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CROCS Inc. (NASDAQ:CROX)

Q1 2008 Earnings Call

May 7, 2008 4:00 pm ET

Executives

Ron Snyder - President and CEO

Russ Hammer - CFO, SVP-Finance and Treasurer

Analysts

Jeff Klinefelter - Piper Jaffray

Mitch Kummetz - Robert W. Baird

Robert Samuels - JPMorgan

Jeff Mintz - Wedbush

Jim Duffy - Thomas Weisel Partners

Operator

Good afternoon ladies and gentlemen and thank you for standing by. Welcome to the Crocs Inc's First Quarter Fiscal 2008 Earnings Call. At this time all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. I would like remind everyone that the conference is being recorded.

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 plans, forecasts, guidance, projections, expectations and estimates or objectives for future operations, including statements regarding economic trends, Eastern European and Brazilian operations, marketing spending, product debuts, retail store expansion, cash generation and inventory levels.

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 those risks and uncertainties in the risk factor section of the Annual Report on Form 10-K and its other documents filed with the SEC, and you are encouraged to read that section and all other disclosures appearing on 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. In addition, certain non-GAAP financial measures relating to the expenses associated with the shutdown of the company's Canadian manufacturing facility will be discussed on the earnings call. For a reconciliation of non-GAAP financial measures discussed in the earnings call, please to refer to the table entitled "reconciliation of non-GAAP performance measures" included at the end of the press release.

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

Ron Snyder

Good afternoon and thank you for joining us to discuss our actual first quarter results. With me today on the call is Russ Hammer, our Chief Financial Officer. As you know, we revised our first quarter and fiscal 2008 guidance on April 14th. This was primarily due to the challenging domestic retail environment and its negative effect on our projected level of at once business.

Based on our first quarter results combined with the macro economic trends in a generally challenging marketplace, we believed it was prudent to adopt a more conservative outlook for the remainder of this year and adjusted our fiscal 2008 projections accordingly. As I discussed before, we have been building inventory and infrastructure to accommodate our projections at that time. We have now taken immediate action to bring cost in line with the revised revenue forecast and we expect this activity to be completed by the end of Q3, '08.

First quarter financials. Sales were $198.5 million compared to $142 million a year ago, an increase of 40%. Albeit lower than original guidance this is the ninth consecutive quarter of double-digit revenue increase since going public in February 2006. EPS excluding the charts associated with the shutdown of our Canadian manufacturing facility was $0.09. Including a portion of the charges associated with the shutdown of our Canadian manufacturing operations, we reported a net loss of $4.5 million or negative $0.05 per share.

First quarter international sales increased 79% to $105.9 million versus $59 million a year ago and represented 53% of our total business compared with 42% for the same period last year. At the end of the first quarter our international door count stood at approximately 21,000, up from 19,000 at year end. As expected we continue to experience good door growth internationally.

In Europe sales increased 109% to $55.3 million from $26.4 million last year. As a reminder we are significantly increasing our product offering in Europe with new styles from both our Spring '07 and Spring '08 collections, including the Adara, the Baya, the Basa, the Patra, the Sassari and the Sobek. We now offer more than 56 Crocs branded styles in Europe, compared with only a handful of styles this time last year.

During the first quarter, we experienced strong demand across the continent led by Germany, Spain, Benelux and Italy to name a few. We are pleased with our success in Western Europe and we look forward to expanding our operations and increasing our presence in Eastern Europe including Russia, we will begin shipping products in the second quarter.

In Asia, first quarter sales increased 93% to $37 million, which is up from $19.2 million at the same time last year. Japan continues to lead the way. However, we are also seeing meaningful year-over-year increase in countries such as the Philippines, Malaysia, Indonesia, Australia, Hong Kong and China. Similar to Europe, we are broadening the product mix in this market to include more than 80 Crocs style spring versus less than half that number last year.

As the weather begins to warm across the northern part of Asia, we are seeing improved traction at our retailers. Meanwhile down south in Australia and New Zealand, we are benefiting from strong demand for the Mammoth as that hemisphere's winter season approaches. Sales in other international markets increased to 65% to $5.1 million versus $3.1 million in the first quarter last year. In this category, Brazil has been a standout market for us, despite the fact that we only started selling there in the second quarter of last year.

As further indication of our early success in Brazil, we recently signed an agreement with the Sao Paulo Football Club to market and sell Crocs footwear with the Club's colors and logo. Sao Paulo Club was the 2005 Club World Champions and the 2007 Brazilian National Champion, and has over 13 million supporters. Importantly, this agreement gives us great creditability in the Soccer crazed country and provides us entry into many sporting goods, retail doors across the country. We are currently exploring similar opportunities with other teams in both South and Central America where Soccer is just as popular.

Now turning to our domestic performance, first quarter domestic sales increased 12% to $92.6 million, driven by the demand for both, our core styles coupled with strong demand for new styles. We now offer more than 130 of Crocs branded footwear in the US. As I mentioned on our call in mid-April, we booked over 50,000 units of at least 48 of these styles globally at that time. That number is now up to that model year-to-date. We are getting nice traction with the new model.

This spring we have introduced several new styles and incorporated materials such as canvas and suede, as well as shoes that feature higher heels. The reaction has been very positive. In addition to further diversifying our portfolio, these new products allow us to open up new channels of distribution and attract new consumers to the brand. Some of the key styles include the Malindi, the Cyprus, The Yukon, and The Santa Cruz, the Tikali, the Adara, and the Otter for kids. The Yukon, Santa Cruz and other men's casuals will be available at Dicks, Journeys, Macy's and (inaudible), while Malindi and the Adara are being sold at Dick's, Macy's, (inaudible) and the Sports Authority to name just a few. Of course, all styles are available on our website at crocs.com

Interestingly for the past six weeks, the Cyprus which is a new $50 price point model with a inch wield for has been the number one booking item on our website. Not to be overlooked, our core styles performed well, they are in the quarter led by our classics, came in the Mary Jaine, Rosemary Jane and the Mammoth. We ended the quarter the with a domestic door account of approximately 13,500 compared to roughly 13,000 at year-end.

Turning to our licensing business, as you saw from our recent release we are extending our Disney by crocs collection to include an all new collection inspired by Hannah Montana. This line will debut in retail in May with the Hannah Montana Mary Jane-style crocs for girls, followed by the cozier Hannah Montana seemed Mammoth Crocs for the back of school season. In addition to this collection, extension will also include Disney's High School Musical, and the upcoming Disney Pixar Animated film Wall-E with footwear and Jibbitz hitting the shelf later this summer.

We also recently announced that we expanded our sports licensing business with an agreement covering the National Basketball Association, which will allow us to license logos from all 30 NBA teams for both Crocs footwear and Jibbitz charms. NBA branded shoes including the Mammoth model created for cold weather wear will be available prior to the start of the 2008-2009 basketball season.

Also worth mentioning, just a result of our strong relationship that we have developed with Major League Baseball, we have been granted the right to extend our product offerings beyond just classics into other styles such as the Santa Cruz, the Venture and some additional footbox categories.

Lastly, we signed a licensing agreement with Mossy Oak for their break up cool camo pattern and now offer that rugged look and feel on several of our Crocs styles. We have been very pleased with the response to this new line which is proving to be very popular with the outdoor channel and consumer where we have historically been under penetrated.

I would like to now quickly touch on some of our recent and upcoming retail initiatives as that division is becoming more meaningful to our overall results. During the first quarter we opened three company owned stores in Europe, one in Hamburg, Germany and two in Finland. Additionally, three Crocs stores will open in India, as well as two outlets in the US. We ended the first quarter with 214 company owned locations worldwide, including four domestic full price stores, eight outlet stores, 62 international full price stores, six in Europe, 55 in Asia and one in Canada. 133 domestic kiosks and seven international kiosks, and seven and 66 licensed stores with 10 locations in Europe, 34 locations in Asia, six locations in Mexico and an additional 16 licensed kiosks in the US. Over the remainder of this year we will be opening full price stores in Honolulu, Chicago, San Francisco, Portland and Los Angeles, as well as more than 10 outlet stores here in the US.

Additionally we will be opening four full price and one outlet store in Canada and additional 10 stores in Europe and about 15 stores in Asia. In fact in Q1 our Asian stores were about 16% of that regions total business. We expect to end 2008 with approximately 118 stores and 150 kiosks worldwide. Again our stores do a great job of highlighting the diversity of our product line, while providing us real time sales information that we can track and use to help forecast future demand levels, not to mention the margins are extremely favorable.

Turning to some of our other brands and categories, we are very excited about the recent launch of the Jibbitz, o-dial, our cell phone carrier that looks like a miniature Crocs beach. We think this will be a huge hit with young consumers including the follow-up version based on the mammoth that will be introduced later this year. These create a nice business opportunity for Jibbitz as both carriers have 13 holes to fill.

With regard to Ocean Minded we are launching that brand in Europe and we will be opening the first ever Ocean Minded store in Hague. In addition we are launching Ocean Minded at select retailers in China, Malaysia, Hong Kong and the Middle East. Domestically we have expanded the collection to roughly 40 plus styles and broadened the brands distribution.

Now to our Bite collection, during the current quarter, we will debut our first ever golf shoe across states at sporting goods, retailers and pro-shops around the country. The feedback from golfers who have worn and tested this product on the course have been very positive. Soon we will be introducing the eight boat shoe designed for boating and casual wear.

Later this fall we will launch the trail break, a light weight outdoor walking scandal based on Crocs Lite technology and injected rubber. There are currently more than 50 Lite footwear styles available through selected Crocs dealers, Crocs retail stores and the Crocs website.

Before I turn the call over to Russ, I want walk through our marketing and advertising strategy, which we believe is very important particularly in a tough retail environment like the one we are currently experiencing. During the first quarter we executed several new initiatives and the heightening of awareness of brand and increasing demand for our products, while at the same time giving some thing back to the community.

This included launching the first of its kind recycling in humanitarian footwear donation program called SolesUnited. On the NBC history's 'Celebrity Apprentice'. During this two our episode apprentice teams competed to develop consumer education and Crocs collection programs that will be activated in Crocs retailers across the US.

We also introduce a new expressive advertising campaign "What a Croc" to support the debut of our colorful and stylish new spring model in popular publication such as 'O', InStyle, New York Times style magazine, Cookie and Rolling Stone.

This diverse collection of spring styles also received prominent mention throughout our ongoing PR efforts in outside, InStyle, Red Book and people amongst others. We continue our successful experience for marketing efforts in order to directly reach consumers interact with our target market and feed products in key markets.

Notable events we sponsored and attended included the Sony Ericsson Tennis Open, the AVP Crocs Hot Winter Nights tour, South Beach Food and Wine festival, NASCAR and numerous collegiate and pro sports events.

Another positive note, we were recently informed that Crocs was selected as a finalist in the Fashion Style category at the upcoming AFI Awards for our Crocs advertising campaign. This premier honor in the advertising world is awarded to creative advertising campaigns that deliver results.

We believe it is critical to the lifestyle development and long term potential of the Crocs brand that we maintain our marketing and advertising spend this year. We will continue to invest in developing an influential brand in the active lifestyle space, including our title sponsorship of the AVP Crocs professional beach volleyball tour that prominently features our brand in 18 tour stops across the country and as global TV reach including NBC and Fox Sports Net in the US. We believe this will be a tremendous opportunity for us this year as beach volleyball was one of the most popular sports in the last summer Olympics.

Now I will turn it over to Russ for the financial review.

Russ Hammer

Thank you, Ron. Sales for the first quarter increased 40% to $198.5 million compared to sales of $142 million in the first quarter of 2007. For the quarter international sales increased 79% to $105.9 million from $59 million a year ago. Revenue for Canada and Mexico was $8.5 million. Revenue for Europe was $55.3 million. Revenue for Asia was $37 million and the balance of $5.1 million was from the other international locations.

Domestic sales rose 12% to $92.6 million. Footwear sales accounted for approximately 95% of revenue and represented 11.1 million units for an average selling price of $16.33. Sales of our classics represented 29% of footwear sales.

Gross profit for the first quarter of fiscal 2008 was $85.2 million or 43% of sales compared to $84.5 million or 60% of sales in the first quarter of 2007. This decrease in margin was primarily attributable to lower sales volumes in plan and higher cost associated with under utilized capacity in our company owned manufacturing facilities and distribution centers.

SG&A for the first quarter was $77 million compared to $47.3 million in the corresponding period last year. This increase was primarily a result of higher cost required to support increased sales volumes, including increases in selling and marketing expenses for global ramp plant building, heavy trade show season activity, and international personnel and infrastructure additions to support our growth.

As a percentage of revenues, selling, general and administrative expenses increased to 39% in the three months ended March 31, 2008 from 33% in three months ended Mach 31, 2007. Excluding the portion of the restructuring charges associated with the shutdown of our Canadian manufacturing facility, equaling $17.3 million that we incurred due to the first quarter. We reported a pretax operating income of $10.9 million in the first quarter compared to the pretax operating income of $37.2 million a year ago, including the shutdown charges; we reported a pretax operating loss of $6.4 million in the first quarter.

Excluding the net, the charges, net earnings were $7.6 million or $0.09 per diluted share, including the charge we reported a net loss of $4.5 million or $0.05 per diluted share compared to net income of $24.9 million or $0.31 per diluted share in the first quarter of 2007.

Now turning to the balance sheet, as of March 31, 2008, we had $29.6 million in cash and cash equivalents, and short-term investments compared to $36.3 million as of December 31, 2007. This decrease quarter-over-quarter is primarily due to investments in our inventory, global infrastructure and property, plant and equipment such as mold tooling and manufacturing equipment in order to continue broadening our product offering in footwear and accessories.

Our election to invest in these areas combined with a tough economy domestically has contributed the decline in cash and cash equivalents available. As we decreased inventory, and our day sales outstanding coupled with our profit increases over the next few quarters, we expect to generate significant cash by year-end. Our net accounts receivable balance as of March 31, 2008 was $154.6 million, an increase of $1.7 million or 1% since last quarter. Our inventories increased to $265.5 million at March 31, 2008 from $248.4 million as of December 31, 2007.

During the quarter ended March 31, 2008, expected slight increase was primarily due to our sales shortfall during the quarter. Our inventories are aligned geographically to meet our forecasted sales or forecast of sales in each region. Since April 1, our inventory is already down 10 million and we expect that inventory levels will continue to decrease over remaining quarters of the year. Our net fixed assets increased to $90.9 million on March 31, 2008, up from $88.2 million reported December 31, 2007.

Now for the outlook for the reminder of the year, as we stated on the April 15 conference call, we expect second quarter sales to increase approximately 10% to 15% on a same period last year with earnings per share in the range of $0.45 to $0.50 for the quarter, excluding the restructuring charges. This guidance's assumes gross margin of approximately 45% to 56% and SG&A as a percentage of sales in the low 30%, and SG&A as a percentage of sales in the low 30%.

For the full year, we continue to expect sales to increase 15% to 20% over 2007 and diluted earnings per share to be $1.70 to $1.80, excluding any charges, including total pretax charges associated with the shutdown. We expect diluted earnings per share to be in the range of $1.54 to $1.64.

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

Ron Snyder

Thanks, Russ. Before we turn the call over to questions, I just wanted to touch on a few items. As I mentioned previously, we are working hard to bring inventory and cost into line with our current forecast and that effort will continue over the next couple of quarters. By the end of Q3 we would expect these figures to return to historical averages with the potential exception that we may increase advertising and marketing to a higher percentage than we have historically used to both promote new products and to build the brand globally.

We have historically targeted 5% to 6% for this activity which is below what many similar companies do. So we may increase that slightly in the coming quarters to 7% to 8% as long as we are executing to our plan. Sometimes it is easy to lose perspectives during difficult economic times in the US. This continues to be a very strong growth business. People love our products in every market we sell to and this is evident by our continued revenue growth. More importantly, we continue to see growth opportunities in all our markets and we remain very encouraged about our long-term prospects and the potential for this business.

Operator, I would like to now turn it over to questions.

Question-and-Answer Session

Operator

(Operator instructions). Our first question in the afternoon will go to Jeff Klinefelter at Piper Jaffray. Please go ahead.

Jeff Klinefelter - Piper Jaffray

Yeah. Hey guys, couple of questions for you. Hitting the domestic market Ron, could you. If I missed the beginning I apologize, but give average selling prices, the number of units sold during the quarter?

Ron Snyder

In the domestic market you are asking?

Jeff Klinefelter - Piper Jaffray

Well you just give in total and then I have a follow up for the domestic market?

Ron Snyder

Let's get that, Jeff.

Jeff Klinefelter - Piper Jaffray

Okay. While you are looking for that, I am also wondering if you had -- go ahead.

Ron Snyder

The average selling price is $6.33. Sorry, $16.33 and we sold 11.1 million units.

Jeff Klinefelter - Piper Jaffray

Okay. Children's, Men's, Women's, do you have that split?

Ron Snyder

Give us a second. Jeff, will get back.

Jeff Klinefelter - Piper Jaffray

Okay. Fine. As you are looking --

Ron Snyder

Men's and women's is still pretty tough too --

Jeff Klinefelter - Piper Jaffray

Yeah, good.

Ron Snyder

Find an exact number as many of our shoes are unisex. So we still feel that it is about in the 65, 35 level. We are seeing nice sell through within some of the newer women's models and like we said we are having good sell through with men now approaching our brand. They are buying the Yukon, the Santa Cruz are just coming out. Of course some of our flip flops are very popular with men as well, as well as the classic crocs style. With kids it is still in the high 20% range.

Jeff Klinefelter - Piper Jaffray

Okay. So just to put it in perspective, the domestic market grows 12% year-over-year, doors are up, it looks like what about 30% year-over-year. Could you help us put that in context? Is it doors growing faster that our smaller doors like the footlocker doors and that is taken down the overall sales growth or how should we think about the potential delusion here that you would appear to be having in the domestic market in terms of productivity?

Ron Snyder

Yeah, we have added some smaller doors and I would say we are still relatively early in the season, so some of the smaller doors would not be coming on quite as quickly. Just in a difficult economic environment, we have had some dilution in our doors. However, in our US doors, however we feel very confident that going forward the doors in the stores are very excited about. The new products that they are seeing, they are just getting them out on the shelf's now, really late March, early April and even into May in some cases. So we are expecting good things in there.

Jeff Klinefelter - Piper Jaffray

Okay. Couple other questions. One, just in general how has your sale process or strategy in terms of working with your sales force using systems and technology to better forecast demand given the challenges of all this reorder business and season reorder. Clearly, things have changed since Q3 through Q4 and now in terms of the demand outlook. Has anything changed in terms of how you are working with your sales force, people you added, how you are better leveraging technology?

Ron Snyder

Yes, we have expanded and improved our sales force over the last few quarters where we feel very confident. We have a very solid sales force out on the streets right now. We have an analytics team that we brought in really over last year. They are very active with forecasting, working with all of our customers even some of the smaller ones to get better information, better forecast. We are having a lot of luck with getting pre-book, more pre-books than we have in the past. In fact, our pre-book situation right now for Q3, Q4 and the fall is up significantly over where it was last year.

So the strategy is working. It is working in the US. We are also getting better visibility in Europe. Asia is still largely an advance business and we are working with our sales force over in Asia to try to get more visibility. We have got a lot of products now and not all of them will be available in higher, much higher volumes as the Mammoth was in Q4, unless we get some visibility on pre-books.

Jeff Klinefelter - Piper Jaffray

Okay, and then just two last quick questions, Ron for you on gross margin. Again can you help explain in a little bit more detail in terms of the gross margin line items or inputs? How you are going from the Q1 performance back to Q what you are forecasting for Q2 back to one of a normalized mid 50% range. What was the big drag in Q1 and then how are you getting that leverage back in this still challenging environment.

Russ Hammer

Sure, Jeff let me take. This is Russ. So our margin in Q1 was 44.2 before the restructuring charge and 42.9 after restructuring charge. The primary issue that hits us are fixed cost base versus our volume. So our sales volume was about half of the issue that contributed to our unfavorable gross margin as we fell short with a fixed cost base that was higher.

The second answer is just our overhead capacity was impacted by the underutilization of our company owned factory capacity. Another issue that impacted us in Q1 is retail sales were significantly lower than expected. About 20% lower in Q1 versus the fourth quarter '07. We did have there, break in the quarter and duties were slightly higher due to the mix of products that we were shipping.

So that is the first quarter and then how do we intend to go from the GAAP reported 42.9 gross margin in Q1 '08 to the 54% and 56% gross margin expected in the second quarter. Three things; one, we have implemented cost reduction programs in CapEx, SG&A and operation [stocks] that impact of any under utilization of our factory capacity. We expect retail sales would be higher percentage of our overall business in second quarter than they were in first quarter, significantly higher. We expect our air freight cost to be much lower than in previous periods. One example is, we took out over 1000 people out of our distribution and manufacturing company owned cost structure by the end of the first quarter. We will see that start to leverage in the second quarter and third quarters as we go forward significantly.

Jeff Klinefelter - Piper Jaffray

Okay, that is helpful. Thank you, Russ. The stock buyback is a little thing, you bought about 3 million shares back in the first quarter, is that right?

Russ Hammer

No, we did not buyback any stock.

Jeff Klinefelter - Piper Jaffray

You were not in the market in the first quarter?

Russ Hammer

We were not.

Ron Snyder

No.

Jeff Klinefelter - Piper Jaffray

Okay. What is you CapEx projection for the year?

Russ Hammer

CapEx as I mentioned, we have a significant cost reduction, full quarter press on and we think we are going to have our CapEx coming around $85 million. Those significantly are down from what we have projected before.

Jeff Klinefelter - Piper Jaffray

Okay. All right, thanks guys, good luck.

Ron Snyder

Thanks.

Operator

We will go next to Mitch Kummetz at Robert W. Baird

Mitch Kummetz - Robert W. Baird

Yeah, thank you. Let me follow-up on Jeff's gross margin question because it looks like the cost to sales in the first quarter came in about $10 million higher than what your initial Q1 guidance would have implied when you were guiding to $225 million sales. I am wondering is that difference, the higher cost to sales, is that essentially explained by the air freight and their duties?

Russ Hammer

Two things Mitch, thanks for the question. Our fixed cost was slightly higher than what we had anticipated in our guidance, and we were also inversely impacted by the timing in some of our marketing and advertising brands spends with our magazine and brand marketing campaign, those were primarily the two factors versus our guidance.

Mitch Kummetz - Robert W. Baird

Okay, that is helpful. Ron, you mentioned earlier in your prepared remarks that you are taking actions to bring costs in line. Could you just detail some of those actions, I mean, is this has to do with headcount reduction, or it does not sound like you are doing too much on the marketing side at least?

Ron Snyder

Yeah, as Russ said, we have taken -- we have looked at really every corner of our business making sure that we are properly sized now for the current demand for our products. We have taken costs out on the operation side. We have, as you saw we closed the Canadian facility. We have taken out head to have the proper amount of personnel in our Mexican and Brazilian factories and the support people we need for our third party facilities. We have sized our distribution locations properly, some needing maybe more people and some needing less. Also on the SG&A side, we just took a look at everything, we had planned obviously at a higher level as we were coming into this year and we needed to have enough infrastructure, people and expenses really to support the pretty high uptick in sales. So now we have taken a look at -- given the current conditions, we have taken a look at it, and we have gotten into every part of our business.

Mitch Kummetz - Robert W. Baird

Okay. Ron, could you comment a little bit on your current business, we are one month into second quarter, obviously, on the US side there was some softness in Q1, and if you want to look on the sales per average store basis that was down. I assume that the guidance for Q2 would indicate down on the sales per average store in the US as well, but I do not know, if you guys have seen any improvement in the business in the US in the last month, maybe as the weather has warmed up a little bit at least?

Ron Snyder

Lets make a couple of comments there, and really our sales through is now improving in all regions as weather improves. In the US, early April was down year-over-year and however, we are seeing an up tick now in sale through as weather improves now across the country. Our largest sporting good retailers, presently about 15% above last year-to-date and the industry sales through date that we get from a couple of the channels that report that CROCS is about 10% higher than the footwear averages in those channels. We are about 10% on average; we are about 10% above what average footwear it is.

So the sale through, while less than expectations, remains encouraging as we go right into our strong selling season. In Europe, they have had a tough early season weather wise in the UK. However, sale through has accelerated in the rest of Europe. As we get into the spring, we are very encouraged with the early indications we are getting, especially from the German market. In Asia, we cannot get the best lead in Asia because we have so many CROCS stores and CROCS franchise stores there that we get daily data on and we are very encouraged by the [quarter-to-date] numbers coming out of the Asian retail stores.

We are having especially strong sales in Asia, right now in early May, as much of Asia's off on holiday, for either Golden Week in Japan or Labor Day in the Chinese areas. Particular standout has been China, here recently were sales over the Labor Day that past about a week, and they have been very strong. We think that works pretty well for us as we continue to launch and develop our brand in the Chinese market. Also our retail stores in Japan are selling significant increases. So, we are encouraged, guardedly encouraged as we go into the spring and summer selling season for our product.

Mitch Kummetz - Robert W. Baird

Okay. Russ you mentioned in your comments that classics were 29% of the business in the quarter. Could you address how the business performed in the quarter by the buckets that you broken out on your Q4 call you talked about classics, core and others. Is there anyway to comment on the performance of those three buckets in the quarter in terms of percentage increases?

Russ Hammer

We probably do not have that right at hand, Mitch. We will find it.

Mitch Kummetz - Robert W. Baird

Okay. Fair enough. A couple other questions, Ron you gave door counts at quarter end. Could you update us on your expectations by full year, and could you speak a little bit to some of these developing markets. China you saw off a fairly low door count, South America, South East Asia then you mentioned that you are going into Russia in Q2. Could also speak a little about what you think the potential for those markets are longer-term in terms of doors?

Ron Snyder

Yes. We are not actively adding doors quickly in the US market. Certainly as we add new styles and we have some new collections, we have broken our business down into a number of collections. We have got sports collection, we have got work collections, we have medical, we have got standard Crocs, we have got more fashion oriented Crocs now. So, as we do that and our development teams have been very active with all the styles we have, all of our entertainment license properties and sports license properties. So we have a lot of products out there that we will have to open some more channels over time most likely. We are even giving, doing some more special makeup type products for some of our, say more exclusive retailers. So, that is really more of a US story.

With the international market we are still fairly under penetrated on a door basis in many markets. Now in Asia, while we are adding doors there, we think that the our retail presence there is having a tremendous amount of success. So we can show of the styles, we can show our new stuff, we can show extensively, we can really expose our brand in those markets, and this an example in Japan that the Crocs logo is the number one selling gibed, so the brand means something and is resonating.

So we will not have as accelerated logos in Asia, but we will in Europe. There is, we are just expanding now, we just launched in the Ukraine recently, of course we talked about the Baltic's. ur Head of Europe right now, this week is in Russia and we are just beginning, we just have our first shipments going into Russia. So that market we will continue to see nice growth.

We also mentioned, well let me go back to Europe for a minute. We were very under penetrated last year in Germany. That will probably be one of the highest growth markets for us this year, a large growth market anyway. We are seeing nice early indications from Italy, Spain, France, Switzerland and Austria, which was good market last year as well. We would go down to South America, I could say we had a nice launch in Brazil; we are now up to about a thousand doors there. So, that is going nicely and will be extremely well positioned as we hit there spring and summer season later this year.

Talking about some of the emerging markets, China, our brand we think is also beginning to mean something there. In the last couple of weeks sales in our retail stores is stunning. So we have done very well there in early launch of our brand and we have got a few stores now. Three stores in India and we are beginning to add more doors there. So we have got a lot of activity going all over the world. Our door growth internationally will continue at a fairly fast pace.

Mitch Kummetz - Robert W. Baird

Okay. I hate to try to pin you down, but I think at one point you said 15% to 20% growth year-over-year this year. Is that still within the ballpark?

Ron Snyder

Yeah. That is about what our target was --

Mitch Kummetz - Robert W. Baird

Then lastly two real quick housekeeping items. Russ, what would the diluted share count have been in order to get to the $0.09 of earnings?

Russ Hammer

That is $82.4 million.

Operator

We will go to our next question and that is from Robert Samuels at JPMorgan. Please go ahead.

Robert Samuels - JPMorgan

Hi, good afternoon guys. Just with respect to the longer term guidance do you still feel comfortable with the 20% to 30% sales and EPS growth that you gave at the end of last quarter?

Ron Snyder

Given the current state of the US economy and the retail environment, it is really too early to project now, I think our long term growth targets. As we exit Q4 '08 we feel that we are extremely well positioned, we will be extremely well positioned for a strong '09 with the gaining strength of our brand and brands around the world. Most have them have many new categories, products and successful retail business. Of course as we just talked about we are increasing our door count around the world that will continue to help rise sales. Given that it is what we expected we will continue to experience above industry standard growth rates for '09 and beyond. However, due to the uncertainty now in the markets were not projecting specific numbers at this time.

Robert Samuels - JPMorgan

Okay, great and then, just with regards to the domestic business. Can you break down; first, what performance was like between your big box retailers versus your smaller mom and pop type of stores?

Ron Snyder

It was relatively similar, we get a little more of an up tick in the small independents as we go into the spring and summer season, because a lot of them are seasonal businesses, a lot only open for 6 to maybe 8 months of the year. So we probably would have seen a little bit more in the first quarter from our big box department stores, sporting goods, some of our larger shoe stores, but now the independent starts coming on more heavily now.

Robert Samuels - JPMorgan

Okay, great and then finally just in terms of cost pressures, what are you guys seeing, Russ?

Russ Hammer

Well, I think as Ron mentioned in the beginning of the call, we have a very aggressive cost action on right now on all fronts on capital, on our operating cost and our SG&A. However, as Ron said, we are going to get those cost structures inline over the next two quarters.

Ron Snyder

As far as cost pressures, we are not really seeing much movement in material price yet We expect that there will be some there, we will also see -- overtime all the foot wear, apparel companies that are manufacturing in China are going to have cost pressures. We are a little bit luckier there and that we have already launched activities in Vietnam. We actually have lower cost structures in Vietnam and Bosnia and ultimately our Mexican manufacturing will be lower too, because its lower freight coming here as we bring them up to more capacity utilization. So as the labor cost go up there which they are doing, we think we are pretty well positioned for the long-term.

Robert Samuels - JPMorgan

Great, and then, just finally, do have any sense of repeat business this year versus last year. I mean, can you tell whether customer exports three pairs of Crocs last year and this year has bought another three pairs. Is there anyway to the determine that?

Ron Snyder

Now really is, we do see a lot of repeat customers on our internet where we can measure it. However, some of our larger retailers they really do a good job of displaying our products or even on own stores. We see a lot of repeat customers coming back in wanting to look at this, see the new the stuff, try it on., and as I said early indications on some of our new products are very strong, and then those typically buy another pair of Beaches or Mary Janes or Athens whatever they like of our prior model.

Robert Samuels - JPMorgan

Thanks so much.

Operator

(Operator Instruction) Our next question goes Jeff Mintz at Wedbush. Please go ahead

Jeff Mintz - Wedbush

Thanks. A couple a questions, on the inventory Russ, I think you said it was down about $10 million quarter-to-date so far. Can you give us some sense of where you expect it to be at the end of Q2?

Russ Hammer

Yeah, so, we expect that our inventory is going to be down about 15% by the end of the second quarter.

Jeff Mintz - Wedbush

Can you just talk a little bit about the make up of the inventory in terms of is it primarily classic, is it more of the new product, what is in that inventory?

Russ Hammer

Well, the inventory that we are coming out as we have said before is about, it is 70% of our core products and about 30% of our new products coming out. Again, the demand, as we see the product as Ron mentioned on the internet we see the demand that is when we start ramping our production on the new products. We do not bill those in inventory until we see the demand there.

Ron Snyder

Yeah, obviously a lot of our production now is focused on filling holes with some of the core new colors and some of our core products, but primarily it is the spring '07 products that are selling through, selling in very well now. Our spring '08, certainly we are starting here soon to build out our fall '08 line up. Our inventory, we are actually targeting to be down between 10% and 15% for -- by the end of the quarter and we will continue to take it down through Q3.

Jeff Mintz - Wedbush

Okay, great. Ron, can you just talk a little bit about your initiatives with Finish Line and Foot Locker, and how the product is doing in more of the athletic specialty in the mall?

Ron Snyder

Yeah, now regarding Finish Line, we are still relatively new there and we are just getting into the season. They are going to be doing some promotions in windows and things like that. So it is probably too early to tell. It is quite the same story for Foot Locker, we are just in test. If I close to 500 stores now maybe between 400 and 500 and in Foot Locker, Lady Foot Locker, Kids Foot Locker and Champs, and they are just now getting into the season. We are making -- we are being careful with that channel. I think they are too to make sure that we get the people trained properly, we get the right displays, we tell the story. We do have some specific products that are coming out for our next years lines that more specifically target actually that more sport market which is part of the CROCS sport collection. So we will continue to get momentum from those guidance as we go forward.

Jeff Mintz - Wedbush

Okay. I may have missed it, but did you give the number of international doors at the end of Q1?

Ron Snyder

Yeah, 21,000.

Jeff Mintz - Wedbush

21,000. What about the CapEx for the quarter?

Ron Snyder

It was $18 million.

Jeff Mintz - Wedbush

Okay. Finally, did you -- do you have a headcount number for the end of the quarter? You said, I think you were down a thousand people, is that the actual end of quarter number?

Russ Hammer

That is not the ending headcount, it is around 4,300.

Ron Snyder

Yes, continuing to come down. Since then obviously that number still has a Canadian operation in it.

Jeff Mintz - Wedbush

Okay, great. Thanks very much.

Operator

We will go now to Jim Duffy at Thomas Weisel Partners.

Jim Duffy - Thomas Weisel Partners

Thanks. Hello, everyone.

Ron Snyder

Yeah.

Jim Duffy - Thomas Weisel Partners

Ron, question for you. In the US market, you have yet too really go down market in terms of distribution, which is like GSW or should provide you something like that. What is the current top process on that as you balance building the brand versus volume in inventory management objective?

Ron Snyder

We haven't hit the up-price market yet as we have talked about -- we are always considering all alternatives as I said before. It fits with having so many different products now and a lot of products and development but it could be more appropriate for the family channel. We have done very well by the way with just, in the last month, really a few weeks really in Famous Footwear with our work line, I mean we are actually going to be delivering our [Mamba's] line in the same as here this quarter and its in the SW already. So we are considering some expansion there with some of our older models but, we haven't done anything yet.

Jim Duffy - Thomas Weisel Partners

Okay. Russ, what was the gross margin guidance for the year? I think I wrote it down incorrectly?

Russ Hammer

One moment, Jim. $54 million to $56 million.

Jim Duffy - Thomas Weisel Partners

Okay. In the first quarter, at the bottom of the press release in the reconciliation of GAAP, non-GAAP, it was an inventory charge of $0.02, what was that, I do not think you guys spoke to that?

Russ Hammer

Jim, let me get back to you on, with that one.

Jim Duffy - Thomas Weisel Partners

Okay. Regarding the expenses that you mentioned which you intend to have one who would plan revenue run by run rate by Q3 '08. Help me understand the dynamic there, is it just a lag effect in terms of when you take actions as to when it is manifested in the SG&A line?

Russ Hammer

Correct. So there is timing issues, there is some severance issues when we are laying off people so there is timing as it grows out. As Ron said in the beginning of the call, our actions in Q2 and Q3 seems substantially completed as we get into Q3. You will see the full benefit of those actions then.

Jim Duffy - Thomas Weisel Partners

That makes a lot of sense. Would you speak to your relationship with your third party capacity as you slowdown production, shift more of in an attempt to keep your own production utilized, has this caused any disruptions with relationship with third party capacity or put you in any challenging situations with regards to that?

Russ Hammer

We have had a pretty good relationship with these guys for quite sometime now and become a pretty a sizable important customer for them. They are certainly disappointed that our volumes are not higher right now, I will say that. However, we have a lot of new products coming on, they are in -- they work with us in the development of these new products. They can see our growth really all over the world, still moving in the right direction. Anyhow they are still very important for us. There were primarily a couple, maybe three over in China that we are about here, but yeah, it is been a little strange, but they are still working with us very well.

Jim Duffy - Thomas Weisel Partners

Is that affecting your lead times at all?

Russ Hammer

No.

Jim Duffy - Thomas Weisel Partners

Okay.

Russ Hammer

It helps them because they can be very flexible now with moving manufacturing lines around to lets say make more Cyprus that are selling like crazy. I mean, they have been very flexible with us.

Jim Duffy - Thomas Weisel Partners

Okay. Regarding Jibbitz, would you comment as to whether that is growing faster or slower than the footwear business? How penetrated are you with that?

Russ Hammer

It has probably gone a little bit slower in the US but overall faster because we are now bringing the Jibbitz products, we are really launching Jibbitz in more markets around the world which we hadn't done last year. So our agent in European and even in South American jibbitz sales are up quite significantly. We have got some plans there. We have got some new products. A lot of new interesting types of Jibbitz that ones that light up and all sorts of different gizmos like compasses and watches and things that we can put into Jibbitz. So we are pretty excited about a bunch of stuff we have in there. We are launching a fairly major campaign for the second half of the year that we expect to drive sales in that division.

Jim Duffy - Thomas Weisel Partners

Hey, very good. I will let someone else jump in.

Operator

Mr. Snyder we have no other questions in the queue at this time. So I would like to turn the call back to you for any closing comments.

Ron Snyder

All right. Well, thank you very much. Russ and I will be available for questions. Thanks again.

Operator

Thank you. That does conclude the call. We do appreciate your participation. At this time you may disconnect. Thank you.

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Source: CROCS Inc. Q1 2008 Earnings Call Transcript
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