Brendon Frey - Managing Director, ICR LLC Gregg Ribatt - Chief Executive Officer & Director Andrew Rees - President and Principal Executive Officer Carrie W. Teffner - Chief Financial Officer & Executive Vice President.

Jim Duffy - Stifel, Nicolaus & Co., Inc. Erinn E. Murphy - Piper Jaffray & Co. (Broker) Mitch Kummetz - B. Riley & Co. LLC Samuel Marc Poser - Susquehanna International Group, LLP Jim A. Chartier - Monness, Crespi, Hardt & Co., Inc. Steven L. Marotta - C.L. King & Associates, Inc. Benjamin Bray - Robert W. Baird & Co., Inc. (Broker).

[Starts abruptly] (00:00) Second Quarter 2016 Crocs Incorporated Earnings Conference Call. My name is Adrianne 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 a question-and-answer session. As a reminder, this conference is being recorded.

I will now turn the call over to Brendon Frey. Mr. Frey, you may begin..

Thank you. And thank you, everyone, for joining us today for the Crocs' second quarter 2016 earnings conference call. This morning, we announced our second 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 impact 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'll now turn the call over to Gregg..

Thank you, Brendon, and good morning, everyone. This morning, we announced our second quarter 2016 financial results. Net income available to common shareholders was $11.7 million, up 21.1% as compared to Q2 last year. Revenues were $323.8 million, down 6.3% versus the second quarter of 2015.

On a constant currency basis and excluding the sale of our South Africa business, revenue was down 5.4%. For the first half of 2016, revenue as reported was down less than 1%, and up 1% on a constant currency basis, excluding the sale of South Africa.

Overall, while revenue fell short of our expectations, we believe the shortfall relative to our guidance was primarily tied to industry softness in the quarter and our continued distributor challenges in China rather than the overall health of our brand or specific product performance.

In addition, we see a number of positive indicators that give us confidence in the direction that we're headed, including our fifth consecutive quarter of positive DTC comp performance. For the first half, Americas revenue was up mid-single digits. Gross margin showed significant sequential improvement. We managed expenses effectively.

We reduced inventory levels and we have executed deals with the majority of our challenged China distributors. And as indicated on our last earnings call, we continue to have strong delivery performance and feedback on our new product remains very positive.

Relative to our expectations, wholesale was negatively impacted by lower at-once orders, particularly in the Americas given retailers caution in allocating open-to-buy dollars. In addition, China underperformed versus expectation.

The resolution of our challenged distributors has taken longer than planned, and while we have reached agreements with most of our distributors, we still have more work to do to re-establish growth in our China wholesale business.

That said, despite these challenges in the wholesale side of the business, our DTC business in China continues to be very strong. Andrew will share more details in a moment. During the quarter, we managed what was in our control and we were able to mitigate most of the sale shortfall.

Gross margins up 600 basis points sequentially from Q1 came in approximately 150 basis points better than our expectations due to less discounting as well as a higher mix of DTC revenue which comes at a higher gross margin than our wholesale business.

In addition, we closely managed our operating expenses and adjusted SG&A spending came in below expectations, reflecting an $8.7 million reduction to prior year. Finally, as a result of our improved operations, we were able to manage our inventories down $12.8 million or down 7% to last year despite the revenue shortfall.

Let me now share my perspectives on where we stand today and where we are going. First, importantly, our global direct-to-consumer business grew for the fifth consecutive quarter with DTC comps up 2.9% despite the continued decline in retail traffic.

Retail comps decreased by 3.4%, due primarily to declines in Asia and the Americas as increased conversion and units per transaction were not enough to offset the decline in retail traffic during the quarter. E-commerce grew 19.5%, reflecting growth in all regions. Global wholesale revenue was down 12.4% for the quarter versus last year.

The majority of the decline in the second quarter was primarily due to shortfalls in our China business resulting from changes being implemented with distributors in that market. For the first half, global wholesale was down 3.1% versus last year.

Despite disappointing top line results in Q2, I believe our results show that we're making significant strategic progress including managing our business tightly and we're committed to maintaining this operating discipline going forward.

Against the backdrop of our Q2 performance, we believe our second half revenues in 2016 will be lower than previously indicated. We now expect 2016 full year revenues to be down low single digits based on our more cautious view on North America consumer demand and slower improvement in China.

At the same time, the better-than-expected improvement in gross margins indicates a shift to our higher margin molded product and a more disciplined approach to discounting and promotional activity.

With a tighter product line, a more molded product mix, less discounts and better inventory discipline, we continue to expect year-over-year gross margin improvements going forward.

Also, we expect continued SG&A improvement as we manage our expenses in the second half, leveraging more efficient and effective operating capabilities while managing costs where we can. As we have communicated in the past, we remain committed to controlling our operating expenses and improving our operating margins.

Finally, we'll continue to manage our inventory closely, balancing it with demand while delivering service at industry benchmark levels or better. Fewer SKUs, leveraging a common global platform along with tighter processes and procedures are providing improved operational performance.

As we look to 2017, retailer feedback on our current and spring 2017 line is very strong. That, combined with continued growth in our global DTC business based on new product, strong marketing, and continued operational improvements, position us well for spring/summer 2017 and beyond.

I want to reiterate that I am disappointed that we are not yet delivering the revenue growth we projected for 2016. But given the overall retail environment, we feel it is prudent to be more conservative with our guidance at this time. Our product, our marketing and our service levels are better than they have been in our recent history.

I'm proud of the work our team has done over the past 18 months to 24 months, which is showing up in our gross margins, our SG&A, our working capital and our service levels. We remain committed to the pillars of the strategy that we have laid out previously. And while we've made substantial progress in each of these areas, the work continues.

And despite recent challenges, we continue to see many positive signs, which gives us confidence in the direction we're heading and seeing the results reflected in our operating performance. And now, Andrew will highlight some of the details for our key initiatives in the second quarter..

Boots, the Lodge Point Boot and the Bump It Rain Boot with Batman and Dory graphics. Clogs, new graphics continue to indent the (13:26) strong response across multiple product lines, notably the new graphic package on our best-selling Bistro clog.

Athleisure, the CitiLane cut and sew slip-on is a nice fall on to the molded CitiLane introduced in full holiday of 2015. We are extremely pleased with the continued improvements in our product line.

And as Gregg outlined in his remarks, these product line improvements are the foundation needed in order for the brand to achieve its fullest potential in any macroeconomic environment. Now, I'll turn it over to Carrie to go into details of our Q2 financial performance..

Thank you, Andrew. Turning to the financials, revenue in the second quarter was $323.8 million, down 6.3% from a year ago on an as-reported basis. Revenue was down 5.4% excluding the sale of our South Africa business and on a constant currency basis.

Currency had a negative $440,000 impact during the quarter, and the sale of South Africa, which we've discussed on previous calls, reduced revenue by $3 million in the quarter. There were no other factors materially affecting the year-over-year comparability of our Q2 revenues.

Given the minor impact of currency in the quarter, all of the revenues which we follow are quoted as reported. In the Americas, revenue was $135.1 million for the quarter, down 5.6%. Wholesale revenue was down 16.3%, of which over 80% was due to early deliveries in Q1 as we have previously discussed.

For the first half, total Americas revenue was up 4.2% with North America wholesale revenue up 7.6% for the first half. Retail sales in the Americas decreased just less than 1% for the quarter, reflecting negative comps of 2.5% and four fewer stores as compared to last year. E-commerce in the Americas grew 16%, resulting in Americas DTC comps of 2.4%.

In Asia, revenue was $130.8 million for the quarter, down 12.5%. Wholesale revenues were down 19.6%, primarily due to the sales decline associated with our challenged China distributors.

Retail revenues were down 10%, reflecting the sale of our South Africa business, and negative comps of 6.8% partially offset by seven more stores as compared to last year. E-commerce sales in Asia increased 37.4% resulting in Asia DTC comps of 4.3%. In Europe, revenue was $57.7 million for the quarter, up 9.5%.

Wholesale revenue increased 17.5%, driven by the planned change in the shipping window as we discussed last quarter to better align our product delivery across regions, which shifted some wholesale orders from Q1 to Q2 as compared to last year.

Retail revenues were down 3.9%, reflecting positive comps of 1.8% and four fewer stores as compared to last year. E-commerce sales in Europe increased 2.4% resulting in European DTC comps of 1.6%. We sold 17.7 million pairs in the quarter, a 0.7% increase from last year.

The average selling price of our footwear in the second quarter was $18.05, a 6.3% reduction from the prior year, driven primarily by the regional mix of revenue.

Gross margin for the quarter was 52.4%, down 254 basis points from the prior year, primarily due to higher distribution costs associated with both higher e-commerce volume as well as smaller, more frequent retail replenishment for better inventory management, higher royalty expenses and lapping a favorable inventory adjustment from last year.

This was, however, a greater sequential improvement than we had anticipated due to better product margins associated with lower discounting and favorable channel mix. Adjusted selling and general administrative expenses were $148.2 million, down $8.7 million from the prior year, primarily associated with lower bad debt and variable comp.

SG&A at 45.8% of sales for the quarter is up 40 basis points as the loss of leverage offset the reductions in absolute spending. Turning to the balance sheet at the end of the quarter, we ended the quarter with $146.7 million in cash and no outstanding borrowings on our credit facility.

We ended the quarter with 73.5 million shares outstanding, and the company did not repurchase any shares during the quarter. Inventory at the end of the quarter was $169.9 million, down $12.7 million or 7% from Q2 2015 ending inventory of $182.6 million. Two final notes on the financials.

First, net income attributable to common shareholders was $11.7 million for the quarter after preferred share dividends and equivalents of $3.8 million. Second, the weighted average share count used to calculate EPS was 73.4 million shares for the quarter.

In recognition of the soft macroeconomic conditions and the cautious retail environment, we expect third quarter revenue to be between $245 million and $255 million compared to $274.1 million last year.

We expect Q3 gross margins to be approximately 500 basis points better than Q3 prior year and adjusted SG&A to be approximately $10 million better than prior year. For the year, we now expect 2016 revenue to be down low single digits.

We believe gross margins will be approximately 150 basis points better than prior year, while adjusted SG&A will now be approximately $500 million versus our previous expectation of $510 million. Now, I'll turn it back to Gregg for closing comments..

Thanks, Carrie. In closing, despite the decline in our second quarter revenue performance, the team has made great progress elevating the brand, developing compelling product, vastly improving service levels, reducing costs and implementing better operating disciplines.

In the face of a challenging global consumer environment, this work has not yet been fully reflected in our financial results. It is our responsibility to translate this into strong operating performance.

Despite the challenges, I'm confident that we have repositioned the business and built the platform to provide sustained growth and profitability for the future. While we are not immune to the over-arching business conditions, we must continue to improve to execute better every day.

I'm confident that we have the right plan and the right team to do just that. My thanks, again, to our team around the globe for all of their hard work. Now, operator, we'll open the call up for questions..

Thank you. We will now begin the question-and-answer session. And our first question comes from Jim Duffy from Stifel. Please go ahead..

Thank you. Good morning.

Can I ask you to provide more detail on the revenue puts and takes and the changes to the guidance?.

Sure. So this is Carrie. Specifically, with respect to the overall revenue shortfall in the quarter, I think we have talked – well, first about Q2, and then that will help inform the full year change to our overall guidance.

Well, we mentioned Q2 revenues came in below our expectations, primarily related to the decline in the Americas wholesale at-once. Despite solid sell-throughs, we have cautiousness with retailers using their open-to-buy dollars and then the China transition taking longer than we had hoped.

So factoring that impact into our overall guidance, we've projected full year revenue down to the low single digits, and that really is incorporating that Q2 performance and taking that continued cautious outlook from our wholesale business as well as the China business.

That said, I think what I want to make sure is clear relative to our guidance for the full year, and again, Q2 is a great example of taking how we performed in Q2 and translating that into our guidance.

Despite the revenue shortfall in Q2 from our guidance, our improved margin and our SG&A performance allowed us to deliver our EBIT above the consensus expectation. So as we take that into the full year, we are calling our gross margin up 50 basis points from our last guidance.

We are also lowering our SG&A spend $10 million from $510 million down to $500 million for the full year. So with that gross margin improvement and the SG&A improvement, we're expecting both of those to help mitigate the majority of the revenue – call it, shortfall in our revenue guidance..

Okay. Thanks for that. And the China situation, we're now going on over a year of challenges there, can you give us more detail on where you stand with respect to distributors? When we should expect a return to growth in China? Perhaps itemize the expected impact to the top line guidance from the China situation? That'd be helpful..

Yeah. Thank you, Jim. You're right. Look, the resulting distribution issues in China have taken absolutely longer than we planned. I do want to highlight that, during the first two quarters of this year, our DTC business actually grew very strong double-digits in China.

Resolving the wholesale issues with our key distributors is really a two-step process, the first of which is terminating the relationships with the troubled distributors. And I can tell you at this point, that's effectively complete. The second step is then transitioning the stores that those distributors operate, and there's two parts to that.

Firstly, some of those have gone to other strong distributors, and others that we've taken over ourselves. And I can tell you that that's substantially complete. There are one or two transitions to take place during this quarter, but the majority of that's done.

So in terms of handling and dealing with our troubled distributors, we can update you that that is, at this point, largely complete.

We then turn our attention to building back our distribution, which is hiring incremental, or building relationships with incremental distributors for key parts of the country and probably, more importantly, working with a base of distributors that, through this process, have been working well.

As we look to the second half of the year, to the second part of your question, there's a couple of critical things to keep in mind. In Q3 and Q3 onwards, we're no longer up against revenue to those troubled distributors. So the last revenue that we placed with them was in Q2 of 2015, so we're not up against that business anymore.

And secondly, the DTC portion of our business, both retail and e-com, grows as a proportion of the overall revenues in China, and that's been tracking all year at a strong double-digit growth rate.

So the combination of those two events as we look at the back half of the year, while we're planning it conservatively because this, as you rightly point out with your question, has taken longer than we thought, we are confident that we'll see growth in H2 from China..

Thank you for that. My last question, the inventory really stands out as a positive. You were able to manage that nicely without consequence to gross margin despite the lower than expected sales. Was that managing flow of receipts? Some perspective there would be helpful. Thanks, Carrie..

Yeah. Look, we've been able to leverage a series of operational improvements, leveraging systems, talent, processes. And I would say we've, over the course of the last year, really changed our whole approach to inventory management at the company. And so it's a key area of focus for us, in making sure we're operating at the highest level going forward.

And we've made great progress, and we expect to continue to do so going forward..

Thanks. Good luck..

Thank you..

Thanks, Jim..

And our next question comes from Erinn Murphy from Piper Jaffray. Please go ahead..

Great. Thanks. Good morning. I guess I wanted to follow up just a little bit more in detail on the Q2 mix. I mean it seems like it was mostly wholesale. Could you just maybe parse out as you've thought about that at-once order business, particularly in North America, that you were planning for the quarter? And then where that ended up coming in.

I understand the China issue a little bit, but just trying to understand the Americas shortfall in that planning process..

Yeah. Thanks, Erinn. Look, when we look at our Q2 performance, our overall performance was, from a business at retail perspective, it was solid. We obviously had strong delivery throughout Q1, which we talked about. That continued into Q2. Our products performed well at retail, and we had solid sell-throughs throughout the quarter.

New product introductions performed well. Shoes that we talked about in our prepared remarks, like the CitiLane, the Duet, the Isabella, but shoes like the Roka as well, performed well and give us confidence in terms of both the strategic direction we're heading, as well as key platforms that we're building for the future.

We had solid global DTC performance which relates to, obviously, the other side of the business. But when you take a step back, our North America business in the first half, and North America is where we've always talked about we expect the business to turn first. Our North America wholesale business in the first half was up about 7.6%.

And so we feel good about that. What we saw in Q2 is, as the quarter progressed, the retail environment got more challenging and at-once orders became more difficult to fill. And we saw that progress, in particular, in the last two months of the quarter.

And so when we look at our peers, and despite being very disappointed in our top line results, we feel, in light of the overall environment, and when you look at the first half figures, our overall performance was solid and that – there's strong indicators that we're moving in the right direction and it's set a foundation for our plans going forward..

Yes. And I think the only piece I'd add to that, Erinn, would be in China, which was the other real big piece of this. I'd say it was largely due to our credit policy, which I've highlighted in the script. We made a change in our credit policy in 2016 to really tighten the provision of credit to the ongoing distributors.

The vast majority of our ongoing distributors in China are paying cash before delivery, so we're not providing credit. That caused them to be more cautious in terms of their receipts. We think that was the right decision relative to making sure that we have a quality business in China..

Okay. That's helpful. And then maybe just, Carrie, for you if you think about the cadence of the year I would just take the midpoint of your revenue guidance for the third quarter. It implies about down 9% in terms of sales.

So are you seeing trends weakening quarter-to-date or is there a timing shift in terms of how you're planning that wholesale business between Q3 and Q4? Just trying to understand that third quarter and then it obviously implies growth again in the fourth quarter to get to a down low single for the year.

So any constructs of how you're thinking about or what you're seeing right now that provides that range would be helpful..

Yeah. I think so (29:42) as you think about Q3 and Q4, there is a step-up in Q4 and part of that is what we've talked about previously in our ability to shift more spring/summer 2017 products in the fourth quarter to the warm weather markets, and that's been factored into our guidance all year.

And so that's kind of helping with the step-up in Q4 relative to Q3..

Okay.

And then in Q3 the weakening relative to Q2, is that something that you guys are seeing now or are you anticipating the North American market to continue to soften or how should we think about the sequential deceleration in Q3?.

Yeah. So with respect to Q3, we are continuing to remain cautious related to the at-once orders in North America wholesale, and we're taking a more cautious point of view on China specifically as we kind of ramp through that, as Andrew discussed earlier..

Okay. And then just big picture longer term. At the Analyst Day about a year ago, you guys were referencing the 2018 pillars, 8% top-line growth, the 12% EBIT.

Should we still be thinking about that or does this year, and I know you are seeing some good bright spots in your products, but does this year given how the environment and the industry's panned out, I mean should we assume that that's no longer on the table particularly on the top-line side of the equation?.

So what we've talked about is the 8% on the top-line, 10% to 12% on the operating margin. We continue to leave that 10% to 12% operating margin as the right target for the business. That said, the gross margin improvement that we're seeing, the trend that we're on, we continue to expect that to grow, as we discussed, to the low 50%s.

The SG&A improvement, again, we're tracking on that. However, the slower ramp in sales will have an impact on that relative to the – delivering that 10% to 12% margin in 2018. But obviously, our midterm guidance to 2018 didn't take into account the overall slowdown in the U.S. and global economy.

But we still feel confident in the direction we're headed. So I think what I – kind of the short answer to that, Erinn, is really we're seeing a little bit of a timing delay, specifically as it relates to SG&A leverage and this lower ramp in the revenue, given the – given that we're projecting low single digits for 2016..

Got it. All right. Thank you, guys, and best of luck..

Thanks..

Thanks, Erinn..

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

Great.

Can you hear me okay?.

Yep..

Yes..

Okay. Sorry. I just want to reconcile some comments around China, because, Andrew, I thought you said earlier either in response to Jim's question or Erinn's, you expect China to grow in the back half.

Is that right?.

That's correct. Yes..

But not in the third – I think you said – or you guys said Q3 is still going to be tough on China. So China doesn't grow in Q3 but it grows in the back half, so a lot of that comes in, in Q4.

Is that how to think about China?.

I think the way to think about China is more that we expect it to grow in the back half, it's just not growing at the rate that we had previously anticipated..

Sure, that's exactly right. Yeah..

Okay..

We talked about up..

Yeah..

Yep..

And then on, Gregg, I know you talked about a positive response to – initial positive response to spring 2017. How – I know it's early to talk about next year, but how do you think about potential spring pre-books, coming out of a, what looks like, a spring/summer season that was pretty challenging at retail.

I mean I would think that retailers are likely to take a pretty cautious stance on pre-books.

How do you kind of think about all of that, positive response with products but maybe retailers being a little gun-shy to order?.

Yeah. I think if you look at it from a Crocs perspective, we had a number of things to prove coming into spring/summer 2016. Clearly, one of the issues we've talked about over the last year has been delivery.

Throughout Q1 and Q2, we delivered what we call on time in full top quartile in terms of industry performance and having done that kind of two quarters in a row and leveraging people, processes, new systems, we're confident that issue is behind us. So to us, that was kind of a first step that we had to – that we had to address.

In terms of the second issue, our spring/summer 2016 sell-through was solid, including taking the brand and introducing some new style – an elevation of style in molded product, and – as well as providing and kind of try to put a new energy into our core clog category. And I think we've performed in both of those areas well.

So we're able to leverage those learnings and use that as a foundation. Yes, the retail – the broader retail environment in the U.S. and across the globe is more difficult. So as we're thinking about the business in the back half and into 2017, we're absolutely taking that into consideration.

But I will say we're a critical spring/summer 2016 resource in the industry, and I think we've had some key learnings that we can build off of and that gives us confidence in the direction we're heading..

Yeah..

Okay. Thanks. And then maybe lastly, could you talk a little bit about maybe differences in performance by gender in the quarter? I'm just curious whether it's men's, women's or kids. If you saw any differences in how that product performed or if it was all pretty consistent..

Yeah. No, there were some differences, Mitch. So I think we saw stronger progress in women's, particularly in sandals and in clogs. And some of our men's business was more challenging. So I think we can see some clear differences. That's relative to U.S. wholesale on a global basis. I think we saw progress in kids as well.

But really, there's – the highlight in the U.S. wholesale business was women's in the sandal category and in the clog category..

Got it. Okay. Thanks, guys. Good luck..

Thank you..

And our next question comes from Sam Poser from Susquehanna. Please go ahead..

Good morning. Thank you for taking my question. I guess, what changed in China from when you gave the guidance in the first quarter to now? What was it that changed in that period of time, because it really sounded like you were turning the corner on the first quarter call? And then it seems like they did decelerate..

Yeah, Sam, the critical thing that changed is it just took longer, right? So we felt like we had agreements with our troubled distributors that we're moving them out and we're replacing them. And that has taken probably six months longer than we thought it was going to take.

But at this point, they are – our relationship is over with (36:50) those distributors, that is done..

Okay. And then secondly, granted the macro environment isn't as good as people would like to see and your sell-throughs at retail have been good.

When you look at your wholesale accounts, you have to maybe get more focused, do more work with those retailers to do better in-store storytelling and so on to create items that they can't live without rather – because what happened this year is when you had a great item, people filled it in.

If it was a good item, people tended not to, from what I gather.

So what can you do to raise the bar, I guess, on those items that have performed well and work to make them more compelling within the wholesale account?.

Yeah. Broadly, Sam, that's right, right? So going into this year, as Gregg said, we have two challenges. One was deliveries and giving them confidence in that because previously they felt like they placed orders and never received product, right? So I think we gave them that confidence. And we've done that two quarters in a row now.

The second was really making those items big and making them really successful. And exactly as you said, making them must have. And I think what we've landed in this season is they've really seen a number of items, they've seen both the core products, clogs are 49% of the business in Q2. They were 43% of the business last year in Q2.

So the core product with newness in graphics and newness in terms of key styles within that category has resonated. We've seen sandals move forward into some really critical items that we'll be building upon next year and really landing those. The second is absolutely reinforcing that sell-through with marketing.

We've got some really exciting programs that we're working on for next year. There is also importantly some real shifts going on in the marketplace in terms of channel mix. We've seen the e-commerce and the digital channels really taking a lot of share.

That's working for us, it's working for other people, and we're really focused on partnering very strongly with our large, digital partners and with our family channel partners..

To Andrew's last point, we also think we're well positioned relative to the channels of distribution which we're focused so obviously family and e-tailers within the wholesale business, outlet and e-com in terms of our DTC business and then distributors internationally.

So we think we're kind of well-positioned in that we've built enough of a foundation in the first half of spring – in the first half of 2016 to leverage that for growth into 2017..

Thank you.

And then lastly, I guess just one – on the full year gross margin improvement, Carrie, what – you said it's at 100 basis points?.

Yeah. We said we expect it to be 150 basis points above last year, which is a 50 basis point improvement from our most recent guidance..

And so all of that's going to come in – I mean you've got 500 basis points improvement in Q3 and then the balance in the fourth quarter, correct?.

Correct. Yeah. And leverage and, of course, we can deliver better than we planned in Q2 as well, so that factors in..

Okay. All right.

But it is 500 bps in Q3 improvement over last year, that is correct?.

Yes, it is..

I'm just....

Yup..

Okay. Thanks for that..

Just kind of the....

I'm sorry..

No, that's fine..

Thanks, Sam..

Thank you, guys..

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

Good morning. Thanks for taking my questions. Just the direct-to-consumer comps were positive again, which is great to see, but it deceled [de-accelerated] from the last couple of quarters.

Do you think that was primarily weather related? Or was there something else going on?.

There's a couple of things going on. Probably the biggest is the e-com component, as you saw in the – e-com was up 20% this quarter. I think prior quarters, we've been up 30% plus but importantly, we are now lapping when we started to make real traction on the e-commerce business Q2 last year. So Q2 last year, we were up a strong 30% in e-commerce.

We are now lapping that with an additional 20%. So that's one factor. The second factor is underlying DTC. We saw a little deceleration in the Americas and Asia, and I think that's really a reflection of the tough marketplace we're operating in, and in particular, the tourist markets.

We haven't talked about that at length in this call, but it continues to be a challenge. The tourist markets are important to us, and tourist traffic is clearly down..

Okay.

And then, any color in terms of how the DTC comps progressed over the course of the quarter? And any color on third quarter to date?.

Yeah. So, we are not going to comment on quarter to date. And we don't break out DTC comps by month. But they did clearly decelerate during the quarter. The strongest month of the quarter was the first month, and they decelerated through the quarter..

Okay. And then Andrew, you mentioned that increased or stricter credit standards was part of the issue in China.

Did that cause lower orders with the quote "non-troubled" distributors, the go-forward distributors, as well as the troubled distributors?.

Well, just to be clear, in the first half of this year, we've shipped nothing to the troubled distributors. We haven't shipped them since Q2 of last year. So the deceleration in orders was to our ongoing distributors, where they're really managing their inventories more tightly, as you'd expect them to do if they have to pay for their goods upfront..

Okay. And then....

Sorry, but we think that gives us a stronger and higher quality business in China..

Absolutely.

And then, Carrie, on the SG&A improvement versus plan for the quarter and the year, does that primarily lower incentive comp, or are there savings elsewhere?.

So, versus prior year, it was lower bad debt and some variable comp, and variable comp was versus expectation. We also had some lower T&E and those types of things, and some of the variable expenses, we were able to reduce..

Great. Thanks and best of luck..

Thank you..

Thanks..

And our next question comes from Steve Marotta from C.L.K. Associates (sic) [C.L. King & Associates, Inc.] (43:41). Please go ahead..

Good morning, everybody. Gregg, you've mentioned in the past that increasing penetration across channels and across geographies is very important. Obviously, if you only have, say, two or three styles in a particular door, going to four or five is very important. And you can even do that sometimes in a more difficult environment.

Can you talk a little bit about where you are in that process? Where you think you might be a year from now, both domestically and internationally?.

Yeah, sure. Thanks, Steve. Look, I think, as I said before, I think we did make significant strategic progress in terms of delivering our spring/summer 2016 line, connecting with consumers. I think our DTC performance is an indication that they're reacting favorably to our product offering, particularly given the overarching retail environment.

We've also had a lot of learnings, whether it's things that we can leverage and build on, to help drive growth. I think our relationships with our wholesale partners around the globe have strengthened pretty materially, and sets a foundation. So we believe we can grow dollars per door, and grow shelf space.

It is something that's going to happen over time, but we do believe we can move forward and make some progress as we head into 2017, and continue to leverage that as we move beyond 2017 as well..

Thank you.

And Carrie, could you quantify how much those earlier deliveries in the fourth quarter, what the delta is over the previous year? Or give a little bit of guidance there?.

Yeah. So it's been – what I would say is, we've not quantified how much that is, but that's been factored into our guidance consistently as we've guided for the year. We typically have shipped some spring/summer 2017. So it's not all incremental relative to prior year, so this is just an increase in what we've done previously..

Do you feel that that's more of a pull-forward through – from first quarter, or incremental?.

We're looking at it overall – I would say in the past, I don't think we necessarily had the product ready – fully ready to be able to deliver. So we actually see – I would say it's a little bit of blend of both, to be honest.

There's a little bit that we're now able to deliver sooner, but we also would expect more repeat orders given the timing that we're putting it in the market..

And some of it, frankly, is for those warm weather doors where our retailers are looking to bring that product in early so they can set it up on the floor and start selling it early, to Carrie's point. And it's also, when we're able to do that, we can leverage those learnings and react accordingly..

Great. Thank you..

Thank you..

And our next question comes from Benjamin Bray from Robert Baird. Please go ahead..

Hi. Thanks for taking our question.

So coming out of the first half of the year, can you just comment on the reception of some of the new products and comment on what learnings you have coming out of this year for next season?.

Yeah. I think the greater successes we saw during the first half of this year, I think, was innovation we put into products that we're well known for. So molded product, clog product, we talked about clogs being 49% of the business versus 43% of the business last year.

The appealing part of that, which you've seen in our margins, is those are high margin products. The second place where innovation has really played is in the sandal category where the Isabella and the number of other sandals that we highlighted, the Sloane, the Meleen, et cetera, have been particularly strong.

And I think, as Gregg also highlighted in one of his answers, as we look at our top 10 selling styles, three of them were brand new items. So to get to 30%, three brand new items in your top 10 global styles, I think, is a good result.

We see NPI performance about 40% of our overall business whereas if we looked (47:53) a couple years ago, NPI was about 20% of our in-season sell-through. So hopefully, that gives you a little color about the new product introductions..

Yeah. Thank you. And then as a follow-up.

Did you comment on what the marketing spend was in the quarter? And related to those initiatives, are you seeing any impact on how consumers are approaching the brand?.

So, yeah. Marketing spend in the first half in the season and in the quarter was consistent with what it was last year as a percent of sales. So we've maintained the same stance in terms of the amount of money we're willing to invest in marketing.

As we've talked about previously, we've narrowed the focus of those marketing dollars to our key markets, and we've really been spending against five key markets this season.

In terms of the impact relative to consumer perception of the brand, I think we talked previously that we've seen some evidence that through some of our research, that that improved fairly markedly towards the end of last year. And we keep a close eye on that on an ongoing basis..

All right. Thanks. That's helpful..

Thank you. And that was the last question. Thank you, ladies and gentlemen, this concludes today's conference. Thank you for your participation and you may now disconnect..

Thank you, everyone..

Thank you for participating..