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Executives

William I. Kent – Investor Relations

John P. McCarvel – President and Chief Executive Officer

Jeffrey J. Lasher – Chief Financial Officer

Analysts

Erinn E. Murphy – Piper Jaffray, Inc.

Sam Poser – Sterne, Agee & Leach

Jim Duffy – Stifel Nicolaus & Company, Inc.

Corinna Freedman – Wedbush Securities

Reed A. Anderson – Northland Securities, Inc.

Mitch Kummetz – Robert W. Baird & Co., Inc.

Scott D. Krasik – BB&T Capital Markets

Steven L. Marotta – C.L. King & Associates, Inc.

Mike Schwartz – SunTrust

Jim Chartier – Monness, Crespi, Hardt & Co., Inc.

Crocs, Inc. (CROX) Q3 2012 Earnings Call October 24, 2012 5:00 PM ET

Operator

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

It is my pleasure to turn the conference over to William Kent, Senior Director of Investor Relations. Mr. Kent, please go ahead.

William I. Kent

Thank you and thank you all for joining us for our third quarter 2012 earnings conference call. Participants from the Company include John McCarvel, President and Chief Executive Officer and Jeff Lasher, Senior Vice President and Chief Financial Officer.

During today's call John McCarvel share some opening remarks, cover third quarter highlights and talked briefly on Crocs corporate strategy. Jeff Lasher will review our third quarter financial results in detail and cover guidance. John McCarvel will then wrap up our prepared remarks with a few closing comments.

Earlier this afternoon, we announced our third quarter fiscal 2012 financial results. A copy of the press release can be found on our website at crocs.com. We 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.

We caution you that these statements are subject to a number of risks and uncertainties described in the risk factor section of the Company's 2011 report on Form 10-K filed on February 29, 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 these forward-looking statements to reflect the impact of future events. The Company may refer to certain non-GAAP metrics regarding currency on this call. Explanation of those metrics can be found on the earnings release filed earlier today.

I will now turn the call over to John McCarvel.

John P. McCarvel

Thanks Will. And thanks for joining us this afternoon as we discuss our third quarter results. The third quarter demonstrates how diversified Crocs is today. We are operating in a global marketplace with balance distribution channels, which benefit Crocs and our shareholders. Revenue for the quarter increased 7.5% to $296 million, and our sales on a constant currency basis, grew 10.3% globally. Our gross margins increased 80 basis points in Q3 2011. Average global same-store sales grew by 1% for the quarter, $0.49 per diluted share on a net income of $45 million inclusive of a one-time tax benefit that was recognized in the quarter. Our global multi-channel strategy continues to provide a platform to engage consumers wherever they shop. As we saw growth in all three channels wholesale, retail, and Internet.

On a constant currency basis, our direct-to-consumer business grew 12.7% in the Americas and 17.6% in Asia. The consumers have to pay for the brand and constantly speaking out our products in all three channels is extremely encouraging to all of us at Crocs.

Revenue for the quarter increased slightly less than we had expected. I would like to discuss two key factors that affected our quarterly results. There were macroeconomic challenges in Japan and in the European market that we are not immune to in the quarter. In Japan, we experienced a drop-off in our own retail stores primarily from an overall consumer spending slowdown and partly, from a comparison against significant gain in our same-store sales in last year’s results.

In Europe, at-once demand for our wholesale accounts and distribution partners for our products was significantly down as most retailers experienced a cooler summer season and managed their inventory level lower during the quarter. Before I talk about business factors, I would like to take this opportunity to talk about our Crocs Cares program.

This is an important initiative at Crocs that gives to local and global share view and it’s a very important part of our culture. In July, there was a terrible tragedy in our Colorado community. the shootings at the movie theatres in Aurora, Colorado not far from Boulder, not far from where many of us live in the Greater Denver area. We felt that it was imperative that we do something to the people that were affected by this tragedy. We donated $5 from every per shoes that we sold online and in our Colorado stores for one week in August, we were honored to present check to the Aurora Fund for $559,000. We’ve done some listings after other tragedies in Europe, tsunami in Japan, and here in the United States last year in Tuscaloosa, Alabama, as well as Joplin, Missouri.

Turning for a moment to some of the key positive events that we see in the business from those that impacted the quarter, first, we continue to see the investments that we have made in our diversified product line pay off specifically in product security, higher price points in our clog business. In the third quarter more than 35% of our sales volumes came from new styles. Our average sales price in the quarter increased by approximately 3% while unit sales increased 6%. We are seeing excellent demand for a number of our new fall and winter products.

In the U.S. marketplace, we are seeing sell-in and sell through of our Cobbler collection, boot collections, including the new Rain Flow and the newly reintroduced Mammoth product are all doing well. We’re seeing improving U.S. domestic marketplace for Crocs products. Increased demand for new products with all of our key U.S. wholesale partners increased in the third quarter. We experience sell-in and sell-through of our 2012 spring-summer products.

Additionally, we are seeing sell-through of our new fall-winter products too. The solid and improving performance of the brand can be seen in both wholesale and our direct to consumer channel. Retail, comp gains were above 9% in the U.S. marketplace for August and September.

Second, we continue to focus our marketing campaign on bringing new consumers, to think about it differently during spring summer but also during fall winter. It's in the gradual process and our marketing data shows that we're attracting new consumers to the brand at the highest levels in many years. Our new products are changing the minds of consumers globally, you thought about us only as the clog brand, and I remind you the growth rate from the back half of the year are lower than those in the front half of the year.

Third, a lot have been written about the Asian marketplace and the changes that are occurring. The market is changing and it is changing rapidly, but to us throughout the American, Brazilian and European markets. Jeff is going to talk about the specific performance changes of various Asian countries later in his section.

However you can say in our increased free book backlog levels for Asia in 2013 that we anticipate another solid year, ahead of us. We also remained very positive about the growth prospects in the Middle East and in South America too.

Lastly while Europe is a difficult market for everyone today and the London Olympics had a large negative effect on our UK stores expect for one in Stratford which is there by the Olympic venue.

We did scratch out a small comp store increase for the quarter. New stores and outlet locations in France, Germany and Russia they are all performing well. Our new retail format was opened near London in the Bluewater mall and is performing well. We like to improve brand image in the shopping experience. We’re seeing more interest in the European customers in Crocs new product offering, outside of the clog and the bookings for 2013 also reflect the change in confidence in the brand.

Before I turn the call over to Jeff, I would like to say a few words about an important initiative at Crocs that is our sustainability program.

As we have consistently demonstrated over the years, with our Crocs Cares program we are committed to the well being of our neighbors and our social environment. Next month we will further underscore our commitment to the environment by publishing our first sustainability report planned to release on November 1 of 2012. This report aligns to the Global Reporting Initiative, GRI sustainability reporting guidelines. The GRI is a globally accepted sustainability reporting framework that have considered the growth standard and provides the flexible system that promotes incremental improvement overtime.

Our first report outlines our approach to sustainability and addresses key environmental and social issue including both accomplishments and challenges. Through the pubic communication of our sustainability program we will build on the strong platform from which to communicate and grow our sustainability efforts more formally.

With that I will turn the call over to Jeff.

Jeffrey J. Lasher

Thank you, John. Hello everyone and thanks for joining us. I’ll start with some financial highlights of the quarter before going some details. First revenue for the quarter increased to new record of $296 million for Q3, up $20 million or 7.5%, on a constant currency basis revenue grew 10.3%. 2012 year-to-date our revenue has increased 13%, which on a constant currency basis represents a year-to-date revenue increase of 15%. Second total resale sales grew 18%, with same store sales on a constant currency basis increasing 1% globally. The year-to-date same store sales were up 3%.

Third we were able to focus on enhanced profitability as we generated improvement in operating margins of 80 basis points driven by better product margin.

Fourth, we continue to focus on building up a strong balance sheet as we ended the quarter with $313 million of cash and cash equivalents.

Finally, in the quarter, we successfully defended certain tax positions globally that led to a release of a tax provision. This resulted in a non-recurring tax benefit in the quarter of approximately $11 million. These factors all combined contributed to the $0.16 year-over-year increase and diluted EPS to $0.49 during the quarter.

Looking at the results in more detail. As John communicated, sales in Asia were more challenging than expected in the quarter. Same-store sales in Japan declined 15% in the quarter as the country experienced a general slowdown in consumer purchasing and was further challenged by strong sales growth last year. This unexpected slowdown in consumer demand in Japan was partially offset by the rest of the region. Overall, same store sales in Asia dropped 6%.

Our expectation for the region was for single-digit growth. Our Internet growth was powered by a 12% percent improvement in Americas while consumption in Europe continues to be challenged by macroeconomic factors impacting consumer confidence.

Europe Internet was down 10% on a constant currency basis. We had higher than expected wholesale revenue of about $5 million with lower-than-expected direct to consumer revenue of about $10 million compared with a regional shift. The outcome of this revenue mix was reflected in our operating results.

Notably in the Asia region, notwithstanding the challenging retail market in Japan and the delayed shipment of $2.5 million in wholesale orders following a strike in one of our manufacturing locations in the quarter. Our overall sales in the Japan were flat to last year. And outside of Japan and the region, China sales continues to show exceptional strength and increased 47%. Our Korea business expanded 18%. In Europe, our UK business was impacted by lower than expected demand in August, but this was offset by stronger sales in Germany and Russia, which resulted in a 1% constant currency same store sales increase.

Globally retail channel revenues in the third quarter increased 18% to $112 million. Global same store sales for the quarter increased 1% on an FX neutral basis; on a year-to-date basis same store sales have increased 3% over the last year with Americas at 4%, Asia at 1% and Europe at 8%. For the remainder of the year, we plan to open an additional 35 to 40 stores globally with most of these in Asia and Europe. Our direct to consumer model benefits us greatly in the peak selling seasons around the globe, and sometimes requires perseverance during shoulder drought season.

We remained committed to expanding our direct to consumer portfolio and continue to assess individual location performance and act aggressively when Judgmental Day arises. This was evidenced in our decision last year to close underperforming kiosks location and shift to more full line stores.

Turning to product data, our percentage of third quarter revenue derived from the clog silhouette grew slightly to 48% from 46%. This was in part driven by the return of the Mammoth this season. Also our new product introductions globally represented about 35% of our Q3 unit sales.

As we highlighted at our Analyst Day early in the year, we continue to grow the clog silhouette, while diversifying into other important categories. Average selling price per footwear in Q3 increased $0.59 or 3% to $22.77 compared with last year in the same period. Global footwear unit sales in the quarter grew 6% to 12.4 million pairs. For the first nine months, total unit sales have been up 40.1 million pairs, up 4% from first nine months of 2011, while ASP has increased about 8%. Gross profit for Q3 2012, was $161 million, up from $147 million. Margin was 54.4% in Q3 versus 53.5% in the prior year.

We benefited from key initiatives in controlling our cost of goods sold, lower promotional activity, improved economics from new products introduction, but our margin was slightly impacted by lower than expected retail growth in Asia.

Third quarter 2012 SG&A increased 8% to $121 million compared to $112 million in Q3 2011. As a percentage of sales, SG&A was 40.8% essentially flat to 2011. 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 declined 5% compared with last year.

As we tightly managed SG&A cost and leveraged our existing infrastructure at our corporate and regional locations. Overall, Q3 operating income increased 14% to $40 million, or 13.5% of sales, primarily driven by improved gross margins.

In Q3, we had a non-recurring tax benefit of $11 million as we successfully defended certain tax positions around the globe and released valuation allowances in the USA as our profitability here has improved substantially in 2012.

Going forward into 2013, our rate will be impacted by improving USA net profit; it will be on the higher end of our forecasted rate range of 18% to 22%.

Net income was $45 million, or $0.49 per diluted share, a $91.1 million shares compared with $30 million or $0.33 per diluted share in the prior year. We ended Q3 with $313 million in cash, nominal bank debt, and inventory of $188 million. Our inventory increase was the result of timing of Q4 deliveries, higher priced new products for fall holiday, and additional retail stores.

Moving on to backlog, at the end of the quarter, backlog increased 33% from the same period a year ago to $395 million. Inside this result, Americas backlog is up 19%, Europe is up 49%, and Asia is up 40%. On a quarterly basis, backlog for Q4 deliveries represented $71 million, up 5% from 2011.

Backlog for Q1 2013 stood at $217 million as of September 30, and was up 38%. Backlog for Q2 2013 deliveries totaled $107 million and was up 30% from 2011 for the same date. Many of our wholesale accounts around the globe accelerated their ordering in the Q3 in order to secure early-season deliveries, which is a departure from historical pre-book ordering patterns.

Guidance for the fourth quarter of 2012, we expect to generate revenues of about $220 million, up about 8% from last year, or 9% on a constant currency basis. We expect our revenue will be moderated by continued weak consumer demand in Japan and the ongoing challenges to the consumer market in Europe.

With additional retail store locations coming online in a challenging international macroeconomic environment, we estimate the company will breakeven on a net profit basis in the quarter. Currency estimates used for the quarter are $1.30 to the euro and 79 yen to the U.S. dollar. On a year-to-date basis, EPS is $1.48, compared with the $1.18 at the same time last year or a 25% improvement. With our fourth quarter estimated EPS, we anticipate full year 2012 to be $1.48 per share.

Overall, we estimate that revenue growth in the U.S. dollars will be about 12% over 2011. In constant dollar growth, that will be about 15%. Our second half revenue has been impacted by global consumer behavior changes impacting our operating margin for the year, and is keeping us from hitting our goal of 15% full-year operating margin.

As we reflect on Q3, there are a number of key takeaways. We were able to increase revenue 10% on a constant currency basis in a challenging global market to the strength of our overall product line and the distribution network that we have developed around the world.

For some specific markets, we’re troubled and resulted in below expected levels of revenue; we are still able to grow our sales in those areas, because of our investment and direct-to-consumer channels, and the strength that our product line brings to our wholesale accounts around the globe.

Our operating profit increased 14% compared to the same period last year. And for year-to-date, our operating profit is up 20%. For the full year, we expect constant currency revenue growth of 15% and as such, this will mark the third year of 15 plus percent growth. The company’s employees around the globe are focused on delivering outstanding results to our investors as we build a fantastic diversified footwear brand.

Thanks, I will now turn the call back over to John for some closing comments before taking questions.

John P. McCarvel

Thanks, Jeff. As Jeff mentioned, our pre-booked business for spring summer ‘13 product line has been received very well. Positive order flow bookings from all of our major wholesale partners, but as Jeff noted, we see order flow coming in slightly earlier than last year. when we look at the strength from our ‘13 bookings season when it’s completed, we expect backlog to be somewhere between 15% to 18% higher than spring summer ‘13.

Spring summer products remain a foundation for our business and while we are making aesthetic progress to grow Crocs into a four-season brand. we do believe that the growth in the back half of the year will continue to be slower than the first half.

With these thoughts in mind, I would expect 2013 revenue growth and operating income to follow a similar trend to what we are exhibiting here in 2011. Like the whole industry, we’ll continue to see these kind of challenges with specific global markets being challenged, and solid growth; we expect to see solid growth here in our Americas business.

Thanks. and with that, we’ll open up to questions.

Question-and-Answer Session

Operator

(Operator Instructions) And we will take our first question from Erinn Murphy with Piper Jaffray.

Erinn E. Murphy – Piper Jaffray, Inc.

Good afternoon, gentlemen. John, I just had a question for you really, if we just want to dig in a little bit more to the Asian piece of business and very helpful for that regional spilt out that both you and Jeff provided. but curious if you looked at the quarter, how it started relative to your plan versus how it ended, relative to plan? If you could just may be provide some more detail and context around some of the major markets, acknowledging Japan as you mentioned, significant market for you, and that’s where you thought the most pressure. But hoping you could maybe help us understand how some of the quarter trended from the beginning to the end relative to plan?

John P. McCarvel

Okay, happy to do it. And I think what Jeff and I will do is with this particular question, I think it’s probably one that’s on the minds of a lot of people when you look at the financials, not only revenue mix within the quarter, but then how that overall impact of mix change, geographic mix change affects the overall profitability business. I think what we’ll do fairness will, those kind of tight keenness, and on the revenue side of this, I think we came out of the second quarter in most of our Asian countries on trend where we thought the plan would be and we saw a very little change to that in the Japanese markets, and sell-through was on trend on and on track.

Starting really in late July, and then into the August timeframe, we just saw the amount of conversion in our retail stores starting to decrease at a level that we haven’t seen before in that marketplace. And you’ve to remember that last year that market, the Japanese market comped in retail at 15%. so you’re comparing against a pretty strong quarter in your previous year.

In the marketplace that we would now start to consider semi-matured from a growth standpoint, I think other brands, VF and others have talked about what they think the Japanese market looks like relative to the [restivation] and I’d hear that same belief that we’ll see growth from the Japanese market in that 5% to 10% range where we see much higher growth rates in other parts of Asia.

So relative to our overall business in Japan, the wholesale business as Jeff mentioned our total sales in Japan in the third quarter was flat, but it was more that back-end, back portion of the third quarter where we saw a retail degradation.

Erinn E. Murphy – Piper Jaffray, Inc.

Okay, that’s helpful and I guess in terms of just speaking to the retail comp kind of going from that mid single digit positive to a mid single digit negative rate Q2 versus Q3, are you seeing more pressure just from traffic or are you seeing when the consumer comes and at the basket size, whether it’s driven by units or pricing is actually coming down, where are you seeing more the pressure on the comp.

Jeffrey J. Lasher

And you’re talking about this in a global environment or specific to…

Erinn E. Murphy – Piper Jaffray, Inc.

Sorry, that was specific to Asia, so just kind of going from that kind of positive mid single digit through a negative mid single digit Q2 versus Q3, where was that incremental pressure coming from on the comp contributor side of it.

Jeffrey J. Lasher

I think that again a lot has been written, if you think about Japan we’re not converting and traffic is down, if you look at in some of the major Chinese cities and in Hong Kong, where you do depend on a lot of consumer behavior during a tourist kind of outing or endeavor. What we’re seeing in traffic is down spending is down across the board. I think specific to the U.S. market place, there is the counter part of that is that we’re seeing traffic up in a lot of our outlet stores and we’re seeing conversion at a higher rate. So I think it’s depending up on the market and depending up on really the situation specific to each of those countries.

Erinn E. Murphy – Piper Jaffray, Inc.

Okay, that’s helpful. And just last on Europe, you talked about clearly in the UK market some pressure around the Olympics, but still able to have that positive comp, did you see actually the comp trend improve after the Olympics, or hit with essentially in that kind of slightly positive, slightly negative brain short the quarter. Trying to again understand that the pattern of the quarter.

John P. McCarvel

I think with out a doubt in another brands that have recorded before us and have talked about, what has happened in their European business. Really around the Olympics two, three weeks before that during the Olympic time and then really with the vacuum that was created there after many of the U.K. stores were impacted significantly just by this lack of tourists traffic in London and in the U.K. marketplace. I think in other destinations in Europe outside of the U.K., it was consistent comp performance throughout the quarter, as we get better, brand recognition now that were more than just a clog product. So lot of new products, were putting in our retail stores in Europe performed very well.

Before we move past it a little bit, I would like to come back and then talk about this impacts with these are being down a little bit this quarter, which has been an anomaly for us. You asked Americas business up, and how that really flows through the (inaudible), may be I’ll let Jeff kind of take that.

Jeffrey J. Lasher

As we mentioned during the script and as John talked about just now, both of those areas Japan, the rest of Asia to a more limited extent. And then the U.K. sector of Europe, we are lower than what we had originally expected for the quarter. That resulted in about $10 million shift downward in the retail business overall. We were able to make some of that up with the wholesale demand that we saw during the quarter and about half of that revenue was made up through the wholesale demand and an at once basis during the quarter. But when you take retail with high margin product sales and replace that revenue with wholesale, unfortunately the operating income impact of that was round about $5 million, which is what you see in the operating results for the quarter.

So $10 million lower retail coming out at 70%, 75% margins replaced with $5 million higher wholesale, which comes in at round about $2.5 million of margin for us results in about $5 million operating income, and we just wanted to clarify that yet again for everyone, so that everyone understands the impact of the revenue mix at the retail store line. But like John said, we’re really happy with the performances especially in the latter two months in the U.S. business, as John said in his script, 9% growth in those two months in the Americas locations as we set ourselves up for the fourth quarter selling season.

Erinn E. Murphy – Piper Jaffray, Inc.

Thank you guys, that's very helpful. And I’ll let someone else jump in. Thank you.

Operator

(Operator Instructions) Our next question comes from Sam Poser with Sterne Agee.

Sam Poser – Sterne, Agee & Leach

Hi, guys. A question about your guidance and the results, when you guided for the quarter, did you know that this one-time tax benefit was going to be there?

Jeffrey J. Lasher

No.

Sam Poser – Sterne, Agee & Leach

And your guidance for the fourth quarter, so that was about $0.12, if I did my math right, correct?

Jeffrey J. Lasher

Yeah. As we talked about at the end of the second quarter Sam, we anticipated a normal quarter in taxes. We benefited from settlements, or not really settlements, but finishing up of audits around the globe and our tax structure survived those audits around the globe, which we are really proud of, as you can tell from the script.

We also benefited from a movement in the USA net profit to be profitable again in 2012, which results in us taking a look at our valuation allowances that we had set up in the prior years and those were reviewed and reduced in the quarter. Those were not planned activities, but it takes place in Q3.

Sam Poser – Sterne, Agee & Leach

So if we think, I mean, you’ve guided to about $1.48, $1.49 in your last call for the full year, correct?

Jeffrey J. Lasher

Yeah.

Sam Poser – Sterne, Agee & Leach

Okay. So basically even though maintaining itself, the guidance sort of on a recurring basis has been dropped about $1.36?

Jeffrey J. Lasher

As we said Sam, we took into account the global consumer slowdown especially in Japan and parts of Europe as we talked about in the script.

Sam Poser – Sterne, Agee & Leach

I understand. I guess it’s just, the question is, am I thinking about that correctly?

Jeffrey J. Lasher

Yeah, I think so.

Sam Poser – Sterne, Agee & Leach

Okay. And then in Q4, I mean how do you look at the SG&A versus the gross margin on the revenue on the $220 million to get to the flat earnings?

Jeffrey J. Lasher

I think we’ll be at about $220 million of revenue, and our gross margin will be about 50%, a slight improvement from last year’s gross margin attainment as we are able to control our discounting in the marketplace. When we look at fourth quarter as we head into the Christmas selling season, the U.S. as John mentioned, August-September was pretty strong and our same-store sales comps were good. As we go into the back half of the year, there’s a lot of optimism around the consumer behavior in the U.S., but that optimism can shift rather quickly if something were to happen in the U.S. relative to the election or some other macro events impacting the Q4 consumer demand in the U.S.

Sam Poser – Sterne, Agee & Leach

Okay. Well, thanks very much. I’ll get back in.

Operator

And we will take our next question from Jim Duffy with Stifel Nicolaus.

Jim Duffy – Stifel Nicolaus & Company, Inc.

Thanks. Hi, guys. So the backlog numbers really jump off the page, it seems there is some nuance to it. I’m not sure I understand why retailers will be ordering so much earlier this year than in the past, if you could provide some help there, that would be great.

and then, momentum in the spring line clearly looks very good, fall holiday progress seems to be more difficult to come by. So your revenue is becoming even more concentrated from a seasonality standpoint. Does that all change your thoughts on how you plan expenses for the business, or you go-to-market strategy? Thanks.

Jeffrey J. Lasher

I think we start with kind of how we think about backlog first. And I think that this quarter is a bit of an anomaly where we would see in prior seasons, order flow come in starting at 7/15 date all the way to 10/15 and 11/15, we didn’t get orders in 12/15 for delivery in the second quarter. What we noticed this year and I think part of it has been, we’re becoming more mature. As the sales organization as a company, I think we’re doing a better job of pre-lining and preparing customers. I think that in a lot of our more mature markets Asia and the U.S. especially where we are working with major retailers that are booking in the 8/15 and 9/15 dates what we’re seeing is, orders that some times would have trickled into the fourth quarter to be processed internally now or entered really in the third quarter. So we think that it artificially inflates the actual growth in backlog to the point of 10% to maybe 15%. and I think you’ll get a better feel for overall backlog for first and second quarter when we report the 12/31 backlog.

With all that said, I will come back to something that Jeff said, and that is that as he gave the breakout for Q1, I mean Q2. you can’t see the strength of our spring summer line that we have put out and maybe that’s part of the reason why we see retailers ordering it earlier with more delivery dates on 2/15 and 3/15. I think they think that if there is momentum with the brand and if we do have a solid spring sell-through that they can actually get another turn maybe or two, with the products for next year.

So optimistically thinking, we think that there is some momentum there that’s going to play itself out into ‘13. I think that the skewing and the movement of the brand to spring summer is a natural phenomenon and that we have a place in most wholesalers’ mind where we sell and are taking more shell space and opening more doors. There is great product that falls into the category; it runs the longer period of time.

and unfortunately, it’s just a much shorter selling season for fall winter. And we just continue to work at boots and relevant indoor products than casual or leather upper products for men and women that try to find a place with consumers in the fall winter period that I think it is clear that next year, we will have a stronger first-half, again, to the year, just based on the momentum that we have on the products that are coming to market.

And then to finish that Jim, it does that, I think what Jeff and I have said over the last 2 to 2.5 years. Now we really do try to manage the business and as we’ve communicated to the investors and to the streets that we do try to match expenses and revenue appropriately within each quarter where possible, I think one of the things that it’s going to impact our Q4 business, maybe a little bit more this year than it has in previous years, we’re going to have more stores in the fourth quarter than most brands would and as the matter of timing, when the stores are coming open, a few of those stores should have opened in Q3 that have rolled over into Q4, but it’s an investment that we believe that we have to make and that will pay off in the long-term. So opening those stores will create a little bit of downward pressure on operating income in the fourth quarter.

Jim Duffy – Stifel Nicolaus & Company, Inc.

Okay, that's helpful, John. Good answers. Does the concentration in spring summer change the go-to-market thought process at all? Clearly, wholesale has a potential to grow as a percent of the mix in the spring summer ‘13?

John P. McCarvel

I think every brand that struggles to a different. I think other brand out there Decors others with that. I think we all strive to be a 12-month brand. we all strive to be a four-season brand. It just takes a lot of work, and it takes a lot of focus and some things come more naturally, spring summer comes more naturally for us. That’s where we started and in the consumers’ minds that’s what resonates. But I just think we have to work harder both from a marketing and from a product standpoint to overcome those weaknesses and we’ve got to keep working harder at the back-to-school and our fall winter products.

Jim Duffy – Stifel Nicolaus & Company, Inc.

I appreciate that perspective. Thank you.

Operator

Our next question is from Corinna Freedman with Wedbush.

Corinna Freedman – Wedbush Securities

Hi guys, I’m sorry, I jumped on late, I’m not sure if you gave the tax rate for fourth quarter, what you are expecting? And if you could also talk about comp expectations for fourth quarter and what’s the comparison, any color you can give us quarter-to-date? And additionally, could you talk about the ASPs of the backlog?

John P. McCarvel

Sure, I’ll take one at a time maybe on the order you gave them. So the comp guidance that we’ve concluded in our number, we basically try to take the year-to-date number, and roll that in. So when the regions are sitting down to think about how their revenue is going to roll out in Q4. they try to use the year-to-date number, not be overly influenced by a 90-day period, because that’s not just enough of a statistical trend to jump off of. So you can kind of use the year-to-date number.

As far as that I guess 3% year-to-date is what we were using in that. As far as the taxes in Q4, we said that we expect revenue to be about $220; we expect that our margin is going to be about 50%. That means the rest being SG&A and taxes, the tax rate in Q4, it’s kind of difficult to estimate as our operating income would be relatively small. so it’s a relatively small tax expense that we’re anticipating in Q4. And then the ASP in backlog, we’re looking at about an 8.3% increase in our ASP in our spring summer backlog. so that’s an improvement over last year’s rate of about $18, we’re looking at next year about $19.50 as far as ASP in our backlog for spring summer 2013.

Corinna Freedman – Wedbush Securities

Okay. Thank you.

Operator

Our next question is from Reed Anderson with Northland Securities.

Reed A. Anderson – Northland Securities, Inc.

Hi, guys. Most of my questions have been answered, but a couple of follow-ups, just last one. Jeff, the ASP comment you made, is that 8.3% spring summer, is that relative to that kind of 15% number John was talking about when you look at your spring summer business or is it relative to more some other figure.

Jeffrey J. Lasher

No, I’ll help you out with it. as John said, we saw a little bit of activity in excess of what we’ve typically seen. so our units are actually a little bit higher at the end of September 30, but the ASP being about 8%, that number that’s a number that will probably continue to carry on. so that’s going to be a pretty good balance growth for spring summer based on the early results between ASP and unit growth.

Reed A. Anderson – Northland Securities, Inc.

Okay. And then the answer you gave on the comp guidance, I mean you used the year-to-date numbers kind of the reference of how you plan that, but I mean does that, should we infer from that that you are expecting to rebound in those Asian markets, Japan or is there some that you’ve seen to suggest that will happen or is that going to play out differently?

John P. McCarvel

I think Reed, when you look at it on an aggregate basis as Jeff talked to that. we think on an aggregate basis.

Reed A. Anderson – Northland Securities, Inc.

Okay.

John P. McCarvel

3% is the reasonable comp growth number. I think that is, as I said in, first in my portion of the talk that I think we’re going to continue to see Europe and we’re going to continue to see Japan challenged in the short-term. I think we don’t know really what to expect in the U.S. We have five more weeks until the election what the consumers’ sentiments going to be and how our brands going to react in the holiday season last year became highly promotional early on. I think as Jeff said earlier, we think 80 basis points increase in gross margin in the fourth quarter. We don’t expect to be as promotional in the fourth quarter this year as we were last year.

Reed A. Anderson – Northland Securities, Inc.

In the U.S. or overall?

John P. McCarvel

In the U.S., and it’s really a U.S. phenomenon that the level of discounting in the fourth quarter.

Reed A. Anderson – Northland Securities, Inc.

Yeah.

John P. McCarvel

So we think that we’ll see a good comp performance in the United States. based on where we [own] the products that we have in stores and the promotions that we have. I think certain parts of Asia will do well during the fourth quarter. And I think Japan will remain challenged. So on average, we think 3% as a secured estimate for the quarter.

Reed A. Anderson – Northland Securities, Inc.

That’s very helpful.

Jeffrey J. Lasher

Reed, also don’t forget that in the fourth quarter, the Americas represented last year, $43 million of $74 million in total retail sales.

Reed A. Anderson – Northland Securities, Inc.

Yeah.

Jeffrey J. Lasher

So the game in the fourth quarter really is in Americas’ retail game. and then on the Internet side, it was 19 of 25.

Reed A. Anderson – Northland Securities, Inc.

Yeah.

Jeffrey J. Lasher

So it’s really important to us to have the strong Americas’ performance in Q4.

Reed A. Anderson – Northland Securities, Inc.

And just one last one I’ll sneak in. Just I look at the – get the mix thing that you explained it Jeff, very helpful in terms of the impact on the margin related to direct declining et cetera. But I guess, it still was a big difference, and I’m just curious if you look at your margin structure in call it your Asian region between direct and wholesale, consumer wholesale everyone look at it, compared to the U.S., are they the same or is that actually a better margin in the Asian markets in that direct channel?

Jeffrey J. Lasher

It’s a better margin in the direct channel, but it’s a higher percentage, because of the wholesale in Asia.

Reed A. Anderson – Northland Securities, Inc.

Okay. That makes sense. Thank you, good luck.

Operator

We will take our next question from Mitch Kummetz with Robert Baird.

Mitch Kummetz – Robert W. Baird & Co., Inc.

Yeah. Thank you. Thanks for taking my questions. I got a few, I’ll try to be quick. On your Q4 sales outlook, you’re seeing $220 million. I think that penciled out to be sort of high single-digit growth. could you give us any color as to how you think of that growth in terms of geographies or by channel?

Jeffrey J. Lasher

Yeah. I think when you look at that 220 number, I just talked to read about. And so much of our retail sales come from the Americas, last year we did 74 of $203 million was associated with the retail and in that $40 million or so was $43 million or so was attributable to the Americas business. So when we look at the growth in the $203 million to $220 million number, a lot of that comes from the Americas investment and the retail infrastructure and converting those kiosks in the full line stores. That’s how we’d kind of develop that $220 million revenue base. when we look out into Japan and the rest of the global marketplaces, frankly, in the fourth quarter from the direct-to-consumers is not as important as the Americas business. it will be important in spring summer when those marketplaces get back to their seasonal uptrend.

Mitch Kummetz – Robert W. Baird & Co., Inc.

Jeff, let me ask the question in a different way, I mean again, when you look at your sort of three geographic segments or three channels of distribution, is there anything that you would expect to be down in Q4 versus last year?

Jeffrey J. Lasher

I think Mitch, on that the European market is still one to be determined.

Mitch Kummetz – Robert W. Baird & Co., Inc.

Okay.

Jeffrey J. Lasher

I think at this point in time, what we have seen with new retail stores openings in outlet channels especially, that resonates with consumers they’ve performed well. Will the opening of our own retail stores offset the kind of black cloud that is sitting over the wholesale accounts today buying was only one purchase and not coming back and repeating or chopping up, I think time is going to tell. So what we’ve done is we’ve taken, we think as a pragmatic look at Asia and Europe, I think that you are going to be basically flat to last year and their growth is just that will come in the Americas business, especially with the investment that we made in retail and to a lesser extent in Asia.

Mitch Kummetz – Robert W. Baird & Co., Inc.

Got it. And John, you provided some additional color on 2013, I’m just wondering if you could give us some sense as to how many stores you plan to open next year?

John P. McCarvel

I think today, we expect to finish the year somewhere north of 500, around 520 stores. our plans right now are not completely set for ‘13. Now we’re just in the process of finishing up our budgeting here at the end of this month or early November, I think I mentioned the range of 75 to 125 stores in total globally next year as an increase for us, with the caveats there that we will be down to somewhere between 10% to 15% kiosk left in 2013.

Mitch Kummetz – Robert W. Baird & Co., Inc.

Okay.

John P. McCarvel

There will be few places tourists markets where they work, but we will almost completely exit the kiosk format.

Mitch Kummetz – Robert W. Baird & Co., Inc.

Okay, and one last quick one, on the backlog even after you adjusted numbers for the early ordering, it still sounds like a very healthy number, is that pretty much on an apples-to-apples basis in terms of accounts, or is there anything new in that spring summer number that we should be thinking about?

Jeffrey J. Lasher

No major addition anywhere globally, no addition of major retailer in that, but continual growth in terms of doors and shelf space and mini major clients in United States, and in Asian we are just kind of getting ourselves reestablished in the Europe, so we will see Crocs going to places like Debenhams and testing other major retailers in the European market that we haven’t seen in prior years, and do remember next year that we’ll have a full year of operations with Benelux now being fully integrated in as the direct market for us in 2013.

Mitch Kummetz – Robert W. Baird & Co., Inc.

Got it. Okay, thanks guys good luck.

Operator

And we’ll take our next question from Kelly Halsor with BB&T Capital Markets.

Scott D. Krasik – BB&T Capital Markets

Yeah, hey, this is Scott Krasik. Thanks for taking my question. The first one on the backlog that it was a big European number, does that actually is that one it’s benefitted from the shift early because of an easy compare from a year ago.

Jeffrey J. Lasher

I don’t think it’s a big number, it was big percentage.

Scott D. Krasik – BB&T Capital Markets

Sure.

Jeffrey J. Lasher

Scott, I think we’ve seen again new management in our team is now been in place for about a year, really working with more major accounts. Last year, I think we went into the spring-summer 2012 timeframe, just not being as well connected as we are this year. So I think the increase in backlog is more new products, more diversity of the brand and some new accounts. But on a dollar basis, it’s not a significant increase around $18 to $20 million increase.

Scott D. Krasik – BB&T Capital Markets

But relative to a year ago, you were sitting there with too much clog inventory, slowing sell-throughs. So in a year you’re able to convince people, even if it’s not a big dollar contribution to take new product, to try it even though your sell-throughs were weaker this year. Is that fair?

Jeffrey J. Lasher

It is fair and it’s the same thing I think that happened here in 2009. A lot of work going back in asking for forgiveness with the accounts, we didn't do very well, all that went on in 2012 in Europe. But I think people see the strength of the brand and we sell a lot of products to Europeans in our own retail stores that are also buying products overseas when they travel.

I think retailers are smart when they look at global trends to their brands. And I think that's also helping us strengthen the U.S. strengthen Asia, convinces retailers to take another look at it in Europe. So yes, I think a slow process of hitting singles, today is the first day in the world series, it’s a matter of kind of slowly easing into and they need to be convinced that, we’re a brand that they can work with and work for on a long-term basis.

Scott D. Krasik – BB&T Capital Markets

Okay. And then Jeff, just on the Q4 guidance, the difference between the 220 this year and the 200 last year, you were able to do $0.06. Gross margins are going to be up, but I mean is that just a make up of less Asian contributions to get to the break-even, it just seems like a big swing?

Jeffrey J. Lasher

That’s part of it for sure and then as we said in the script, we are opening retail stores in Q4, and as John just said in the last few questions ago. That’s kind of a new thing for us as far as to quantity that we are going to opening with 35 to 40 coming online in Q4. And we believe that’s necessary to really position ourselves well for the first half.

Scott D. Krasik – BB&T Capital Markets

Okay. And then can you just say it again, I apologize, but John, your last comments about your outlook for 2013, what you said about the sales growth and the operating income growth?

John P. McCarvel

I think when I answered Jim Duffy’s question, talking about order timing, that is probably the best way to look at this. But when the complete season is done, we think that it’s going to be 15% to 18% overall growth in backlog relative to the spring-summer season.

To be surprised, it could be higher, we’ll see what it looks like over the next two months as orders continue to flow in. What I said was is that, operating income would follow a similar trend to what we’re exhibiting in 2012, where we will make up lot of money and we will see higher growth rates in the first half of the year and we’re going to see slower growth rates and a little bit lower operating income on the back half of the year.

And when you look at it on a holistic basis, we still believe that 15% to 20% growth is still achievable. And we still believe that 14%, 15% mid-teens operating income is how we want you to think about it, and how we try to operate the business today.

Scott D. Krasik – BB&T Capital Markets

So you believe, just I’m sorry, I’m a little bit slow. So you believe you can do 15% annual operating income growth next year. we did above that to the first half.

John P. McCarvel

We said that, yeah.

Scott D. Krasik – BB&T Capital Markets

Okay, awesome.

John P. McCarvel

And many different forms that we…

Scott D. Krasik – BB&T Capital Markets

Thank you.

John P. McCarvel

Okay. Thanks, Scott.

Operator

Our next question is from Steve Marotta with C.L. King & Associates.

Steven L. Marotta – C.L. King & Associates, Inc.

Good evening everybody. Good question on inventory. inventory was up 24% on a year-over-year basis, you’ve mentioned that large part of that was early fourth quarter deliveries as well as inventory for our stores yet to be opened. Is it possible to tease out those extra factors and compared inventory on apples-to-apples basis year-over-year?

John P. McCarvel

Yeah. I’ll do it quickly, because we’re kind of running out of time. So we’re thinking about 20% in that growth and inventories associated with our retail stores, 20% is associated with our growth in our ASP, the product mix that we see in the overall, and about the rest is related to building of inventory and timing of inventory receipts in other investments that we’re making to position ourselves for a strong revenue growth in the first half.

Steven L. Marotta – C.L. King & Associates, Inc.

Is it possible to again, tease out on the fourth quarter instead of being up 24% on apples-to-apples, it would have been up excluding those early deliveries as well as further store openings?

John P. McCarvel

Well, as we said at the Analyst Day, we’ll have a little bit of an anomaly in Q4, because the inventory will be about $15 million to $20 million higher on a year-over-year basis, simply because of the way we’re receiving our shipments from our factories overseas. So that we did talk about that at the Analyst Day, it’s important to remember that when you guys do your analysis for the Q4 inventory expectations. but when you think about Q3 that 20, 20, 60 kind of split.

Steven L. Marotta – C.L. King & Associates, Inc.

Okay, forgive me I’m a little new to this story. Have you ever given expectations for year-end inventory levels, and if so, would you like to offer now?

Jeffrey J. Lasher

Well, I think the way that we talked about this far objective that we would be between 3 and 3.5 turns per year.

Steven L. Marotta – C.L. King & Associates, Inc.

Right, thank you.

Jeffrey J. Lasher

Yeah it has been.

Steven L. Marotta – C.L. King & Associates, Inc.

Thank you very much, that's great.

Operator

Our next question is from Mike Schwartz with SunTrust.

Mike Schwartz – SunTrust

Hey, good afternoon, everyone. Could you may be give us some more color on how the inventories look at the wholesale channels right now. May be even with the fall, winter and spring lines?

John P. McCarvel

Could you ask that one more time?

Mike Schwartz – SunTrust

Yeah, could you maybe give us some color on how the inventory levels are at the wholesale channels?

Jeffrey J. Lasher

In the Asian and European markets, you don't have the same dynamics and vehicles in place to be able to look at inventory position. Here in the U.S., the systems are much more integrated, people are much more open with information. Today our inventory levels on the strength of our product business, worked through the third quarter are quite lean in most of our major accounts. Placement for holiday orders relative to spring summer isn't that significant.

So when we look at inventory levels today, they are fairly lean. And in a couple of places, we’re actually seeing the sell through be at such a high rate relative to the buying that we’re actually starting to see some at once orders for products. Now I will give you an example. So DSW, for example, they’ve taken for the first time in this year, our Cobbler collection of shoes, it’s in a category kind of itself, a lot of more country style and a question, so boots in market this year. and so that’s a kind of a nice add-on for them, indoor lined type of clog product some well, and so we see some outlets business coming there. but overall, we don’t see inventory levels in our wholesale accounts to be growing.

Mike Schwartz – SunTrust

Okay. And then one final question, could you maybe give us some color as well on the – of your backlog, how much of that would be new product versus some of the traditional or classic footwear?

John P. McCarvel

About 35% to 40% is what we see for spring summer ‘13 orders.

Mike Schwartz – SunTrust

I guess how does that line up versus last year and years prior?

John P. McCarvel

And it’s slightly higher, in last year, we ran in maybe the lower 30% range. so it’s slightly higher this year.

Mike Schwartz – SunTrust

Okay, great. Thank you.

Operator

Our next question is from Jim Chartier with Monness, Crespi, and Hardt.

Jim Chartier – Monness, Crespi, Hardt & Co., Inc.

Good afternoon. John, I know you’ve been asked this in the past. but any update on your thinking on the share repurchase program at this point?

John P. McCarvel

I think to let Jeff, maybe Jim, take it down.

Jeffrey J. Lasher

Yeah. I think Jim, when we look at our cash balances in our capital structure, we’re pretty proud of the cash reserves that we built, they’ve increased substantially over the past few years, we continue to be very thoughtful on how we choose to deploy the cash. Stock repurchase is obviously one way to do so. The only comment, I think we’re going to make today as we continue to evaluate our options to maximize the returns on the cash and we maintain a very conservative and appropriate capital structure that we can weather the storms economically across the globe. We do have an existing authorization to repurchase up to 5.5 million shares of our common stock and we’re always looking what’s the best use of our capital is.

Jim Chartier – Monness, Crespi, Hardt & Co., Inc.

Great, thanks. Thank you.

Operator

And our final question comes from Sam Poser with Sterne, Agee.

Sam Poser – Sterne, Agee & Leach Inc.

I just want to verify that you’re talking about operating income growth next year. So basically, we’re looking at basically the earnings growth off of that $1.36 number, not off the $1.48?

John P. McCarvel

Yeah. I mean…

Sam Poser – Sterne, Agee & Leach Inc.

Because that would be a more normalized tax rate.

John P. McCarvel

Correct, yeah. The tax rate has been normally benefitted by that non-recurring income tax benefit in Q3, Sam. So when you look at in the next year, you got to adjust for that. And as I said, you have that additional issue of the USA being more profitable next year again, which puts some upward pressure on the tax rate being that the U.S. had such a very high tax rate relative to the rest of world.

Sam Poser – Sterne, Agee & Leach Inc.

So you expect a mix to grow into the U.S. a little more next year, just based on the way things are growing?

John P. McCarvel

Yeah. Just when you look at statutory accounting in the USA tax rate is impacted by the USA net profit, there is a lot of variables and those variables are all moving favorably for our business in the USA.

Sam Poser – Sterne, Agee & Leach Inc.

Okay. Let’s say, thank you very much. Good luck.

John P. McCarvel

Welcome, Sam. Thank you. We don’t see any other questions in the queue at this point in time. So on behalf of us within the Crocs’ management team, we thank you for joining us today on the call. We would look forward to taking to you in January.

Operator

Ladies and gentlemen, this does conclude today’s presentation. we thank you for your participation.

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