seeing those markets contrast to potentially some of the other markets that you are in?

Jeff Lasher

Europe, like Asia for us, is a wide diversity of different cultures and weather. When we look at the really northern European marketplace from England, Holland, and really above, we continue to [seek in] second season of really difficult weather.

Rainy season on record in Scotland and England, and this clearly has an impact both on the mood of the consumers, as well as people shopping for summer products. I think the good news is the benefit, yes, we have brought in additional management staff into Europe.

We are seeing better upsell this year in Germany, as we place more products into a wider diversity of retailers, in a warmer weather climate, where you still have a high number of tourists.

We are seeing good sell through in those markets. The new stores that we have opened in France, two of the new stores that we have opened in France, the one in Nice that we have talked about, is kind of a place where we need to be, in Europe, on a going forward basis, is up 50% over what our expectations were for that store when we opened it.

But I think the diversity in the marketplace, on the economics in different countries, and just ebb and flow of financial information also has a tremendous impact on the people that live in those countries, and is impacting consumer behavior, and is impacting the amount of products we are selling this year.

Erinn Murphy – Piper Jaffray

Thank you guys very much and best of luck.

Operator

Moving on, we will go to Jim Duffy of Stifel Nicolaus.

Jim Duffy – Stifel Nicolaus

Thanks, hello everyone. John, I am hoping you can share some insights about the changing cadence of the business across the quarter, into the early part of the third quarter specific due to the different regions?

John McCarvel

I will give it my best shot. I think in our U.S. business, we have kind of seen the ups and downs during the quarter, with respect to retail. We have had some good weeks and warmer weather climate, and it was clearly impacted by the early spring pull forward and the holiday, as the quarter has gone on, I think we see a little bit more appetite for product, leading into the third quarter.

For our wholesale accounts, I think across the board, and I was out at the end of June, visiting six of our top 10 accounts. I don't think we have ever had a better working environment. Sell-throughs have been good. All of our core wholesale partners are happy with the product line, the traffic that it's driving, and I think that all indications are that, we are going to continue to expand on doors present in all of our major accounts going into '13.

You know our model, as we touched on it, in both Jeff's presentation and mine, changed a little bit again this year, where we have not sold as much or chased as much (inaudible) business, as we get in the early days of the company, and that's clearly impacted a little bit of our topline and growth for Q2, just with a model change.

I think kind of building on a little bit, with what I said to Erinn, with respect to Europe, it's a Happy Day there today on our Amsterdam office. They have actually had three straight days of sunshine, and once people get out and there is some pent-up demand, what will that look like in the third quarter, coupled with the Olympics starting at the end of this weekend, the psyche of the consumer will hopefully be in a more positive mode, and I think we are still waiting to see what the impact will be with more people in England, in the U.K. market during these three, four weeks of the Olympics. It's a little bit early for us to tell there.

Across our Asian business, you have a good summer going on. In the Middle East, we continue to see that extend and expand from what we have talked about before, and more store openings with our partners in the region, and additional new products going into all of the Middle East countries for the third and fourth quarter.

You know, a lot of conversations with respect to China and Hong Kong, I don't know that we are in the same realm, where casual lifestyle product in that $25 to $50 price point stays, we continue to see good traffic across the border. Our business in China and in Korea has been very solid this year. Early indication for prebooks for spring '13 are very strong, and well, we don't have final numbers into the system yet, we think we are going to see solid growth in those markets, but we are at a different price point.

We are an aspirational brand for the middle class, and we still have a lot of room to grow in China with the amount of wholesale and retail doors that we have in that country. So we are going kind of a little (inaudible) direction, Jim there, than maybe what other people have said, and our Hong Kong business is flattened out year-over-year just, not because of the same issues that people have seen it less, we are seeing less footfall traffic in our Hong Kong stores. But nothing dramatic, and it's not really impacting the overall business, just we are comping at a more neutral level year-over-year.

Jim Duffy – Stifel Nicolaus

That's very helpful, thank you. In the context of the revenue trends you have seen in Asia, during second quarter, I was surprised by the Asian backlog numbers, is there anything unique with respect to the comparison on those?

John McCarvel

I think that the Northern Asian marketplace is seeing same kind of challenges, weather wise that we saw in both the Americas and Europe. So we still see a little bit of growth with our Chinese wholesale partners.

We see a little bit of coalescence with our Japanese accounts when it comes to what the appetite for fall-winter products are going to be at this point in time, because they also had a short winter there last year. So backlog growth in the Americas was up about 10%, Europe was down about 10% year-over-year and our Asian business in total is flat right now, with a lot of that, I think still waiting to see what happened, weather wise in those markets.

The other [thing] that happens for us, as we go to the back half of this years, we are going to have 100 to 110 additional stores, retail locations online this year, and our back half of the year does shift to being a little bit more direct business than it has been wholesale, as it's a little bit harder still for us to convince wholesalers to take Crocs as a fall holiday brand.

Jim Duffy – Stifel Nicolaus

Last question, and I will let someone else jump in. Your inventory management looks really sharp, particularly in light of a sales number which came in short of what you had previously thought. How did you manage to keep the inventory so tight, and what you see from inventory levels in the channel into the third quarter?

Jeff Lasher

Hello Jim, this is Jeff. When you look at our inventory levels in the balance sheet, we are up 6%. Sales are up 12%, so the team has done a good job of managing that growth in our total dollars of inventory.

As far as the channel health of our inventory, we are pretty happy with the levels in the inventory channel. We don't really see any big surprises on either side, but I think that the real key for us from an organization perspective is the focus that this group has put on inventory over the past couple of years and commitment that we all have to manage our inventory very conservatively and prudently.

Jim Duffy – Stifel Nicolaus

Great. Well done. Thanks.

Operator

(Operator Instructions) We will move on to Corinna Freedman with Wedbush Securities.

Corinna Freedman – Wedbush Securities

Hello guys. Just wondering if you could give us an update on your plans for fall and the family footwear channel, and how you have been increasing shop space and increasing your marketing/POS initiatives there still? If you could just give us an update for fall, that'd be great. Thanks.

John McCarvel

I think to the U.S. wholesale market, a lot of conversation when we were out at the end of June with them, with respect to three key stories, three key new product collections that we are launching, plus one extension to last year's Cobbler collection of products. It is a little bit harder for us on the sell-in there, given the inventory positions that most of our key wholesale accounts have in the mid-channel and in that kind of mid-tier department store arena.

So I think we are going to get a little bit more placement, based on conversation out there that we are getting to see some of those key stories show up in locations that will either end up in (inaudible), on table tops, that will give us a better feeling for whether these new selection of products do resonate with their consumers, and if their consumers would truly shop Crocs on a fall holiday, fall winter kind of basis.

So I think the backlog is there. We are getting some additional -- based on the orders going into the third and fourth quarter, and now we are getting to see what others like and how that actually cues.

Corinna Freedman – Wedbush Securities

If I can ask a follow-up, do you have an update on your licensing initiatives and what we could expect for fall or holiday?

Jeff Lasher

Licensing has continued to be with the primary key partners that we have had in the past with Disney, with some of the other properties that we have had. I don't see any change really on licensed products.

When it comes to some of the licensing initiatives that we have had around accessories and kids apparel and some other small pieces of apparel, we never thought that it would be a meaningful piece of business this year, it's really something in our three to five year growth initiative and I think, you are going to continue to hear more about that, as that continues to grow and be meaningful really over the next six to 12 months.

Corinna Freedman – Wedbush Securities

Okay. Thank you.

Operator

We will take our next question from Sam Poser with Sterne Agee.

Sam Poser – Sterne Agee

Good afternoon. Thanks for taking my call. Can you talk a little bit about the longer term growth plans, specifically in South America and Brazil and how are you looking at that and timing of Latin America really?

John McCarvel

I think in our Latin American market, we would consider everything from the Caribbean and Mexico really in the south, as part of that discussion in equation. I think we feel that the business is continuing to grow nicely in many of the markets there.

Today, we sell into Ecuador, Venezuela, Chile, Argentina. We have our own operations in Brazil that allows us to open retail stores, and we bring on our Crocs website here in the coming quarter. I think we feel like we have all the pieces in place. I think Jeff can talk to this in a little bit.

What we have seen really over the last 12 months, is just the impact of dollar to the real and what's happening there, we see a huge amount of Latin American consumers, both in our Florida business, as well as in our California business, as people that are buying the brand, taking it back with them because we don't have enough distribution in (inaudible), just because of the arbitrage and the pricing and the cost to sell products there. It's more beneficial for them to buy it when they are in the U.S.

So we see a real connection with the consumers there, and I think we have said that we think we are going to continue to grow that business at a rate of about $25 million, $30 million per year for the next two years. So we think that there is a good market there for us, across the border from Mexico, Caribbean, all the way down to South America.

Sam Poser – Sterne Agee

Let me just follow-up, specifically on Brazil and Chile and then in Europe, in the Latin American countries there, and in Spain and Portugal as well, if you are seeing any improvements in those markets yet?

John McCarvel

I think we are going to see with the real, what I said and what's going to happen with their spring-summer coming forward here in the next six months, we are going to see what that looks like, and what kind of impact we are going to have on the FX side of that in larger markets like that.

I think for the European markets, couple of things that's going to happen or us there. One, we -- as Jeff said, have taken back our distribution rates right now in the Benelux, in a smooth transition with our distributor partner there for the past seven years.

So we have been working at this for the last few years, making sure that if we can take on both their retail and wholesale accounts, this was something that we feel that we can leverage going forward. We have done the same thing in Spain, relative to retail out. There is not a whole lot of retail in Spain today at the distributor, having only two stores. One in Madrid and one in Barcelona.

So that's a nominal impact. But again, it's a place where we think when we talked about opening locations in the back half of the year, as to being more outlet type centers in a warm weather tourist type climate, where we just don't have enough distribution today for our products. Does that cover what you wanted, (inaudible), both areas.

Operator

Moving on, we will go to Scott Krasik of BB&T Capital Markets.

Scott Krasik – BB&T Capital Markets

Hey, thank you. John, you sort of alluded to it, but it sounded like the comps are positive so far in the third quarter, and are there any opportunities, given your merchandize, (inaudible) steps in the outlet stores in the third quarter. How good could the comps recover in Q3, then I have a follow-up?

John McCarvel

I think what we feel is that we have built in the same growth rates in our business in the back half of the year for retail as we had in the first half of the year. I don't see anything meaningfully changing year-over-year. I know last year we had some difficulties in the third quarter in our U.S. retail business.

I think it's a little early to tell how that will affect our overall comp performance for the quarter. But the way that we have built our guidance and the way that we are looking at our business today, is similar growth rates in retail comp level performance in retail from the first half of the year and second half of the year.

Scott Krasik – BB&T Capital Markets

Okay. Then just a question on backlog, are the spring bookings in these numbers yet, and I know Japan for instance had a very cold, wet, early summer. What impact is that really having on a point basis on the backlog?

John McCarvel

For the specific backlog that we told as of June 30, 2012, would have a very nominal amount of business beyond 2012. So it doesn't really represent the strong belief that we have, that our spring summer '13 product line is the strongest that we have ever had as company.

So we haven't seen those financial numbers come in, but we are looking forward for those this quarter, and I will have a little bit more color for you in 90 days, when we do the Q3 call, and we will be able to provide additional backlog color at that point.

To your question about Japan in the backlog there, I think it's also important to recognize that last year they had a very strong year in Japan and we grew substantially in the Japan market last year.

So they do have some tough comps, and in fact on a global basis, our backlog at the end of Q2 2012 was up 45% compared to Q2 2010. So if you look at it from a two year growth perspective, the global backlog is up significantly, 45% over that two year period.

Scott Krasik – BB&T Capital Markets

Thank you.

Operator

Our next question will come from Mitch Kummetz with Robert W. Baird.

Mitch Kummetz – Robert W. Baird

Thanks. Maybe along those lines Jeff, on the backlog, I think in the past you have broken it out by kind of the next couple of quarters. So something you might be able to do that, break that out Q3 and Q4?

Jeff Lasher

Sure, Q3 represents about a flat year-over-year growth, or a lot of the growth in the backlog on a nominal basis is in Q4, about $46 million versus last year's $41 million, and again those are in nominal basis, as far as the constant currency growth, that would be strong or so. About 12% on a nominal basis in Q4, again in Q3 about flat.

Mitch Kummetz – Robert W. Baird

Okay. Then just a follow-up. On the gross margin, obviously very strong in the quarter. You mentioned a number of drivers there. As you look out into the back half, I guess, I am just starting with Q3, given your overall sales earnings guidance. What are you expecting for gross margin? Do you expect some of the similar drivers to be in place? I know your gross margin was a little tough last year, given some of the issues that you guys had in Q3?

John McCarvel

Yeah Mitch, we are anticipating about the same kind of trends going forward. Like we said in the script earlier, we have benefitted from improvements in our supply chain costs, a shift towards new products, strength of our retail in Asia business, all of those trends continue into the back half.

I think we said back in May that we anticipated zero to 150 basis points of improvement in margins, and we should be at the high end of that range, as we look out to the end of the year. Sorry, zero to 100 basis points that we are expecting there.

Mitch Kummetz – Robert W. Baird

Okay. That's helpful. Thanks. Good luck.

Operator

We will go now to Reed Anderson of Northland.

Reed Anderson – Northland

Good afternoon. Well some questions have been answered. I was curious if you can kind look at the retail business, and in the Americas. You continue to grow, even though the store account is flat and comps are kind of flat, and obviously reflects a transition from kiosks to stores, how long can that go on? Where do we kind of anniversary that where you don't have the benefit of a bigger footprint, just trying to get a sense of where the timing of that would be?

John McCarvel

I think one of the things that gets lost, sometimes when we just look at the numbers is how much we have changed from a product portfolio presentation standpoint, connection with the consumer overall, marketing aspect.

I think when we think about any business, if this is a 10 year old business and 20 year old business, and you have very established lines of product that consumers were shopping you for them, then I think you are going to drive certain conclusion from that.

The fact that we are getting more new consumers to come into our stores and come to the website and look at us like they have never looked at us before. Our consumer data that we have been building now for the last 18 months, really kind of shows that the negative element of our brand is dissipating at a pretty good rate.

That consumers today do look at us in a different way. That people who never considered us before from a product standpoint, from a consumer standpoint, now look at both the mom level and as well as the dad level when it comes to products. Our male and female consumers are considering us in ways that they never have before.

In the meantime, as we talk about this, as the clog business is slowly starting to find, I think a level that we are going to be happy with and I think is going to be sustainable, we all feel is going to be sustainable on an ongoing basis, is still the core foundation for the brand.

So when I think about the effect and when we look at our retail business, that is affected, and our revenue per square foot is still pretty significant, relative to many other people in the marketplace, and our operating income obviously from our numbers as you can all see today, has been pretty solid again this quarter, even with our nominal comp growth, and even a negative comp growth in the Americas.

I think you can see what's happening, we can see what's happening. So how does that look 12, 18, 24 months from now, I think the optimistic view of this is, is that we are going to continue to convert and attract new consumers to the brand and stores are going to perform better in the long term, as people consider us in a different way.

I think the negative aspect of that is, is that you are accounting us off some pretty good revenue, face this in a number of stores, and you might be -- you might think about that in a way that, can they really sustain that level of business.

Reed Anderson – Northland

Fair enough. I completely understand. Okay good, then I guess Jeff, just relative to store growth and, the remaining stores we got left to open, timing for that would likely be, most of those in front of the holiday or do you think that it would be something that would flip further back into the fourth quarter?

John McCarvel

Well it's about I think 20-20 splits, Q3, Q4, so yeah the goal would be to get any of the Americas stores open in advance of Christmas, but the European ones will kind of come in, and the Asia ones will kind of come in throughout the Q4 period. Not a whole lot of stores open in the month of December.

Reed Anderson – Northland

Great. Thank you. Best of luck.

Operator

We will take our next question from Jonathon Grassi of Longbow Research.

Jonathon Grassi – Longbow Research

Good afternoon. Thanks for taking my calls. Just looking at the SG&A, I believe the initial expectation going into the year was to be flat to elaborate. I guess with these top line headwinds, is that still possible or should we expect a similar amount of deleverage that we saw in 2Q over the balance of the year?

John McCarvel

I don't think it's going to be a similar amount of Q2 leverage, because we did have a lot of additional stores on a year-over-year basis in Q2, versus the revenue generated on last year. So I don't think it's necessarily an indication of full year being deleveraged into the same extent.

I think we said back in May that we anticipated a little bit of a leverage. Now it's going to be close to a flat on the SG&A, I think the more important thing is for us, the operating income leverage, that we see over the overall organization, not necessarily depending on the cost of goods sold, versus the SG&A.

Jonathon Grassi – Longbow Research

Then, could you guys just talk real quick about how your products at the highest price point level have performed, and how it's shaping your approach to spring 2013?

John McCarvel

We had a sub-brand called the (inaudible) Crocs, sold from anywhere from $100 to up to $200, more traditional footwear leather base trying to build comfort, cushioning into the foot [bid], and it's something that we have shuttled this year, in the first half of the year. What that teaches us about the brand is really on the higher price range, getting into that $100 range.

We are still earning our way into those categories, it has to bring enough innovation to the consumer that they feel that Crocs plays in that space. I think one of the best places to kind of see that, is the innovation that's built into the Golf shoe. These are anywhere from $90 to $110, more than that in our Asian marketplace.

But consumers are willing to pay for that for comfort for a true product in that space. So I think we look at majority of our products in that $25 to $50, $25 to $60 price point. I think our wholesale partners feel that that's also the place where we play, where we can bring enough comfort, fun, innovation and color, and not much of our product goes above those price points. So we are pretty comfortable where we play today. We think that there is lot of opportunity to grow just within that space.

Operator

We will go now to Jim Chartier of Monness, Crespi, Hardt.

Jim Chartier – Monness, Crespi, Hardt

Thanks for taking my call. You have talked at the investor day, I think last quarter about bringing back the Mammoth for fourth quarter. Could you just tell us why that has performed better than similar products like the Blitzen and what channels and regions is this going to be most important for you?

John McCarvel

Jim, what we said there was that we really have three major pushes for the holiday season this year, which was a continuation building on the Cobbler collection of products that we came out with last year, which fell in those price points I just talked about, by getting some cases up to the $80 price point. It's a place where (inaudible) it's not an indoor product per se, and so that will end up against our product to new consumers.

Same thing with the rain snow boots which is a really nice new technology innovation based rain boot, we think again this puts us in a place where we don't have other people with similar kinds of products and lastly to the point that you raised, which is the Mammoth product, which was wildly successful in its early stages.

Personally, Jim, I just think the product lives a lot better. The design of the Blitzen was a little bit more masculine than it was the unisex. This kind of goes back to our core heritage of the original clog, and of the original Mammoth, and it brings a new liner story to it. So it's a nicer looking more comfortable product and the place where consumers do look for products from Crocs in this space, so I think it will be a good hit for the upcoming fall winter season for us.

Jim Chartier – Monness, Crespi, Hardt

Are you going to keep guiding your retail stores? I know you said it was used as a discounting product and then some wholesale accounts in the past?

John McCarvel

No, the Mammoth was one, I think as it god old and aged a little bit, it did end up in other channel. It will be front and center in our retail stores, or for this fall winter globally, as well as some of our key independent and other wholesale accounts.

Jim Chartier – Monness, Crespi, Hardt

Great. Thank you.

Operator

We will take our next question from Mike Schwartz of SunTrust.

Mike Schwartz – SunTrust

Good evening everyone. Just wanted to kind of dig into the inventory position at your company-owned stores is a little more. Maybe you can provide a little more granularity around those levels, your full priced stores versus -- at some of the outlet channels?

John McCarvel

We don't really breakdown inventory by store. Maybe there is some specifics that I can answer for you or?

Mike Schwartz – SunTrust

Yeah. Just I mean directionally, maybe year-over-year, what does it look like? What does the inventory levels look like? Are you carrying a lot more inventory at your full priced outlets this year versus last year and kind of a similar question on the outlets?

John McCarvel

Across the board in Q1 we did clean up in our U.S. business with respect to the amount of product that we have, the type of product that we have, where it was positioned, and it reduced our inventory level, in stores and in backrooms by about 30%, and then with that product, we are able then to bring back and redirect it into the rate channels, consolidate, what might have been broken product in the marketplace. So all that was done in the first quarter of 2012 on the U.S. side of the business.

Mike Schwartz – SunTrust

Okay. So nothing materially different in the second quarter then?

John McCarvel

Nothing materially different in the second quarter and I think we are just starting to start to phase in certain markets into back to school and then back into the fall time of the year. So what you will see is, inventories starting to change over, depending upon location of the retail stores.

One significant focus here in our business to be able to do auto replenishment and quick retail replenishment programs to our stores, so we stay as best we can and stock on core colors and sizes and products.

Mike Schwartz – SunTrust

Great. Very helpful. Then just maybe jumping over to the European business. Can you maybe provide some more color on your wholesale distributor base over there? I know you've guided, you use a lot of smaller kind of independent distributors? Maybe you could flush out some more color there?

John McCarvel

Actually we don't -- really we are at a point now where you don't have a large number of distributors in that market, actually at all anymore. We have a partner for wholesale in both Italy and Spain. We are direct in Portugal. We are direct in almost every other major Western European country.

We are direct in the Nordic, and Finland. Agents in the other Nordic countries. We are direct in Russia with our own office in Moscow. We do use distributor partners in the Balkans. We use distributors and partners in Eastern Bloc countries, and CIS countries, but the major markets today are all direct. The Benelux market was really the last key market become to be a direct for us.

Operator

Next, we will go to Steven Marotta of CL King and Associates.

Steven Marotta – CL King and Associates

Good evening everyone. Most of my questions have been answered. Very quickly, your ASPs were up about 13% in Q2. What are your expectations quantitatively for the back half of the year please?

John McCarvel

Can you say it one more time? I am sorry.

Steven Marotta – CL King and Associates

Your ASPs were up 13% in 2Q, and I am wondering quantitatively what your expectations are for ASPs in the back half of the current year?

John McCarvel

I think what we'd say is ASPs in the backlog were $20.21, up from $19.79 last year. We saw a big improvement in our ASPs last year in the back half. 2011, we saw $22.18, and $21.09 respectively in Q3 and Q4.

So we are (inaudible) increases and I think you will see that kind of percentage increase in ASP, but probably not to the same extent that you saw in the first half of the year, where we were up against some lower ASP numbers.

Steven Marotta – CL King and Associates

Sure. Great. Thank you.

Operator

At this time we have no further questions. I will turn it back over to management for closing remarks.

John McCarvel

Thank you. Thanks to everyone for joining us for today's conference call, and we will talk to you again at the end of the third quarter.

Operator

Once again, that concludes our conference. Thank you all for your participation.

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