Ladies and gentlemen, thank you for standing by, and welcome to the Crocs, Inc. Fourth Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded.

[Operator Instructions] I would like to now hand the conference over to your speakers today..

Good morning, everyone. Thank you for joining us today for the Crocs’ fourth quarter 2020 earnings call. Earlier this morning, we announced our latest quarterly results, and a copy of the press release may be found on our website at crocs.com.

We would like to remind you that some of the information provided on this call is forward-looking and accordingly, is subject to the Safe Harbor provisions of the federal securities laws. These statements include, but are not limited to, statements regarding potential impacts to our business related to the COVID-19 pandemic.

Crocs is not obligated to update these forward-looking statements to reflect the impact of future events. We caution you that all forward-looking statements are subject to risks and uncertainties described in the Risk Factors section of our Annual Report on the Form 10-K.

Accordingly, actual results could differ materially from those described on this call. Please refer to the Crocs’ Annual Report on Form 10-K, as well as other documents filed with the SEC for more information relating to these risk factors.

Adjusted gross margin, income from operations, operating margin, and earnings per diluted common share, are non-GAAP measures. A reconciliation of these amounts to their GAAP counterparts is contained in the press release we issued earlier this morning.

Joining us on the call today are Andrew Rees, Chief Executive Officer; and Anne Mehlman, Executive Vice President and Chief Financial Officer. Following their prepared remarks, we will open the call for your question. At this time, I’ll turn the call over to Andrew..

clogs, sandals, Jibbitz and Visible Comfort technology. For 2020, sales of our clogs were particularly strong, increasing 33% year-over-year to represent 72% of total footwear revenues versus 60% in 2019. Early in the pandemic, we canceled several receipts as the initial store closures interrupted the peak of the sandal season.

As such, 2020 sandal revenues declined by 19% and represented 18% of footwear sales versus 25% last year. Jibbitz sales accelerated nearly doubling for the year versus 2019. Turning to 2021. We’re investing in our key growth drivers, digital, China and our four product pillars. Digital is our top priority.

In 2021, we’ll be investing to personalize our consumer journey globally, enabling differentiated and more effective communication with our diverse consumer base. We’re also investing in talent, technology and supply chain infrastructure to support high levels of growth for the foreseeable future.

China, as the second largest footwear market in the world, remains one of our most significant long-term opportunities. We have repositioned our product portfolio to align to our four product pillars.

We continued to drive focused investments to create brand heat and consumer demand through a proven playbook that uses high-profile celebrities, influencers, and global and regional collaborations.

To that end, we are excited to have signed Chinese Actress Yang Mi as our brand ambassador for the second year, and we’re confident she will continue to build brand awareness and relevance through sustained marketing investment. We’re focused on optimizing our mono branded store network by selectively upgrading partners in certain provinces.

We’re also renovating our store portfolio in China to improve our store environment by leveraging personalization to drive an interactive consumer experience. Similar to other areas of the world, we’re investing in digital, including elevating TMall and embedding personalization as our unique selling proposition.

By the end of this year, we’ll have executed our playbook, setting ourselves up for strong growth in 2022. Finally, we’re very confident in our entire product lineup for 2021. Sell in has been strong on a global basis, giving us confidence in our revenue guidance.

We look forward to a full sandal season and restoring sandal growth by building on the early successes of Brooklyn, Tulum and Classic Slide, as well as introducing a new two-strap plastic sandal. We’re excited about the innovation we’re bringing to clogs in 2021 and expect clogs to continue to outpace sandals for this year.

As inventory levels improved on our Crocs at Work product, we have seen four consecutive months of strong double-digit growth. We anticipate strong growth in personalization through Jibbitz, based on investment in the consumer experience, both in-store and online.

We feel incredibly fortunate to have outperformed in 2020 and are proud to have given back to our global and local communities through our Crocs Cares program. In Q2, our Free Pair for Healthcare program donated over 860,000 pairs of shoes or nearly $40 million in retail value to frontline healthcare workers.

In July, we partnered with Feeding America, a hunger relief organization in the United States. Thanks to the generosity of our consumers, we raised nearly $1 million in six months, enabling over 8 million meals to those in need.

We look forward to continuing our commitment to provide comfort to our global communities with the philanthropic efforts in the coming year. In summary, we’re even more confident now than a year ago about the Crocs’ brand strength and our long-term growth potential. We’re incredibly optimistic about 2021 and our growth trajectory.

Our four key product pillars and our powerful social and digital marketing are clearly creating exceptional consumer engagement. From a channel and region perspective, our digital-first strategy and our long-term focus on Asia, particularly China, will drive our growth for years to come.

Before I turn the call over to Anne, I want to express my gratitude to the entire Crocs organization for their hard work and commitment to delivering best-in-class results. It was an incredibly challenging year for everyone. And I’m proud of how we have executed as a team and the results we have delivered for all our stakeholders.

With that, Anne will now review our financial results in more detail..

Thank you, Andrew, and good morning, everyone. I’ll begin with a short recap of our fourth quarter results. For a reconciliation of the non-GAAP amounts mentioned to their equivalent GAAP amounts, please refer to our press release. Our fourth quarter results were exceptional.

Fueled by the Americas and EMEA, we delivered record revenue and operating profit and generated record cash flow in spite of a global pandemic. Profitability was best-in-class as we grew gross margins and levered SG&A, increasing operating income and profitability.

Fourth quarter revenues came in at $411.5 million compared to $263 million in the fourth quarter of 2019, a 56.5% increase or 56.1% on a constant currency basis. We sold 18.9 million pairs of shoes, an increase of 37.7% over last year’s fourth quarter.

Our average selling price during Q4 increased 13.7% to $21.63, with the increase attributable to fewer promotions and discounts as well as greater sales of charms per shoe. For 2020, we sold 69.1 million pairs of shoes, up 3% over 2019 with an average selling price of $19.91, up 9.3%. We believe the increase in ASP is an indicator of brand strength.

Now, let’s review our results by region. As Andrew mentioned earlier, the Americas had another strong quarter, with revenues doubling to $310.3 million. Retail comps increased 54.4% on higher traffic and increases in conversion.

Growth was phenomenal in e-commerce, up 125% and stronger-than-anticipated in wholesale, up 130.5%, led by e-tail and our top 20 global brick-and-mortar partners. Our performance in the U.S. is the direct result of our commitment to driving relevance with the consumer through our iconic product and innovative marketing.

In Asia, Q4 revenues were $51.8 million, down 19.5% from last year’s fourth quarter. Strong e-commerce growth of 19.2% was offset by declines in distributor in India wholesale revenue. India was heavily disrupted due to COVID-19 lockdowns, but we are optimistic about India returning to growth in 2021.

South Korea continues to outperform and grew nicely during the quarter. EMEA revenues increased 14.9% over last year’s fourth quarter to $49.4 million. Strong revenue growth in wholesale, up 10.8%; and e-commerce, up 53.8%, were slightly offset by declines in retail due to COVID-related store closures.

While our retail stores in Western Europe remain closed today, we do not anticipate this to be a material impact to our 2021 expectations.

EMEA is beginning to benefit from improved brand relevance and consideration, created by our marketing and product innovation as well as our continued focus on digital commerce, which represented nearly 60% of EMEA revenue this quarter. Our fourth quarter adjusted gross margin was 56%, up 670 basis points from last year’s 49.3%.

Gross margin improved in all regions and all channels, driven by fewer promotions and discounts, favorable product mix and operating leverage. Our SG&A fell to 34.9% of revenues, an improvement of 950 basis points versus 44.4% in last year’s fourth quarter.

The significant decrease in adjusted SG&A rate is a result of strong sales growth and operating leverage, even as we incurred variable expenses related to revenue growth and invested in additional brand marketing to support future growth.

Adjusted SG&A excludes $21.1 million in onetime noncash impairments, including a $20 million noncash impairment taken on our 34th Street location in New York City. Our fourth quarter operating income increased to $64.6 million versus $8.4 million last year, and operating margin increased over 1,200 basis points to 15.7%.

Adjusted operating margin increased over 1,600 basis points to 21.1% as SG&A leverage on strong sales growth added to gross margin expansion. In Q4, the Company recorded a onetime tax benefit of approximately $128 million related to changes in the tax structure of our operations.

For 2021 and the next years, we expect our underlying GAAP tax rate to be approximately 25%, and our underlying non-GAAP tax rate, which reflects cash taxes paid to be approximately 16% to 18%.

Fourth quarter non-GAAP adjusted diluted earnings per share adjusted for onetime tax credits increased over 780% to a quarterly record of $1.06 compared to $0.12 a year ago.

With record fourth quarter cash flow, our liquidity position is strong with $135.8 million of cash and cash equivalents in addition to $180 million of long-term borrowings and $319.4 million of borrowing capacity on our revolver.

Given the historically low interest rates, we may opportunistically seek to add permanent capital to our capital structure. If we pursue this, we expect to use proceeds to pay down our existing revolver balance and for general corporate purposes. Given our record cash flow generation, we restarted our share repurchase program.

In the fourth quarter, we engaged in a $125 million accelerated share repurchase, or ASR, and received 1.5 million shares in the fourth quarter and additional 500,000 shares in January of 2021. For 2020, we repurchased a total of 3.2 million shares for $170.8 million, including the impact of the final ASR share delivery in January 2021.

The average price per share repurchases in 2020 was $46.50 per share. Inventory at December 31, 2020, was $175.1 million, up slightly from $172 million in the fourth quarter last year. As Andrew mentioned, inventory in the channel remains lean, given strong sell-through.

We do not expect the same degree of inventory constraints in 2021 that we had in 2020. Turning to the future, I would like to share our current outlook for Q1 and full year 2021. For Q1, we expect revenue to grow approximately 40% to 50%, and adjusted operating margin to improve between approximately 17% and 18%.

Strong growth is expected in all regions as we see continued brand momentum and we anniversary some COVID-related closures that began in the first quarter of 2020. Barring significant additional COVID-related closures, we expect 2021 revenue to grow between 20% and 25%.

We anticipate approximately $12 million to $15 million in onetime charges for our distribution center investments to impact gross margin. As revenue grows, we expect to be able to leverage SG&A, leading to adjusted operating profit margins of approximately 18% to 19% for 2021.

As we invest in supply chain to support our digital growth, we expect capital expenditures to be approximately $100 million to $130 million this year. For 2021, we expect our underlying non-GAAP tax rate, which reflects cash tax paid, to be approximately 16% to 18%. Our GAAP tax rate will be approximately 25%.

In summary, we delivered an incredible fourth quarter and full year revenue growth, profitability and cash flow. We are confident we have positioned ourselves for sustained profitable growth and strong cash flow generation for the future. At this time, I’ll turn the call back over to Andrew for his final thoughts..

Thank you, Anne. The Crocs brand has never been stronger. Despite an extremely challenging environment, our Company had an extraordinary year in 2020, and we expect acceleration in 2021. Looking to the future, I’m confident in our ability to continue to deliver best-in-class results. Operator, please open the call for questions..

Thank you. [Operator Instructions] Your first question comes from Erinn Murphy of Piper Sandler..

Great. Thanks. Good morning. And truly a banner year. So, congratulations Andrew to you and the entire team. I guess, my question for you is on the digital-first focused strategy. I’d love to just hear a little bit more about the biggest pieces of incremental spend that you feel bullish about for 2021.

And then, specifically on the fourth quarter, digital e-com was up 92%.

Could you just share a little bit more about what you’re seeing from a new customer perspective versus existing customers with their basket purchases?.

Great. Thanks, Erinn. And I appreciate the kind remarks. I know the team will be appreciative of that. From a digital-first perspective, yes, I’ll probably put the spend in three big buckets. I think, the first bucket is all about sophistication of communication.

And that’s about personalizing our communication so that we can speak -- we have a very broad customer base consumer base. So, we can speak to the consumers differentially.

And obviously, the intent there is that we speak to them more personally, they buy more, they return more often, et cetera, because we really have that incredibly broad consumer base. So, I would say personalization of communication, and that requires people, that requires technology, and that requires intent.

I think, the second piece is just generally scaling of the business, right? So, it’s scaling of technology, it’s scaling of talent. It’s building out our talent across our digital realm, which is not only here in the United States, but in Europe and in Asia.

And then, the third big piece is really supply chain, right? So, you saw us at the back end of last year’s scale, kind of U.S. supply chain to meet digital demand. That was very successful and allowed us to really have that banner quarter that we had from a digital perspective as we were able to kind of build out that capability.

But, we kind of need to do that across the globe. So, those are really the three buckets of digital investment. From a Q4 and kind of new and existing customers, I would say, it’s a little bit of all three buckets, right? So, the first bucket being new customers, we’re absolutely bringing new customers to the brand.

I think, we had about 4 million new customers last year through our e-commerce businesses on a global basis. So, that’s a very significant number. It is also existing customers returning at key shopping occasions. And we can also see some trends in terms of existing customers kind of buying more lifetime value ticking up.

I think, one thing that we’ve highlighted before, this is really important. When a customer buys Jibbitz online, their lifetime value is 2x the average customer. And we are seeing increased incremental penetration of Jibbitz through our online channels..

Great. That’s helpful. And then, if I could just ask a follow-up on the visibility that you guys have on the second half order book. It sounds like you’re seeing some early reads that are strong. But, I’m trying to marry that comment with just the way you guys have sloped the guidance for the year.

So, Q1 being $40 million to $50 million at the full year hasn’t budged. So, it doesn’t seem like you’re giving yourself a lot of credit for the back half. So, any help on kind of marrying those two comments would be great..

Yes. I would say -- look, I’ll just give you a general comment, maybe Anne can give you a little bit more detail. Look, I think, it’s still a little early to the back half order book. We’re certainly booking into Q3, but there’s a long way to go with the strength of back-to-school and holidays. So, we feel great about where it is.

We feel really great about our lineup and the feedback that we’re getting on that lineup in terms of what we’re bringing to market, but it’s early..

Yes. And I think just, Erinn, if you remember last year, in Q1 and Q2, in Q1, we start anniversarying COVID-related closures in China and then early in the quarter and then Asia later and then in March obviously kind of worldwide. And we go through that in Q2 where much of our retail fleet was closed and our partners weren’t seeking shipments.

So, our business is very strong, but we are re-anniversarying some weakness based on COVID last year, and that’s why the guidance looks like it does..

Got it. Just one last one, if I may, on Jibbitz. We’ve noticed you’ve been testing higher price points online. I’m just really curious to see how that’s performing and if that’s something you would roll out to physical stores. Thank you so much..

Great. Thanks, Erinn. Yes. Look, I think, the test is still ongoing. Obviously, it’s out there on our U.S. -- online on our U.S. site. We’ve raised the price of singles, but also introduced kind of a multi-buy offer. Obviously, when you’re kind of transacting digitally, if people put more stuff in their basket, it really aids your package economics.

So, we think this is the right way to go. We feel good about the test. It’s still ongoing. I wouldn’t say we have concrete conclusions, but we like where it’s heading..

Your next question comes from Jonathan Komp with Baird..

Could I just ask if you could clarify the clogs and the sandals growth in the fourth quarter? And then, I’m curious, it sounds like you expect clogs to outpace sandals still for 2021, which I’m interested in, given the difference in comparisons? And maybe just separately, one follow-up, Anne.

It looks like maybe you’re embedding something less than 10% growth in the second half for total revenue. I just want to maybe clarify that if you’re willing, and kind of just understand that a little bit more as well..

Why don’t I start, Jonathan, with the sort of clogs versus sandals and Anne can clarify the Q4 numbers and how kind of guidance plays out. Yes. I think, as we look at ‘21, clogs have been growing tremendously through ‘19 through ‘20, and we see that continuing in ‘21.

I think, that’s partly consumer receptivity to that silhouette and to the utility that that silhouette allows the consumers to have. But, it’s also tremendous innovation in terms of color, print, hike, et cetera, that we have in our product lineup. So, we -- and obviously, we’ve got kind of strong visibility to bookings.

So, we can definitely see that clogs are going to perform well in ‘21. Sandals will return to strong growth in ‘21. And as I look through a multiyear trajectory, we would expect over time, sandal growth to accelerate past clog growth..

And then, on the guidance, Jonathan. So ,I think a couple of things. Again, we had a lot of -- some interesting timing last year with Q2 coming out of Q2 with much of the closure. So, we had a lot of wholesale revenue that shifted in Q3. So, we’re still guiding growth for the full year.

I think, we’re still trying to make sure that we have good visibility. I think, we’re giving actually quite a bit of guidance. And as we move through the year, obviously, we will be transparent. And as we get better insight into how things are trending in the back half of the year, we will certainly keep you updated.

I think -- but we have obviously the best visibility in the first half of the year. And we certainly feel like all of our underlying trends are extremely strong, and we don’t see anything changing from the way the business was trending in Q4..

Yes. That makes perfect sense. Maybe just one follow-up then on the margin outlook. Guiding an adjusted operating margin for the year, 18% to 19%, I think you’re close to 19% in 2020. And I believe you mentioned expectations for SG&A leverage.

So, I just want to ask about the implied gross margin outlook that you’re embedding? And any other color you have, first quarter versus full year drivers for gross margin?.

Yes, sure. So, our full year guidance, obviously, our revenue growth is 20% to 25%. We expect all regions to grow with the strongest growth expected out of Americas and EMEA. From a channel perspective, we do expect to have continued digital LED growth, but we also see really strong wholesale growth from distributors as they’re coming back.

Some of it is because of 2020, as we talked a lot about, we didn’t ship as much, and then we see strong return at the back half. And that wholesale growth will pressure gross margin a little bit. Just because it is a little bit lower. Obviously, it doesn’t have much SG&A associated with it.

So, how we’re thinking about that is that our underlying gross margin remains really strong. But, we do expect the wholesale mix, especially with the strong return of distributors to put a little bit of pressure on our gross margins. However, it allows us to drive SG&A leverage while continuing to invest..

And just to clarify, would you not have maybe pricing opportunity and currency favorable offsets? And that’s it from me. Thanks..

Yes. That’s a good question. So, let me tackle currency first. Right now, we do have some currency tailwinds for the first time in a while. So, that’s nice to see. I would say from just overall in gross margin, there are several puts and takes.

We’re also seeing great pressure on inbound largely just due to the supply chain right now globally is a little bit, I would say, just slow and lane -- shipping lanes are really clogged as everybody is trying to get product in and things are just messed up from COVID. But, we are seeing the currency offset the inbound freight.

So, I would say, that’s probably a little bit neutral. Obviously, currency will support ASPs. And then, to end my -- end your question, from a pricing perspective, there’s always pricing opportunities.

I think, we’ve done a lot of work that you saw culminate in our 400 basis points of gross margin improvement in 2020, and we expect to continue to look at that in 2021, and we’ll see. But, I do expect this year to be a little bit more unit-led than I do ASP led..

Your next question comes from Jay Sole of UBS..

Great. Thank you so much. Andrew, I want to ask you about rain boots. It seems like in the quarter, there was some good signals that maybe some of the kids’ and the men’s and the women’s rain boots did pretty well. You didn’t mention it in your -- the four key drivers of product.

Where do boots fit in? And can you just talk about what you saw in the quarter from that product category?.

Yes. I would say, Jay, that’s not a huge product category for us. I think, we do make a kids’ rain boot that’s been on the line for a long period of time, and I would say it has a very loyal following amongst mums. It’s easy on and off and has a lot of the kind of key attributes they’re looking for. We historically have not been significant in rain.

It’s not been a good category for us. And I think, the category is somewhat bifurcated. There’s a lot of low-end products that’s very low-margin for manufacturers and frankly for retailers too. And there’s also some premium product. We’re kind of stuck in the middle of both. So, we don’t really see that as really interesting for us at this stage.

I would say, as we’re looking to full holiday of ‘21 and into ‘22, we do have some interesting, easy on and off boot development that we’ve been showing to retailers. It’s not really a rain boot, but it’s more of a comfort warm weather boot, and that’s been getting really good feedback from our wholesale partners..

Got it, interesting. Okay. Thank you. And maybe -- and just on the margins, just a follow-up. If you can really maybe focus on the second quarter and the third quarter margins, and if we think about the difference between where the margins were in 2019 and where the margins were in 2020.

Could you just sort of help us sort of understand how to think about what the margin should look like this year based on -- obviously, you talked about the distributor improvement, obviously wholesale in general, probably rebounding is a factor.

But, are there other drivers which should move the margins more back to a normalized 2019 level or vice versa, like something that you drive the more to that 2020 level?.

Yes. I don’t -- I’m going to talk generally, because obviously, we haven’t guided Q2 and Q3. But I think, we don’t see gross margins moving back to 2019 levels. We feel pretty good that our 2020 gross margins are largely sustainable and which is implied I think in our guidance. There is a little mix impact.

And obviously, as Q2 was a very strange quarter last year as a lot of our retail was shut down, I will say, retail does carry a very high gross margin. So, the wholesale and the retail can offset. So, I don’t think there’s anything particularly abnormal in any quarter that you need to be concerned about at this point in time.

We’ll certainly keep you posted. I think, overall, margins -- our gross margins are really good, and we’re really proud of all the work we’ve done. And remember, the major drivers of our gross margin have been pricing and discounts that we pulled back on, which we think are sustainable..

Got it. And then, maybe one last one from me. You talked about a lot of investments happening in digital China products. A lot of that sounds like SG&A, at the same time, $130 million in CapEx.

Would it be possible to elaborate a little bit on what the money allocated to CapEx is really going to go for and what that’s going to be driving for the business?.

Yes, sure. It’s distribution centers. So, it’s really building out our distribution network to support mostly our digital business as that does -- that is serviced a little differently. And so, as we’ve mentioned before, we’re moving our Niwot distributor -- our Niwot distribution center. And we’re automating that.

And then, we’re looking at just other distribution center investments around the globe and continuing to expand our U.S. distribution center..

Your next question comes from Mitch Kummetz of Pivotal Research..

I guess I have a couple. Let me start with the line clog business. Is there any way you can say, like what percent of sales that was in the fourth quarter? Maybe how much it was up in the quarter? And I’m curious if you’ve seen continued strong performance through the early part of Q1 in that business..

Yes. Look, we don’t break it out, Mitch. But, I can tell you, performance was extremely strong, right? So, the line clog performed extremely well here in the U.S., in Europe and in parts of Northern Asia. So, it’s obviously a very important part of our fourth quarter business.

In terms of its continued performance in Q1, it continued to perform well in Q1, absolutely. We plan to be essentially out of stock as we come into Q1. So, we don’t have huge inventories at this time period because obviously we want to be out of stock and then reintroduced next year.

We will carry year-round on our e-comm sites on an ongoing basis because we do actually see kind of year-round demand for that silhouette. So, it’s been really good. And I would say, we haven’t found the top yet. I think, there is a long way to go online clogs..

Got it.

And then, on collabs, are there any metrics you can give around that when you think about 2021 versus 2020, maybe in terms of the number of collabs, the type and the timing of them? Is there anything you can offer on those sort of metrics?.

Yes. So, I’d give you a little color. So, I think collabs will be as strong -- potentially stronger than they were in ‘20. They will be a little bit more evenly distributed through the year. We’ve already executed some collabs already this year, a key one in Europe did particularly well even last month.

So, there will obviously be -- without the COVID impact, they will be spread more evenly throughout the year. There will be more of them than they were last year. There will be more regional collabs than they were last year. So, think Europe, Korea, Japan, China, et cetera.

And so, those tend to be a little bit kind of smaller as we’re reaching to a more niche audience, but we do also have some of our kind of blockbuster names that we’re really excited about. So, I would say, the pipeline is super full.

And at this point, we’re still also getting significant inbound interest, and that obviously is obviously tiering over into ‘22 at this point..

Yes. Mitch, just to remember -- if I could just add, those aren’t financially significant on their own. Obviously, they create a great halo for the brand and are an important part of our marketing strategy, but you don’t need to worry about us anniversarying something from a financial perspective..

Your next question comes from Sam Poser of Williams Trading..

I just have a few. I’m just going to get one.

What is -- what do you anticipate the share count to be for ‘21 right now?.

We didn’t guide share count, Sam. So, I would just use what we gave in our release, which I think was around -- yes, $68 million..

$68 million..

I think….

Got it. Okay. And then, I want to talk about China a little bit.

Number one, can you -- Andrew, can you give us some history -- like give everybody a history lesson sort of on -- over the years as to what happened in China and why it’s taking as long as it’s taking to get it turned around? Because, I mean, any -- based on what I know, any other market, Europe, U.S., China was more negatively impacted by various things that happened in the past, hence taking it longer.

But, can you give everybody some details as to what happened, what you’re doing and why it’s taken so long?.

Yes. So, I think -- look, a couple of things. I’m not sure we have time on this call for a complete history lesson, Sam, but I can give kind of some of the key issues, right? And absolutely, I agree. It’s taking longer than we had hoped it would. I think -- and that’s not just COVID. It’s just taken us longer to unwind some of the issues of the past.

I think, the core issue that we’ve been wrestling with is the network of partners that we have that operate single branded stores throughout China, right? So, we had a network of partners. They operated largely single branded stores on a province by province basis. And I think historically, we were with the wrong partners.

We were the people that were not equipped to grow and evolve the brand in the future in the way that we wanted to grow and uphold it. And that’s frankly not inconsistent with the transition that other brands have been through in China, but they’ve largely been through it.

At this point, as we indicated in the prepared remarks, I think, we’re making some real progress on that, right? So, number one, the product strategy has been reset, right? The product strategy in China was historically a little bit different than it was in the rest of the globe.

It emphasized more mail, emphasized loafers, emphasized kind of canvas loafers. We’ve reset to our four pillars that we know work around the globe. And I would say that reset is complete. And we are in the thick of transitioning, I would say, the partners that we use. We’ve transitioned a number of them. We’ve got a few more to go.

So, we’re in the thick of that, and we think that will be complete by the end of ‘21. So, that will put us in a place where we have the right product strategy, we have the right partners.

At the same time, we’re investing in the brand awareness and the brand resonance with Yang Mi and a significant marketing investment, and we’ve also built our digital business through Tmall. So, we feel very confident we have the kind of the right strategy. It’s just taking longer than we would have liked and would have hoped.

But, we really can see light at the end of the tunnel today..

And then, lastly, pricing in China. How does that compare to pricing, as you could give us China and Europe versus pricing in the U.S.? What is the differential there on sort of....

So, think about the pricing -- yes. Yes. How we think about price? We price to market, we price to the local market. So, we don’t try and keep our icon in the same price everywhere in the globe. We price it relative to, I would say, competitive product in the local marketplaces. And we’ve moved it differentially at different times.

What that translates to today is, we sell the clog at a slight price premium in China as frankly as many brands do. They sell a little bit at a premium to what they sell-out in the rest of the world as we think that market can sustain and bear that relative to competition. Then, your other question embedded in that was Europe.

Europe right now is a little bit of a discount to our U.S. price, and that is something that we’re taking a look at..

Your next question comes from Laura Champine of Loop Capital..

Thanks for taking my question this morning. It’s really on longer term CapEx. So, the CapEx budget is much higher this year that makes a lot of sense.

Is that just catch-up with demand, or is this elevated level of CapEx spend as a percentage of sales likely to continue for the out years?.

Yes. I think, it’s certainly elevated this year as we’re investing along with the business. I don’t think we’re prepared yet to guide long term. Our -- what we’ve talked about in the past is maintenance CapEx is around replenishment of depreciation, which is around $30 million. And that’s run rate CapEx. But, we will continue to invest in the business.

We are really proud of our free cash flow. We generate a lot of cash from operations well to over $250 million this year. So, we feel like investing in the business is really important. So, we will continue to do that to support the growth as we see the opportunities..

How much of your CapEx spend this year of that budget is about moving the distribution center in EMEA and therefore likely does not repeat?.

I will say, all of the CapEx this year is related to distribution centers. I wouldn’t say that any of it is recurring as far as -- well, the vast majority of it is distribution centers. So, it’s either EMEA or investing in our other distribution centers to upsize or to automate.

So, I don’t think any of it is necessarily, what I would call, repetitive on an ongoing basis. The reason I’m hesitant to guide past that is because I don’t want to -- I want to make sure that we have the opportunity to invest, continuing as we see revenue growth..

Your next question comes from Steven Marotta of CL King..

Good morning, Andrew. Congrats again on a great 2020. Q4 ended with leaner than desired inventories that you mentioned. You also mentioned that this is going to be remedied throughout the year.

Can you talk a little bit about the year-to-date remedy and how you see your inflow of inventory finally meeting outflow from a demand standpoint?.

Yes. I mean, that comment in our prepared remarks was really around our wholesale partners where we obviously, particularly in the U.S. had significant shipments. I mean, our wholesale business in the U.S. was up I think 130%. So, we shipped them a lot of product. They just sold a lot of product as well, right.

So, they didn’t end with the stronger inventories that they and we anticipated. So, we’re still kind of catching up a little bit from that perspective. And so, what I would say, as we look into ‘21, we have been able to ramp up production capacity very significantly.

We have -- absolutely have adequate production and can make enough products to meet our expectations and get our kind of -- our own environments, our DTC environments and our wholesale customers back in stock.

I would say, global logistics here in the first quarter are really challenging, right? So, we’re kind of -- I don’t think we’re meeting everybody’s expectations today and frankly will unlike too.

And I doubt if anybody else is either, importing product from Asia, getting it through Long Beach and other ports, getting shipped to customers is really challenging right now. And that’s not an issue with production capacity. That’s just logistics. I think that will smooth out over time, but it’s going to take a little while..

That’s very helpful. And you provided very nice detailed commentary regarding gross margin in the current year, just to put the finest point on it possible. Obviously, with wholesale increasing as a percent of the consolidated mix, there will be a little bit of that as you mentioned, the pressure on gross margin.

Will gross margin -- do you expect gross margin to increase in each channel throughout the year?.

So, we don’t guide gross margin by channel because our reportable segments are actually Americas, EMEA and Asia. What I will say is that -- you just talked about inventory. One of our strategies is to run lean inventories and obviously keep our consumer in stock on core.

But running lean inventory supports good gross margins, and we don’t expect to go backwards from a pricing perspective on -- in any of our channels. So, we are really excited about the work we’ve done on gross margin, and we’re focused on maintaining really high level gross margins..

Your next question comes from Susan Anderson of B. Riley Securities..

Hi. Good morning. Let me add my congratulations on a very nice year.

I guess, on the wholesale front, I’m curious if you feel like there’s still opportunity for shelf space gains or new doors in 2021 or even, I guess, adding Jibbitz to more wholesale doors? And then, just in terms of the door growth in fourth quarter, was that impactful or significant in terms of the wholesale growth, or did that mainly come from sell-ins in existing doors?.

Yes. Okay. So, let me kind of hit the last bit first. So, the door growth in the fourth quarter really wasn’t as significant. I mean, I think, our rollout with new customers, particularly some large ones here in the U.S. is absolutely going well and meeting all of our expectations and their expectations, but that wasn’t impactful in terms of growth.

The real driver of growth was accelerated sell-through. And so, that’s the big driver. In terms of share of shelf gains, absolutely. Yes, we believe we have opportunity to gain share of shelf in our major customers, both bricks-and-mortar customers as well as online customers.

I would say, particularly with sandals over time as we grow our sale business, we want to keep all of our clog SKUs and add sandal SKUs. That will be a key part of our strategy. And so, yes, we do believe that there is an opportunity to significantly grow Jibbitz in the wholesale environment.

I would say that’s made strongest headway here in the U.S., and we had a really nice year with Jibbitz in wholesale last year, but I think we can do a lot more and a lot better, particularly as we increasingly package the Jibbitz into kind of multipacks, which I think will make a lot easier for our wholesale partners to display and handle them..

Great. That’s helpful. And then, just on the work category, I think, you said it grew double digits in the last four quarters.

Is that accelerating as the economy reopens? And then, any color on how big that category could be or where it could go?.

I didn’t hear what you were referring to there. Jibbitz. Oh, yes..

No, just work category. Yes. So….

Work category, yes. The work category, absolutely. If you remember last year, we really gave a lot of that product away earlier on in the year to frontline healthcare workers. So, we put ourselves in a very big inventory hole. We’ve managed to get that replenished towards the back end of last year.

And in aggregate, we said we saw a very high double-digit growth on that over the last four months of the year. We see that continuing.

I would highlight that in some of our kind of controlled DTC environments, we see even higher growth, right? So, we’re -- so, we think that’s a very interesting signal and an interesting business for us in the future..

Your next question comes from Jim Duffy of Stifel..

Thank you. Good morning. Terrific year, guys. Thank you for your philanthropic contributions. So, a lot of reasons to be proud on 2020 execution. And I wanted to start on the balance sheet, big step-up in deferred tax assets, $350 million. Can you give us some insights ahead of the K? Is that all U.S.

based? What are the requirements to utilize that asset?.

Yes. So, the tax asset is related to the movement of some of our IP rights from Bermuda to the Netherlands. And that is associated with that deferred tax asset. Remember, we took the GAAP impact of most of that upfront. And that’s the over $100 million credit you saw in Q4.

And then, from a cash tax perspective, we actually saved the money over the long term. So, that’s how that works. It’s not -- that’s why you see the big credit upfront. So, we do have obviously some allowances against that. But, that’s why there is a big DTA on the balance sheet..

And so that $350 million, what’s kind of the accounting treatment for drawing that down? Does it have to be profits recognized in a certain region to offset that in cash taxes?.

Yes. So, it’s not the DTA. I think, there’s some valuation allowances against it. And then, it will amortize over time, and that’s how it will roll off.

So, there’s -- the valuation allowance is against it as you -- it’s not profit, it’s as you prove your valuation overseas, then you can kind of -- as you have better visibility into that, then that’s how you draw that down. But the overall deferred tax asset just amortizes over time. And that’s how it draws down..

Understood. And then, Anne, can you talk about SG&A budget for the year and the shape of SG&A across the year? I believe, you spoke expectations for leverage for the year as a whole, 2020. I know SG&A was somewhat artificially depressed, given COVID savings in the first half of the year.

How much should we be looking for to come back into the model from that? What’s the budget for marketing spend versus 2020? I know you’re talking about ramping investments in China over the course of the year.

Where I’m going with this, I’m curious, like do you get leverage in the first half of the year? And are you assuming deleverage of SG&A in the model as the year unfolds?.

Yes. So, really good question. I don’t think we’re prepared yet to guide by quarter. And part of that is just because we spend in SG&A as we see growth and to support our accelerated growth, and there’s some timing. But overall, SG&A, we expect it to leverage. We’re excited about the work that we’ve done on our SG&A structure.

And last year, we invested in marketing in the back half of the year and invested almost $10 million in marketing and still we’re able to leverage our SG&A. And we see similar trends like that this year. So, we see that we’ll be able to leverage SG&A while continuing to invest in marketing..

Great. And then, last question. Can you speak to what’s included in the adjustments related to cost of goods? I guess, I’m curious why these are appropriate exclusions for a growing business.

Can you speak in more detail about specifically what those expenses are?.

Yes. They’re related to our distribution center move in EMEA and their duplicate running costs..

Your next question comes from Jim Chartier of Monness Crespi..

Good morning. Congrats on a great quarter and thanks for taking my question. Andrew, I was wondering if you could provide some color on brand desirability, relevance and consideration by region? And I’m really curious how the U.S. compares to other regions, and are other regions kind of progressing similar to what you saw in the U.S.

and maybe a year or two ago? Thanks..

Yes, happy to, Jim. That’s a really important set of metrics that we watch actually really closely.

So, what I’d say is, firstly, brand desirability, relevance and consideration, we have seen double-digit increases in our global metric for four years in a row now, right? And as you look at those kind of metrics, a double-digit increase is, frankly, in one year it’s pretty extraordinary.

But, I think it’s a real testament to the trajectory of the brand that we have been able to sustain those level of increases. I would say, the increases have been strongest and most dramatic in the U.S., as you’d expect, as you see the underlying business.

We have seen them strengthen very strongly in EMEA, and we really measure them in EMEA in Western Europe, to be clear. We’ve seen them strengthen very strongly in EMEA, I would take in ‘19, ‘20, so over the last two years.

And then, as we look to Asia, I would say, we’ve seen strong trajectory in some of our key markets, like Korea, like India, and we’ve seen positive trajectory in Japan and China. So that kind of gives you a little bit of kind of relativity.

I would say as we look at them, the reason we follow them closely, we do see them quite well correlated to future growth..

Great. That’s very helpful. And then, in terms of collaborations, you mentioned increasing regional collaborations this year. How do the number of collaborations, regional collaborations in Europe or Korea, or Japan compared to the level in the U.S.? And is there an opportunity to get those more aligned? Thanks..

Yes. Look, I think, there is an opportunity to grow them into the future. As we look at this year, it’ll be a pretty significant increase in those regional collaborations, but probably will still do more here in the U.S., right.

So, I think, if you kind of look at that over a two to three-year time horizon, we would really see strong growth in some of those regional collaborations.

Frankly, some of those regional collaboration partners actually have global potential, right? So, we could also see with the rising -- particularly in Asia, with the rising importance of some I would say celebrities and/or musicians, et cetera from key Asian markets, I think we could see those kind of in a global footprint as well..

[Operator Instructions] Your next question comes from Sam Poser with Williams Trading..

I have a quick follow-up. Thank you. The philanthropy, the donations you did to the frontline workers earlier in the year, do you have any read-through on how that sort of grew the equity of the brand and how many new customers may have been driven by sort of doing -- just doing good by related issues? It might have helped business.

Do you have any way to measure that?.

Yes. I think, we have some insights, Sam. I would say, firstly, that was not the reason we did it, right? So, the first reason we did it was because it was the right thing to do. I would say, it has been very positive. We can definitely read improvements in brand empathy and association with the brand from a lot of growth communities.

And that’s been -- that’s very much appreciated. In terms of the new customers, I would say, it was pretty effective. As we look at the customers that we acquired during that time period, it was very significant. There was a lot of new customers we acquired during that time period.

I’m not sure I’d give you a number off the top of my head, but it was a big number. And we’ve seen continued activity from those customers. So, it was very effective from that perspective..

There are no further questions at this time. I will now return the call to Mr. Rees for closing remarks..

I just wanted to express my thanks for everybody and their interest in the Company. We’re looking forward to a really stellar ‘21 and continue to talk to you through the year. So, thank you..

Ladies and gentlemen, this concludes today’s conference call. We thank you for your participation. You may now disconnect..