Edited Transcript of CROX earnings conference call or presentation 27-Feb-20 1:30pm GMT

NIWOT Mar 20, 2020 (Thomson StreetEvents) — Edited Transcript of Crocs Inc earnings conference call or presentation Thursday, February 27, 2020 at 1:30:00pm GMT

Crocs, Inc. – President, CEO & Director

Crocs, Inc. – Executive VP & CFO

Robert W. Baird & Co. Incorporated, Research Division – Senior Research Analyst

Pivotal Research Group LLC – Senior Analyst of Footwear, Apparel Vendors and Retailers

Ladies and gentlemen, thank you for standing by and welcome to the Crocs, Inc. fourth quarter conference call. (Operator Instructions) Please be advised that today’s conference is being recorded. (Operator Instructions)

I’d now like to hand the conference over to Brendon Frey of ICR. Thank you. Please go ahead.

Thank you and good morning, everyone, and thank you for joining us today for the Crocs Fourth Quarter 2019 Earnings Call. Earlier this morning, we announced our latest quarterly results, and a copy of the press release can 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 provision of the Federal securities laws. These statements include, but are not limited to, statements regarding future revenue, gross margin, SG&A as a percentage of revenue, operating margin, CapEx and our product pipeline. 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 Form 10-K. Accordingly, actual results could differ materially from those described on this call. Please refer to 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, net income 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, President and Chief Executive Officer; and Anne Mehlman, Executive Vice President and Chief Financial Officer. Following their prepared remarks, we will open the call for your questions.

At this time, I’ll turn the call over to Andrew.

Andrew Rees, Crocs, Inc. – President, CEO & Director [3]

Thank you, Brendon, and good morning, everyone. This morning, we reported revenues of $263 million, which was slightly ahead of the upwardly revised guidance we provided in early January. This result marks an all-time fourth quarter record high for the company and represents an increase of 22% over the same period last year.

Our strong top line growth allowed us to drive significant SG&A leverage which, along with 310 basis points of adjusted gross margin expansion, helped fuel adjusted earnings per share of $0.12 versus an adjusted loss of $0.10 per share a year ago. These achievements underscore the work we have done expanding the year-round desirability, relevance and consideration of our brand and product offering.

Our fourth quarter performance represents a strong finish to a record revenue year. Anne will review our financial results in more detail shortly, but here are just a few of the many highlights from 2019. Overall, global revenues grew 13% to a record of $1.2 billion for the full year. Excluding store closings and currency, underlying growth was 17%. Adjusted operating margin of 11.6% was approximately 390 basis points over 2018, and adjusted EPS increased 87% to $1.61. We invested $15 million back into the business by our additional marketing programs. We returned cash to shareholders by buying back more than 6 million shares, and we relocated our U.S. distribution center to a new automated facility in Ohio. Importantly, momentum we generated in 2019 has carried into the new year, and we anticipate continuing to drive meaningful growth in 2020. To better understand where the business is headed, it’s helpful to understand the key drivers of our recent performance since the same underlying strategies will be passed forward in the future.

Starting with building brand heat. It was an incredibly busy and exciting year. Throughout 2019, we executed numerous programs and campaigns that further strengthen consumer affinity for the Crocs brand around the world. This was the third year of our successful Come As You Are campaign, and we once again invested in the strong lineup of brand ambassadors, including Zooey Deschanel, Kim Sejeong and Suzu Hirose. And late last year, we announced the addition of award-winning actor, activist and entrepreneur, Priyanka Chopra Jonas, to our team for 2020. Priyanka will be featured in many of our marketing assets for 2020, both in the U.S. and in our international markets. More recently, we unveiled our newest brand ambassador, Yang Mi, an actress and singer and one of the top celebrities in China with over 100 million followers across her social media platform. We’re very excited to have Yang Mi onboard as her reach and appeal is a key component of our growth strategy in this large and important market.

We launched over 20 collaborations in 2019, each of which had an impact on enhancing brand relevance. These included partnerships with Post Malone, Luke Combs, Takashi Murakami and Vera Bradley in the U.S., PSY in Korea, Vivienne Tam in China and BEAMS in Japan. We’ll reprise several of these collaborations in 2020, along with many partnerships that we’re really excited about.

Another important part of our 2019 marketing strategy in the U.S. was the introduction of a Crocs profile on TikTok, a video sharing app popular with teens and young adults. The initial reception has been fantastic, evidenced by the fact that our #ThousandDollarCrocs challenge has received 2.8 billion views to date. The effect of our marketing efforts is clearly evident and measurable. In Piper Jaffray’s most recent study, in just 1 year, Crocs moved from the #13 most preferred footwear brand by teens to #7. In our own annual brand strength survey, we saw double-digit increases in both desirability and relevance. And according to Google, we had 2 of the top 10 most searched shoes in 2019, including the coveted #1 spot with our Luke Combs collaboration.

From a product perspective, our results continue to be driven by our focus on our four key growth pillars: prioritizing clogs, sandals, visible comfort technology and personalization. Following strong spring/summer and back-to-school seasons for clogs, we fueled demand during the holidays by refreshing our core assortment with on-trend colors, prints and expanded our offering of line clogs for cold weather wearing occasions. The response from the consumers was incredibly strong. Q4 clog revenues increased approximately 36% and represented 69% of our footwear sales, up from 62% during last year’s fourth quarter, providing further proof that our clog silhouette is a year-round style.

At the same time, our sandal business enjoyed a successful holiday, and we continue to build awareness of our presence in this category and inspire our female consumers with the breadth of our offering. Sales grew 7% over last year’s fourth quarter and grew 10% for 2019, the third consecutive year of double-digit growth for this category. We have exciting plans to build on this momentum in 2020, including seeing more of our celebrities in our new sandals as well as featuring more sandals in our collaborations.

We’ve also expanded the third component of our product strategy, visible comfort technology, with the recent introduction of kids’ sizes into our LiteRide collection. Since launching LiteRide in early 2018, it has quickly become one of our top 5 franchises. Visible comfort technology is now a core part of Crocs DNA, and we believe it provides us with the compelling growth opportunities well into the future

With respect to our Jibbitz Charms business, we saw accelerated momentum as the year progressed, culminating in a rollout to select wholesale accounts during the fourth quarter. We’ve made great progress in broadening the appeal of our unique charms by evolving the assortment and regularly refreshing the offering with on-trend, relevant and localized designs. Personalization is a global megatrend, and we are seeing growing numbers of consumers worldwide who customize their Crocs footwear. We anticipate that our Jibbitz business will continue to gain momentum in 2020 and beyond driven by all channels.

Let me now turn briefly to the fourth quarter performance of our sales channels. Our DTC comp, which combines our retail and e-commerce results, increased 22% for the fourth quarter on top of a 16% gain a year ago. E-commerce sales were up 34% on top of 19% growth last year. This represents our 11th consecutive quarter of strong double-digit e-commerce growth. The increasing brand heat continues to drive more traffic to our own sites, plus we are seeing good traction on global marketplaces. Retail comps rose 16%, our tenth consecutive quarter of positive comps. On a 2-year stack, retail comps were up 29%.

Fourth quarter wholesale revenues increased 22%, following last year’s 10% growth led by strong sell-through and replenishment orders from many of our leading wholesale partners around the globe.

As we think about Q4 from a geographic perspective, Q4 revenues grew double digits in each of our 3 regions, with the strongest growth coming from the Americas, led by the U.S.

Our performance in our home market is the direct result of our commitment to execute the playbook we outlined a couple of years ago, one that centers on strengthening our relationship and driving relevance with the consumer through great product and marketing. We’re confident that the work we’ve done further igniting brand heat and emphasizing our core clogs and sandals, along with our burgeoning Jibbitz business, has Crocs well positioned to drive sustainable growth in the U.S.

We believe the same is true for EMEA and Asia, where we are in various stages of implementing the same strategies and playbook we’ve developed domestically. EMEA showed great progress in Q4, growing 17% in constant currency year-over-year. Asia represents our largest long-term growth opportunity where clog relevance, particularly in China, lags our other key countries. With a much stronger foundation in place in China, we’re starting to ramp up our efforts to accelerate growth. In the near term, however, our priority is to ensure that our employees in China, along with our partners and suppliers, safely navigate the health risks associated with the coronavirus. Our thoughts are with everyone affected. Many of our approximately 350 partner stores are closed temporarily. For those that remain open, they are operating on reduced schedules and experience lower-than-usual traffic. Despite this difficult situation, we continue to be very optimistic about our long-term growth prospects in China.

Finally, I’m pleased to announce that we recently appointed Elaine Boltz to the newly-created position of Executive Vice President, Chief Operations and Transformation Officer. Elaine brings nearly 3 decades of leadership, operations, direct-to-consumer and marketing experience to Crocs, having served in senior leadership positions at the TJX Companies, Chicos and AnnTaylor during her career. In her new role, Elaine will have responsibility for our operations’ functions globally, including information technology, supply chain and enterprise-wide business transformation. I’m confident she’ll play a key role enhancing execution of our long-term strategies.

Before I turn the call over to Anne, I want to express my gratitude to the entire Crocs organization while delivering such a strong year of growth and profitability. We have come a long way over the past few years, and this wouldn’t have been possible without the hard work and commitment we have seen demonstrated by our global teams on a daily basis. Normally, at this time of year, we would send New Year’s greetings to all our associates, customers, family and friends in China. These are concerning times for many, and we would like to wish them and all of their families good health over the coming weeks and months. We look forward to healthier times ahead for everyone.

With that said, Anne will now review our financial results in more detail and outline our guidance.

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Anne Mehlman, Crocs, Inc. – Executive VP & CFO [4]

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Thank you, Andrew, and good morning, everyone. I’ll begin with a short recap of our fourth quarter and full year 2019 results. For a reconciliation of the non-GAAP amounts mentioned to their equivalent GAAP amounts, please refer to our press release.

As you’ve already heard, we had a record-setting fourth quarter, exceeding our revenue guidance and achieving a dramatic improvement in our bottom line. Fourth quarter revenues came in at $263 million compared to $216 million in the fourth quarter of 2018, a 21.8% increase or 22.7% on a constant currency basis. Currency negatively impacted our revenues by approximately $2 million. In addition, store closures reduced revenues by approximately $2 million. Absent which, our sales would have been up 23.7%. This is our 11th consecutive quarter of organic sales growth and the sixth consecutive quarter of double-digit organic sales growth. We sold 13.7 million pairs of shoes, an increase of 18% over last year’s fourth quarter.

Our average selling price per footwear during Q4 increased 3% to $18.44, with the increase attributable to less discounting and higher prices on certain products, which more than offset the impact of changes in our channel mix and the negative impact of currency. For 2019 in total, we sold 67.1 million pairs of shoes, 12% more than 2018 at an average selling price of $17.81, up 1% from prior year or 3% in constant currency. The Americas had another phenomenal quarter, with revenues up 28% to $155.8 million and minimal impact from currency. Growth was robust across every channel. In addition, we completed the relocation of our Americas distribution center from California to Ohio during Q4.

While there were some challenges getting products out in a timely manner, which required some additional spending to remedy, we are very excited about the great benefits we expect to receive from our new distribution center investment, including: higher throughput, greater efficiency and an improved customer experience. In 2021, we intend to relocate our distribution center in the Netherlands, supporting our EMEA region to a larger facility, and are evaluating similar investments this year and beyond designed to support our anticipated growth.

In Asia, Q4 revenues were $64.4 million, up 15% from last year’s fourth quarter. On a constant currency basis, revenues rose 15.4%. DTC comparable sales were up 5.7% driven by growth in our own dotcom and our expanding marketplace presence, somewhat offset by lower retail costs.

EMEA revenues rose 15% over last year’s fourth quarter to $43 million. On a constant currency basis, revenues grew 17.2%. Our business is benefiting from growing brand heat and our continued focus on digital commerce.

Our fourth quarter adjusted gross margin was 49.3%, well above last year’s 46.2% driven by favorable product mix, lower levels of promotions and discounts and higher volumes, helping to leverage our fixed costs. This was partially offset by higher distribution center costs in the U.S. related to the start-up of our new U.S. DC. Compared with our guidance, adjusted gross margin was lower by 70 basis points due to the cost of scaling activities at our new Ohio distribution center.

Our adjusted SG&A improved by 620 basis points to 44.4% of revenue versus 50.6% in last year’s fourth quarter and compared to our guidance of approximately 47% of revenue. The upside to our guidance was driven by our ability to leverage higher revenues in the quarter. Nonrecurring charges were $1.2 million in Q4 compared to $4.6 million in last year’s fourth quarter. The work done over the past 2 years to reduce cost is now enabling us to drive significant leverage from revenue growth even as we continue to invest more in marketing. Our operating margin improved dramatically to 3.2% or 4.9% on an adjusted basis.

For Q4, we recorded a tax benefit versus the tax expense last year. Higher-than-anticipated U.S. profits enabled us to use various tax benefits accumulated during prior years. Fourth quarter diluted adjusted earnings per share, excluding the tax benefit and non-GAAP adjustments, were $0.12 compared to a non-GAAP loss per diluted share of $0.10 a year ago.

During Q4, we repurchased approximately 400,000 shares of our common stock on the open market for $13.7 million at an average share price of $34.73. For the full year, we repurchased 6.1 million shares of our common stock for $147.2 million at an average cost of $24.2 per share. $508.6 million remains available under our plan for future share repurchases.

Our balance sheet continues to be very strong. We ended the year with $108.3 million in cash and $205 million in outstanding borrowings. Inventory at December 31, 2019, was $172 million, up 38.2% compared to $124.5 million last year. The increase was driven in part by early receipts ahead of Chinese New Year. For the year, our inventory turns were 4.3x. As pleased as I am with our strong Q4 performance, I am equally excited by our full year results. We grew revenue by 13% or 17%, excluding approximately $28 million of currency impact and about $17 million of store closures. In addition, we have leveraged adjusted SG&A by approximately 430 basis points even as we increased our marketing spend by $14.5 million.

For the year, adjusted operating margins were 11.6%, up 390 basis points. On a GAAP basis, operating margins were 10.5%. With this result, we achieved our goal outlined 2 years ago of double-digit operating margin. Adjusted EPS for the full year was $1.61 versus $0.86 last year. Excluding the Q4 tax benefit, our underlying effective tax rate for the year was 13.5%. We plan to host an Investor Day during the second half of 2020 where we will lay out our longer-term financial targets for the company.

As we turn to guidance, I want to remind you that our guidance is based on current currency rates and on the best information we have given the limited visibility with respect to the coronavirus impact. As Andrew touched on earlier, our thoughts and our focus are on the wellbeing of our colleagues and partners in China as they deal with this very difficult situation. With a number of partner stores currently closed and other measures in place to try to prevent further spreading of the coronavirus, we shipped very little product in China so far this quarter. As a result, we’ve lowered our Q1 2020 revenue projection for our Asia region by $20 million to $30 million. This includes the impact on our China business as well as the impact on other key markets in Asia as we are seeing declines in retail traffic in Singapore, South Korea, Japan and our Southeast Asia distributor market. It also reflects our best estimates for supply delays out of our Asia factories in Q1.

For the first quarter of 2020, we expect revenues to be between $305 million and $325 million compared to $295.9 million in last year’s first quarter, including a negative currency impact of $3 million. We expect operating margin to be between 9% and 12%, including approximately $3 million of onetime expenses for store closures and other provisions in Asia. For 2020, we now expect our revenues to grow 8% to 12% over 2019. This includes a negative currency impact of approximately $10 million as well as an estimated impact of $40 million to $60 million related to the coronavirus.

To be clear, the impact from the coronavirus assumed in our guidance is related to store closures and overall consumer demand in the Asia region and doesn’t contemplate a further disruption to our supply chain nor continued softness in the region during the back half of the year. Our operating margin is expected to increase to approximately 11% to 13%, including estimated transition costs of about $3 million for the new DC in the Netherlands and approximately $5 million related to onetime charges for store closures and other provisions in Asia. Interest expense for 2020 is expected to be approximately $9 million.

In terms of income taxes. Excluding the utilization of any discrete tax benefits, we expect a tax rate of approximately 17% in 2020. With respect to CapEx, we expect to invest between $50 million to $60 million in 2020, which includes expenditures related to our new distribution facility in the Netherlands scheduled to open in 2021 as well as some investments that shifted from last year into this year.

In summary, although we are experiencing near-term challenges with the disruption in our Asia business, the Crocs brand and our fundamentals are strong, and we believe this disruption to be temporary. I remain very excited about our plans for 2020 as we continue to drive top and bottom line growth while making important investments to fuel the business over the long term.

At this time, I’ll turn the call back over to Andrew for his final thoughts.

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Andrew Rees, Crocs, Inc. – President, CEO & Director [5]

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Thank you, Anne. As our 2019 performance indicates, we have great momentum in our business and our brand heat has never been stronger. While we decreased our 2020 guidance as a result of challenges created by the coronavirus, our positive outlook for Crocs remains unchanged. We are confident there is a long runway of growth ahead of us and numerous opportunities to drive increased shareholder value for years to come.

Operator, please open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of Erinn Murphy with Piper Sandler.

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Erinn Elisabeth Murphy, Piper Sandler & Co., Research Division – MD & Senior Research Analyst [2]

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I guess my question, maybe just starting with the coronavirus and what you’ve embedded in your guidance of the $40 million to $60 million for the full year. It sounds like you’re already assuming kind of the broader impact you’re seeing in outside of the Asian markets outside of China. But what’s your assumption on how long this pressure continues?

And then maybe if we can just understand a bit more on the supply chain side. Can you talk about kind of what’s being produced in China? If there’s specific packaging or other input costs or inputs that go into maybe production lines elsewhere in Asia? And if you’ve seen any disruption on the supply side at this point?

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Andrew Rees, Crocs, Inc. – President, CEO & Director [3]

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Yes. Thanks, Erinn. So firstly, I think I would like to say that our first focus is around health and well-being of our employees, our partners and our suppliers throughout the Asia region. So that’s kind of how we’ve approached this. As we look at the business impacts, I think they’re on three levels. Firstly, we’ve got direct impact in China, which I think is pretty clear to everybody. So stores are still substantially closed. Our e-commerce was not operating through most of February because our distribution partner was closed at the request of the local government. They are now operating. But obviously, your business is at a reduced level. Almost as important as that is the impact in rest of Asia.

So if you look at the 130 million-plus Chinese tourists that travel globally, 8 of their top destinations are in Asia, and we’re seeing significant drops in traffic in Japan, in Korea, in Singapore. And as we look at our distributor businesses in Thailand and other parts of Southeast Asia, we’re seeing big drops in traffic there. And then on top of that, you’ve got the supply disruption. So there’s really three levels of impact that we’re managing and monitoring. Part of your question was how long have we assumed that this goes on. Our assumption is essentially, and what we’ve built into the guidance that we have provided at this stage, is that this goes on through first and second quarter, so we’ve got impact in first quarter and second quarter, and we recover in the back half.

In terms of the supply disruptions, and kind of the way to think about it is we’re a little over 10% of our finished goods production comes out of China. A little over 70% of our finished goods production comes out of Vietnam, so that kind of gives you kind of where we’re orientated. But as you rightly pointed out, Vietnam is not free from impacts, right? So we do get components that go into the product that we make in Vietnam out of China. Some of that is dual-sourced, so we can switch to a Vietnam-only source and some of it comes — and some of it’s sole-sourced out of China, so we’ll have to look for different sources around that. And you also see other impacts in terms of just the productivity of the Vietnam facilities because many of these manufacturing groups are Chinese or Taiwanese-owned.

So we are seeing supply disruption. I think if you kind of look at February, for example, coming back from Chinese New Year, look, a lot of facilities came back very, very slowly or came back at far less productivity than they would have done. That is getting better, but there’s definitely disruption going forward. I don’t know if there’s anything else you’d add, Anne?

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Anne Mehlman, Crocs, Inc. – Executive VP & CFO [4]

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Yes, I would just say that all of our factories have restarted in China, just at varying levels of productivity.

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Erinn Elisabeth Murphy, Piper Sandler & Co., Research Division – MD & Senior Research Analyst [5]

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Okay, that’s helpful. But then in terms of the disruption, just want to make sure I understand how you’re kind of framing the guidance. You’re not assuming any further disruption from here on the supply chain side? And really the impact is on kind of the cooler demand across APAC in the first half? Am I understanding that right? Or you have included supply chain?

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Andrew Rees, Crocs, Inc. – President, CEO & Director [6]

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No, we — yes, yes, yes, correct. Just to put a final point on that. If we see significant delays going into Q3 and Q4 deliveries, that would be a larger impact than we’ve outlined.

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Erinn Elisabeth Murphy, Piper Sandler & Co., Research Division – MD & Senior Research Analyst [7]

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Got it. And then in terms of like inventory on hand, particularly into the North American market, how comfortable are you as you look out through the first half, just given that this is the region where you’ve been seeing the most significant piece of your growth?

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Anne Mehlman, Crocs, Inc. – Executive VP & CFO [8]

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Yes. I would say from the U.S. perspective, a couple of things, right? Our inventory is up approximately 37% year-over-year, and most of that is in our U.S. market because we did bring about 50% of that is because we brought it in ahead of Chinese New Year, which proved prudent just because of the Chinese New Year and the timing of that. And then the rest of it is because we were obviously light on the pipe last year, and going into U.S. growth, we wanted to make sure we had enough inventory. So we’re less — I would say we’re less impacted at this point in the U.S. right now because of our inventory.

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Erinn Elisabeth Murphy, Piper Sandler & Co., Research Division – MD & Senior Research Analyst [9]

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Got it, okay. And then just last question for me. Just on the collaboration pipeline. Can you talk a little bit more about how we should be thinking about the phasing of that here in 2020? And then what is the international opportunity on the collab that you guys have been introducing to the market?

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Andrew Rees, Crocs, Inc. – President, CEO & Director [10]

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Yes. Thanks, Erinn. So collabs you’ve probably seen, we’ve started to ramp up — the way to think about phasing is they are sort of now through summer and then we have another pulse in Q — in late Q3, Q4. That’s basically how we phase it. So through the summer and then leading up to holiday is — are our two periods that we focus on for collabs. I think we’ve seen that those work most effectively in the past. In terms of kicking off 2020 collabs, you saw we did KFC a couple of weeks ago, which I’d have to say, that was not really oriented around selling a lot of pairs. The pairs that we sell will actually be in March, and we delayed that because we wanted to have access to the Chinese market for that because obviously, KFC is very important in that marketplace.

But I would say the media attention, the PR and the earned media we got from that was probably one of the best we’ve ever done, to be quite honest. It was really impactful. You also saw us tease one this week, which if you haven’t figured it out, that will be coming out over the weekend. And then from an international perspective, absolutely. I would say today, we probably have on the schedule, more than double what we did last year from an international perspective. And that’s probably one of the key focuses is getting more intellectual collabs, which would be China, Asia and Europe.

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Operator [11]

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Our next question comes from the line of Jonathan Komp from Baird.

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Jonathan Robert Komp, Robert W. Baird & Co. Incorporated, Research Division – Senior Research Analyst [12]

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Just maybe first, following up on the coronavirus impact in the guidance. Could you just remind us the size of China today? Is it still kind of 7% or 8% of sales? And then when you look at the trend in the rest of your Asia business, pretty clear that China saw a sharp fall off. Can you maybe just talk about kind of the direct share into the recent trends you’re seeing? And is it intensifying in terms of the traffic declines? Or how do you think about kind of the rest of the Asia business?

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Anne Mehlman, Crocs, Inc. – Executive VP & CFO [13]

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Sure. So we don’t normally disclose China because it’s not a disclosable segment. But for purposes of this, it was about 5% of revenue in 2018 is the right way to think about it. And so obviously, we’re seeing the impact in China. And then I would say, from our direct market — the biggest impact markets that we’re seeing are really Singapore, Korea and Japan, and that’s really on mostly the retail side and pretty large drop-off of traffic. And then as far as the Southeast Asia market, we know that Thailand, as Andrew mentioned, is very exposed to — from a tourism perspective. So we are also hearing from our distributor partners that certain of our markets in Southeast Asia are experiencing large drops in traffic.

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Jonathan Robert Komp, Robert W. Baird & Co. Incorporated, Research Division – Senior Research Analyst [14]

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Okay. That’s really helpful. And then more broadly on the earnings guidance, just two questions there. I think, first, excluding kind of the coronavirus impact, looks like very strong growth still. So I wanted to ask maybe what’s driving, especially kind of gross margin, what you’re seeing for the year? And then just also when you look at the range, a pretty wide range, obviously, from the implied high end versus the low end. So what’s — like what are the major moving parts or assumptions that you’re embedding in the range?

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Andrew Rees, Crocs, Inc. – President, CEO & Director [15]

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Yes. So Jon, let me give you kind of sort of what’s the sort of flavor as to what’s driving it and what we’re assuming, and then Anne will dig into some of the components that you are alluding to there in terms of margin and SG&A. So if you think about — yes, we’ve still got underlying growth. So despite the coronavirus impact that we’ve called out, our full year guidance still directs you towards strong growth. That growth coming from the Americas and EMEA. And if you kind of look back at Q4, you really start to — and I would say, in 2019, for the full year, and certainly, the latter period of the year, you start to see growth accelerating in EMEA. So we think Americas and EMEA are strong drivers of our growth. The causation of that growth is kind of what we’ve been talking about.

So product, marketing, connecting with our consumer, driving brand relevance and awareness. I think that’s working extremely well, and we’re seeing really clear evidence of that spreading. So we feel good about that. Obviously, without these impacts, we think that we would have started to see that in Asia, and we’ll start to see that in the future in Asia, but we think we’ve got a clear game plan to drive growth.

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Anne Mehlman, Crocs, Inc. – Executive VP & CFO [16]

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Yes. Just to reiterate what Andrew said, the underlying business is strong, and we wouldn’t be updating guidance if it wasn’t for the coronavirus. Taking that into account, when you think about gross margins directionally for the year, we do expect adjusted gross margins to be up as we continue to have stronger product margins and tailwinds from higher prices and mix. And then as discussed in our prepared remarks, we had $3 million of charges associated with our new Netherlands DC that we expect to open in 2021, but we had $12 million in charges last year associated with our U.S DC. And then we expect continued improvement throughout the year in our U.S. DC and that ramping up. We don’t expect the full impact this year from the 100 basis points, but we will get that on an ongoing basis on an annualized basis as soon as we’re at full productivity level.

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Jonathan Robert Komp, Robert W. Baird & Co. Incorporated, Research Division – Senior Research Analyst [17]

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Okay. And is there any chance of quantifying just kind of how much you think gross margin will be up or any more detail there? Basically, the question…

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Anne Mehlman, Crocs, Inc. – Executive VP & CFO [18]

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I think the way that I would think about that is that it’s embedded in our overall EBIT margin guidance of 11% to 13%. So I would say, gross margin is going to be up. SG&A, when we planned SG&A, we planned investments in marketing China and capabilities in certain functions. Obviously, planning a pretty big growth year. And we also plan to invest an incremental $20 million in marketing. So even though we have the impact of coronavirus on 2020, we really don’t want to jeopardize our long-term growth and still expect to invest, so we only expect modest leverage in SG&A. So with those pieces, you can get to the overall guidance.

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Operator [19]

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Our next question comes from the line of Mitch Kummetz with Pivotal Research.

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Mitchel John Kummetz, Pivotal Research Group LLC – Senior Analyst of Footwear, Apparel Vendors and Retailers [20]

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Just maybe a couple on coronavirus and then I got another one. So just to be clear, your $40 million to $60 million, that’s just Asia. You’re not assuming anything for Europe, even though it always is a problem now?

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Andrew Rees, Crocs, Inc. – President, CEO & Director [21]

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Yes. I mean that’s broadly true. I think the thing that we’re conscious of is potential supply disruption in the future, but we don’t see that in the first half significantly. And as Anne alluded to earlier, I think we have some inventory buffer in the U.S., so that’s really predominantly Asia.

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Mitchel John Kummetz, Pivotal Research Group LLC – Senior Analyst of Footwear, Apparel Vendors and Retailers [22]

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And then on the EBIT margin guidance for both Q1 and the full year — actually, maybe just at the full year, the 11% to 13%. In the press release, you kind of talked about provisions in Asia as a

(technical difficulty)

[accounting] for the year, is it like 50 basis points, 100 basis points that you factored in for coronavirus?

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Andrew Rees, Crocs, Inc. – President, CEO & Director [23]

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Could you — the line went dead in the middle of your second question.

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Mitchel John Kummetz, Pivotal Research Group LLC – Senior Analyst of Footwear, Apparel Vendors and Retailers [24]

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Oh, sorry. Yes, I think I’ve got a bad line. How much are you factoring into EBIT margin on coronavirus?

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Anne Mehlman, Crocs, Inc. – Executive VP & CFO [25]

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The flow-through of our revenue plus, I would say, the onetime charges that we outlined of approximately $5 million, and that’s really related to some things around stores that we may want to take some store closures early just based on traffic levels.

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Mitchel John Kummetz, Pivotal Research Group LLC – Senior Analyst of Footwear, Apparel Vendors and Retailers [26]

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Okay. And then just last question. As you think about this explorer consumer that I think is driving a lot of your incremental revenue growth, have you started to see much demand outside of classic clogs? Yet I know that like the Brooklyn Wedge collection is new, I think you’re going to be focusing more on — I think you said it on the call, some of the celebrities and collabs outside of just clogs? Are you starting to see demand pick up in other areas outside of clogs, particularly with that consumer?

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Andrew Rees, Crocs, Inc. – President, CEO & Director [27]

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I would say the majority of the interest from that consumer is probably still on the core clog at this stage. I think it’s really early in our 2020 product introduction plans. And as you rightly point out, we have focused a set of products and a set of marketing strategies on engaging that consumer in a wider set of product strategy. I think it’s really too early to say. I would say our sandals that we have planned for this year, I think we are really optimistic about. And obviously, very, very early, but where we see performance of some of those sandals on some of our DTC channels, I think we’re feeling good about where we are.

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Operator [28]

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Our next question comes from the line of Jim Chartier with Monness, Crespi.

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James Andrew Chartier, Monness, Crespi, Hardt & Co., Inc., Research Division – Security Analyst [29]

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So Andrew, earlier, I think you said that you expect a recovery in the second half of ’20. Is that just the coronavirus impact goes away, or do you expect some of the demand that’s impacted related to the coronavirus to shift into third or fourth quarter?

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Andrew Rees, Crocs, Inc. – President, CEO & Director [30]

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I think it’s mostly that we expect the lack of commercial activity, commerce activity, shopping and being in malls to subside in Q3 and Q4. People will be back out in the malls. I think most of the demand in the Asian countries is lost. I don’t think it just pushes out. There’s no reason to believe that they would — they will buy more in the back half of the year because they didn’t buy in the first half of the year.

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James Andrew Chartier, Monness, Crespi, Hardt & Co., Inc., Research Division – Security Analyst [31]

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Okay. And then Anne, the nonrecurring store closing costs, you quantified $3 million in the first quarter, but you didn’t quantify it for the year. Is there additional costs beyond first quarter related to those store closings?

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Anne Mehlman, Crocs, Inc. – Executive VP & CFO [32]

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Yes. So what we talked about related to Asia, mostly charges related to Asia, onetime charges for the year is $5 million, $3 million being in Q1.

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James Andrew Chartier, Monness, Crespi, Hardt & Co., Inc., Research Division – Security Analyst [33]

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Okay. And then just by my math, the $40 million to $60 million impact is 3% to 5%. And when you add that to your sales guidance for the year, comes out to 13% to 15%, which is 1% above your previous guidance. Is there an implicit raise to the underlying business, or is that math off?

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Anne Mehlman, Crocs, Inc. – Executive VP & CFO [34]

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Yes, I think within — very close to our original range. Obviously, we continue to see strength in our underlying business as we talked about, and we feel really good about the underlying business, excluding kind of the extraordinary events with the coronavirus.

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Operator [35]

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(Operator Instructions) Our next question comes from the line of Sam Poser with Susquehanna.

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Samuel Marc Poser, Susquehanna Financial Group, LLLP, Research Division – Senior Analyst [36]

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Most of the stuff that I wanted to know about has been asked. But I guess the question is in the fourth quarter, it was Asia Pac — how did Asia Pac do relative to your internal expectation from a — both a sales and margin perspective?

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Anne Mehlman, Crocs, Inc. – Executive VP & CFO [37]

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Yes. Our Asia growth in the fourth quarter was 15%, so we were pleased with that growth. Some of it, we’re starting to see the pickup in wholesale. And then we had extremely strong e-commerce growth, which was in line with our strategy of opening marketplaces and really focusing on digital. So we were pleased with our Asia growth in the fourth quarter.

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Andrew Rees, Crocs, Inc. – President, CEO & Director [38]

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Yes, consistent with our plans, Sam.

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Samuel Marc Poser, Susquehanna Financial Group, LLLP, Research Division – Senior Analyst [39]

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And so there’s — so if we think ahead a year, I mean once the dust settles and you’re not going to make — may not make up the sales this year, but you should make — you should run a very healthy increase at the end — at the beginning of next year, theoretically, if the brand momentum continues as you have planned. Is that a fair statement?

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Andrew Rees, Crocs, Inc. – President, CEO & Director [40]

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Yes. I mean I’m not going to comment on sort of on long-range growth expectations. I think we’ve highlighted we will definitely do that in the — later this year when we plan to hold an investor conference. But yes, I think as we’ve talked about repeatedly, we definitely see Asia as our largest long-term growth opportunity based on the size of the markets that we are participating in, the direct markets where we participate and also the indirect market, the distributors that we have in those marketplaces. So it was important to us that we were able to achieve the growth that we did in Q4. And in the future, once the dust settles from coronavirus, we will be — we are focused, and we’ll continue to be very focused, on driving growth in Asia.

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Samuel Marc Poser, Susquehanna Financial Group, LLLP, Research Division – Senior Analyst [41]

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And then just a follow-up on that. Other brands have talked about how business — how their business was, let’s say, for the first 3 weeks of January. Can you give us some idea of the trend prior to the advent of the coronavirus?

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Anne Mehlman, Crocs, Inc. – Executive VP & CFO [42]

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Yes, so we don’t talk — Sam, we don’t talk about trends within the quarter. But just going back to Q4 because I think that’s relevant with our 15% sales increase, we saw really strong growth within our Southeast Asia distributor markets, in India especially and in e-com. And I think that’s the best way to think about it.

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Samuel Marc Poser, Susquehanna Financial Group, LLLP, Research Division – Senior Analyst [43]

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Okay. And then just a follow-up on somebody else’s question. I mean are you — are you seeing or do you foresee any impact of the coronavirus in, let’s say, Europe, Australia or the Americas within your — is any — is there any impact in markets other than in Asia baked into the sales reduction that you provided?

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Andrew Rees, Crocs, Inc. – President, CEO & Director [44]

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Yes. So look, it’s a very fluid situation, Sam, as you’re aware of. From what you highlight, look, Australia, absolutely. I mean Australia, we’re already seeing that. It’s a strong tourist destination out of China, and so you can see that impact already. I don’t know about Europe, to be quite honest. And obviously, the explosion in cases in Northern Italy and potential for that to spread in Europe is something that’s very recent. It’s really this week and it’s very hard to contemplate what that would have. And really, any impact in Europe is not built into our expectations.

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Anne Mehlman, Crocs, Inc. – Executive VP & CFO [45]

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Yes. And if I could just elaborate just to clarify one thing. Australia is actually considered part of our Asia region, so that would be included in our guidance. It’s actually pretty small for us, but that — Australia is included in our Asia region in your guidance, whereas Europe is not.

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Samuel Marc Poser, Susquehanna Financial Group, LLLP, Research Division – Senior Analyst [46]

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And then lastly, as I promised you. What — can you talk about like sort of the evolution of the management of the brand and the — and what’s really sort of besides the product and the — maybe it’s the manner by which you’re marketing, the way you’re segmenting the product and so on. In North — in the Americas, how that’s working? And how — and where that is, all other things being equal, in Europe and Asia?

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Andrew Rees, Crocs, Inc. – President, CEO & Director [47]

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Yes, that’s a very good question, Sam. So I would say, as we kind of look at our marketplaces, obviously, the America — the U.S. market is by far the most sophisticated. And I think what you’re alluding to is we’ve definitely instituted and are focused on a marketplace management strategy, which allows us to manage which products go to which channels, how much they are allocated, if you like, and make sure that we have the right product in the right places for the right consumers. Clearly, there’s different consumers going to different channels, and we are working actively on that. We’re pleased with where we are on that. And I would say the vast majority of our retail partners are also pleased with that to see us very proactively managing the marketplace.

That need is also — that is also a need in Europe, and we’re transposing some of those marketplace management techniques to Europe. It’s less relevant in other markets, which are far less sophisticated. But it is a key element of our ongoing strategy, and we think it’s an important element because it drives — it will drive longevity and sustain our growth strategy — our growth over time.

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Operator [48]

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Our next question comes from the line of Jim Duffy with Stifel.

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James Vincent Duffy, Stifel, Nicolaus & Company, Incorporated, Research Division – MD [49]

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First, congratulations to the team on a terrific year in 2019. Anne, I wanted to ask with respect to the 2020 guidance, can you guys speak to the wholesale growth rates and DTC comps assumed in the guide? And I’m specifically curious what’s assumed for North American DTC comps.

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Anne Mehlman, Crocs, Inc. – Executive VP & CFO [50]

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Yes. We don’t break out the pieces. I would say that it’s encompassed in our overall guidance, but we — from the Americas standpoint, we expect DTC comps to be positive, and we expect good wholesale growth as well.

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James Vincent Duffy, Stifel, Nicolaus & Company, Incorporated, Research Division – MD [51]

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Okay. And one of the reasons I asked, I’m curious, expectations for mix and the influence there on ASP. Would you expect ASPs to increase on a year-to-year basis?

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Anne Mehlman, Crocs, Inc. – Executive VP & CFO [52]

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Yes, I would say, all things being equal and ex currency because obviously, that’s a fluid situation, I would say yes.

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James Vincent Duffy, Stifel, Nicolaus & Company, Incorporated, Research Division – MD [53]

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Okay. And then I wanted to ask some about inventories and the complexities of inventory management given the virus disruptions. What are some of the considerations and the differences as it relates to inventory management in Asia that you’re seeing between distributor markets and direct markets? Had you yet sold into the distributors when the virus came about for direct markets? What are the considerations for channel inventories? Can you guys speak through that a little bit, please?

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Andrew Rees, Crocs, Inc. – President, CEO & Director [54]

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Yes. I think this is one of the areas that internally, we’re incredibly focused on because it’s going to be extremely fluid. I mean I think the broad dynamics are that factories came back slower than we would have expected out of Chinese New Year because of the coronavirus. So you’ve got some delays coming out of those factories. You’ve always got reduction in demand, particularly in some of the Asian markets. So you’ve got future supply that’s not going to be consumed. So I would say we’re very focused on kind of rescheduling supply that’s coming out of the factories that are producing and also redirecting supply that was intended for China and some of those other markets. As Anne alluded to earlier, I think it’s fortuitous that we improve — that we brought in a good amount of inventory into our North America marketplace ahead of an early Chinese New Year because that puts us in a better position there. But this is going to be a very fluid situation, and we’re going to be working very closely with our distributors and our wholesale accounts to manage this over the coming months.

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James Vincent Duffy, Stifel, Nicolaus & Company, Incorporated, Research Division – MD [55]

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Andrew, with respect to those distributors, had you yet sold into them for the spring/summer season, or is that something that happens generally after the Chinese New Year?

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Andrew Rees, Crocs, Inc. – President, CEO & Director [56]

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No, I would say different in different parts of the world. But in Asia, they’ve taken — I think Anne mentioned it, they’ve taken quite a lot of supply in Q4, very early Q1. In Latin America and EMEA, it’s flowing as we speak. But — so it’s different with different parts of the world.

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James Vincent Duffy, Stifel, Nicolaus & Company, Incorporated, Research Division – MD [57]

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Okay. And then last one for me. I’m curious how you’re phasing marketing investments in Asia. You’ve made some investments in ambassadors for Asia. Can you talk about how you’re leveraging those relationships? And have you delayed any programs or anything like that? You mentioned the KFC launch was delayed. Just how are you thinking about marketing investments in Asia? Are you able to delay that until later in the year when it may be more impactful?

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Andrew Rees, Crocs, Inc. – President, CEO & Director [58]

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Yes. So I mean I think that obviously, China was a really big focus for us. It was, I think, a very big coop for the brand to be able to land Yang Mi is our brand ambassador. And as we revealed her and launched that, really, pre-coronavirus, it had a great impact. We saw a tremendous social media engagement, and we saw a nice impact from that. So — but obviously, with stores being closed, we have pulled back on some of that activity, and we’ll push it into later in the year.

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Operator [59]

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And there are no further questions at this time. I’d like to turn the call back over to our presenters.

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Andrew Rees, Crocs, Inc. – President, CEO & Director [60]

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Thank you very much. I appreciate everybody’s interest in the company. Obviously, a difficult — an interesting time and difficult time for all of those impacted by the coronavirus. But as a company, we’re very much focused on the well-being of our employees and managing the situation going forward. So we appreciate everybody’s ongoing interest in the company.

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Operator [61]

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And this does conclude today’s conference call. You may now disconnect.

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