Q3 2020 Crocs Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Crocs Inc. third quarter 2020 earnings Conference call. At this time, all participants are listen only mode. After the speakers presentation to be a question and answer session to ask a question. During the session you will need to press star one on your telephone please be advised that today's conference.
Is being recorded if you require any further assistance please press star zero.
I would like to now hand the conference.
Over to your morning, everyone and thank you for joining us today for the Crocs third quarter Twentytwenty 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 Dot com.
We would like to remind you that some of the information provided on this call is forward looking and accordingly are 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.
He 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 factor section of our annual report on 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 any other documents filed with the SEC for more information related to these risk factors.
Adjusted gross margin income from operations operating margin and earnings per diluted common share. Our non-GAAP measures. A reconciliation of these amounts to their GAAP counterparts is contained in the press release, we issued earlier this morning joining.
Joining us today on the call are Andrew Reese, Chief Executive Officer, and then Ellman 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.
Thank you Gary and good morning, everyone as.
As you saw from our release issued this morning ill business achieved record third quarter top and bottom line results. Our extraordinary performance amidst these dynamic and difficult times demonstrates the strength of our brand and product offering globally, and our ability to deliver sustainable profitable growth.
Im incredibly proud of the results and how the entire Crocs organization has executed against our long term growth plan and manage the business through the COVID-19 pandemic.
And we will review our financial results in more detail shortly but here are a few highlights from the third quarter of 2020.
We achieved record third quarter revenues of $362 million up 16% versus prior year.
Our Americas business had an exceptional quarter with revenue, increasing 26% on DTC comp growth of 31%.
Our new business delivered strong revenue growth of 13% with double digit revenue growth in both E commerce on wholesale ever.
Every channel grew revenue with digital commerce sales, increasing 36% to represent 38% of global revenue.
Adjusted operating profit was $75 million, an increase of 70% with margin expansion of 660 basis points.
Adjusted diluted earnings per share grew 65% to a third quarter record of 94 cents.
Let's first focus on the strength of our brand.
Which underpin these extraordinary results the crocs brand continues to resonate strongly with consumers throughout the world as a result of a powerful marketing an iconic products.
We said on our last earnings call that we had an exciting marketing pipeline and Weve seen this coming to fruition.
In July we released a loot combed collaboration.
Featuring the classic slide.
The oldest fans in Korea acute overnight at stores for our collaboration with case study that sold out in 90 seconds.
Weve Chinatown market, we launched our colorful grateful dead club, which Lebron James more around the MB a bubble creating questar.
In September we released localized manager bits chunks of.
Brian has always stood for a quality and inclusivity and encourages everyone to come as you are.
We continue to celebrate come as you are with the special edition glow in the dark cloud with Puerto Rican stop Opcone.
For those of you may be less familiar with but I'd be performed initiate NFL Super Bowl halftime show along.
Alongside Jennifer Lopez answer Kara and according to US Billboard is late 2000 became the highest charting all Spanish language on ever.
Across the body design, we're in very high demand selling out in minutes.
More recently, we kicked off our month long for October celebration with the launch of a crossover tibbets calendar containing 50 unique given the countdown to crop day on October 23rd.
This month was full of October surprise is the most noteworthy being our collaboration with Justin Bieber and his closing Brown drew house, which generated an incredible global media Buzz.
The singer songwriter design yellow giblets adorn clubs that sold out quickly around the world.
I'm pleased to share that this best in class marketing is translating into results.
In our own 2020 brand survey, which measures participants views about the crocs brand globally, Brazil.
Results were up double digits each of our key metrics brand is our ability brand relevance and Brian consideration.
We have now average double digit growth across these same metrics for the past four years.
Another indicator of brand strength is Piper Soundless fall Twentytwenty, taking stock with teams survey.
For the cross brand remained in the top 10 footwear brands preferred by teams in the U.S.
In summary, our brand has never been stronger and the brand strength as further increase through the pandemic.
I'm confident that the Crocs brand will continues to drive accelerated growth this year and beyond.
Now, let's turn to the third quarter highlights.
From a channel perspective global E Commerce revenue grew by 36%.
This represents our 14th consecutive quarter of double digit E commerce revenue growth.
Our digital business, which combines E commerce and retail grew 36% and represented 38% of our third quarter sales compared to 32% last year.
Digital growth rates tempered a bit from Q2, when much of brick and mortar was closed for an extended period.
Digital penetration remains high and this remains a top priority.
Over the long term, we believe our digital presence on both our sites and those of our partners will allow us to serve our consumers in their preferred channel and will continue to be a competitive advantage relative to other footwear brands.
Our wholesale channel, which includes bricks and mortar detail and distributors grew 12% versus prior year.
Fueled by strong sell through in detail and our top 20 global brick and mortar accounts.
Over the past 18 months, we have been increasingly focused on these top 20 leadership brick and mortar accounts, which are made up of sporting goods family footwear and specialty footwear retailers.
One of these reside in the U.S.
We are pleased to have recently added both foot locker and finish line to expand our presence in specialty athletic.
Turning to company owned retail third quarter comp sales increased 16% over 30% last year, driven this year by the Americas, and South Korea, which together account for approximately two thirds of our store base.
During the quarter most of our stores will open but operating at reduced hours.
Both our own retail and that of our bricks and mortar partners return to growth in the third quarter and recover from the impact of the panel pandemic much faster than we expected.
From a product perspective, our results continue to be driven by our four key product pillars.
Plus sandals derivates visible competent analogy.
Sales of clubs were particularly strong this quarter, increasing 31% year over year to represent 72% of total footwear revenues versus 62% last year.
I will end the pandemic, we cancel sandal receipts.
As such Q3 total revenues declined by 4% and represented 19% of footwear sales versus 22% last year.
Cubist sales continued to be strong doubling for the quarter versus last year.
Looking to next year's product pipeline were very confident in our lineup.
2021 sell in has been strong on a global basis.
We're excited about our innovation in Cogs, and our ability to deliver a full season of sandals with classic slide Brooklyn and Tulu.
We also expect to capture strong interest in our crossover where client based on our prepared for health care program.
We are poised to continue significant growth in personalization, which had its chance.
Finally.
Profitability was incredibly strong our brand strength and lean inventory led to fewer promotions, which coupled with price increases and product mix boosted our gross margins.
We significantly leverage as DNA to deliver best in class operating margins and we delivered record third quarter EPS.
We are 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 products colors, and a powerful social and digital marketing are clearly, creating exceptional consumer engagement for.
From a channel and region perspective, our digital first strategy and our long term focus on Asia will deliver growth for years to come.
Before I turn the call over to Adam I want to express my gratitude to the entire across organization for their hard work and commitment to delivering best in class results.
Im tremendously proud of how the executed as a team and the results we have delivered for our employees our customers and our shareholders.
With that I 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 third quarter results for a reconciliation of the non-GAAP announced mentioned to their equivalent catamount. Please refer to our press release.
Our third quarter results were exceptional fueled by the Americas and EMEA, we delivered record third quarter revenue I have a global pandemic. In addition to delivering record third quarter revenue last year profitability without standing as we grew gross margin and leveraged SGN AG, increasing operating income and operating margin and generate.
Record third quarter free cash flow generation third.
Third quarter revenue came in at $361.7 million compared to $312.8 million in the third quarter of 2018 at 15.7% increase or 15.9% on a constant currency basis.
We sold 16.9 million pairs associated increase of 6.2% over last years third quarter.
Our average selling price during Q3 increased 8.8% to 20 $1.36 cents, but the increase attributable to fewer promotions and discounts higher pricing on certain products and increased sales of turns per share now let's review our results Arrington as Andrew mentioned earlier, the Americas had another strong quarter with revenue.
At $234 million up 26.4% or 27.3% on a constant currency basis retail comps increased 22.3% growth was phenomenal ecommerce and stronger than anticipated in wholesale led by detail and our key brick and mortar partners our performance in the.
New App is the direct result of our commitment to driving relevance with the consumer through great product and innovative marketing.
In Asia that Q3 revenues were $67.7 million down 8.8% from last year's third quarter ecommerce growth of 10% and retail comp growth of 2.8% were offset by declines in our distributor wholesale revenue and retail closures related to further rightsizing of our fleet.
Both South Korea, and China performed well however, our distributor in southeast Asia continued to be under significant pressure due to lack of tourism.
EMEA revenue increased 12.6% over last year's third quarter to $60 million in spite of inventory constraints. The impacted performance early in the quarter strong revenue in wholesale and ecommerce is partially offset by declines in retail.
Our EMEA business is benefiting from growing brand heat and our continued focus on digital commerce, which represented almost 60% of in the quarter.
Our third quarter adjusted gross margin was 57.4% at 380 basis points from last year to 53.6% driven by changes in product mix fewer promotions and discounts and price increases.
Our adjusted EPS DNA fell to 36.6% of revenue versus 39.4% in last years third quarter the.
The decrease in adjusted EPS any rate as a result, the strong sales growth and operating leverage even as we made additional brand marketing investment to support future growth and a bit that.
Our third quarter operating income increased 80.7% to $72.1 million versus $39.9 million last year and operating margin increased over 700 basis points to 19.9%.
Adjusted operating margin increased 660 basis points to 20.8% is any leverage on strong sales growth added to the gross margin expansion.
For Q3, we recorded $8.2 million of income tax expense with an effective tax rate of 11.7% versus 6.4% last year.
Third quarter non-GAAP adjusted diluted earnings per share increased 64.9% to 94 cents compared to 57 cents a year ago with.
With record third quarter free cash flow, our liquidity position is strong with $123.6 million of cash and cash equivalent in addition to $364.4 million of borrowing capacity available on our revolver, we did not repurchase any shares during the quarter and given our strong balance sheet and liquidity we may opportunistically.
Labour damn share repurchases.
Inventory at September Thirtyth, 2020, with a $174.1 million up from $139.8 million in the third quarter last year.
We ran lean inventory throughout Q3 with significant received later in the quarter and high entry into inventory, we anticipate a strong fourth quarter and do not expect the same degree at inventory constraints that we saw this past quarter.
Turning to the future as we have said, we will share our expectations and visibility allows I would like to share our current outlook for the balance of 2025.
Barring significant additional covered related closure, we expect fourth quarter revenue to grow between 20 and 30%. This will translate to full year 2020 revenue growth of approximately 5% to 7%.
In summary, we delivered incredible third quarter profitability with exceptional cash flow further strengthening our balance sheet and positioning ourselves for sustained profitable growth at this time I will turn the call back over to Andrew for his final thoughts.
Thank you Ana.
The Crocs brand has never been stronger with electronic products, great storytelling and global distribution.
As you can see from our third quarter results, we have great momentum in our business and we're excited about the future offer.
Operator, please open the call to questions.
As a reminder to ask a question you may need to press star one on your telephone keypad.
Good question, Yes, the town or Heskey. Please stand by we compile the culinary Rob.
Your first question comes from the line of Jonathan Komp from Baird. Your line is now open.
Yes, hi, Thank you I want to start just by asking about the desktop or acceleration in the topline growth both from the third quarter and that continued into the fourth quarter.
More color on.
Any any call outs or any any drivers as we think about that going into the fourth quarter year on the top line and then.
In addition, about just thinking through the margin implications from a demand for that Youve seen any any specific call out that you might provide for the fourth quarter from a margin perspective.
Why don't I start by just talking to a little bit to the top line question, then hand, it over to on and she can fill in some details around margin.
Margin in Q4 expectations so.
Really topline liquid filled the brand momentum is really playing out very strongly obviously, a really strong driver in terms of growth both in percentage and dollars from the Americas really thrilled with the performance in EMEA from a channel perspective.
Digital channels are performing very strongly the marketing were doing on the collaboration to obviously driving people to those channels without us being super effective.
So we really see very strong sellers in the business I would say.
Couple of things.
Inventory has been lean until this point so there's certainly some restocking going on with our wholesale partners, but as we restart those multiple partners. We also see accelerating sulfur. So we think it's definitely a sustainable and intelligence on.
Yes.
And then when you talked about a little bit what giving a little more detail around Q3.
The stronger guidance, we had strong really strong execution of our wholesale order book, where we saw better sell through on existing inventory with very little promotion. We also saw continued direct to consumer strength in the Americas, and we were a little bit conservative in Q3, just given the fluidity at the situation as we go into Q4 as we guided on in the prepared.
Remarks, we expect to see growth rate at 20% to 30% in Q4, so really that is accelerating trend growth continuing into Q4.
From a gross margin standpoint in Q3, we saw expansion of about 350 basis points.
Most of that is due to reduced promotions and product mix and we really see that as dynamic continuing over into Q4. So we should see similar gross margin on an adjusted basis expansion in Q4 year over year.
And then I think just to kind of finish out the piano from an M&A standpoint, we're really pleased about being able to leverage our cost base, which is something we've been able to do successfully for many quarters at this point.
We leveraged our cost base to almost 300 basis points in Q3, and we expect to see similar leverage effect on our volume in Q4, and then obviously at the top end of the guidance range we would.
Additional leverage on top of that.
Okay. That's very helpful. And then maybe thinking forward to next year, just generally as part of our thinking about this baby the momentum I know Andrew you talked about the brand.
Celebrating area clearly added new of our may be bringing on new customers with them.
Collaboration and Thats driven.
Just how are you thinking about continuing that success into next year and any broad stroke commentary you might or might there.
Yes, absolutely so well, obviously, we're not providing.
Specific guidance at this time for next year, so there's a tremendous amount of uncertainty in.
In front of us with an election week than we can today and obviously pulled at 19 continuing through the through the winter.
I would say we feel extremely confident.
We are confident about the growth momentum, we're confident based on the receptivity we've seen to spring.
Spleen 21, selling weve seen great receptivity from our wholesale accounts.
In multiple regions.
There was confidence on the consumer perspective in terms of the breadth and depth of our consumer engagements. So.
I think thats, probably the best.
Sensing guidance that I can give you.
In terms of 21.
Okay excellent best of luck. Thank you.
Thank you.
Your next question comes from the line of Erinn Murphy Murphy from Piper Sandler Your line is now open.
Thanks, Good morning.
Maybe first a follow up to Jonathans question around EBIT margin, I guess kind of putting it together and for the fourth quarter you would see at at least a mid teen kind of 15 to 16.
For the full year, how do you think about the sustainability of that going forward because it seems like a lot of the levers that you have on a product mix perspective, even regional mix perspective would continue to benefit at over overtime.
Yes, Eric.
Obviously as Andrew said, we haven't really guided for our 2021 I will say from EBIT margin perspective, we do feel good about pieces that are sustainable which include drivers of gross margin for Q3 were product mix.
Were discounts price and give it and we feel good about our ability to maintain those elevated margins barring changes in currency.
So I think you know we feel pretty good about that and we know that we can.
Drive growth and leverage our cost base I would say permitted guiding long term EBIT margins that we are planning on having an investor day towards the end of next year as you remember we delayed one added this year just given the lack of visibility so as long as we have enough visibility we plan to do that next year, and we'll talk a little bit more about where we see our unit.
Margins moving too okay.
Okay got it and then a couple more from me maybe I'll ask on Captain deeper collaboration I think this is one of the first that you kind of.
Moving around the Globe started here in North America I believe you had it in store in Korea, and China as well as the drop in Europe can you just speak to I don't know kind of the magnitude that you saw that move.
The overall business at the.
Translated now into the fourth quarter.
Yes, we were very pleased with the Justice Veeva calibration, obviously given his.
Global statuses celebrity status and around the World is social media. Following it was a really good.
The shift in terms of being able to activate that around the world. As you said, we activated online here in the US online in multiple regions on in store in a number of regions as well I would say we sold through completely.
In.
Rapidly and I think it was very very successful in terms of the amount of social engagement on the amount of consumer person degenerated. So we're really pleased with that.
We don't disclose the size and scale of any particular collaboration but I can say that certainly one of the larger ones we have done.
Got it. Thank you and then I guess last question for me its into the holiday season, there's been a lot of comp.
Conversation around kind of elevated shipping cost and I believe you guys expanded your DC.
To talk about at that operationally and then what are you expecting in terms of like.
Shipping cost.
Thank you yeah. Thanks, Aaron So as we've stated growth into this year, particularly in digital we've actually doubled our ecommerce capacity in the lab to support our own E Commerce business. So as you remember we've been talking about that we've expanded our Ohio facility.
In order to accommodate that so we are actually currently up and running and shipping out of there and were really pleased so we feel really really good about being able to handle what we think will be a really strong holiday season for us.
On the freight side, we are definitely seeing elevated freight rate, both inbound and outbound.
Those are outweighed by obviously a lot of other tailwinds that we have but we are certainly seeing elevated logistics costs as well as just kind of logistic delays around the world and around the globe and we do expect those logistic cost to continue through next year.
Yes, I didn't really think I might add and I think from a consumer perspective, and the biggest issue is going to be.
Less than shipping capacity in terms of to the consumer and we do anticipate and I would say.
You can see very strong messaging from the major shipping companies trying to encourage consumers to pull forward.
They're shipping in ordering so it doesn't all hit those last two weeks December whether we'll be definitely concerns.
Thank you so much and all of that.
Yeah.
Your next question comes from the line of Sam Poser from Keybanc. Your line is now open.
Good morning, Thank you for taking my questions.
So let me just ask you.
In the fourth quarter, you're anticipating from an M&A perspective, I mean are you are you anticipating the same kind of dollars.
That will in Q.
That were in Q2, Q3, excuse me or or are you looking for a similar rate I mean, just can you give us some color there. Please.
I think we're looking for a similar rate so similar ability to leverage year over year.
So when you think about the fact that we were able to leverage our year over year at DNA rate by 300 basis points. In Q3, we expect to be able to leverage Q4 by that around 300 basis points as well I would say at the top end of our guidance range, we'll be able to leverage that more just given the amount of fixed cost that we have in Q4.
And then.
How to think about that.
Okay. Thank you and then on can you give us.
Some color.
Within the revenue guidance of how you're thinking about it by.
General by channel and region.
Where do you think the biggest increases are going to come from sure. Yes, yes, we can talk to that so what 100000 to fill in.
So I think loose we will continue to see strongest growth by region in the Americas.
Where we're seeing strong underlying growth in the math, but we do have some.
Comparable as you've seen some major distributors shipments that we don't anticipate making in the US I don't think in there will be quite a strong next quarter.
We're also we big eight eight times will continue kind of how it has to be yes. So on that kind of gives you cited by by region as well as analysis from a channel perspective, we expect DTC to be very strong on both of these homes.
And our school business, we are seeing strong homes in the analysis, we can see in our release, but also in South Korea, and we also expect to wholesale business to be strong, particularly in Americas, but also in the mix and I think it's just.
Adding on to that a little bit is the interesting thing about Q4 for us versus other key ports to size the amount of volume we're going to drive it.
We will see typically Q4 is a very strong DTC quarter, Fourx, which it will still be this quarter. So we actually think that mix is going to be a little bit more even as we see some demand shift from Q3 to Q4 and us being able to be back in stock at our wholesalers on strong on strong sell through in the U.S.. So we should actually see a pretty even quarter.
From DTC versus wholesale as a percentage.
Thank you and.
Then lastly, you talked in prior analyst days and so on about.
As to you in a targets under 40%, while we're well under.
And given that you're starting to get the top line growth how should we think in general about.
As DNA growth.
Longer term.
Yes, I think obviously, we saw a lot of leverage and actually made this quarter were also at the lowest store count.
That weve been asked that we're really excited about that in the stores, we have a very productive to feel really good about our escalating.
Well, we continue to invest in marketing in the back half of this year, we've invested an additional approximately $7 million that will invest in the back half of that you're really to support next year and we'll continue to make investments that we think are important to our business.
We will definitely come out with a longer term as seen a rate as part of our Investor Day next year as we update our overall.
EBIT margin thought process.
Thanks, and then lastly.
Why should investors not be concerned.
About.
Sure.
Uhhuh sustainability of.
Okay crops and the trends that you.
You're seeing work what.
Can you talk about the evolution of brand management.
Supply chain management, and segmentation management and so on.
Yes, So let me start off by saying.
I do understand why investors are concerned about sustainability. If you look at the history of the company.
The flu I would safely significant cycles, but I would also tell you I think today the company and the plan is a very different brand in a very different company.
So if I start with the sort of consumer facing side of the business.
I think the west of consumer engagement.
Clogs sandals was good and visible come to technologies, though he gets into how is getting us multiple avenues that we have to grow the business.
The sophistication of our marketing and consumer engagement is completely different to how it's been off.
I think the effectiveness of our go to market and how we manage the marketplace with.
With both.
Segmentation between accounts allocation that we gave particular account and and we've announced two accounts that we will also be meeting tomorrow by things here in the last on 140 of our best selling styles. So I think we are managing the marketplace in collaboration with the wholesalers in a very different way than we have.
In the past.
And we're managing inventory in a very different way we have in the past.
So I think it's it is completely different.
I would say.
So the consumer is different so I think well plus is certainly not a pandemic play I think thats also a concern some investors.
We are seeing this trajectory in this trend before we came into the pandemic I think the shifting consumer mindset has only help to Brian we make a product that is.
That is funded value priced it easy on analysis easy to clean their other though a lot of both functional and emotional benefits to our brand I think it fits really well with whether global consumers today. So I think that many many reasons too.
Two things that.
The stadium is the growth that we're seeing is short lived.
And.
On the oil side, if you want to use that word I think we can substantiate data on multiple avenues, yes, and I think even just to give a little bit of color around that from a numbers perspective. If you think about our unit sales versus our SP ARPU growth has really been very balanced this year.
And were up both in price and in units and actually for nine months really freight thats driving a lot of the increase in revenue. So it's not that we're selling a bunch of units into the market. So definitely something to think about.
It's hard to believe.
Really.
Well.
Thank you continued success and it's great to hear about the better pricing and I just heard from a client can you explain that prices everybody because.
I know with some people may not.
Well, we believe that you've done.
Thank you.
Good.
Your next question comes from the line of Susan Anderson from B. Riley. Your line is now open.
Hi, Good morning, Thanks for taking my question nice job on the quarter and I guess, just a follow up on the wholesale channel I'm kind of curious it sounds like it's going to be a lot as well.
Restocking going on this quarter, so kind of as we look forward and replenish that restocking its how much of the acceleration and growth in fourth quarter is kind of being driven by the fact that the wholesale so lean right now versus that growth continuing into next year.
Yes US is I would say, it's both right so and when I say, both I mean, there is certainly an element of replenishing our wholesale partners, whose inventories are ultimately right. The two leaders there. This body in terms of size coverage et cetera.
But as we as our inventories have built through the quarter and we enter a stronger and stronger physician unable to refill those partners will.
What we have also seen is accelerating salsa.
So what that tells us is that.
The consumer demand is for.
Well those inventory.
Inventory levels in our wholesale partners and we can see that in our own DTC business as well.
So it's certainly both.
Certainly not just of restocking component there is a piece of that but there is a piece of the of also advised on cellphone.
And just to add a little bit more color as well do you think that is a very you extra event.
Phenomenon and outside of the U.S., we definitely see some distributor that normally sell into in Q4 that were not going to be selling into this Q4. So there is opportunity.
For that next year.
Great. That's helpful and then I guess over in Asia, So nice to see the Cequent on treatment. There can you maybe give a little bit more color just by channel and we'll take online grew.
Retail slightly down and then wholesale was down more I guess kind of what's going on with the wholesale channel there was that supply constraint or and.
Is it gets where that consumer shopping over in Asia, and what do you expect that to continue to improve.
Yes, no. That's the best way to think about Asia is actually by regional type of business. So.
Me kind of give you some some color on that so.
The biggest impact that we're seeing in Asia.
And I would say Asia in totality has seen the greatest impact from folded 19, and probably we will have the most sustained impact as it relates to our business.
Because there are a lots of tourists that are left those tons into Asia on within Asia.
Big part of the Asian business is stimulated by Chinese tourists television all those different markets. So we see that most strongly in our distributor businesses, which are in southeast Asia, So think Thailand, Philippines, Indonesia et cetera.
Those distributors are heavily impacted that's wholesale and so thats why we see the drag in our wholesale business. If you look at the other countries in Asia software is our strongest market is performing very well, we're seeing robust momentum were seeing elevation of wholesale distribution wishing really strong sell throughs in splunk before.
In our department by Department store shop in shops and.
Which is a digital retail sale for us.
In Japan, I think that consumer has pulled back during the pandemic. So we're definitely seeing some pullback in.
In Japan.
From a China perspective, we see.
Good performance on our digital business.
Very much encouraged by the.
The reaction to our new store concepts that we talked about at our last earnings call but.
But we are concerned about our apartment store portfolio. So upon the store portfolios, Jim Leyland polo retail locations and they have not bounced back as quick as the as the rest of the economy and as we look at that we anticipate that we'll give further investment and optimization Department store network in 21.
So we can get back to wholesale growth in 22 was in China.
Great Thats helpful. And then I guess lastly, really quick on the cloud and.
Well I guess the club maybe small as a piece of the revenue I guess I'm curious if you see large bump and other products across maybe the crocs website, our retail stores. When you do launch like it Justin Bieber Classic is there any color that you could give around kind of the bigger picture on what these are dry.
Moving in terms of revenue.
So.
What I would say what we focus on.
Is the collaborations driving consumer engagement right. So they drive consumer engagement, they drive social and digital impressions on a global basis and on an enormous scale.
In addition, the dynamics of the consumer shopping on our website allows us typically to collect their email addresses and create a relationship with those consumers, which obviously has value beyond the sale of that collaboration on future sales of the brands into those consumers. So I would say it's the consumer.
Engagement, it's a social and digital activation and then it's the ability to be able to reach out and market to those discrete consumers on an ongoing basis and given the portfolio of collaborations and give some types of consumers that were bringing to the sites that obviously broadens our reach is different.
Great. That's helpful. Thanks, So much good luck next quarter.
Thank you.
Your next question comes from the line of Marsh Champine from.
Your line is now open.
Hi, Mark.
Laura Champine from.
Hi, guys. Thanks for taking my question. This morning, it's really on gross margin. So appreciate the very strong performance. There this quarter and the guide for next does does how much of that is just coming from leverage on the better sales and how much is related to lesser promotions.
Given that strong topline trend.
Yes, it's a great question longer term, we do feel like gross margins are sustainable partly because we're able to leverage.
Our fixed cost on better revenue I would say for the quarter. We did naturally see that as we have several distribution center project in Europe in the U.S. and a couple other.
Countries underway I was the biggest piece of gross margin expansion for the quarter was really fewer discounts and promotional.
Cadence followed by the mix, both with plots and to have it.
If it's obviously very high margin and then the price increases that we took last year. So I would say those are the biggest dynamics driving gross margin for the quarter.
Great. Thank you.
Thank you.
Your next question comes from the line of Mitch Kummetz. Some capital your line is now open.
Yes, thanks for taking my questions.
Just a few let me start on Q4 could you maybe address your outlook by product category, a little bit I guess I'm, particularly interested in the line clog business can you say what percent it was.
A year ago in the fourth quarter and are you looking at that business to kind of grow in line with the.
Turning to 30 that you provided or maybe even at a faster rate.
Okay.
Yes, I can talk a little bit to that mix. So.
Look in Q4, I think the big drivers from a product category perspective.
I was going to be both clubs and units.
Obviously, we do sell 70 around but obviously, it's a weaker servicer as those clubs and give us what the big drivers on a global basis.
Turning to the loan business I would say the line business funding.
Very strongly.
In fact, I think we are struggling to keep up with that we struggle to keep up with it last year.
And I would say will grow substantially faster than the overall 20 to 30 guide that we gave so it's really it's a very strong positive.
Andrew You mentioned Giblets and I think in your prepared remarks.
As I mentioned that that business doubled in the quarter.
Can you frame that a little bit for us I mean, I feel like you're going to a bit reluctant in the past to kind of.
Right got out, but can you say kind of what percent of the total that is.
And just its impact on margins as it grows it outpaced rate.
Yes, I think we get paid download and we're really pleased with that and remember the reason we left as the sites are high margin if they really create really good consumer engagement and they come back.
And we.
We feel great about the fact that that business is so important because it's our unique way to really do personalization in a way that resonate with the consumer and then also really accretive to our margin the best place to see that as we have started including it in our at pieces. We think it's an add on to our clock purchase and so you can see that is driving.
Skis, and therefore flowing through to margin.
I think we.
We continue to see that business and we will continue to continue to see it accelerate in crossover we sold at the calendar with 50 gigabit to know sold through really well and also as we talked about the collaboration they all feature thats not a really good way to showcase the kit.
Got it and then and then last question just on.
On on 2021, and I recognize that visibility is limited, especially because of coated.
But as I'm kind of looking at my model last year or I should say last year first half of 2020 I think your sales were down.
6% of our if my math is correct and I would guess that your initial plan was that sales would have been up double digits that is not good for cologuard.
And I'm just kind of curious how you think about your ability to kind of recover what you lost especially as you have visibility into your spring order book, which what I imagine is.
Probably a pretty strong.
Yeah, I mean, I think look what we're up against a weak first half of this year absolutely. So I think we're pretty confident that we will recover obviously the the business that was lost because store as opposed et cetera, and continue to grow as we think the first half will be much stronger than the second half.
I think.
At this stage when we're not anxious to say more than that.
We do understand that everybody is looking for for that perspective, our intent is to.
To attend the IC our conference in January and I think we'll be in a good position to give everybody more information the most active on 2001.
I'm sorry, one quick reminder, about what we guided coming into the year before Kevin.
Pretty early because as Asia. So we did guide.
12% to 14% revenue growth before pre pandemic and I will say that we feel really good that we would have hit those numbers had there not been.
The COVID-19 outbreak.
Great Thanks, and good luck.
Thanks much.
Again, if youd like to ask a question Thats Star one on your telephone. Your next question comes from the line of August 22 down from Stifel. Your line is now open.
Good morning.
Well not be on mute.
This is Jim can you hear me.
Hey, Tim Yes, yes.
Not sure I ended up Feldman under my associates, well, great terrific momentum guys and Andrew. Thank you for the market specific commentary on what is it specifically region.
I know it turned in China has been a strategic priority for the management team can you talk about the brand indicators, you're seeing in China, and maybe speak more about the top two acceleration on the China business.
How big is that real drag from the realignment of apartment door footprint and then can use it.
Perfect business, how big is the distributor business as a percent of the APAC revenues.
Thanks, Okay.
Okay. So Sean here, and then distributors, so I would say underlying brand indicators in China.
Our.
Prudent right. So we're definitely encouraged by that if you looked at us.
Twentytwenty, obviously, our investment plans and our strategy related to China. This was heavily interrupted by over 90.
But we will.
We did collaborate and work with that Yang me earlier on year, She's a major celebrities.
In in China, including doing a collaboration with that was well received and we.
We're seeing great. So obviously digital and social engagement more recently as Alan highlighted the Bill was a global.
Release that also resonated very well in China. So we are seeing land indicators from our fronts.
Brian study in.
Lastly, we are seeing.
Good trajectory on our digital business.
So we feel confident about our future and I would say remains our number one priority. We think ultimately the China market should be able to market on a global basis.
The us.
The drag from the distributor realignment, we don't think is substantial relative to this year.
Because frankly, they've not taking a lot of clubs to ship.
So we don't think visit is a strong driver and it's a perfect opportunity to to make those investments.
That realignment.
Then moving to the second TCOS question, which is distributors.
We don't break that out, but a substantial right those distributors in southeast Asia. Those are not small small economies. When you think of product Philippines, Indonesia huge amounts of people went back up to those 2 billion people.
Those are visible to the businesses and so thats data thats been a big drag this year.
We do not expect them to rebound early next year just to be very clear right. The if they are very much dependent on on tourist travel and and people are just not in a position to probably yet. So we don't think that will be deemed to be late next year and potentially into 22 before these types of events, Yeah, and then just wholesale.
It was in 2018, which is a more normalized year was 60% of our overall Asia business. So if you look at the decline.
This year versus last year, a lot of that is that it yes distributor business you can kind of get the magnitude there.
Got it. Thanks, that's helpful and can you talk more about the rollouts of foot locker and finish line. How many doors are you in now what's kind of the glide path to broader rollout.
That'd be helpful. Thanks.
Yes, I'd, probably just give a little color on that I want to get into that in too much detail, but finish line. We're in a I would say a good proportion of the stores today.
Within within the assortment, we're definitely performed really well on the website.
On days participated with us.
In the release of the 5000 collaboration which I think was a record day for their for their website.
So in terms of profit.
The foot locker.
Is just getting started.
In terms of and that's really.
To be clear thats across.
Multiple of their faces not just the full of the base and and also a number of different styles. So that's getting started here in the fourth quarter and will accelerate in <unk> and 21.
Thank you very much.
Your next question comes from the line of James tools from you because your line is now open.
Hi, Good morning. This is Marty just on on behalf of Jay So just wanted to ask.
About the retail stores, I mean, they've been performing quite well and the comp sales I just want to just think how does that balance with you know all your comment that you're kind of like focusing on keeping the most efficient store should we see that.
Further store closures going forward or are we reaching more like our average spike this this balance and the store count.
So look I think the first thing to say is particularly here in the U.S., but also win in South Korea, which is about two thirds of our store base. Today, we saw really great comps do you smoke quite systems out there that definitely dead and bear in mind those stores are operating on.
We significantly reduced hours and I would say Q2 store associates, who are working really really hard and difficult conditions to service our consumers.
And as you go to many of the malls and this will operate and frequently see a line outside our store because were very explicit about the number of people that we allow into the store at any given time to protect.
Our associates and also subsets of consumers.
So that gives you also an indication of the strength of demand for us as a brand in terms of the store portfolio in the fleet look we'll continue to pursue I would say not.
I think weve closed sites.
Frankly, most of the poor performing on profitable stores, the exception to probably one or two around the globe.
The remaining stores, a highly productive, but we do not anticipate or we do not intend to open a significant number of stores. We just don't think that's the right growth possible for our brands not the most effective and profitable way to grow the brand will be growing the brand through our digital business and through a wholesale business. Yes every quarter about 60 stores this year.
And we expect our fleet I would say is relatively stable as we have talked about in prior calls that there actually maybe a few more outlets, we would want to open, especially in the Asia region.
Great Thats very helpful and then just.
Lastly on on the pricing I mean, just wanted to check with you how often do you usually you increase prices and just kind of particularly given like the very strong momentum do you see opportunity just maybe do a little bit more price increases.
In the short term.
Yes, we replaced the market. So we evaluate all of our products in all of the markets in which we go to market. So.
We're very focused on price in the market looking for on making sure that we're giving consumers incredible value with ADESA, a very important part of the brand, especially in an environment, where the consumer I think is generally under pressure.
But also make sure that we're capturing the right value for the brand that we think we deserve and that will enable us to invest in the brand in the future.
Obviously, we've made some fairly asserted moves in pricing over the last two to three years.
It's not all at once it's sort of cadence in different regions different times I don't think we see such.
Such significant movements in the future, but we will continue to evaluate.
Products in the local market on an ongoing basis.
Great. Thank you I am just wondering last one if I may.
Just on the on the buybacks you mentioned in the press release that you May you know I guess like depending on the situation consider doing their resuming the buybacks just.
I wanted to ask.
Around because if that were to happen, how how I guess like the pace at which you would would you would like to return to.
We'll historical amount of buyback that you have been doing too.
Previous years.
One of the most.
In.
Important pieces of our performance this quarter is really showing certainly using our strong balance sheet and that we generated record free cash flow. So I think we used a lot of our cash flow to pay down the revolver, which we have $365 million Undrawn, we have a $140 million cash. So we have plenty of capacity obviously.
Our business operations are very capital efficient and we expect to generate free cash flow going forward, while we prioritize the growth of the business first and then we'll look for other ways to deploy that capital and provide the best returns to our shareholders and we obviously have over 500 million left on our authorization I think on for buybacks. So we have plenty of for the authorized.
Happy to do that as well.
Great. Thanks, Thanks, a lot and congratulations on the results.
Thank you.
Your next question comes from the line of Jim Chartier from Monness Crespi in how your line is now open.
Good morning, Thanks for taking my question.
You are talking about the follow up on the new distribution, what do you do from a product segmentation standpoint.
So you have to manage the different channels and.
And then any product categories or styles that you might.
You think you might sell better expect.
What it specialty channel.
And then.
Those doors help you reached a younger I think your coffee explore customer thanks.
Yes so.
Let me just did last piece first I think the the assortment of our athletic specialty will certainly start with costs.
Yes that does help us reach.
Slightly different consumer I think the key customers that reach 17 was that it gives us more critical mass in terms of reaching a younger consumer.
Teen customer both urban and suburban so I think that's important.
In terms of.
Contagion in allocation really what we're looking to do is to revise the point of difference for our major retailers.
Obviously, they all want to carry the best selling taller than the best selling products, which is one of the toughest slow here in North America today, and this is really mainly in North America conversation, but it is important.
Other markets as well.
They also want to point difference. So we'll use energy packs will use exclusives will also do some special make ups for different retailers. So that their overall assortment is is differentiated they get the volume, but deals that differentiation. So thats kind of really the approach.
Great Thanks, and best of luck.
Thank you.
Your next question comes from the line of Sam Poser from Sig. Your line is now open.
Just two follow ups number one on the.
To confirm when the big collaborations such as Justin Bieber.
You are bringing more people to to the brand and then you're selling more just because people are trying to let's say for instance, personalized there.
Your yellow Claude to look like that to be.
I would say that exactly so we're certainly putting more people to the brand. So if we look at sort of bad some ingesting data to very very different populations. They both world enormous numbers of people to our website and to the brand and gave us.
Our ability to talk to them on ongoing basis in terms of people trying to mimic the product by buying give it out.
Adding them to maybe an inline product I don't think you'd really see that seemed to be to be Frank.
What people want is to call our product.
Because of the extensive nature that has this is trying to.
Trying to sort of indicated if you like I would say our store associates, a super creative in terms of.
And continues to do some things in store, but thats more about expressing their own point of view in their own business.
Thank you and then lastly, you said, how you're creating that's similar to last question about.
Segment again create a point of difference within your top retailers.
Just.
In a sense I mean.
Your per Se I mean could you just say that everything you're doing now, especially about the of map and everything else is getting down to personalization and I'm really.
Two or to an individual consumer or to individual retailers, who trends in distribution that sort of the long term objective here I would say that that's pretty good summary, I think we want to enable us consumers to be able to personalize that brought us and obviously this is a unique way to do that and these are really compelling aspect of it.
Is it can constantly change and its instantaneous right and many other brands offer personalization opportunity that you'll be waiting 678 weeks for that product to arrive how personalization allows you to do it at the point of purchase immediately for a for I would say a good value and then.
If you bought a bit.
Four weeks later whatever period of time like to come back and redo. It. So it is an incredibly versatile census, personalization from the from the retailer from the customer point of view. We're also trying to get more and more I would say customize for them as well absolutely I think one thing I would point out.
Our.
Brand heat and our differentiation that were really working hard to provide to.
To our customers actually yielded about a 15% increase in our out the door pricing in the North American market last quarter. So it's definitely having an impact in terms of raising outdoors.
Thanks again to success.
Thank you.
There are no further questions at this time I will turn the call back over to the presenters.
Thank you just a big thank you to everybody for their ongoing interest in the company and we look forward to talking to you next quarter.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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