Brendon Frey - ICR Gregg Ribatt - CEO Andrew Rees - President Jeff Lasher - SVP and CFO.

Erinn Murphy - Piper Jaffray Mitch Kummetz - B. Riley & Company Kelly Halsor - Buckingham Research Jonathan Komp - Robert W. Baird Jim Duffy - Stifel Nicolaus Steve Marotta - CL King & Associates Jim Chartier - Monness, Crespi, & Hardt Sam Poser - Sterne Agee.

Welcome to the Q2 2015 Crocs Inc. Earnings Conference Call. My name is Vivian and I’ll be your operator for today’s call. At this time, all participants are in a listen-only mode. Later we will conduct the question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Brendon Frey. Please go ahead..

Thank you. And thank you, everyone, for joining us today for the Crocs Second Quarter 2015 Earnings Conference Call. This morning, we announced our second quarter 2015 financial results. A copy of the press release can be found on our Web site 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 the 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 2014 report on Form 10-K, filed on March 2, 2015 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 the additional discussions of these risk factors. Crocs is not obligated to update these forward-looking statements to reflect the impact on future events.

The Company may refer to certain non-GAAP metrics on this call. Explanation of these metrics can be found on the earnings release filed earlier today and on our investor Web site, once again, at crocs.com.

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

Thank you, Brendon. Good morning, everyone and thank you for joining us today. This morning, we announced our second quarter 2015 financial results. Revenues were 345.7 million, in line with expectations and adjusted net income available to common shareholders was 27.3 million.

Excluding store closings, discontinued product lines in China, our remaining business was up 20 million or 5% to last year on a constant currency basis. We’re making meaningful progress in transforming Crocs into one of the leading global casual life lifestyle footwear companies in the industry.

As we go through these changes we continue to face the ongoing headwinds of the strong U.S. dollar.

Despite this overhanging challenge, over the past year we've laid out much of the foundation for that transformation, making great progress on the strategic initiatives we laid out in prior calls including, strengthening the Crocs brand, elevating out product stores exiting non-core categories and businesses, evolving our international business model to focus on our six most important markets, strengthening our relationships with key wholesale partners, improving our direct-to-consumer capabilities and performance, simplifying our operations and processes, and building a best-in-class team.

We are highly confident that the actions we've taken will positively impact our business and our partners’ businesses around the world.

As we've said before, it will take until the first half of 2016 for these initiatives to be fully implemented and to deliver material improvements in growth and profitability as our new spring, summer 2016 product will then be in front of consumers.

Having said that, we're extremely pleased with some of the results we're starting to see from these actions. And I want to call out a few of them this morning.

First, in the second quarter we've launched our new marketing campaign #FindYourFun on a very tight tagline establish a global campaign that celebrated the Crocs brand in our core clients of the west. The campaign was extremely well received and is a foundation for Crocs to communicate more effectively with our consumers around the globe.

Andrew will share some of the details on our new marketing platform in a few minutes. Second, our global e-commerce business was up almost 30% on a constant currency basis, despite a reduction of nine individual country Web sites versus the prior year, results were especially strong in the U.S. up 30% and China up 84% on a constant currency basis.

The U.S. in particular benefiting from our new marketing campaign much of which was spent on digital media, helping drive Internet activity and sales, I also want to note that while our retail comps were negative showing only slight improvement over the first quarter.

We did see week-over-week improvement throughout the quarter, coupled with strong growth in e-commerce and modest constant dollar growth in global wholesale excluding exited businesses in China. I view the quarter’s overall results with tempered optimism.

Third, we continue to make nice progress with new product introductions that gives us confidence for the future. On prior calls I have discussed the Freesail and the Sloane, two new designs which sort of continued to perform extremely well in retail.

On this call I also want to mention that Citilane moulded sandal and our Swiftwater franchise that are both having very strong sell throughs at retail. The success of these shoes demonstrate our ability to both continue to evolve our core moulded business as well as build strong platforms in new adjacent segments, such as outdoor.

And finally, we continue to be extremely excited about the launch of our new spring summer 2016 collection which begins shipping in the fourth quarter. Retail response has been overwhelmingly favourable and gives us confidence in the commercial success of this important new line.

In summary, we continue to make significant progress on our strategic initiatives and we're confident that they will have material positive impacts on the business in the very near future. Having said that, we do continue to face some challenges, cheap among them is strong U.S. dollar.

Second, while we've built our organizational capabilities by strengthening our team, investing in systems and streamlining processes. We need to elevate our service levels across the globe. And finally, we need to return China to growth in the second half of the year. On the positive side, we see early signs of growth in the U.S.

a substantial moderation of the declines in China and stability in Europe. We are also excited about our gross margin improvement in the first half and this quarter's strong e-commerce increases.

I believe the steps are subbed well to capitalize on the launch of our new spring summer 2016 collection and I remain very confident in our strategy, our team and our ability to transform the Crocs brand and business to reach its full potential. And now Andrew will highlight some of the key details of our turnaround efforts..

Thank you, Gregg. We have previously outlined the six pillars of our strategy for repositioning Crocs which are well underway. Let me reiterate the major initiatives, the progress we have made, and some of our plans going forward. One, elevating the brand.

In Q2, we launched our global marketing campaign #FindYourFun, which builds on our iconic club silhouette.

As a reminder, the campaign is designed to reignite excitement and relevance of Crocs, celebrate our core club while inviting consumers to move into appropriate adjacent categories and give consumers a neutral in their attitudes towards Crocs, permission to engage with us.

Thus far, consumer and customer's feedback around our campaign has been very positive and we're seeing both significant growths in traffic to our Web sites and sell through acceleration at key wholesale accounts when they would be linked to our digital marketing.

We're now working on the evolution of the campaign for 2016, as well as looking into ways to drive greater global cohesion and further increase the proportion of our marketing, and utilize for work in media. Two, focusing on our core product.

We're in early stages of seeing some newer and more innovative product coming to market both within core molded as well as a broader range of casual footwear styles which expand wearing occasions. To update you on Freesail, which we mentioned in our Q1 call, this style continues to perform well across our direct to consumer channels.

Globally this style was worth less than 20,000 pairs in the first-half of 2015 where we boarded to market on an accelerated timeline. But we’ll expand to more than 200,000 pairs in the back-up of 2015 based on its sound performance in retail.

This is a great example of how we can reinvigorate our core molded category, with freshness and elevated styling as well as establish a robust test and learn capability that will enable us to drive growth in the future.

Today I would like to highlight three additional styles, first the Citilane, a molded twin gore clog which is being delivered to our own direct to consumer channels and is selling at double-digit sell throughs. We estimate we will ship greater than 300,000 pairs globally in fall holiday of 2015 across all channels.

Second the Bump It collection which Gregg mentioned on the last call, a kids molded clog and shoe which also had initial deliveries in our direct to consumer channels. They have been top selling styles over the past few weeks.

Our expectation that we will also ship in excess of 300,000 pairs of this collection in the full holiday of 2015, third, the Swiftwater, a new men's outdoor franchise that have expanded to seven styles for full holiday of 2015 from a single style in spring-summer of 2014.

They will be further expanded to a total of 13 styles including kids in spring-summer of ’16. Its performance demonstrates our ability to expand existing offerings into naturally adjacent segments.

Our larger makeover in terms of product innovation into our spring-summer 2016 line, we continue to be super excited about the feedback we’ve been getting from our wholesale partners as well as other distributors around the new line.

Three focusing on our six key markets, we continue to focus our efforts and investments on our six largest markets which represent 70% of our overall revenues and profits, the U.S., China, Japan, South Korea, Germany and the UK.

During Q2 we also have the opportunity to host a global distributor conference for our 40 largest distributors from around the world in Dubai. This allowed us to outline our strategy and future direction in detail to our best in class partners who service our non-direct markets. We are making progress at addressing our challenges in China.

As we discussed on our last call, during the second quarter we saw a revenue decline in China moderate significantly from $25 million decline in the first quarter to a $5 million decline in the second quarter. We are focused on driving sales to door and profitability of the business.

We have closed stores, cleaned up distribution, and moved through excess inventory. We continue to expect and return to growth in the second half.

Four, building stronger relationships with key wholesale accounts, starting next week we will embark on a series of pre-line meetings with our largest wholesale accounts globally to review our major product stories for full holiday of 2016.

Earlier this year this initiative to pre-line our spring-summer ’16 season was a major success in terms of building stronger wholesale relationships. Five, improving our direct to consumer capabilities and performance, our e-commerce business was very strong across all regions led by the U.S.

and China despite operating nine pure country-specific sites compared to last year. Overall global e-commerce revenues increased almost 30%. In our six core markets our e-commerce benefitted from most directly from our investment in marketing.

Our business also benefitted from better execution including a globally consistent online customer experience and a commitment to better in-sub positions on key products. We continue to trim our retail operations eliminating underperforming and inefficient stores, while these stores previously contributed 12 million to top-line sales in Q2.

They have made no meaningful contribution to earnings. We’re also pleased to announce the hiring of Neil Parker based in Singapore, who will lead our Asia, direct to consumer business, as well as drive strategic direction for our global partners stores.

Neil comes to Crocs with an extensive direct to consumer background most recently from Lewis Strauss in Asia. While we are disappointed in our key to retail comps, we’re confident we’re putting in place the team, processes and systems to drive much stronger performance in the future.

Six, centralizing and streamlining operations while building a best-in-class team. As Gregg alluded to earlier, we’re not satisfied with our current service levels. We’ve done a lot to build our capabilities, strengthening our team, implementing SAP, streamlining new processes and centralizing key activities.

In the second quarter, the lingering effect of the West Coast port strike, exacerbated by the supply chain challenges more than offset the positive changes we have made.

However, we believe the new organization structure new team, new tools currently in place are sufficient for us to achieve a prudent in service levels we demand and our customers expect.

In summary, I echo great sentiments, that we have done much to stabilize the business and create a platform to deliver improved growth and profitability, beginning with a successful and profitable launch of our Spring Summer 2016 line. Now I will turn it over to Jeff to go into details of our performance..

Thank you, Andrew. Today, we will cover our second quarter 2015 results and then briefly review expectations for third quarter, including the impact from changes in foreign currency. Revenue in the second quarter was in line with our expectations at 346 million, down 8% from a year ago on a reported basis.

Revenue was down 1% on a constant currency basis. Revenue as reported was impacted by first, the currency impact of the stronger U.S. dollar of $27 million, slightly more than expected. Second, the closing of 44 retail stores so far this year, which reduced revenue $12 million compared to last year.

Third, a 7 million reduction in revenue from discontinued products in segments. And fourth, lower China wholesale revenue down $5 million as expected. Excluding the impact of these items, revenue increased 5%. All of the revenue growth rates from here that we will cover today are recorded in constant currency change versus prior year.

America's revenue was 143 million for the quarter, up 3%. As e-commerce revenue grew 30% in the quarter and now represents 14% of the overall America's business.

Retail sales in the America's declined 3% for the quarter reflecting a 3% drop in same-store sales and the closing of 13 stores this year, as Gregg mentioned, retail comps improved throughout the quarter. As expected, wholesale sales were up 2% in the quarter, reflecting improving results in the U.S. wholesale business.

In Europe, revenues were $53 million for the quarter, down 7% year-over-year with wholesale decline of 11%. This represents a shift in the order pattern to earlier in the season.

As European wholesale revenues were up 1% for the first half, retail same-store sales grew slightly but revenue declined 3% compared to Q2, 2014 as we closed nine stores year-to-date. E-commerce sales in Europe increased 5% over 2014 levels, despite having closed six country-specific sites in the region.

Asia revenues for the quarter were $150 million, down 2% versus prior year. Excluding China, our Asia wholesale business was up 9% from prior year. As we anticipated China wholesale revenue was down $5 million, we saw an exceptionally strong growth in e-commerce revenue in China as that volume doubled over prior year.

And total e-commerce sales in Asia were up 55% compared to 2014. Overall Asia same-store sales were down 9% with large cuts in China and Hong Kong. Sales in South Korea where we have one-third of our company-owned retail points of distribution in Asia were impacted by a 30% decline in traffic result from the merge upright.

In addition, the strategic decision enclosed many retail sites, resulted in lower retail revenue of 13% overall. But we anticipate that lower fixed cost will improve our profitability in that region. Globally we sold 17.3 million pairs in the quarter, a slight increase from the prior year.

The average selling price of our footwear in the second quarter was $19.24, a 12% reduction from the prior year, primarily the result of currency, a shift away from retail and higher mix of core moulded footwear. Turning to our retail operations for the year-to-date, we have closed 44 stores and opened 18.

Of these closures 30 were full priced retail store locations. During the second quarter we reduced our pace of closures for seasonal reasons. We ended the quarter with 559 locations, compared to 624 locations at the same quarter last year. The stores that we closed generated $12 million of revenue in Q2 of 2014.

We are on pace to have fewer than 550 locations at year-end. Adjusted gross margin for the quarter was 55.2%, up 100 basis points from prior year. As favourable merchandizing mix and exiting on profitable product lines more than offset the negative impact to currency.

We anticipate Q3 margins to decline compared to last year, as currency impact will be the greatest during the quarter and more than offset other gross margin benefits. In Q4 we expect year-over-year margins to improve as we anniversary a strengthening dollar and our China issues.

Overall we expect back half margins to finish flat to slightly down and project again that full year gross margins will be essentially flat. During the quarter, we have made significant progress in our strategic objectives announced in 2014.

As a result, we have restructuring charges of $2.8 million in the quarter and with had expenses of $2.7 million specifically for the SAP launch cost, as well as other onetime charges of $12.1 million in the quarter. Excluding these items, core selling and administrative structure expenses were $157 million, up from $146 million in the prior year.

The items impacting core SG&A for the quarter were first, increased marketing spending by $15 million over 2014 levels. This was slightly more than previously discussed, reflecting our decision of pull forward approximately $5 million of Q3 spending to energize the brand during the peak selling season.

And we increased reserves for doubtful accounts by $5 million primarily associated with our China business and partnership network. We expect our operating SG&A to be down in Q3 and Q4. Specifically we now expect that with that to pull ahead in marketing spend we should see our overall SG&A spending in U.S.

dollars in the second half to be down more than $20 million compared to adjusted SG&A expenses in 2014 which totaled 263 million. This improvement should be evenly split between the quarters.

Turning to the balance sheet at the end of the quarter, inventory at the end of the quarter was $183 million, down from Q2 of 2014 ending inventory of 190 million. Global cash position at the end of the quarter was strong and the company repurchased 1.6 million shares in the quarter at an average price of $14.62.

Two final notes on the financials; first adjusted net income distributable to common shareholders was 27.3 million, after preferred share dividends in equivalence of 3.7 million. Second the weighted average share count used to calculate EPS was 76.8 million shares for Q2.

As we discussed on the last call that we continue to make progress on strategic initiatives, currency continues to be an external headwind. Approximately 70% of our expense structure is denominated in U.S. dollars while only 35% of revenues is generated in U.S. dollars.

We expect the revenue impact to currency in the third quarter to be about 7% in today’s rates, while approximately $22 million. As a reminder at this time the euro stood at approximately $1.37 compared to $1.12 used in our projections for Q3 this year. In the end it was at 102 yen to the dollar compared to 122 today.

Revenue in Q3 will be impacted by several strategic decisions we have made to improve long-term financial performance of the business. First our retail footprint is lowered by 65 stores at the beginning of Q3 and we plan on closing additional stores. This will reduce third quarter revenue by $9 million.

Second, we exited several non-core product lines in the last year including Ocean Minded in our golf and apparel business. The exited these businesses will reduce Q3 revenue by $2 million as these product lines accounted for sales of $12 million in 2014.

We expect third quarter revenue to be between $280 million and $290 million, down from last year on as reported basis, but shown an increase of 4% to 8% on core business on a constant currency basis. We continue to be very confident in our future and expect to show material progress in our results in the coming quarter.

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

Thanks Jeff. As I mentioned at the opening of the call, we’re 12 months into the transformation of Crocs well into the 18 to 24 month process that it typically takes to impact the business in the footwear industry.

We continue to make meaningful progress in the transformation of Crocs and we feel very good about our plan and how this will set us up for long-term sustained success.

Despite the headwinds in the business from currency to China to the operational issues that have challenged our business in the past we are making great progress on, focusing the business on core products and markets, elevating our products and marketing stories and evolving our cost structure, organization and talent.

While this quarter provided some early sign to progress over the back half of the year we expect to see increasing benefits of this work. As we’ve discussed on prior calls, we expect to see the lion’s share of this benefit, during the spring-summer 2016 season.

I continue to be very confident in the direction in which we are headed and our ability to successfully executing on our plans. We look forward to providing you a deeper dive on our strategy at the upcoming Investor Day in Boston on September 30th.

Special thanks to the Crocs team across the globe for all their hard work, passion and commitment to unlock the full potential of the Crocs brand and build one of the leading global casual lifestyle footwear companies in the industry. Now operator, we’ll open the call for questions..

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Erinn Murphy from Piper Jaffray. Please go ahead..

I guess I have a couple of questions and I think I’ll start Gregg with you and you’ve been in the hot seat now for just over half a year, kind of what’s that you're excited about the future and then I guess are you still confident in that 10% to 12% operating margin goal overtime?.

So obviously we spend a lot of time talking about our strategy and we’re now just beginning to see some of the early signs that is giving us more and more confidence in terms of the direction we’re heading. Probably three day have of this past quarter outside of the customer feedback that we have talked about, that gives us some of that confidence.

So first if you dissect our Q2 results, our underlying business grew by 5% when you take out currency, closed stores, discontinued products and our China decline and even if you include China and look at our go forward business. The business was actually up 4% in the quarter.

So that is certainly getting us excited and making us feel good about the direction we’re heading. Second, we continue to see very positive consumer reaction on some of our new product introductions and shoes that we have talked about on past calls like the Freesail and Sloane.

Shoes that we talked about in this call like the Citilane, the Bump It and the Swiftwater they are all performing extremely well at retail which tells us that as we think about the products changes we've made to the future and we think about that spring summer 2016 line and the broader direction we are having, it gives us confidence that those product changes will connect to its consumers going forward.

And I think the third thing is if you look at the Q2 e-commerce results and our 30% increase in the quarter which can be attributed to our improved marketing as well as operational improvements in our online customer experience and in stock position that tells us we're making the right moves both from a marketing perspective and some of the operational changes that we're making are going to have the kind of impact that we're expecting to have in the future.

So we think while it is still early that there are a lot of signs who take from our Q2 results that would tell us that we are heading in the right direction. And then in terms of your second question the margin goals, the long-term margin goals.

Our long-term operating margin goal remains the same, obviously in the near-term it has been impacted by, you know our near-term results have been impacted by a higher U.S.

dollar which depresses our international margins and given the mix of our business impacts our overall results but we're very confident we can improve our profitability in the near-term and achieve some of our broader operating margin goals in the intermediate future and so we still feel good about that and frankly we plan to talk about that in more detail at our investor conference in Boston in late September..

And then I guess Andrew for you, you talked about return to growth in China in the second half and obviously the negative headwinds has lessened through the second quarter but just help us think about some of the mechanics, that you are seeing; that gives you the confidence that that business can stabilize and just maybe broader, are you seeing any near-term volatility just with some of the pressure points on the consumer there off late? Thank you..

So to start with the sort of sets and context our China business is less than 10% of our overall business and as I think we’ve been very explicit about a plan that we laid out to stabilize that business which was to pull back on our selling to our key partners within China, help them liquidate inventory in the channel and work selectively with some key partners to help them improve their operations of their business.

That plan entailed us selling lesser to the marketplace by $25 million in Q1, $5 million in Q2, if we are upfront and explicit about that and we have hit both of those goals.

It's true that the macro consumer environment is becoming a little bit more volatile in China with the stock market volatility and the impacts on consumer confidence but based on the plan that we have put in place the tracking against that plan and the leadership that we brought to the table within the broader range of business with hiring of David Thomson and shifted Adrian Holloway from Europe to the DFC in our Asia business and the hiring of Neil Parker as the lead on the DTC.

We feel like we're on track and we feel confident that we will return to aggregate growth in the China market. I think it's worth also pointing out even at these depressed levels of revenue in the first half of the business it is still a very profitable business for us..

And if I could just sneak one more I guess Andrew it would be for you as well. On the last conference call I think you talked about the quarter-to-date trends in the second quarter kind of picking up through early May.

Just as weather had improved and what we are trying to reconcile is the comp in and out itself is roughly similar Q1 versus Q2 and you have kind of talked about week to week improvement throughout the quarter.

So just trying to understand maybe more how is April versus May versus June shake out just as sensing like that there is a little bit of a disconnect there?.

That makes so much sense. So I think the first thing I'd say as if you looked at our combined DTC business, so if you looked at retail plus e-commerce in North America you would have gone from a negative 4% performance in Q1 to a plus 4% performance in Q2. Okay so you have got an 800 basis points swing in aggregate DTC.

Now I know you are focused on the underlying retail business and yes we saw improvement in comps between April, May, June and into July and we feel like we've got the team in place, and the process improvements, systems improvements to drive improved retail performance in North American business but undoubtedly as every other business is experiencing you are seeing some shift from consumer preference from going in we still ought to go on our Web sites..

And our next question comes from Mitch Kummetz from B. Riley. Please go ahead..

A couple of them I guess, you guys have made a few comments this morning just on how encouraged you are about the spring and excitement that you have around that line for 2016.

Is there any way you could provide some more color on the order book? How much of the orders were in? Kind of what are you seeing in terms of those orders? And how do you think about the impact of shipping that product earlier this year than last given a standard calendar what that might do to Q4?.

This is Gregg. First thing I’d say is you look it is extremely earlier in the selling season our major booking windows for Spring Summer '16, is our August to October timeframe, so, meaningful level of data at this point.

As we've shared in our prepared remarks the feedback we've gotten from our retail and distributer partners around the globe, gives us a lot of confidence in the direction we are heading as they're planning the business and as we're discussing kind of our opportunities and mix going forward.

And I'd say the other piece is the product that is selling through and performing of retail which is kind of an early indicator of some of the product trends that we're going to be investing more behind going forward that gives us a lot of confidence as well.

So, we feel really good about the direction that we're heading, the day is not here at this point, we'll be in a better place to talk more about that during our Investor meeting in September..

Okay.

May be a question for you on the gross margins I want to make sure that I caught your comments correctly on gross margin, you were saying Q3 should be down year-over-year and that's the quarter we see the biggest negative impact from FX, and then Q4 gross margin is up but as on the back half is a whole, I think you're saying flat to down slightly is that right? Did I hear that correctly and is that any different than how you're thinking about margins prior to this call or?.

So, Mitch we expect that gross margin for the full year to be flat to slightly down, on an as reported basis overall. Honestly the currency impact on us is offsetting some of the improvements that we're seeing in mix and other changes. In the second quarter, that mix and other changes were substantial and we were able to overcome to currency headwind.

In the third quarter with the both the end of the year, down 18% on a year-over-year basis, that headwind will be about 300 basis points in the quarter and we will not be able to offset fully the impact of currency in the quarter.

So, on a year-over-year basis, the Q3 will be down, but because of the improvements in some of the operational issues that we had last year in China our year-over-year comparisons in Q4, are favourable as we anniversary both the stronger dollar and those China issues, so that is how we are tiered right now and then it kind of blends out to be basically flat for the full year..

And can you quickly remind me what the China drag on gross margin was last year in Q4?.

We've talked about it last year in the Q4 period, it was substantial, we didn't break it out specifically Mitch but it was a substantial impact as you may remember. I think our Q4 2014 margins were only 42% and that was impacted by that issues we had in China..

And our next question comes from Scott Krasik from Buckingham Research. Please go ahead..

This is Kelly on for Scott. Just have a quick question on Europe.

It looks like, you did talk about a shift in the wholesale business that accounts for some of the deceleration in there but if you look at the comps on a sequential basis those kind of decelerated as well so could you just talk about the dynamics of that market and how should we expect that to play out in the back half to year?.

Yes, I mean, I think from Europe from a macro prospective is in the difficult place, the economy is still extremely sluggish Gregg talked a little bit about some of the operational factors effecting Europe in the first part of the year.

It was a slight deterioration in the retail comps but again if you point to the -- if you look at the aggregate DTC business, you have actually got an acceleration in the business. So the combination of e-com and physical retail was a plus 2% in Q1 and was a plus 6% in Q2.

So I think the way we think about Europe is it, it is a stable market and we've kind of weathering the broader things in the marketplace..

And then just your expectations for them just the wholesale business is it -- if the channel shifts out of a wholesale towards retail, for the back half?.

For the first half, I think, as we look at it we said the first half on a constant currency was up sale wide and so I think, that's the way we look at the business..

And then secondly, just when we get to 2016 and just when we think about model, so are we going to be past most of the divestitures and retail closures, well may be on a like for like basis on a -- when we think about revenues?.

Yes, we will be. If you think about the big impacts on revenue this year, that were three. One is currency through its retail closures through its divestitures.

We will be obviously cost to divestitures there will still be modest retail closings next year because as we've analyzed our retail portfolio, we've taken a sensible economic view of what we close when based on the cost to do that.

So, there will be still some aggregate closings in the next part of next year but the rate was slowdown significantly and I think your guess is as good as ours relative to FX..

And our next question comes from Jonathan Komp from Robert W. Baird. Please go ahead..

May be just one follow-up, first on the retail comps, Andrew, I think you have mentioned, a little bit disappointed with the results there and it's not entirely clear to me how much may be the macro issues with some of the shift towards the online channel versus some internal execution or operations challenges.

Do you have any more color around on your views and what's impacting the comps there? And may be how soon you might expect to see some changes?.

Yes, I mean I think very clearly there is a macro issue, which is broadly across a broad segment of retail, e-commerce or direct to consumer by the Web is growing much more significantly than store-based retailing.

So we’re seeing that in our performance, but we’re also seeing the impact of our marketing program, I think very strongly within our e-commerce business where we’re seeing 20% increase in traffic. The other thing that you also have to dissect and breakout of our aggregate retail performance it is Asia where we saw a significant negative comp.

But a third of our own retail points of distribution are in Asia, are actually within Korea and Korea was impacted by the MERS outbreak this last quarter which drove a 30% decline in traffic to shopping malls and into shopping environment that delegates towards the end of this month if there is no more new cases of MERS, but that’s a very significant drag on our agent results.

So you have got another external factor take into consideration and I think more broadly putting in place the team and the capabilities and the operational efficacy that we need run an effective DTC business is well underway and we’ll start to see that impact in the future..

And if there is a scenario where the comp stay negative for a longer and maybe I am thinking more in North America business, would you go back and revaluate the store closure plan that you currently have in place or is there any scenario where you’d be more aggressive on closing some them, in just being bricks and mortar?.

We look rigorously at our entire portfolio every year.

So we do an economic analysis of portfolio to understand does each individual store make a contribution to cash flow and to profitability and how that is likely to trend in the future relative to the economic options you have against closing or earlier -- at sensible points of lease termination, so we have a very solid grip on the portfolio performance and if a store is not making a contribution, we will almost always chose to close it..

We’re also confident that retail will continue to play a pivotal role in the business and will continue to provide significant profits, will provide significant profits in the future..

And then maybe just one more bigger picture for whoever wants to take it and I am sure we’ll hear more in September, it sounds like, but if I look at the second quarter revenue growth constant currency and excluding the year-over-year headwinds that you called out, it sounds like about 5% growth on that basis and projecting 4% to 8% in the third quarter.

As you look longer-term in understanding there is a lot of moving parts, is that type of kind of underlying growth rate that you think that is sustainable going forward, do you think the ultimate growth rate is materially different than that or how do you structurally think about the right pace of growth for the business?.

We do plan to spend more time talking about that in September and I think we’d like to hold-off on kind of having that part of the discussion till our Investor Meeting in Boston.

But we do feel very good about that 5% number when you kind of exclude retail eliminated product line of currency in China and feel that is an indication combined with our guidance for the third quarter, that the business is stabilizing, we’re making progress and we’re well positioned to have some more significant growth going forward.

So we feel that we’re making meaningful progress..

And our next question comes from Jim Duffy from Stifel. Please go ahead..

Two lines of questioning for you; first Jeff on the gross margins, I may have missed this, but did you call out the FX impact to gross margin in the quarter?.

I think the impact for the quarter was around about 350 basis points Jim and we were able to offset more than that by merchandising mix and improvements in our overall product line profitability..

That’s pretty good progress considering that FX headwind, would you expect comparable rate of FX in the third quarter?.

We expect that our FX impact in the third quarter will be around about 300 basis points of margin degradation in Q3 and then it will start to moderate in Q4 we start to lap some of the decline in Japan and then next year as we lap the decline in Europe..

And then based on some of the products you expect to ship in volume in the second half of the year it is actually that mix should continue to be a benefit to the margin is that accurate?.

Yes it will be a benefit to us in Q3 and Q4 it just won’t be able to offset the full 300 basis point impact in Q3. But we did say in Q4 we should see some improvement in our overall gross margins both because of China lapping a bit of currency and yes, the product mix being a benefit for us.

So we are definitely aggressive in managing our product mix especially in those marketplaces for currency has had an impact on our profitability and we are -- you can see in the second quarter results we were able to offset a lot of that currency degradation by better merchandising of our brand..

The mix; I'm interested in the impact that is having on the retail productivity ASP was a 12% drag overall, what's the product mix in ASP impact on the retail comp and then I guess I'm curious is it possible in the retail stores that you're actually comping negative but doing more gross profit dollars just because of the mix?.

That’s an excellent question that Jim and you picked up a lot of the key trends that are obviously within retail.

Yes our ASPs are down within retail which eventually is intentional, right? We are mixing towards our moulded product which is the core DNA of the business where we're driving innovation and where we have substantially higher gross margin percentages.

So we have a ASP drag in the retail business that’s approximately equivalent to the average drag that you are seeing across the whole business but driving some incremental margins and obviously making up for that drag you've got to drive, significant increase in payors at the door and so we think we can do that in the future but that is some of the drag that we are experiencing..

And don’t forget we're doing that in a time where we've been able to impact only very finite portion of our product lines as we had in the fast that we've moved that with an existing product lines and we believe that as we go in the spring '16, the increase in innovation that we have in that moulded product will help drive improved performance at retail and at wholesale across the globe..

And then finally the service levels call out; can you speak in more detail on that? Is that a regional issue? Is it having consequence on the revenue and the margin?.

I think look over the last few weeks we have talked a lot about evolving our strategy. In Q2 we were very disappointed by our on-time deliveries to customers in the U.S.

and to a lesser extent Europe and we tracked it back initially as the port strike in Q1 but subsequently it said some delayed shipments and so given that we're obviously not satisfied with our service levels and the second phase of our strategy has always been focusing on our supply chain and some of our other key shared-service capabilities.

The good news is we have discussed on last few calls, we've made great progress on the product creation process, cutting out lead time, establishing global and decreasing our number of skews. We are also fortunate to have great manufacturing partners, some of the best in the industry.

We have rolled out SAP, so while we have some more work to do to drive efficiencies, we're operating on that on a global basis.

We have added talent we have talked about Phil Blake his is Head of Global Sourcing we have also added Gerry Irvine as VP of Global Supply Planning, those are in addition to some very strong talent we have in the business already and so we're confident that with these changes and putting in some new processes that we're kind of putting in place now that we will make the improvements that as Andrew said on the call earlier that we demand in our customers expect and we feel we are making significant progress in that area and that will be well set up for the future..

And our next question comes from Steve Marotta from CL King & Associates. Please go ahead..

Couple of quick questions on the marketing spend there was $15 million incremental in the second quarter you mentioned that was a $5 million pull through from the third quarter.

Is it possible that overall annual incremental marketing spend could be greater than you previously expected?.

No. We're on-track to spend on marketing that we anticipated and like we've said it is a pull forward we expect that our Q3 adjusted SG&A will be down about $10 million and about $10 million again in Q4 for a total back half savings versus last year of $20 million.

So, significant progress in our core SG&A spending and if you look at the underlying SG&A spending for Q2, you can see that we spend $50 more in marketing in Q2 on a year-over-year basis. We had $3 million year-over-year increase in bad debt. So our overall SG&A savings for the company was $7 million to get to the net number.

So at the end of the day we had some visible progress in our SG&A cost cuts..

The other question I had is a pertained specifically again to marketing you're noticing and realizing increased traffic at Web site that it is -- if there is traction in e-commerce based on a new marketing plan do you expect that similar traction to occur at the retail stores and to a wholesale and if so over what period of time?.

Obviously as we think about making our market investments, we are making medium and long-term investments. We're focused on driving relevance to the brand, introducing new products and really connecting more consistently coherently with our consumers across the globe.

Certainly we have seen the most immediate impact in our e-commerce business and we've certainly seen impacts in our hotel business. There are many instances where we've actually tagged, key wholesale accounts within our digital programs and we've seen dramatic acceleration in terms of sell through.

The one thing that we didn’t do this year as you know is the introduction of the marketing campaign wants to coordinate with our sell in.

We all came to the business too late to do that and as we look at '16 we've made much more significant traction and coordination in terms of presenting our market investments to our wholesale accounts as we sell in.

So we see impacts in a number of areas, one continued impacts in e-commerce, significant impacts on wholesale from a sell in perspective but also a sell through perspective and overtime an impact on retail..

One last question as it pertains to China, are you experiencing any negative effects from the macro issues going on there, clearly you are executing well plan in order to turn the business around as it pertains to hitting those targets in the first and second quarter but do you have any concerns about again the macro issues going on in there as it pertains the attraction that you would expect within China over the next six to 12 months?.

Yes. So I think, we have already outlined in response to Erinn's question that we feel like we're on track with the plan. Clearly the macro environment doesn’t make it easier, but we've been experiencing that environment frankly for the last 12 to 18 months. So we're managing through it..

And our next question comes from Jim Chartier from Monness, Crespi, & Hardt. Please go ahead..

The first question, you have talked about extending the Spring Summer selling season into July, just curious, does that having impact on the business this year and how it would impact the second quarter versus third quarter?.

Yes, as we kind of look at July in Spring Summer that is really a 2016 initiative. We'll have a little bit of business in Q4, as it relates to the earlier part of that initiative but then the Spring Summer reason will extend further than kind of the '15 season. So it's really a July 2016 timeframe..

Okay.

And then you talked a lot about combined e-commerce and store comps trend, is that sustainable where the trends in e-commerce from the combined DTC comps going forward?.

Thank you, Jim. Yes, so -- yes, we think, we're going to see a sustained differentiation between e-commerce and physical store performance based on macro consumer preferences. Clearly the large part of our e-commerce growth is driven by traffic improvements, which is driven by our marketing, which is driven by increasing interest in the brand.

So, as we intend to make sustained investments in marketing over many years, we believe we can improve traffic to the brands and is a leading indicator of preference for the brand.

And so we believe our DTC business needs to play an important strategic role for the brand in terms of allowing us to showcase the broader product rates that we have to offer. And it needs to come positively and drive a strong economic contribution as well..

And we've looked at e-commerce is a leading indicator in terms of that's going to be the first thing that get impacted and we believe that overtime as we have -- as we can impact more and more, we'll see some of the broader benefits as well..

Great, and Jeff, bad debt expense has been going up for four or five quarters now and I think the allowance is something like $43 million versus $21 million a year ago.

Could you just talk a little bit more about what's going on there? Do you see any more increase in the bad debt expense coming or could that reverse itself at some point in the future?.

So Jim we took the charge consistent with our policy internally here at Crocs and the vast majority of our partners in China are currents on their payment plans but we are dealing with some isolated instances among our 40 different distributors in the marketplace.

We are working with those accounts diligently and we are trying to address the situation and recover completely our receivables from those accounts. We continue to work with them and at this time, we feel like our bad debt reserve adequately portrays the rest of the organization.

Specifically our bad debt allowance overall is $12.3 million, when you add the other rebase and other things like that as when you gets the numbers that you quoted Jim..

Okay.

And then finally any thoughts on pricing to offset currency when you take price increases?.

Yes Jim, so we've taken price increases in select markets to us in a currency. We think about the major areas that we have been impacted by currency. They are number one Europe, number two Russia and number three Japan, number four Brazil. We have taken price action in Russia, earlier this year and we will take some later this year.

We have got Japan price action late this year and into the following year. Frankly, in Europe it is extremely difficult, so instead of Mainland Europe the UK, Germany and France, we're taking select action and select styles but a broad based program is really-really hard and we've taken price action in Brazil..

And our last question comes from Sam Poser from Sterne Agee. Please go ahead..

A couple of things, we are talking to people, we have the same response for the product for Spring '16 is pretty good and there is a pull forward, you are not pull forward, you are delivering your warm weather product earlier.

Can you give us some view on how you're looking at the fourth quarter right now from a revenue perspective?.

Yes, I would say we’re planning that in a small way for the fourth quarter and I think we’re prepared to share a number. We’ll talk a little bit more in more detail in September. But right now it's a small part of our fourth quarter plan but we think overtime it becomes a bigger and bigger part of the overall program..

But I mean just trying to get comfortable that you're moving in the right direction.

Your margins were good I assume you are expecting the margins to be up in the fourth quarter fairly significantly if I am not mistaken just given the easy comparison last year and so on? I mean the thing is, is that I guess the question is can you give us some idea of the kind of maybe the change in revenue velocity that you are perceiving, give us like a little preview of the kind of revenue velocity in general that you are perceiving as we go into ’16 given the response product and what you're seeing both in your wholesale, retail and e-commerce channel?.

So obviously Sam we’re going to talk in more detail about this in September and we’ll have a more robust conversation. Going back to thing something we talked about earlier.

We view kind of Q2 performance and the run rate on the go forward business of plus 5% to be an indication of solid performance on the core business despite not having enough gated product lines and putting in new marketing program and platform on an accelerated basis, we have more time as we look at ’16 to leverage our learnings relative to the spring ’15 marketing platform.

We have more time to leverage our learnings as it relates to some of the new product introductions we’ve had over the last six months. And we feel we’ve made a lot of progress.

So we start with that kind of 5% Q2 ’15, we’re sharing 280 to 290 guidance for Q3 which is plus 4% to 8% on that go forward business and I think for that in a similar kind of range.

And so I am just going to leave it as, we continue to feel confident in the direction we’re heading, we feel the core business stabilizing, we believe there are a number of key indicators as we look at Q2 from revenue of plus 5% on a go forward basis core business, gross margins, DTC comps at plus 1% in constant currency and those are all indicators that we’re making meaningful progress.

And I would say as you know we still have the lion’s share to progress that we hope to bring forth that really starts to hit in spring ’16. And again we’ll share greater detail in September, but we’re excited for the direction we’re having..

Just a one quick follow-up is that the 5% go forward will -- the new product that you're adding for spring ’16 will be additive to that, I mean because to get, I mean the 10% to 12% op margin was thrown out there last year and the question -- and it looks to me like you need a fairly healthy top-line growth to get there.

Are you on a go forward product plus new product is it right to think that that starts to happen next year?.

So Sam what I’d say is yes to get to the operating margin we’ll talked about in the 10% to 12% range, we obviously new revenue growth and that’s our core part of the strategy and our expectation based on our product and marketing evolution and some of the changes we’re making in terms of how we run the business and how the business is structured that we will be able to drive growth going forward and that’s a core part of the strategy..

And we’ll get more details on that at the end of September?.

You’ll get more details on that at the end of September, absolutely..

And I am not showing any further questions at this time..

Thank you everyone and have a great day..

Thank you..

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