Crocs Q1'16 Earnings Conference Call: Full Transcript

Operator:

Welcome to the First Quarter 2016 <b>Crocs, Inc.</b> CROX Earnings Conference Call. My name is Jason and I will be your operator for today’s call. At this time all participants are in a listen only-mode. Later we will conduct a question-and-answer session and please note that this conference is being recorded. I will now turn the call over to Brendon Frey. Mr. Frey you may begin.

Brendon Frey:Investor Relations:

Thank you and thank you everyone for joining us today for the Crocs first quarter 2016 earnings conference call. This morning we announced our first quarter 2016 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 information provided in this call will be forward-looking and accordingly are subject to Safe Harbor provisions of the federal securities law.

These statements include but are not limited to statements regarding future revenue and earnings, prospects and product pipeline. We caution you that these statements are subject to a number of risks and uncertainties described in the risk factors section on the Company’s 2015 report on Form 10-K filed on February 29, 2016 with the Securities and Exchange Commission. Accordingly, all 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 discussions of these risk factors. Crocs is not obligated to update these forward-looking statements to reflect the impacts of future events. The Company may refer to certain non-GAAP metrics on this call. Explanation of these metrics and reconciliations to the nearest GAAP metric can be found on the earnings release filed earlier today and on our investor website, once again at crocs.com.

Joining on the call today are Gregg Ribatt, Chief Executive Officer; Andrew Rees, President; and Carrie Teffner, Executive Vice President and Chief Financial Officer. Following their prepared remarks, we will open the call for your questions. I will now turn the call over to Gregg.

Gregg Ribatt:Chief Executive Officer:

Thank you, Brandon and good morning everyone. Today we announced our first quarter 2016 financial results. Revenues were $279.1 million above our guidance of $260 million to $270 million and net income available to common shareholders was $6.4 million. Revenue was up 6.5% on a reported basis and up 9.2% on a constant currency basis versus the first quarter of 2015.

Overall, we delivered a strong first quarter which demonstrates the meaningful progress that we have made and repositioning the Crocs brand and business over the past 21 months. This morning I will touch on a few highlights of the quarter and then Andrew will dive deeper on some of the key actions that we are taking and finally Carrie will walk you through the detailed financials and discuss our outlook.

In the first quarter we saw five key indicators of our progress. First, importantly, the Americas grew 19.5% on a constant currency basis. We experienced growth across all Americas distribution channels, as significant wholesale and e-commerce growth was coupled with modest free retail growth. As our biggest region and one closest to home, we believe this growth is indicative of the progress that we have made.

Second, we saw direct to consumer or DTC comp sales increases in each region. Strong double-digit e-commerce growth in every region was backed up by positive retail comps with North America retail comp store sales turning positive for the first time in ten quarters. Third, we sustained and leveraged a lower operating cost structure as adjusted SG&A as a percentage of revenue was down over 400 basis points. While $1.3 million of this was timing of marketing activities shifting from Q1 to Q2. We continue to see the benefits from the restructuring initiatives executed over the past 21 months.

Fourth, I am happy to communicate that our supply chain execution and on-time delivery performance has substantially improved. Our Q1 delivery performance was our best shipping trend in many years, resulting in earlier deliveries as compared to last year. And I am pleased to say that the second quarter delivery performance is continuing at these significantly improved levels. And finally fifth, we’ve made significant improvements in our inventory margin processes.

Inventory was up only $1.4 million or less than 1% compared with sales growth of 6.5%. Over the past 21 months we build a strong team, we’ve simplified and strengthen core processes, elevated our product line, and enhanced our go to market approach around the globe. As we proceed in 2016 we believe our financial performance will increasingly reflect the benefits of these significant improvements.
Despite having more work to do we are off to a good start as evidenced by solid Q1 performance and we remain confident that were on track to further transform the Crocs brand and business and achieve both our full year and future sales and profit objectives. And now Andrew will highlight some of the key details of the quarter.

Andrew Rees:President:

Thank you, Greg. Today I want to update you on four key topics. One global DTC performance, two our turnaround in China, three current product-line performance and four the sale of South Africa. Firstly global DTC performance, global direct to consumer revenues were up 5.9% on an as reported basis, supported by strong DTC com sales which were up 9.9%. This is our fourth quarter in the row of delivering positive DTC comp growth. Our e-commerce business was strong across all regions led by the US and Asia. Overall, global e-commerce revenues growth accelerated by 31.9% on an as reported basis and 34.3% on a constant currency basis.

Our e-commerce business continues to benefit from our new product line and better channel execution, including enhanced digital marketing efforts and a commitment to better in stock positions on core product. Retail comps were up 3.1% in the quarter with all regions reporting positive comps. Importantly comps in North America were positive for the first time in ten quarters. These results reflect positive consumer response to our new product line, strong end of season sales in January and our continuing efforts to improve retail processes and systems. Specifically we enhanced the assortment strategies, brand storytelling, improved the re-punishment and in stock positions and elevated consumer experience.

Having completed the bulk of our store closings we continue to find share in our retail portfolio eliminating underperforming stores while selectively opening new stores. In the quarter we closed 15 stores and open 6, 5 of which were in Asia bringing our Q1 global store count to 550. The net change in store count did not have a meaningful impact on a consolidated financial performance during the quarter.

Secondly turn around in China, as we discussed on our last call we have in active discussing with our challenged distributors. I am pleased to share we’ve reached agreements with several of these distributors. Over the next few months we will replacing certain retail locations currently managed by some of our challenged distributors with new company owned retail operations as well as shifting certain territories from trouble distributors to stronger existing distributors. We are tracking to have our issues with these challenged distributors result at the end of Q2 which will allow us to focus on driving sustainable growth in this key market. This progress gives us confidence that will return to growth in our China business in the back half to 2016.

Thirdly current product line performance, as you know our spring summer ‘16 product was a first develop by Michelle Poole and her team. While early in the season this product has been well received with replenishment orders up approximately 20% in Q1 versus the first quarter of 2015 and retailer feedback remains extremely positive. Our curious view of the performance of 2016 today comes from our own DTC business where we can see some very positive signs across the number of initiatives.

I will rationalizing our -- assortment we have driven approximately 20% growth into our go forward anchor styles including classic and Croc brand. This allows us to consolidate volume across few SKUs maximizing margins and simplifying our supply chain execution. In addition, -- style freestyle on a made for him -- have seen strong overall performance. Swiftwater, a key collections is currently focused on men’s and kid’s have seen an exceptional growth over last year with greater than 600% revenue growth driven by expansion of the collection and strong sell-through.

In 2017 we will expand Swiftwater to women’s and continue to build its franchise across men’s, women’s, and kid’s. -- a collection of varied sandals have seen strong early season performance especially with the Mini Wedge --. Unlicensed product continues to perform well across stalwarts, frozen and real free. Move -- among the areas that are working best are New Malden Silhouettes, season and trend light colors and enhanced graphics.

Our new product generated over 40% of global revenues in Q1 with two of new introductions -- and Santa Cruz west making it into our top ten selling styles globally. Fourthly the sale of South-Africa, as we discussed last quarter we completed negotiations to sales our South Africa subsidiary to our licensee the transaction closed on April 15. Our new licensee will continue to operate the wholesale business, retail stores and e-commerce. South Africa revenues in our Q1 results was $1.7 million. As we noted in our last earnings call while this license model will result in lower of reported revenue and will provide greater profitability and lower risk from this market as we leverage our licensees infrastructure and market knowledge.

This change is consistent with our overall strategic plan of focusing our direct business model on our largest markets and using best in class partners in the rest of the world. Now I will turn it over to Carrie to go into the details of our Q1 performance.

Carrie Teffner:Chief Financial Officer:

Thank you, Andrew. Now turning to our financials, revenue in the first quarter was $279.1 million compared to our prior guidance of $260 million to $270 million. Revenue was up 6.5% compared to the first quarter of 2015 on an as reported basis and up 9.2% on a constant currency basis. Compared to the first quarter of 2015, currency impact from the stronger US dollar was $7.1 million and we are lapping the poor strike from last year that impacted revenue by $5 million to $10 million. There were no other factors materially affecting the year-over-year comparability of revenues this quarter.

Q1 revenue outperformed our prior guidance in large part due to our wholesale channel we’re improved supply chain execution and delivery performance, reduce the number of unfulfilled orders at quarter end relative to prior year. We believe these improvements resulted in increased revenue of approximately $9 million for the period. Relative to the prior guidance we also benefited from $1.7 million of South Africa sales in Q1 due to the later than expected closing up of sale as well as stronger DTC performance across the business. The timing of wholesale shipments will result in our wider Q2 but keeps us on track from my half one prospective.

All other revenue results which follow are quoted in constant currency change versus prior year. In the Americas revenue was $124.1 million for the quarter up 19.5%. Wholesale revenue was up 24.7% of which approximately two-thirds was due to the for mentioned delivery improvements and prior year’s shipping delays including challenges resulting from the port strike. Retail sales in Americas increased 3.6% for the quarter reflecting positive comps of 2.9% and better productivity in the stores opened during the past year. E-commerce in the Americas grew 43.5% and total America DTC comps were up 12.2%.

In Asia, revenue is $104.5 million for the quarter, up 7.9%. Wholesale revenue were up 9.2% primarily due to timing of shipments between Q1 and Q2. Retail revenues were up 0.6% reflecting positive comps of 2.0%. E-commerce sales in Asia increased 27.3% and total Asia DTC comps were up 5.8%. In Europe, revenue was $50.3 million for the quarter down 7.9%. Retail comps were up 7.5%, but retail revenue declined 4% compared to Q1 2015, as we have 12 fewer stores as compared to the last year. E-commerce sales in Europe increased 15.1% while DTC comps were up 9.7%. Wholesale revenue declined l0.3% driven by a planned changed in the shipping window to better align our product delivery across regions which shifted some wholesale orders from Q1 to Q2 as compared to the last year.

We sold 16.3 million pairs in the quarter, a 9.9% increase over last year. The average selling price of our footwear in the first quarter was $16.85, a 3.4% reduction from the prior year mainly the result of 140 basis points of currency. Adjusted gross margin for the quarter was 46.1%, down 247 basis points from the prior year primarily due to a negative currency impact of 106 basis points, a successful year end sale period in January and higher distribution costs. We expect to see sequential gross margin improvement from Q1 to Q2 of approximately 450 basis points reflecting higher demand for end season products partially offset by the impact of currency. As we get to the back half of the year, we expect meaningful improvement in gross margins on a year-over-year basis.

Adjusted selling, general and administrative expenses were $114.4 million, down $4.6 million from the prior year. Adjusted SG&A at 41% of sales for the quarter is down 441 basis points reflecting higher revenue combined with savings from our re-organization efforts, timing of marketing expenses and currency. We realized minimal non-recurring and special charges in the first quarter of 2016. Income from operations was $14.2 million compared to a loss of $2.4 million in the first quarter of 2015.

Turning to the balance sheet at the end of the quarter, we ended the quarter with $89.1 million in cash and $8.5 million in outstanding borrowings on our credit facility. As a reminder, Q1 is our peak working capital quarter. The company did not repurchase any shares during the quarter and we ended the quarter with $73.3 million shares outstanding. Inventory at the end of the quarter was $186.1 million, up $1.4 million or less than 1% from Q1 2015 ending inventory of $184.7 million.

Two final notes on the financials, first adjusted net income attributable to common shareholders was $6.4 million for the quarter after preferred share dividends and equivalents of $3.8 million. After adjusting for Class A participation rights of $1 million associate with our preferred shares the weighted average share count used to calculate diluted EPS was 74.0 million shares.

Given our ability to deliver more of our spring summer 2016 orders in Q1, we expect second quarter revenue to be between $340 million and $350 million compared to $345.7 million last year. This results in our projected first half revenues on a constant currency basis excluding the impact of the loss of the South Africa revenue in Q2 to be up mid single-digits. We continue to expect full year 2016 revenue to grow in the mid single-digit range and EBIT margins at mid single-digits.

Now I will turn it back to Greg for closing thoughts.

Gregg Ribatt:

Thanks, Carrie. As I discussed earlier our performance in the first quarter is a strong indication that the strategic change we have been implementing over the last 21 months is beginning to take hold and having a positive impact on the business. While we are pleased with this results, we still have more work to do. Despite challenges from a strong US dollar and an overall choppy macroeconomic environment, I continue to be confident in the direction which we are head and our ability to successfully execute against our plans and achieve our goal of sustained profitable growth. Special thanks to the Crocs Team around the globe for all their hard work, their passion and commitment to unlock the full potential of the Crocs brand and create one of the leading global casual lifestyle footwear companies in the industry.

Now Operator we will open the call up for questions.

Question & Answer

Operator:

Thank you. We will now begin the question and answer session. If you have a question please press star then one on your touch tone phone. If you wish to remove yourself from the queue please press the pound sign or the hash key. If you are using a speaker phone you may need to pick up the handset first before pressing the numbers. Once again if you have a question please press star then one on your touch tone phone and our first question comes from Scott Krasik from Buckingham Research Group.

Scott Krasik:Buckingham Research Group:

Yeah. Hi everyone. Thanks on good quarter.

Gregg Ribatt:

Thanks. Thanks, Scott.

Scott Krasik:

Hi. So a couple of questions here I guess the first you talked about the $9 million improvements in sales because of being able to deliver on time you talked about timing shifts helping 1Q wholesale sales in Asia-Pacific I think Europe was hurt by a shift in the shipping window for deliveries. So can you just help us understand actually how much moved around between 1Q and 2Q and how sort of view the underlying season.

Gregg Ribatt:

Thanks, Scott. When we look at Q1 and take a step back we feel we are making meaningful progress and beginning to see the positive results of our turnaround efforts. First there is a increase in structural stability in the business. So we things like store closings and exiting lines of business are essentially behind us.

Currency impact is moderate and should to continue do so current rates hold, deliveries are performing well which is part of what you are referring to and the management teams in place around the globe and beginning to make a real impact on the business. So we definitely did have some challenge tailwind in the business in the first quarter. The $9 million you referenced which was the combination of the improved deliveries and accompanying the port strike challenges from year ago. But the fundamentals in the businesses is strong so we take a step back and looked at the core business.

E-commerce continues to grow at a high rate. We saw positive retail comps in every region and then when you look at wholesale which was up in a very real way. The timing of first quarter wholesale orders was favorable in the US, but unfavorable in Europe which you referenced. And so we think overall it was a very solid Q1 and as we look at Q2 we do see some moderation of growth as Q1 timing reverses, but we are solidly on track to achieve our objectives and achieve mid single-digit growth for the full year and our Q1 results gives us confidence in terms of direction which we are having.

Scott Krasik:

okay. And I guess just a follow up then your referenced 2Q, the comps obviously indicative of brand strength but we are seeing in some of the POS that we look at covers family footwear, the -- some of your key retailers extreme weakness in 1Q. How do they sale through they where seeing in data sets like that relate to you are still guiding 2Q revs to flat even with some of these timing shifts how do we reconcile that?

Gregg Ribatt:

Sure. When we look at our Q1 sell-through we actually feel very positive about the results and they’re certainly within our expectations. Early in the season direct feedback from our retailers and the data that we received from other external sources shows that our sell-throughs were up in the first quarter and Scott extremely a different picture then the sports candidate that you are referencing. So it’s clear to us that is the disconnect with the sports candidate accurately reflecting the breadth of our customer base and when we go back and look at our Q1 performance we feel very good about both of our sell-in and our sell-throughs that retail.

Andrew Rees:

And Scott just a elaborate a little bit on that. We are seeing some key programs performing well at retail at for we could call out number one Swiftwater mentioned in this script but it’s a key franchise both in men’s and kid’s has performing extremely well whether expanding that it’s performing well at our own retail plus also at wholesale. The clog business is performing well somewhat driven by improved deliveries and in stocks but we’re seeing nice increases both again at wholesale and in our own retail and probably most recently just delivering in the last few weeks is our Isabella program which is really high summer sandal program not quiet seen the weather for that yet but it’s performing well despite that.

Scott Krasik:

Okay. Than I like it to squeeze one last one in Carrie your SG&A was down a few percent on a dollar basis year-over-year. Should we expect the similar magnitude in 2Q or are there opportunities to see even more significant decline in SG&A dollars year-over-year in 2Q?

Carrie Teffner:

Yes so with the second Q2 we actually have some puts and takes in the quarter. So we’re picking up some additional expense relative to variable comp and those types of things that’s being offset by some lower bad debt expense. So we actually expect Q2 SG&A to be relatively inline with last year and then kind of the reiterate last even we are on the call at the end of the fourth quarter our full year SG&A is expected to be around $510 million.

Scott Krasik:

Okay, that’s great. Thanks very much. Good luck.

Carrie Teffner:

Sure.

Andrew Rees:

Thank you.

Gregg Ribatt:

Thanks, Scott.

Operator:

Thank you, and our next question comes from Sam Poser from CRT Capital.

Sam Poser:CRT Capital:

Good morning everybody. Thanks for taking my question. I just want to follow up on your gross margin commentary. Last year you have gross margin about 55% in Q2, how you said you expected 450 basis points improvement on a sequential basis or I mean which means that your gross margin will still be down I mean 500 basis points, 400 basis points in the quarter.

Carrie Teffner:

Yeah. So you are exactly right with respect to sequential improvements from Q1 to Q2 which does means will be down year-over-year from the gross margin standpoint. Relative to Q1 we expect the margin improvement to come primarily from better in more in season sale of products and that will be partially offset by the continued challenge that we have from an FX standpoints it should mitigate as we get into the back half of the year. And then talked in the prepared comments around the back half margin really showing meaningful improvement in the back half driven by less FX headwind as well as less EOL product to specifically as we look at Q4 and then that lapping some of those delivery issues that we have last year.

Sam Poser:

So I mean can you give us some idea of how are you looking at gross margin on a full year basis on a year-over-year on a full year.

Carrie Teffner:

Yeah, no absolutely Sam. As I am consistent with where we communicated at the end of Q4 we really right this point so expect full year gross margins to be in line with consensus.

Sam Poser:

Well. Can you give us an idea of what percent gross margin you are looking at or the kind of increase you are having from last year or not increase.

Carrie Teffner:

Yes. So the gross margin on a full year basis last year was 47.3% across the adjusted gross margin. We are expecting a 100 plus basis points improvement off of that and again that will put us relatively in line with consensus.

Sam Poser:

Okay. Thank you and then with your just to make sure when we look at China can we get us a little more color just to went through pretty quickly on the breakdown of what you’re expect percent of the business there, you’re taking in house and doing yourself versus the concerned of the changing over to those larger I guess we’re powerful distributors. Can you just give us some more color there please?

Gregg Ribatt:

Yes for sure Sam. So look we made a lot of progress in the last three months in China. We’ve reached agreement with the majority of the channels distributors. We have lot of work to do to continue to reshape the business in the future and as we transition from those channels distributors there is two pathways some of those territories will transfer to existing distributors who will operate the stores that a previous to be an operated by the channels distributors and some will transaction to ask.

As we looked we did a comprehensive review of the market place city by city, province by province to really understand where our primary model is to continue to operate through partners but there are certain cities where we believe it’s very financial attractive for us to operate our own stores where we can densify stores that we are already have today and enhance our portfolio and in particular we are looking to open significant number outlets stores in China.

Andrew Rees:

And Sam we intend to share a lot more that detail on our Q2 call once you’ve had a chance to finalize number of these deals and are in a position to do that.

Sam Poser:

And then and then lastly as you talk a lot about South Africa, so that hurts the second quarter but it was start to helping from a revenue prospective they start helping the profitability on a go forward basis and then you have other I think its Taiwan and Brazil where you already have established licensees or distributor agreements there are you done with those after you finished with South Africa is that the end of the those kind of changes or there other regions where you’re still looking to go to third party.

Andrew Rees:

Yes I mean as we have been clear about from the beginning Sam our strategy is to operate the business ourselves in our major markets where we have scale and its financial attractive and then some of the smaller markets didn’t transition it to distributors. Yes you are right South Africa the sale of South Africa to a licensee will take the revenue out of our go forward revenues but we will be obviously add license fee as we go forward and we think that will be a more profitable model in the future as the current as the new licensee gets up to speed. Brazil is the market we operate directly today, Taiwan is a kind of a combination market where the importer of record and then we primarily do business through three distributors. Well there will be more regional changes could potentially be more regional changes overtime but there will be carefully executed.

Sam Poser:

Okay and one answer I am sorry one more last lastly, over the long term Carrie the gross margin I mean let’s say next two or three years I mean are you seeing you see the gross margin with the mix and improved execution and sort of what say the flattening our of currency do you see that gross margin going back into the low 50s is that sort of the kind target that you have is that...

Carrie Teffner:

Yes now that’s consistent with our guidance that we provided at Investor Day back in September to get gross margin back in the level of 50s and there exactly its driven by the several other things you mentioned. In addition it’s specifically as shown our team are actually designing to Crocs now that helping margins with each new mind that we bring to market. We improved on time deliveries product lifecycle management and then the outlet expansion primarily in Asia, which gives us a more profitable channel to eliminate end of season product which is something that’s turn out margins thus far.

Sam Poser:

I mean, and do you see that happening do you get there or you do expect that to happen by the next year or is that something that is another year away. I mean as, given a specially the way the gross margin on a year-over-year basis is that a lot in the first half of this year and on a 2 and 3 year stack the numbers are very well.

Andrew Rees:

We really see that Sam over a couple of year timeframe and we definitely have a line of site to that and are working on and have confidence that we can get there but it’s more of a 2018 timeframe.

Sam Poser:

okay. Thanks very much and good luck.

Carrie Teffner:

Thanks, Sam.

Operator:

Thank you. And our next question comes from the Jim Duffy from Stifel.

Jim Duffy:Stifel Nicolaus & Company:

Thank you. Good morning, nice start to year.

Andrew Rees:

Thanks Jim

Jim Duffy:

Couple of questions for you. First with respect to the China distribution resolution, where you stand now can you speak to the percentage of the previous China distribution footprint for you now so you have solution in place. I am trying to get my arms around what the expected contribution from resuming shipments to populate those retail stores with inventory could be?

Gregg Ribatt:

Yeah. Just to stay at higher level far there is only so much we can share at this point and as I mention we do intend to share more detail at the end of the second quarter. We are actively kind of in process working through those deals and obviously that point we will share today than Jim.

Jim Duffy:

Okay. So you do expect to begin shipments few of those regions in the third quarter?

Gregg Ribatt:

Yes so the number of those regions that we will shift in the third quarter and then obviously the stores that we opening will enhance our retail portfolio too.

Jim Duffy:

Okay.

Gregg Ribatt:

And so that gives us confidence for that will see growth in the second half out of China.

Jim Duffy:

Okay. Thanks, and then any updates on the retail door footprint objectives for the year. Any change to the total number of doors expected I think you had previously thought -- about flat year on year?

Gregg Ribatt:

Yes. I think as we indicated in Q1 we close more store than we opened and our intension is to continue to manage the portfolio prudently. I think there are couple of places where we will see some door expansion which is in China with the stores that we are going to be opening and probably slightly more assertive strategy relative to outlets in Asia but we will be up modestly on prior year end store counts.

Jim Duffy:

Okay. Thanks and then Carrie on the SG&A I think you mentioned $510 million if I am not mistaken that the slightly lower number than you guided previously are you finding additional opportunity for SG&A savings?

Carrie Teffner:

Actually yes we continue to look for opportunities to take our cost where we can. So the $510 that approximate number is reflective of what we believe SG&A will be for the year.

Jim Duffy:

Very good.

Carrie Teffner:

Great.

Andrew Rees:

Thank you.

Gregg Ribatt:

Thanks Jim.

Operator:

Thank you. And our next question comes from Mitch Kummetz from B. Riley.

Mitch Kummetz:B. Riley:

Yes thanks. Thanks for taking my question, only my congratulations. So great obviously better execution in the quarter is there any way, any metrics that you can qualify that or not if its you would speak to failure rate this versus last year or may be there is a better metric to used to -- arms around how much improvement you are actually experienced?

Gregg Ribatt:

Yes. Thanks Mitch. We spend a lot of time I think in the second half of the year talking about a series of initiatives that we have put in place kind of addressing deliveries. As you know deliveries historically was the challenge for Crocs and the initiatives range from reducing a number of skews that are implementing kind of global approach to product lifecycle management gaining global alignment from our product range will make big impact.

But it also came down to evolving business processes, leveraging SAP and just building leveraging a stronger global operations team and I think we have communicated to our customers it was the objective of delivering what we call industry standards and while we don’t kind of share a specific metric. We also say that it might take us a little bit of time to get there and what we are proud about or excited about is that we certainly in the first quarter and few order to placed to continue doing this we are at or above industry standards at this point and delivering kind of high levels of service and feel we are in a really good place with both our approach to this area and our execution at this point.

Mitch Kummetz:

And then how do you think about consumer demand for your product based on better execution I would think that from one standpoint better opportunity for replenishment orders throughout the season but then I’m also curious if you think there is some sort of pull forward and demand there is obviously pull forward in terms of wholesale deliveries but I’m wondering how you think about like demand going in the second quarter given that your you got more product at early.

Andrew Rees:

Yeah. So there is couple of things that Mitch one is look we were able to deliver earlier as you can see on wholesale numbers which we think was a positive and that’s was probably more in line when the retail is one today versus where we did a little bit of last year. So we won’t forcing it in earlier. As we look at sell-throughs on that merchandise with higher levels of merchandise at retail and our wholesale channel its selling-through at a higher rates than it did last year and we monitor that.

So that’s positive we talked about in Q1 about at ones being up 20% and we anticipate at ones being continue to grow as we got through the season and probably the peers view of brand health to like is DTC where obviously the assortment in 100% Crocs and I think positive comps across the globe gives us real confidence in the product line.

Mitch Kummetz:

Okay and then Carrie could you give us an update on the impact of FX on the year. If I recall correctly I think after the last earnings call you talked about FX being I think at 3% drag on revenues and I think 100 basis points or the headwind on operating margin are those targets still kind of in play or has that changed all?

Carrie Teffner:

Yes so, many of the better price taken step back and take us back to the guidance we provided back in September was and in store revenue growth in the mid single-digit range and EBIT margins in the mid single-digit range. So the thing to think about is based on our Q1 results in the recent changes we’ve seen a foreign exchange we are still projecting to be in line with that initial guidance range for 2016. The rates today are essentially the same as when we originally guided last September. We’ve seen the movement obviously in Q1 it moved in our moved against us we seen to come back but we continue to hold that overall guidance.

Mitch Kummetz:

No I just going to say based on where FX rates are today when do you think that let that gross margin could actually flat towards FX is no longer drag on gross margin it might actually they will to help gross margins.

Carrie Teffner:

Yes the currently impact we have seeing is mostly in the first half of this year and we will start to able to benefit more from that level enough in the back half. So that’s when we start to expect to see some of that improvements.

Mitch Kummetz:

Okay. Thanks, good luck.

Gregg Ribatt:

Thank you.

Operator:

Thank you and our next question comes from Taposh Bari from Goldman Sachs.

Chad Sutherland:Goldman Sachs:

Good morning, this is Chad on for Taposh congratulation on a nice quarter.

Gregg Ribatt:

Thank you.

Chad Sutherland:

Just wanted to drill down little bit into the comp performance can you provide any color on the comp breakdown by channel outlets versus small locations to etcetera.

Gregg Ribatt:

Yes, we don’t Chad we don’t provide that information and so what we try to do is kind of share kind of an overall kind of view of the market and what feel really positive about our first quarter results. Clearly we do breakout e-com versus retail and as you see e-com performance was very strong retail was strong relative but obviously that drives a weighted average of the comp that’s more towards e-com.

Chad Sutherland:

Understood and then just drilling down on e-com little bit as well I mean its pretty much the best 1Q e-commerce and on a dollar basis you guys have and ever had that larger on the success of the January promotion or there other factors that are influencing that?

Andrew Rees:

Yes the e-com performance has been very strong for a number of quarter now. We have had strong double-digit growth across our e-com channel for a number of quarters. I think the January promotion was strong and effective in terms of clearing our year-end inventory and it was correctly the right thing to do but I think it’s a longer term trend that we’re seeing.

Chad Sutherland:

Okay. Thank you.

Gregg Ribatt:

Thank you.

Operator:

Thank you and our next question comes from Erinn Murphy from Piper Jaffray.

Christopher Schott:Piper Jaffray:

Hey. Good morning this is a Christopher Schott for Erinn Murphy. I was wondering how confident are you guys in the long-term revenue plan given what we are saying from retailers about the open the dollars in the space especially inventories managed bit tighter how are you guys are expecting or how you guys are navigating the landscape.

Gregg Ribatt:

Yeah. Certainly is the challenging macroeconomic environment out there having said that we continue to feel confident in our plan. We feel that our first quarter basically is a strong start for the year a good indicator in terms of the strategic direction that we are heading. We are seeing which ever the more conservative with our -- given the challenging environment but we think a combination of our strong deliveries and solid -- grow as we performance both on our classic core product and our new product introductions sets us well for 2016 and beyond.

Christopher Schott:

Okay. great. Thanks. Then just second question on the good terms of new products so may be comparing contrast on and -- consumers response you guys have got and in terms of being it wholesale channel and retail channel if there is any difference is there. Thanks.

Andrew Rees:

Yeah. I mean I think their’s a few things we are saying on new products good stuff. As we look at Q1, 40% of our sales were on MPI product, about 60% of our spring-summer ‘16 line is new so its a significant renovation on the line that’s been delivering during the Q and we generated about 40% of our sales on that new product. I will see the and we monitor sell- throughs both in our owned stores and in wholesale.

We are seeing as we talked about a couple of times we’re seeing some in very focused areas checking while number one and most importantly from the sales and margin prospective is our core clog range both the classic and clog brand which are evergreen styles as well as made for her, freestyle, made for him -- those have been performing really well. So forward talked about is doing it’s extremely well in DTC and wholesale and it’s a dollar is a new sign in product is deliver now.

Christopher Schott:

Okay great. Thank you very much.

Gregg Ribatt:

Thank you.

Operator:

Thank you. And our next question comes from Jonathan Camp from Robert W. Baird.

Jonathan Komp:Robert W. Baird:

Hi. Thank you. I want to ask first about the Americans comps. First may be just on the retail side I am wondering if you saw any less pressure from some tourist markets and then also looking ahead any thoughts on the expectations for the year it is directionally it looks like the store comps get a little less easy of that comparing and certainly the internet comps get more difficult starting in the second quarter. So any thoughts directionally if you expect kind of a growth rates to moderate or not?

Gregg Ribatt:

I think the so the number of things in that, first is the tourist markets we continue to see significant pressure in the tourist markets by traffic is down considerably and as a reminder those are Orlando, Hawaii and parts of the West Coast where you’ve got tourist in variety of regions coming in and you’ve clearly seeing those tourist counts down. Secondly, I think if you look at kind of overall traffic frankly, overall traffic at retail is being down and -- is been down in once of that on the daily basis, but our comps have been despite that they have been driven by conversion and units per transactions. As you indicate look the competitors change a little bit primarily for e-commerce we go through the year. But today, in Americas in particular laughing and strong performance from e-com we’re continued to see how is the e-commerce related to strong performance outlined.

Jonathan Komp:

okay. Great. And then maybe a couple of question on the outlook first just on the revenue side, I think previously maybe directionally you talked about little higher revenue growth in the second half for the year. Now its sounds like maybe kind of mid single-digit growth both the first half and second half to get to the full year guide. Any thoughts on kind of directionally any changes first half versus second half and then, as you look in the second half how much of the growth is driven by the improvement in China versus any moderation in other places of the business.

Carrie Teffner:

I think as you look at the full year guidance you are right mid single-digit and first half as compared to the second half I would just say its new -- but second half does grow a little bit faster than the first half and then what’s driving that growth certainly when lapping, challenging back an easier back half last year primarily because of the delivery issues that we have in the back half that combined with new product coming in the market, combined with easing of the FX pressures are like give us confidence and then we assumed all along with respect to all of our overall guidance that we will be returned China to growth in the back half. So that’s not the change in terms of our assumptions.

Jonathan Komp:

Great and maybe one more I just similar type of question but on the gross margin a lot of year-over-year noise so may be like in sequentially second half compared to the first half gross margin. It looks like historically the second half gross margin is may be 400 basis points below the first half by what kind of longer term average this year it sounds like the gross margin in the second half may be only slightly below the first half on a sequential basis. So any change in that normal cadence second half versus the first half gross margin or any prospective there?

Carrie Teffner:

Yes I think that’s a fair assessment what you outlined. As we look at why that would be in the second half again go back to less FX headwind factored into our cost of goods sold in the back half less EOL product that were lapping but sales of last year specifically in Q4 I think going back to the fundamental things that we’ve done from the process different than in the past is the design to cost and the product life cycle management activities that were performing so as Greg mentioned earlier the increased overlap in terms of products globally the reduction of skews across the line as we moved to the moreover less across regions those are the things that are going to help up -- gross margin standpoint in the back half.

Andrew Rees:

Yes and as we’ve said in with each season we get as make a larger and larger impact on the business and you start to see some of those benefits coming to live in the second half of the year.

Jonathan Komp:

Okay great. Thanks for the perspective.

Andrew Rees:

Thank you.

Operator:

Thank you, and our next question comes from Jim Chartier from Monness, Crespi, Hardt.

Jim Chartier:Monness, Crespi, Hardt:

Hi. Congratulations on a nice quarter. In the past you just talked about constant currency gross margin I felt that if I missed at this morning but can you just tell us how the gross margin performed the constant currency in the first quarter?

Carrie Teffner:

Yes so currency had a 106 basis points impact on gross margin for Q1.

Jim Chartier:

Okay. and then the 20% increase in replenishment orders is that how is that relative kind of you with your expectations did any of those ship in first quarter or is it more shipping in second and third quarter?

Gregg Ribatt:

So the 20% increase in -- business was in Q1. So that was our Q1 performance I will say that was probably at or slightly above our expectations. Obviously Q2 as a bigger -- quarter the balance in the business ships more to our outlines but were we feel good about where we are here today.

Jim Chartier:

Great and then can you give us an idea of how much of drag China is going to beyond on the first half of 16’ and then what kind of benefit you are embedding in your guidance for this second half of 16’?

Carrie Teffner:

Yes so we are not calling up the overall impact from China specifically. That impact is based into our overall guidance for Q2 with $340 million to $350 million and again as into the back half its returning that country to growth.

Jim Chartier:

Okay and then finally its seems like the availability of some the new products and your wholesale customers, early in the season kind of hard to find other than the Isabella anything else kind of shipping later hitting kind of your wholesale accounts later than retail and how do you feel about kind of the wholesalers response to the new products?

Andrew Rees:

Thanks a lot of shipping did happened at the very end of the quarter. So that get to release through late April into early May and the retail response continues to be as positive as a feedback is has been strong and -- calls out a few examples of that from -- core com the Swiftwater to Isabella and we feel really good about kind of the new product introductions we’ve made this year and directionally what they are telling us in terms of the strategic objectives for the brand and for the company going forward.

Jim Chartier:

Great. Thanks and best of luck.

Andrew Rees:

Thank you.

Operator:

Thank you and we have Scott Krasik with an additional question.

Scott Krasik:

Thanks. So three quick follow ups just number one can you give us some clarity on how the comp trends are performing into 2Q core data they support of the outlook. Number two roughly what percentage of your sales in 1Q were outlines versus 2Q and then three, you need buyback any stock you’ve obviously buyback stock at much higher levels I assume most of your cash is probably overseas at this point is that because you don’t want to take on debt to do it or what’s about process around buyback. Thanks.

Andrew Rees:

Right, Scott. So let me start now handed over to Carrie. So in terms of in season comps we don’t discloses those as you know we feel great about our Q1 performance. But we don’t disclose in season comp or in quarter comes. In terms of percentage of business that is Q2 is a much bigger business here in the US but also in Asia and we are attracting closely to what we have embedded in our guidance in terms of -- shipments.

Carrie Teffner:

And then Scott you are roughly right this is Q1 is our peak working capital quarter and the majority of our cash is international locations. As we called out in the prepared remarks we were in our credit facility in the quarter and we chose to be conservative relative to the US liquidity enough buyback stock at this time. That said we continue to be confident in the performance and the direction that we are heading and we will continue to maintain -- approach and disciplined approach to share repurchases going forward.

Scott Krasik:

Okay. Thanks.

Operator:

Thank you and this concludes the question and answer session. I will now turn the call over to Mr. Ribatt for closing comments.

Gregg Ribatt:

Thanks everyone and have a great day.

Operator:

Thank you. Ladies and gentlemen this concludes today’s conference. Thank you for participating, You may now disconnect.