Q4 2020 Crocs Inc Earnings Call
Ladies and gentlemen, thank you for standing by.
Come to the Crocs, Inc. Fourth quarter 2020 earnings conference call.
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I would like to now hand, the conference over to your speakers today.
Good morning, everyone. Thank you for joining us today for the Crocs fourth quarter 2020 earnings call earlier. This morning, we announced our latest quarterly results and a copy of the press release may be found on our website at crocs Dot com.
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 of our business related to the COVID-19 pandemic.
<unk> is not obligated to update these forward looking statements to reflect the impact of future events.
We caution you that all forward looking statements are subject to risks and uncertainties described in the risk factors section of our annual report on the form 10-K.
Accordingly actual results could differ materially from those described on this call. Please refer to Crocs annual report on form 10-K, as well as the other documents filed with the SEC for more information relating to these risk factors.
<unk> gross margin income from operations operating margin and earnings per diluted common share are non-GAAP measures. A reconciliation of these amounts to the GAAP current parts of contained in the press release, we issued earlier this morning.
Joining us on the call today are Andrew Rees.
Chief Executive Officer, and Anne Mehlman, Executive Vice President and Chief Financial Officer. Following their prepared remarks, we will open the call for your questions. At this time I'll turn the call over to Andrew.
Thank you Carrie and good morning, everyone.
As you saw from our release issued this morning, we achieved record fourth quarter revenues and profitability.
<unk> finished 2020 with very strong brand momentum.
We're looking forward to an exceptional 2021 with accelerated revenue growth as we invest in digital China, and our supply chain to support future growth.
I'm confident in our ability to continue to deliver best in class profitability and strong cash flow from.
Crocs brand has never been stronger and I'm very excited about our future.
And we'll review our financial results in more detail shortly.
But here are a few highlights from 2020.
Our fourth quarter had the highest revenue and adjusted operating profit of any quarter in company history.
We achieved record revenue in 2020 of nearly $1 4 billion of 13% from prior year.
Digital sales grew 50 per cent in 2020 and penetration increased more than the 1000 basis points to 42% of sales.
While DTC comp growth was 39% for the full year.
Adjusted operating profit for the year was $263 million.
An increase of 84% with margin expansion of 730 basis points to approximately 19%.
Adjusted diluted earnings per share for 'twenty 'twenty.
Doubled to a record of $3.22 and we achieved record cash flow, enabling investment in the business and a return to shareholders of over $170 million by share repurchases.
The strength of our brand underpins these extraordinary results.
The cross brand continues to resonate strongly with consumers around the world as a result of our iconic products and powerful marketing.
We continue to launch of pipeline of exciting and innovative collaborations ranging from global launches with Justin Bieber and post Malone to of more regional partnership like Red market in Korea.
Throughout the year Crooks gone of tremendous media coverage around the world from top publications like Vogue bizarre Andrew Squire, we were honored to be recognized by footwear News' brand of the year for 'twenty 'twenty.
We're pleased that our comprehensive marketing strategy resulted in strong brand desirability relevance and consideration, which increased double digits for the fourth consecutive year.
In summary, the Crocs brand has never been stronger and I'm confident of our ability to accelerate in 2021 and beyond.
Now, let's turn to fourth quarter highlights.
From a channel perspective digital remains a top priority.
Global E Commerce growth was extraordinary with revenues up 92%. This represents our 15th consecutive quarter of double digit E commerce revenue growth.
Our digital business, which combines E commerce and E tail grew 87% from represented 41% of fourth quarter sales compared to 34% last year.
Over the long term, we believe our digital presence on both our own sites and those of our partners will allow us to serve our consumers and the preferred channel and we'll continue to be a competitive advantage relative to other footwear brands.
Our wholesale channel grew revenues, 52% versus prior year.
The performance exceeded our expectations driven by incredibly strong sell through in our top 20 brick and mortar wholesale accounts.
The improved deliveries in the fourth quarter, we replenished on hand inventories at wholesale.
However, high consumer demand left inventories leaner than we anticipated at year end.
Turning to company owned retail.
Fourth quarter comp sales increased 41% on top of 16% last year.
Led by the Americas, and South Korea.
We remain pleased with the make and profitability of our store portfolio, which is majority outlet and shop in shop.
Turning to 'twenty 'twenty full year results, we achieved the highest revenue in the company's history of nearly $1 4 billion growing double digits with the particularly strong second half.
Digital sales grew 50 per cent and our already best in class digital penetration increased increased over 1000 basis points to 42%.
Having achieved a double digit operating margin target in 2019.
We had incredible margin expansion the delivered 19% adjusted operating margins for the year.
Last but not least we deliver record cash flow and EPS.
From a product perspective, our results continued to be driven by of four key product pillars, clogs, sandals, gigabits and visible comfort technology.
For 2020 sales of our clubs were particularly strong increasing 33% year over year to represent 72% of total footwear revenues versus 60% in 2019.
Early in the pandemic, we canceled saddle receipt as the initial store closures interrupted the peak of the sandal season.
As such 2000, Twenty's sandal revenues declined by 19% and represented 18% of footwear sales versus 25% last year.
Give it sales accelerated nearly doubling for the year versus 2019.
Turning to 2021, we're investing in our key growth drivers digital China, and a full product pillars.
Digital is the top priority.
In 2021, we'll be investing to personalize, our consumer journey globally, enabling differentiated of more effective communication with our diverse consumer base.
We're also investing in talent technology and supply chain infrastructure to support high levels of growth for the foreseeable future.
China is the second largest full of market in the world remains one of our most significant long term opportunities.
We have repositioned our product portfolio to align to a full product pillars.
We continued to drive focused investments to create band heat and consumer demand through of proven playbook that uses high profile of celebrities influences in the global and regional collaborations.
To that end, we're excited to of sign Chinese actress Yang mine as a brand ambassador for the second year and we're confident she will continue to build brand awareness umbrella Vince through sustained marketing investments.
We will focus on optimizing our mono branded store network by selectively upgrading partners in certain provinces.
We're also renovating our store portfolio in China to improve our store environment by leveraging personalization to drive an interactive consumer experience.
Similar to other areas of the world, we're investing in digital including elevating chemo and embedding personalization as a unique selling proposition.
By the end of this year well of the executed our playbook setting ourselves up for strong growth in 2022.
Finally, we're very confident in our entire product lineup for 2021.
Sell in has been strong on a global basis, giving us confidence in our revenue guidance. We look forward to a full sandal season, and restoring sandal growth by building on the early successes of Brooklyn to loom and classic slide as well as introducing the new two strap classic Sandra.
We're excited about the innovation, we're bringing to clubs in 2021 and expect clubs to continue to outpace sandals for this year.
As the inventory levels improved on a crux of what product we've seen four consecutive months of strong double digit growth.
We anticipate strong growth in personalization through gibbet based on investment in the consumer experience both in store and online.
We feel incredibly fortunate to have outperformed in 2020 and are proud to have given back to our global and local communities through of Crocs cash program.
In Q2 of free pass of Health Cat program donated over 860000 pairs of shoes or nearly $40 million in retail value to frontline health care workers in July we partnered with feeding America Hunger relief organization, United States. Thanks to the generosity of our consumers, we raised nearly $1 million.
Six months, enabling over 8 million meals to those in need we look forward to continuing our commitment to provide comfort to our global communities with our philanthropic efforts in the coming year.
In summary, we're even more confident now than a year ago about the crocs brand strength and our long term growth potential.
When credibly optimistic about 2021 and our growth trajectory.
Our four key product pillars, and our powerful social and digital marketing are clearly, creating exceptional consumer engagement.
From a channel and region perspective, our digital first strategy and our long term focus on Asia, particularly China will drive our growth for years to come.
Before I turn the call over to Anne I want to express my gratitude to the entire Crocs organization for the hard work and commitment to delivering best in class results.
It was an incredibly challenging year for everyone and I am proud of how we have executed as a team and the results we have delivered for all our stakeholders.
With that Andrew will now review of financial results in more detail.
Thank you Andrew and good morning, everyone I'll begin with the short recap of our fourth quarter results for a reconciliation of the non-GAAP amounts mentioned to their equivalent GAAP amounts. Please refer to our press release.
Our fourth quarter results were exceptional.
Fueled by the Americas, and EMEA, we delivered record revenue and operating profit and generated record cash flow in spite of a global pandemic profitability with best in class as we grew gross margins and Levered SG&A, increasing operating income and profitability.
The fourth quarter revenue came in at $411 5 million compared to $263 million in the fourth quarter of 2018 $56 five per cent increase of 56, 1% on a constant currency basis.
We sold $18 9 million pairs of shoes, an increase of 37, 7% over last year's fourth quarter.
Our average selling price during Q4 increased 13, 7% to $21, 63% with the increase attributable to fewer promotions and discounts as well as greater sales of sharp charms per share.
For 2020, we sold $69 1 million pairs of shoes of 3% over 2019.
With an average selling price of $19 91 pence at nine 3%.
We believe the increase in ASP as an indicator of brand strength.
Now, let's review our results by region as Anne.
Andrew mentioned earlier, the Americas had another strong quarter.
With revenue doubling to $310 $3 million <unk>.
The retail comps increased $54 four per cent and higher traffic and increases in conversion.
Growth was phenomenal in E commerce up 125 per cent and stronger than anticipated in wholesale of a 135 per cent led by E tail and our top 20 global brick and mortar partners.
Our performance in the U S. It's the directors all of our commitment to driving relevance with the consumer.
Iconic product and the innovative marketing.
In Asia, Q4 revenues were $51 $8 million down 19, 5% from last year's fourth quarter strong ecommerce growth of 19, 2% was offset by declines in distributor in India of wholesale revenue.
India was heavily disrupted due to COVID-19, lockdowns, but we are optimistic about India returning to growth in 'twenty and 'twenty one.
South Korea continues to outperform and grew nicely during the quarter.
EMEA revenues increased 14, 9% over the last year's fourth quarter, two of $49 $4 million.
Strong revenue growth in the wholesale up 10, 8% and E. Commerce at 53, 8% were slightly offset by declines in retail due to COVID-19 related store closures.
Our retail stores in Western Europe remain closed today, we do not anticipate this to be a material impact to our 2021 expectations.
EMEA is beginning to benefit from improved brand relevance and consideration.
Created by our marketing and product innovation as well as our continued focus on digital commerce, which represented nearly 60% of EMEA revenue this quarter.
Our fourth quarter adjusted gross margin was 56% of 670 basis points from last year's 49, 3%.
Gross margin improved in all regions and all channel driven by fewer promotions and discounts favorable product mix and operating leverage.
SG&A fell to 34, 9% of revenue an improvement of 950 basis points versus $44 four per cent and last year's fourth quarter. The.
The significant decrease in the adjusted SG&A rate as a result strong sales growth and operating leverage even as we incurred variable expenses related to revenue growth and investing in additional brand marketing to support future growth.
Adjusted SG&A, excluding the $21 $1 million in onetime noncash impairments, including a $20 million non cash impairment taken on our 34th Street location in New York City.
Our fourth quarter operating income increased to $64 6 million versus $8 $4 million last year and operating margin increased over 200 basis points to $15 seven per cent.
Adjusted operating margin increased over 600 basis points to $21. One per cent is SG&A leverage on strong sales growth added to growth margin expansion.
In Q4 of the company recorded a one time tax benefit of approximately $128 million related to changes in the tax structure of our operations for 2021 and the next year as we expect our underlying GAAP tax rate to be approximately <unk> 25 per cent and our underlying non-GAAP tax rate which were.
Cash taxes paid to be approximately 16% to 18%.
Fourth quarter non-GAAP adjusted diluted earnings per share adjusted for onetime tax credits increased over 780 per cent to a quarterly record of $1 six compared to 12 cents a year ago.
With record fourth quarter cash flow, our liquidity position is strong with the $135 $8 million of cash and cash equivalents.
The addition to $180 million of long term borrowings and $319 $4 million of borrowing capacity on our revolver.
The historically low interest rates, we may opportunistically seek to add permanent capital to our capital structure.
If we pursue this we expect to use proceeds to pay down of our existing revolver balance.
And for general corporate purposes.
Given our record cash flow generation, we restarted our share repurchase program in the fourth quarter, we engaged in a $125 million accelerated share repurchase or ASR and received $1 5 million shares in the fourth quarter, an additional 500000 shares in January of 2021 for.
For 2020, we repurchased a total of $3 2 million shares for $178 million.
Including the impact of the final ASR share delivery in January 2021, the average price per share repurchases in 2020 with $46.50 per share.
Inventory at December 31, 2020 was the $175 $1 million up slightly from $172 million in the fourth quarter last year.
As Andrew mentioned inventory in the channel remains lean given the strong sell throughs.
We do not expect the same degree of inventory constraints in 2021 that we had in 2020.
Turning to the future I would like to share our current outlook for Q1 and full year 2021.
For Q1, we expect revenue to grow approximately 40% to 50% and adjusted operating margin to improve between approximately 17 and 18 per cent.
Strong growth is expected in all regions as we see continued brand momentum and we anniversary some COVID-19 related closures that began in the first quarter of 2020.
Barring significant additional COVID-19 related closure, we expect 2021 revenue to grow between 20 and 25 per cent.
We anticipate approximately $12 million to $15 million in one time charges for our distribution center of investments to impact gross margin as revenue growth, we expect to be able to leverage SG&A, leading to adjusted operating profit margins of approximately 18% to 19% for 2021.
As we invest in supply chain to support our digital growth, we expect capital expenditures to be approximately of $100 million to $130 million. This year.
For 2021, we expect our underlying non-GAAP tax rate, which reflects cash tax paid to be approximately 16% to 18% our GAAP tax rate will be approximately 25 per cent in.
In summary, we delivered an incredible fourth quarter and full year revenue growth profitability and cash flow. We are confident we have positioned ourselves for sustained profitable growth and strong cash flow generation for the future at this time I'll turn the call back over to Andrew for his final thoughts.
Thank you Anne.
The Crocs brand has never been stronger <unk>.
Despite an extremely challenging environment of company had an extraordinary year in 2020, and we expect the acceleration in 2021.
Looking to the future I'm confident in our ability to continue to deliver best in class results.
Operator, please open the call for questions.
Okay.
Thank you at this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
Your first question comes from Erinn Murphy of Piper Sandler Your line is open.
Great. Thanks, good morning, and truly a banner year, so congratulations Andrew to you and the entire team.
The I guess my question for you is on the digital first focus strategy I'd love to just hear a little bit more about the biggest pieces of incremental spend that you feel bullish about for 2021, and then specifically on the fourth quarter of digital E. Com was up 92% could you just share a little bit more about what youre seeing from of new customer perspective versus <unk>.
<unk> customers with their basket purchases.
Great. Thanks, Eric.
And I appreciate the kind remarks and of the team will be appreciative of that from a digital first perspective, yeah, I would probably put the spend in three big buckets I think the first bucket is all about the sophistication of communication and Thats about personalizing, our communication. So that we can speak to with a very broad customer base consumer base. So we can.
Speak to the consumers differentially and obviously the intent there is that we speak to the more personally they buy more of they were term are often et cetera, because we really have that incredibly broad consumer base. So I would say the personalization of communication and that requires people that requires technology and that requires intact I think the SEC.
<unk> piece is just generally scaling of the business right. So it's scaling of technology. It's scaling of talent is building out our talent across our.
Digital realm, which is not only here in the United States, but in Europe and in Asia, and then the third Big piece is really supply chain right. So you saw us at the back end of last year of scale kind of U S supply chain to meet digital demand that was very successful and allowed us to really have the ban of quarter that we had from the digital perspective as.
We were able to the kind of build out that capability, but the kind of need to do that across the globe.
So those of the really the three buckets of digital investment.
From the from our Q4 and kind of new and existing customers.
I would say, it's a little bit of all three buckets right. So the first bucket the new customers were absolutely, bringing new customers of the brand.
We had about 4 million new customers last year through.
Through our E commerce businesses on the global basis, So that's a very significant number.
It is also existing customers.
Turning at key shopping occasions, and we can also see some trend in terms of existing customers kind of.
More on lifetime value ticking up I think one thing that we've highlighted before the.
It is really important when a customer buys of GBS.
On line that lifetime value of the two X. The average customer and we are seeing increased incremental penetration I'll give it to our online channels.
Great. That's helpful. And then if I could just ask a follow up on the visibility that you guys have on the second half order book It sounds like you're seeing some early reads that are strong, but I'm trying to marry that comment with just the the way you guys had slope of the guidance for the year. So Q1 being 40 to 50 at the full year hasn't budged of it doesn't seem like you're giving yourself a lot of credit for.
The back half so any help on kind of marrying those two comments would be great.
Yeah, I'd say look I'll, just give you a general comment maybe I can give you a little bit more detail look I think it's still a little early from the back half quarter book Order book was certainly booking into Q3, but there's a long way to go with the strength of back to school and holiday. So we feel great about where it is we feel really great about our line up.
And the feedback that we're getting on that line up in terms of what we're bringing to market, but it's early.
Yeah, and I think just Aaron if you remember last year in Q1, and Q2 and Q1, we start Anniversarying COVID-19 related closures in China and then early in the quarter and then Asia later and then in March obviously kind of worldwide and we go through that in Q2 of where much of our retail fleet with closed and our partners.
Warranty King shipments so our businesses very strong, but we are of.
The anniversarying some weakness based on Covid last year, and that's why the guidance looks like it does.
Got it and just one last one if I may on Tibet, we've noticed you've been testing higher price points online I'm, just really curious to see how that's how that's performing and if that's something you would rollout to physical stores. Thank you so much.
Great. Thanks, Eric.
Look I think the test is still ongoing obviously, it's out there on our U S online on our U S site, we've raised the.
The the price of singles, but also introduced kind of a multi buy off the obviously when you are kind of the transacting digitally if people put more stuff in the basket. It really ACR package economics. So we think this is the right way to go we feel good about the test its still ongoing I wouldn't say, we have concrete conclusions but.
We like where it's heading.
Thank you.
Thanks.
Your next question comes from Jonathan Komp of Baird. Your.
Your line is open.
Yeah, Hi, Thank you can I just add.
I ask if you could clarify the the clogs and sandals growth with the fourth quarter and then I'm curious it sounds like you expect clogs outpace sandal skill for 'twenty 'twenty, one of which of them interested in given the different can compare with him.
And maybe just.
Separately, one follow up Andrew.
Looks like maybe you are.
Embedding something to watch the 10% growth from the second half of our total revenue I just wanted to maybe clarify that if youre willing and just understand that a little bit more of as well.
Why don't I start Jonathan with the sort of clogs vs. Sandals that Anne can clarify the Q4 numbers and how kind of guidance plays out yeah, I think as we look at the 21.
Cogs has.
Been growing tremendously through.
Through 19 through 'twenty, and we see the continuing in 'twenty one.
I think thats partly.
Consumer receptivity to that silhouettes into the utility that that silhouette allows the consumers to have but it's also tremendous innovation in terms of color print height et cetera that we have in our in our product lineup. So.
And obviously, we've got kind of strong visibility too to bookings. So we can definitely see the clubs are going to perform well in 'twenty, one sandoz will return to strong growth.
In 'twenty, one and as you look through a multiyear trajectory, we would expect over time sandal growth to accelerate Pos cloud growth.
And then on the guidance Jonathan I think a couple of things again, we had a lot of had some interesting timing last year of with Q2 coming out of Q2 with much of the closures that we had a lot of wholesale revenue that shifted in Q3. So we're still guiding growth for the full year.
I think we're still trying to make sure that we have good visibility I think we're getting actually quite of bit of guidance.
And as we move through the year, obviously, we will be transparent and as we get better insight into how things are trending in the back half of the year. We will certainly keep you updated I think.
But we have obviously the best visibility in the first half of the year and we certainly feel like all of our underlying trends are extremely strong and we don't see anything changing from the way the business was trending in Q4.
Yeah that makes perfect sense.
Maybe just one follow up then on the margin outlook.
Regarding adjusted operating margin because of a year of 18% to 19% I think you're close to 19 in 2020.
I believe you mentioned expectations for SG&A leverage so I just wanted to ask about the implied gross margin now that youre embedding and any other color you have.
First quarter versus full year of drivers for gross margin.
Yeah sure. So our full year guidance, obviously of revenue growth of 20%, 25% and we expect all regions to grow with the strongest growth expected out of the Americas and EMEA from.
From a channel perspective, we do expect to have continued digital led growth, but we also see really strong wholesale growth from distributors as they are coming back.
Some of it is because of 2020 as we talked a lot about we didn't ship as much and then we see strong return at the back half.
And that wholesale growth will pressure gross margin a little bit just because it is a little bit lower obviously it doesn't have much SG&A associated with it. So the how we're thinking about that is that our underlying gross margin remains really strong, but we do expect that the wholesale mix, especially with the strong return of distributors to put a little bit of pressure on it.
Gross margin. However, it allows us to drive SG&A leverage while continuing to invest.
And just to clarify would you got to have maybe pricing opportunity in currency favorable offset from and that's it from me. Thanks.
Yeah. That's a good question. So let me tackle currency force right now we do have some currency tailwind for the first time in a while so that's nice to see I would say from just overall in gross margin. There are several puts and takes we're also seeing freight pressure on inbound.
Largely just due to the supply chain right now globally is a little bit and I would say just flow and.
Lane shipping lanes are really clogged as everybody is trying to get product Anne and things are just mastec from COVID-19, but we are seeing the currency offset the inbound freight so I would say, that's probably a little bit neutral obviously currency will support Asp's and then share in my in your question.
From a pricing perspective, there's always pricing opportunities I think we've done a lot of work that you saw culminate in our 400 basis points of growth margin improvement in 2020.
And we expect to continue to look at that in 2021.
And we will see but I do expect this year to be a little bit more unit led the naidu AFP led.
Thank you.
Oh.
Okay.
Your next question comes from Jay sole of UBS. Your line is open.
Great. Thank you so much Andrew I wanted to ask you about rain boots. It seems like in the quarter there was some.
Good signals that maybe some of the kids in the men's in the women's rain boots did pretty well you didn't mention it in your end of the four key drivers of product where the boots fit in in the can you just talk about what you saw in the quarter from that product category.
Yeah.
I would say that's not a huge product category for us I think.
We do make our kids rain boot that's been on the line for a long period of time and I would say it has a very loyal following amongst the amongst months.
It's easy on and off and has a lot of the kind of key attributes they're looking for.
We historically have not been significant and Ryan It has not been of good category for us and I think the category somewhat bifurcated and Theres a lot of low end product that sort of low margin from manufacturers and frankly, the retailers to and Theres all sorts of premium product, we're kind of stuck in the middle of so we don't really see that as as really the.
Interesting first of this stage.
Would say as we're looking to.
The holiday all of the 'twenty, one and into 'twenty. Two we do have some interesting easy on enough food development that we've been showing to to retailers is not really of rain boots, but it's more of a comfort warm weather boot and thats been getting really good feedback from Basel partners.
Got it interesting okay. Thank you and maybe just on the margins just a follow up if you can really maybe focus on the second quarter in the third quarter margins and if we think about the difference between.
Where the margins were in 2019 and where the margins were in 2020, you just sort of help us sort of understand how to think about what the margin should look like this year based on obviously talked about the distributor improvement obviously of wholesale and general probably rebounding as the factor, but other other other drivers which should move them.
<unk> is more back toward normalized 2019 level or vice versa, like something that should drive the more to that 2020 level.
Yeah, I don't I'm going to talk generally because obviously, we haven't guided Q2 and Q3, but I think we don't see gross margins moving back to 2019 levels, we feel pretty good that our 2020 gross margins are largely sustainable.
As implied I think in our guidance.
There is a little mixed impact and and obviously as you know Q2.
It was the very strange quarter of last year as a lot of our retail was shut down I will say retail does carry a very high gross margin. So the wholesale and the retail kind of offset so I don't think theres anything.
Particularly abnormal in any quarter that you need to be concerned about at this point in time.
We'll certainly keep the posted I think overall margins or gross margins are really good and we're really proud of all the work we've done and remember the major drivers of our gross margin has been pricing and discount that we've pulled back on which we think are sustainable.
Got it and then maybe one last one from me you talked about a lot of investments happening of digital China products, a lot of that sounds like SG&A at the same time, you know at the $130 million in Capex would it be possible to elaborate a little bit on what the.
The the money allocated to Capex is really the go forward and what that's going to be driving from the business.
Yeah sure. It's distribution center, so it's really building out our distribution network to support mostly our digital business.
That does that is serviced a little differently and so as we've mentioned before we're moving our EMEA distributor of our EMEA distribution Center and we're automating that and then we're looking at just other distribution center investments around the globe and continuing to expand our U S distribution center.
Got it understood. That's helpful. Thank you so much.
Your next question comes from Mitch <unk> of pivotal research your line is open.
Yes, thanks for taking my questions I guess sort of a couple of the let me start with the the wind the clock business is there any way you can say like what percentage of sales that was in the fourth quarter or maybe how much it was up in the quarter and I'm curious if you if you're seeing continued strong performance through the early part of Q1 of them.
The business.
Yeah look we don't break it out but I can tell you performance was extremely strong right. So the line called performed extremely well.
Here in the U S.
In Europe and in parts of Northern Asia. So, it's obviously, a very important part of the.
Of our.
The fourth quarter business.
In terms of its continued performance in Q1, it continued to perform well in Q1 absolutely.
We plan to be essentially out of stock as.
We've come into Q1, so we don't have huge inventories at this time period, because obviously, we want to be out of stock in the reintroduce next year, we will carry year round on our E. Com sites on an ongoing basis, because we do actually see kind of year round demand for that the silhouette. So.
It's been really good end of I would say, we haven't found the top yet I think there is a long way to go on line clogs.
Got it and then on coal labs are there any metrics you can give around that when you think about 2021 versus 'twenty 'twenty, maybe in terms of the the number of co labs. The type of the timing of them is there anything you can you can offer on those sort of metrics.
Yeah, Doug I'll give you a little color. So I think co labs will be.
Our strong potentially stronger than they were in 'twenty, they will be a little bit more evenly distributed through the year. We've already executed some callouts already this year of Q1 and in Europe did particularly well even last month. So they will obviously be.
Without the Covid impact they will be spread more evenly throughout the year, there will be more of them than they were last year, there will be more regional co ops than the world last year. So.
Europe, Korea, Japan, China et cetera.
And so those tend to be a little bit the kind of smaller or sort of reaching to a more niche audience, but we do also have some of our kind of blockbuster names that were really excited about so I would say the pipeline Super full.
And.
At this point, we're still get also getting significant inbound interest and that obviously is obviously carrying over into 'twenty two at this point.
Yes.
Number two if I could just add.
As of our financially significant on their own obviously, they create a great halo for the brand are an important part of our marketing strategy, but you don't need to worry about anniversarying some thing from a financial perspective.
Got it okay. Thanks, good luck.
Thanks, so much.
Yes.
Your next question comes from Sam Poser of Williams trading.
Your line is open.
Good morning, everybody. Thank you for taking my questions I just have.
As of few I'm, just going to get one what is what are you anticipating the share count to be four for 'twenty one right now.
We didn't guide share counts the I'm, sorry, I would just use.
What we gave and our release, which I think was around.
$68 million 60 day.
Got it okay. Thank you and then.
John talked about China, a little bit number one.
Andrew can you give us some history like I'll give everybody a history lesson sort of on over the years as to what happened in China and why it's taking as long as it's taking to get it turned around because I mean.
And the.
Based on what I know any Andrew.
And the other market Europe U S. China was more neck.
The negative impacted by various things that happened in the past, hence taking it longer but can you give everybody. Some details of what happened what youre doing it and why it's taken so long.
Yeah. So I think look a couple of things I'm not sure. We have time on this call for a complete history lesson fan, but I can I can give kind of some of the some of the key issues right. Yeah, absolutely I agree it is taking longer than we had hoped it would.
I think and Thats not just COVID-19, it's just taken us longer to.
The unwind some of the issues of the past I think the core issue that we've been wrestling with is the the network of.
Partners that we have the operator single branded stores throughout China right. So we had a network of partners. They operated largely single branded stores on a province by province basis.
And I think historically, we will with the wrong pockets where were the people that we're not equipped to grow and evolve the brand in the future and the way that we wanted to grow in the call day.
And that's frankly, not inconsistent with the transition of the brands have been through in China, but they've largely been through it.
At this point as we as we indicated in the prepared remarks, I think we're making some real progress on that right. So number one the product strategy has been reset right. The product strategy in China was historically, a little bit different than it was in the rest of the globe that emphasize more male emphasized loafers emphasized kind of.
Campus Loafers, we've reset to our four pillars that we we know work around the globe and I would say that reset of complete and we are in the thick of transitioning I would say the.
The the the partners that we use.
We've transitioned a number of them we got a few more to go. So we're in the thick of that and we think that will be complete by the end of 'twenty. One so that will put us in a place where.
We have the right product strategy, we have the right partners at the same time, we're investing in the in the brand awareness in the Bryan resonance with the AG by Anne.
The significant marketing investment and we've also built our digital business through Tmall. So we feel very confident we have the kind of the right strategy. It's just taken longer than we would've liked and would've hoped.
But we really couldnt see light at the end of the tunnel today.
And then lastly pricing in China, how does that compare to the pricing actually.
You could give us China and Europe versus pricing in the U S.
You know what what is the differential there so we don't sort of.
Your line.
So when you think.
Think of the pricing is yes.
Yeah, how do we think about price we price to market the price of the local market. So we don't try and keep our icon the same price everywhere in the globe, we price it relative to.
I would say competitive product in the local marketplaces.
And we've moved it differentially at different times, what that translates to today is we sell the clog at a slight price premium in China as frankly, as many brands do they fell a little bit at a premium to what they sell out the rest of the world as we think that market can sustain and bad debt.
Relative to competition.
Then your other question embedded in that was Europe Europe right now is a little bit of a discount to our U S price.
It is something that we're taking a look at.
Okay. Thank you very much continued success.
Thanks, Jeff Thanks, Tim.
Your next question comes from Laura Champine of Loop capital. Your line is open.
Thanks for taking my question. This morning, it's really on longer term capex. So the capex budget is much higher this year that makes a lot of sense is that just catch up with demand or is this elevated level of capex spend as a percentage of sales likely to continue for the out years.
Yeah, I think it's certainly elevated this year as we're investing along with the business I don't think we're prepared yet to guide long term.
Our what we've talked about in the past and maintenance Capex is around replenishment of depreciation which is around $30 million and that's run rate capex, but we will continue to invest in the business. We are really proud of our free cash flow, we generate a lot of cash from operations.
Two of over $250 million. This year. So we feel like investing in the businesses is really important. So we will continue to do that to support the growth as we see the opportunities.
How much of your Capex spend this year of that budget is about moving the distribution center in EMEA, and therefore likely does not repeat.
I won't say all of the Capex. This year is related to distribution centers I wouldn't say that any of it is recurring as far as the vast majority of the distribution centers. So it's either EMEA or investing in our other distribution centers.
<unk> upsized or to automate so I don't think any of it as necessarily what I would call repetitive on an ongoing basis. The reason I'm hesitant to guide past that is because I don't want to.
I want to make sure that we have the opportunity to invest continuing as we see revenue growth.
Understood. Thank you.
Yeah.
Your next question comes from Steven Marotta of C. L. King Your line is open.
Good morning, Andrew and Anne Congrats again on the Great 2020, Q4 ended with leaner than desired inventories that you'd mentioned you also mentioned that this is gonna be remedied throughout the year can you talk a little bit about the year to date remedy and how you see.
You're in flow of inventory finally meeting outflow from a demand standpoint.
Yes.
The comment in our prepared remarks is really around.
Our wholesale partners, where we've obviously the.
Particularly in the U S had significant shipments I mean, our wholesale business in the U S was up the 130%. So we shipped some of lot of product. They just sold a lot of product as well right. So they didn't Anne.
With the stronger inventories that day, and we anticipated so we still kind of catching up a little bit from that perspective.
And so what I would say as we look into 'twenty. One we have been able to ramp up production capacity very significantly we have absolutely have adequate production.
And can make enough product to meet our expectations and get our kind of our own environments of DTC environments and of wholesale customers back in stock I would.
I'd say global logistics here in the first quarter are really challenging right. So with kind of I don't think we're meeting everybody's expectations today, and frankly, we are unlikely to and I doubt if anybody else does either.
Importing product from Asia, getting it through a long beach and other ports.
Getting shipped to customers is really challenging right now and thats not an issue with production capacity. That's just logistics I think that will smooth out over time, but it's going to take them a while.
That's very helpful and you provided a very nice detailed commentary regarding gross margin in the current year just to put the finest point on of possible, obviously with wholesale increasing as a percentage of the consolidated mix there will be a little bit of that as you mentioned the pressure on gross margin with gross margin do you expect growth.
The margin to increase in each channel.
Throughout the year.
So we don't guide gross margin by channel because of our reportable segments are actually Americas EMEA.
And Asia.
Well I will say is that you.
You just talked about inventory one of our strategies is to run lean inventory.
Obviously, you know keep our consumer in stock on core, but running lean inventory supports good gross margins and we don't expect to go backwards from a pricing perspective.
On any of any of our channel. So we are really excited about the work we've done on gross margin and we're focused on maintaining really high level gross margins.
I got it that's helpful. Thank you.
Okay.
Your next question comes from Susan Anderson of B Riley Securities. Your line is open.
Hi, Good morning, let me add my congratulations on a very nice year.
I guess from the wholesale from.
Curious if you feel like there's still opportunity for shelf space gains or need the orange in 'twenty, 'twenty, one or even I guess, adding tidbits to more wholesale doors and then just in terms of the door growth in fourth quarter was that in <unk>.
Tactful or significant in terms of the wholesale growth or did that mainly come from cell lines in the existing doors.
Yeah, Okay. So let me kind of hit the last bit of so the door growth in the fourth quarter really wasn't significant.
I think a rollout with the new customers, particularly some some large ones here in the U S is absolutely going well and are meeting all of our expectations and their expectations, but that wasn't impactful in terms of the growth the real driver of growth was with the accelerated sell through.
And so that's the that's the big driver in terms of share of shelf gains absolutely. Yes, we believe we have opportunity to gain share of shelf.
Major customers both the <unk>.
Some more of customers as well as online customers I would say, particularly with samples over time as we as we grow outside of the business, we want to keep all of our.
Cogs Skus and AD channel Skus that will be a key part of our strategy and also yes. We do believe that there is an opportunity to.
Significantly growth gigabits in the wholesale environment.
I would say that's made strongest headway here in the U S and we Havent really nice year with <unk> and wholesale last year, but I think we can do a lot more in a lot better, particularly as we increasingly packages of the debits.
<unk> kind of multi packs, which I think will make a lot of lot easier for our wholesale partners to display and handle them.
Great. That's helpful. And then just on the work category I think you said it grew double digits in the last four quarters.
Is that accelerating as the economy reopens and then any color on how big that category could be or where to go.
I didn't hear what you were referring to there to give it oh, yes.
No.
Where category Yeah, so cloud from a category sorry again.
The web category absolutely.
We were if you remember last year, we really gave a lot of that product the way earlier on in the year to frontline health care workers. So we put ourselves in a very big inventory Hall.
Managed to get that replenish towards the backend of last year and in aggregate. We said we saw a very high double digit growth on that over the last four months of the year, we see that continuing I would highlight that in some of the bulk kind of control DTC environments, we see even higher growth right. So what were so we think that's a very.
Interesting signal.
And the interesting business for us in the future.
Great very helpful. Thanks, So much good luck this year.
Thank you.
Your next question comes from Jim Duffy of Stifel. Your line is open.
Thank you that's the morning terrific. Your guys. Thank you for your philanthropic contribution so a lot of reason to be proud of.
On 2020 of execution.
And I wanted to start on the balance sheet.
Step up in the deferred tax assets 350 million can you give us some insight to head of the case at all U S. Based what are the requirements of utilize that asset.
Yeah. So the the tax asset is related to the movement of some of our IP rights.
From Bermuda to the Netherlands.
And that is associated with that deferred tax asset remember, we took the GAAP impact of most of that upfront and that the over $100 million credit you saw in Q4, and then from a cash tax perspective, we actually see of.
The money over the.
Third the long term so that's that's how that work that's not.
That's why you see the bad credit upfront. So we do have obviously some allowances.
Against that but that's why there's the bank DTA on the balance sheet.
And so that 350 million, what's kind of the accounting treatment for drawing that down.
Does it have to be profit recognized in a certain region to offset that.
And cash of axis.
So it's not the not the DTA I think theres, some valuation allowances against it.
And then it'll amortize over time and that's how it all.
Roll off so there's the valuation allowances against that as you.
As you have price, it's not profit as you.
Prove your valuation overseas. Then then you can kind of as we have better visibility into that then that's how you draw that down but the overall deferred tax asset just amortize it over time and that's how it how it dropped down.
Understood.
And then and can you talk about SG&A budget for the year and the shape of SG&A across here I believe you spoke to expectations for leverage for the year. The whole 2020, I know SG&A was somewhat artificially depressed given COVID-19 savings in the first half of the year, how much should we be looking for to come back into the model from that.
What's the budget for marketing spend versus 2020, I know you're talking about ramping investment in China over the course of the year, where I'm going with this I'm curious like can you get leverage in the first half of the year and are you assuming deleverage of SG&A in the model as the year unfolds.
Yeah. So really good question I don't think we're prepared yet to go.
By quarter and part of that is just because we spend in SG&A as we see growth and to support of our accelerated growth and there is some timing.
But overall SG&A, we expect it to leverage we're excited about the work that we've done on our SG&A structure and you know last year, we invested in marketing.
In the back half of the year and invested almost $10 million of marketing and still we're able to leverage our SG&A and we see similar.
Trends like that this year. So we see that we'll be able to leverage SG&A, while continuing to invest in marketing.
Great and then the last question can you just speak to what's included in the adjustments related to cost of goods I guess I'm curious why these are appropriate exclusions for growing business.
Speaking of more detail specifically, what those expenses are.
Yep there related to.
Our distribution center move in EMEA, and they're duplicate running costs.
Okay. Thank you.
Thank you.
Thanks, Jeff.
Your next question comes from Jim Chartier of <unk> Crespi.
Your line is open.
Good morning, Congrats on the great quarter and thanks for taking my question.
Andrew I was wondering if you could provide some color on brand desirability.
Relevant consideration by region and I'm really curious to know how the.
<unk> compares to other regions and our other regions kind of progressing similar to what you saw in the U S maybe per.
Thanks.
Yeah.
Happy to Jim.
That's the really important set of metrics that we watch.
I Couldnt really closely so.
What I'd say is firstly.
The brand desirability relevance and consideration we have seen double digit increases in our global metric.
For four years, and our roadmap right and as you look at those kind of metrics of them.
Did it increase as frankly in one year is pretty extraordinary, but I think as the real Testament to the trajectory of the brand that we kind of being able to sustain those level of increases I would say the increases have been strongest and most dramatic in the U S. As you would expect as you see the underlying business, we have seen them strengthen.
Very strongly.
In EMEA, and we really measure of them in EMEA in western Europe to be clear, we've seen the strengths and very strongly in EMEA I.
I would take of $19 20, so over the last two years.
And then as we look to Asia I would say, we see strong trajectory in some of our key markets like Korea like India.
And we've seen positive trajectory in Japan, and China, So that kind of gives you a little bit of kind of relativity.
I would say.
As we look at them. The reason we follow them closely we do see them quite well correlated to the future growth.
Great that's very helpful and then.
In terms of collaborations you mentioned increasing regional collaborations this year.
How did the number of collaborations regional collaborations in in Europe, or Korea, or Japan compare to the level in the U S and is there an opportunity to get those more of.
The line thanks.
Yes look I think there is an opportunity to.
Think grow them into the future as we look at this year it'll be a pretty significant increase in those regional collaborations.
Probably we will still do more here in the U S right. So.
I think of you kind of looked at that over a two to three year time horizon, we would really see strong growth in some of those regional collaborations.
Frankly some of those.
Regional collaboration partners actually have global potential right. So we could also see.
With the rising, particularly in Asia with the the rising importance of some.
I would say celebrities and the old musicians et cetera from key Asia market. So I think we could see those having the global footprint as well.
Great. Thank you.
Thank you.
Again, if he would like to ask a question for Starz and the number one one of your telephone keypad.
Next question comes from Sam Poser of Williams trading your line is open.
I have a quick follow up thank you the philanthropy of the donation that you did to the front line workers are earlier in the year.
Do you have any read through on how that sort of.
Grew the the equity of the brand and how many new customers may have been driven by sort of.
Doing well just doing good Carrie do.
Goodbye.
The way of these shoes.
They might have help business do you of any way to measure of that.
Yeah, I think we have some inside of the Sam I would say firstly that was not the reason we did it right. So the first thing the reason we did it because at the time it was the right thing to do.
I would say it has been very positive right. We can definitely read the improvements in.
In brand empathy in association with the brand from the from a lot of us.
Those communities and Thats been and Thats very much appreciate it in terms of acquisition of the debut customers I would say it was pretty effective.
As we look at the customers that we acquired during that time period. It was very significant and there was a lot of new customers, we acquired during that time period.
I am not sure I can give you a number off the top my head, but it was it was a big number.
And we've seen continued activity from those customers. So it was very effective from that perspective.
Thanks, and the continued success.
Okay. Thank you Sam.
There are no further questions at this time I will now return the call to Mr. Rees for closing remarks.
Just wanted to express my thanks and for everybody in the interest in the company. We're looking forward to a really stellar 21 and continue to talk to you through the year. So thank you.
Ladies and gentlemen, this concludes today's conference call. We thank you for your participation you may now disconnect.
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All of it.
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Non-GAAP.
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