William Kent Jeffrey J. Lasher - Chief Financial Officer, Principal Accounting Officer and Senior Vice President of Finance.

Welcome to the Crocs First Quarter 2014 Earnings Conference Call. 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..

Thank you, Dawn [ph], and thank you all for joining us today for our first quarter 2014 earnings conference call. Yesterday evening, we announced our first quarter 2014 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, 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 Factors section of the company's 2013 report on Form 10-K filed on February 25, 2014, 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 discussion of these risk factors. 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 on this call, including operating income, tax expense, net income and EPS. Explanation of these metrics can be found on the earnings release filed by yesterday. I'll now turn the call over to Jeff Lasher..

Good morning, and thank you for joining us today to review the first quarter 2014 financial results of Crocs, Inc. I will go over the first quarter financial results of operation, the transition of the earnings per share calculation and projections for second quarter 2014 revenue.

In total, first quarter revenues increased $0.8 million or 0.2% to $312.4 million compared with 2013. Despite unfavorable exchange rates between the Russian ruble and Japanese yen, year-over-year revenues grew in both the European and Asia-Pacific regions in our first quarter.

We continue to face macroeconomic challenges in our Japan segment including the recent change to the consumption tax, lower purchasing power of the yen and lackluster consumer sentiment.

The decline of the Japanese yen and Russian ruble adversely impacted year-over-year March quarter revenues by almost $4 million and operating income by approximately $1 million. In addition, we continue to see challenges in our Americas wholesale channel as a countering lean on inventory.

Despite the timing of the Easter holiday and difficult retail markets in certain areas around the globe, we experienced a $6.1 million or 8.6% increase in retail channel revenues on a constant-currency basis.

This was primarily driven by the addition of 76 global retail locations net of store closures, offset partially by 1.5% decrease in comparable store sales compared to prior year. Internet sales for the quarter were down 3% from prior year.

With regards to products, the first quarter revenue growth was predominately driven by a global average selling price increase of 2.5%, primarily driven by new product introductions and the mix shift from clog to non-clog styles such as men's loafers and women's wedges. Unit volume decreased 2% to just under 15 million pairs.

As we continue to diversify our product line of new footwear lines such as the Stretch Sole and Busy Day and carryover products such as the Huarache and A-Leigh wedge, we have experienced a reduction in Clog sales as a percentage of revenues.

During the 3 months ended March 31, 2014, Clog sales represented approximately 42% of sales as compared with 47% in 2013. This decrease in Clog sales and higher percentage of loafers and other non-fully molded casual footwear styles contributed to lower margin. As a result, gross profit decreased $9.6 million or 5.8% to $156.2 million.

Gross margin decreased 320 basis points to 50%. The decline in gross margin is primarily driven by the evolution of our product assortment and the impacts of product mix, currency and slightly higher production cost.

As we expand our product lines, product mix shifts in the styles that may utilize more labor and more expensive material such as textile, fabric and leather compared to the traditional clog. These styles carry lower margins on a percentage basis.

Selling, general and administrative expenses increased $11 million or 8.7% to $139.4 million compared to 2013. These expenses continued to rise as a result of global retail expansion, which will require corrective action going forward.

In addition, we experienced several charges including restructuring charges as a result of transition activities, additional operating expenses related to our ERP implementation, charges related to ongoing litigation and a liability for certain store closures in Europe.

We expect future corrective actions to result in additional restructuring charges as we start executing on a profitable revenue growth strategy. Expenses not associated with direct-to-consumer activities increased to nominal 1% over last year primarily from increased marketing activity.

Operating income on a GAAP basis was $16.8 million in the quarter.

Excluding cash expense of $7.1 million primarily related to restructuring, ERP implementation and certain legal consuming take roles [ph] and noncash charges of approximately $1.1 million, primarily related to store closures and accelerated depreciation, non-GAAP operating income was $25 million.

For the quarter, we incurred income taxes of $5.4 million, which equates to an effective tax rate of 37%. This higher-than-expected tax rate in the quarter is directly attributable to the charges I just highlighted. Excluding such items, the effective tax rate was 24% on a non-GAAP basis in the first quarter.

Earnings per share in the quarter were $0.06 on a GAAP basis and $0.14 on a non-GAAP fully diluted basis. On a year-over-year, comparable basis excluding the overall impact of the preferred share issuance in January, non-GAAP EPS is $0.19 per share compared to $0.35 per share last year.

It is important to understand the pieces that make up the GAAP EPS calculation, including the impact of the Blackstone preferred stock investment. Please refer to the non-GAAP reconciliations included in our press release for further details. GAAP net income for the quarter was $9 million.

Dividends and dividend equivalents of $2.8 million related to Series A preferred stock issued to Blackstone were deducted from this amount, leaving GAAP net income for common shareholders of $6.4 million. An additional $0.9 million or 13.5% was deducted from the $6.4 million as undistributed earnings related to the preferred stock.

This is based on the 2-class method, leaving $5.5 million for common shareholders and for EPS calculations. Weighted average shares used in the EPS calculation was 89.5 million shares, once again, based on the 2-class method.

Finally, we repurchased just under 1 million shares at an average price of $15 for an aggregate price of approximately $13 million, excluding related commission charges under our publicly announced $350 million repurchase plan.

The company repurchased approximately another 300,000 shares in April and will continue to be patient, methodical and opportunistic in the execution of this buyback plan.

We ended the quarter with $412 million of cash on the balance sheet while our inventories and accounts receivable were slightly higher than Q4, the increase is in line with operating activities in prior year patterns as much as our deliveries occurred in the latter part of the quarter.

Following the closing of the Blackstone investment, and the announcement of the retirement of our President and CEO, we have identified key areas of focus for the business going forward. We are entering the time of transition as we focus on our strategy on enhancing returns for shareholders and becoming the leading brand in casual lifestyle footwear.

We believe the investment by Blackstone conveys a strong financial commitment in our brand together with our strong balance sheet that will enhance our long-term growth strategy and shareholder returns.

We have implemented several strategic initiatives that we believe will drive more profitable revenue growth while improving the operational and technological efficiency of the business.

In 2014, as we intend to increase focus on profitability and retail excellence, we may moderate the pace of our investments in new retail stores, as well as consolidate some existing locations. We will provide this in more detail as we move forward during the year. In the first quarter, we accelerated 2 store closures in Europe.

We ended the quarter with 623 stores, up 4 from the end of 2013. This includes the 34th Street flagship store in New York City, which opened in the quarter. We remain in the testing and development phase of our ERP system implementation. We went live for SAP in Australia on April 1 without significant issues.

A successful global ERP system implementation is our top short-term operational priority.

As previously referenced, we expect to undergo some strategic transitioning during the next year to refine our strategic and long -- our short-term and long-term growth strategies, which will include prioritizing earnings growth and our focus on becoming the leading brand in casual lifestyle footwear.

Entering the second quarter, our backlog was up approximately $57 million to just over $350 million. We expect GAAP revenue of approximately $370 million to $375 million in the second quarter of 2014, driven by strong contributions from Asia and Europe.

However, we expect that our Japan business will be impacted by the increase in consumer taxes and we believe the Americas region likely will be flat in the second quarter as South America continues to suffer from economic and distribution challenges. Currency rates assumed in our projections are $1.38 to the euro and JPY 102 to $1.

Overall, the organization is focused on delivering shareholder value through our focus on casual lifestyle footwear sales and balancing long-term global growth with improving operating margin.

Lastly, we also announced that our Chairman, Tom Smach, will serve as -- will also serve as Interim Chief Executive Officer until such time as the Board appoints a permanent President and/or Chief Executive Officer. The company will make an announcement on the search when successfully concluded.

We hope to provide some additional updates in the very near term. This ends our prepared remarks and our first quarter call. Thank you, all, for attending..

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect..