Crocs (NASDAQ:CROX) Q2 2020 Earnings Call

0:01 Ladies and gentlemen, thank you for standing by and welcome to CROC's second quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Cori Lynn, VP Corporate Finance. Thank you. Please go ahead.

0:39 Good morning, everyone, and thank you for joining us today for the Crocs Second Quarter 2020 Earnings Call. Earlier this morning, we announced our latest quarterly results, and a copy of the press release may be found on our website at crocs.com. We would like to remind you that some of the information provided on this call is forward-looking and accordingly is subject to the safe harbor provisions of the federal securities laws. These statements include but are not limited to statements regarding potential impacts to our business related to the COVID-19 pandemic. Parks 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 the Form 10-A. Accordingly, actual results could differ materially from those described on this call. Please refer to CROC's Annual Report on Form 10-K as well as other documents filed with the FDC for more information relating to these risk factors.

1:34 Adjusted gross margin, income from operations, operating margin, and earnings per diluted common share are non-GAAP measures. A reconciliation of these amounts to their GAAP counterparts is contained in the press release we issued earlier this morning. Joining us today on the call are Andrew Rees, President and Chief Executive Officer, and Anne Mehlman, Executive Vice President and Chief Financial Officer. Following their prepared remarks, we will open the call for your questions. At this time, I'll turn the call over to Andrew. Thank you, Karin, and good morning, everyone.

2:05 As you saw from our release issue this morning, our business, both from a top and bottom line perspective, performed exceptionally well during the second quarter of 2020. Despite the worldwide challenges presented by the COVID-19 pandemic, our extraordinary performance in the midst of the most difficult business environment Many of us have faced in our lifetimes demonstrate our ability to deliver increased profitability and underscores the work we've done expanding the desirability, relevance, and consideration of our brand and product offering globally. Anna will review our financial results in more detail shortly, but here are a few highlights from the second quarter of 2020. Our global revenue for the second quarter declined by only 6% on a constant currency basis. and revenue grew in four of our top five markets, the US, China, Korea and Germany.

3:01 Our America's business had a strong second quarter revenue of 172 million as the US business delivered high single-digit revenue growth despite stores being closed for half of the quarter. America's retail comp store sales increased 18% after reopening. While Asia's future revenue declined, Two of our most important markets in the region, China and Korea, each delivered modest revenue growth. Mobile e-commerce revenue increased by 68%, with strong performance across all three regions. E-commerce revenue for the Americas grew triple digits, while Asia and EMEA each grew strong double digits. Adjusted operating margins increased by 800 basis points to 22%.

3:50 Adjusted diluted earnings per share Thank you. Let's start by reviewing our performance for the quarter and the impact of COVID-19. Our thoughts continue to be those who have been directly impacted. as well as the many heroes on the front line that continue to battle this pandemic. Our top priority throughout continues to be ensuring the well-being of our employees, our consumers, and our partners.

4:36 As we shared in our last earnings call, we focused on positioning our business for both short and long-term success. Our defensive playbook that we began to implement in early March is complete, and our offensive playbook is beginning to show results. as evidenced by our strong Q2 performance. We have previously outlined that the second quarter will be the most difficult one. While we hope the worst is behind us, we remain prudent and cautious. During Q2, most retail locations across the globe, including our wholesale customers, our own stores, and partner stores will close at some point. In the Americas, our company-operated stores closed in mid-March and began reopening in mid-May.

5:24 Many of our wholesale customers' brick-and-mortar stores were also closed during these times. Despite these closures, the Americas region grew 1% on a constant currency basis, benefiting from triple-digit e-commerce growth. We're particularly pleased by our continued momentum in the United States, which delivered a high single-digit revenue growth. When our stores reopened, we saw declines in traffic, but increases in both conversion and average transaction value. As a result, we saw 18% comps, with softness in tourist markets such as Hawaii and Orlando, but strength in markets reliant on local consumers. In Asia, the landscape was mixed, and Q2 revenues declined 19% on a constant currency basis. as growth in China and Korea was offset by declines in Japan, India, and much of Southeast Asia.

6:20 Outside of China and Korea, many stores were closed for the majority of Q2, and we continue to expect a slow recovery in our distributed markets. China and Korea were price bumps, each growing second quarter revenue and delivering positive comps. Korea stores were open throughout the quarter, and we saw significant outperformance in retail. In China, our stores and the approximately 350 partner stores reopened in April and remained open throughout the quarter. We continue to improve brand relevance in China with an all-star live stream event with Yang Mei on Timor, which exceeded our expectations. In June, we were pleased with our brand performance during Mid-Season Festival, and we also opened our first energy store in Shanghai.

7:09 The energy store features our new store concept, showcases both classic and gibbets, with a large gibbet zone in the front of the store allowing for consumers' in-store personalization. As a result of these activities, our WeChat IPA even increased 50% month-over-month in June. We remain optimistic about our growth acceleration plan in China and the positive momentum we are driving. EMEA performed better than expected in light of retail closure. All of our direct markets experienced revenue growth with strong digital performance, offset by weakness in our distributor markets. Revenue declined roughly 2% on a constant currency basis. While many brick-and-mortar stores were closed, Private Q2, Crocs.com, and our third-party digital commerce platforms remained open.

8:04 The Americas delivered triple-digit e-commerce growth. while Adrian Amir grouped double digits resulting in 68% global growth. We also saw strong sell-through at our e-tailers which show up in our wholesale revenues. Our digital business which combines e-commerce and e-tail represented 56% of our Q2 sales compared to 33% for the comparable period last year. While these strong growth rates have recently started to temper, It is clear that the pandemic has accelerated the shift to digital, and that digital has been and will remain a high-priority channel going forward. From a product perspective, our results continue to be driven by our focus on our four key product pillars, fogs, sandals, gibbets, and visible comfort technology.

8:56 Sales of our iconic clog were particularly strong this quarter, increasing 10% year over year to represent 68% of total footwear revenues versus 56% last year. As anticipated, SAML performance was impacted by limited inventory and stores being closed for a good part of the SAML season. In Q2, SAML revenues declined 33% and represented 22% of sales versus 30% of sales last year. We did see encouraging sell-through on our new SAML programs, Brooklyn, Tulum, and the classic slide. We are very optimistic that we'll be able to take full advantage of these programs in 2021.

9:41 Profitability was very strong, driven by improved gross margin. Our strong brand management resulted in high sell-through rates with significantly reduced discounting and clean inventories. The cross-brand ended this crisis with incredible momentum, and our brand relevance increased even further during the pandemic. We continue to fuel brand heat with collaborations throughout the world. In addition to the event I mentioned with Yang Min, we teamed up with Ruby Rose to create a colorful one-of-a-kind Classic Bay Club to celebrate Pride. During Q2, we executed a number of collaborations in Japan and Korea. We have an exciting collaboration pipeline for the second half of the year, which kicked off with Luke Combs last week showcasing a new Classics line.

10:31 We believe Brown Momentum was also aided by our Free Care for Healthcare program, which helped to generate more than 29 million new visits to Crocs.com. More importantly, in just 45 days, we donated more than 860,000 pairs of Crocs with a retail value of nearly $40 million to frontline healthcare workers in need. On July 1st, we launched our U.S. partnership with Feeding America, the largest domestic hunger relief organization. This is an important step in our effort to continue to support our communities. I have seen the power of our organization when we come together for good, and I know that together we will continue to make a meaningful impact globally.

11:16 Brock's vision is everyone comfortable in their own shoes. We are activating our vision through these donation programs, and our Come As You Are campaign now in its fourth year, which celebrates one of a kind and Reflex that we stand together with all different kinds. While it goes without saying that 2020 has been anything but predictable, I'm tremendously proud of how we respond to FTE and the results we have delivered for our employees, our customers, our communities and our shareholders. Now let's turn to the future. We're even more optimistic now about the cross-brand and our long-term growth potential than we were coming into the pandemic. A brand has proven resilient through the crisis, and we're demonstrating that we can deliver best-in-class profitability.

12:07 While we are confident in the long term, we're managing the business cautiously for the balance of 2020. Global uncertainties remain with both the pandemic and the consumer, as stimulus programs potentially expire as unemployment persists. Specifically relating to crops, we have constrained our inventory levels, will limit our revenue upside in the back half of the year. These inventory constraints are deliberate. In March, we dramatically cut orders for summer deliveries, proactively manage working capital, and preserve full holiday newness. We sold through more than anticipated in Q2, and while we were reacting to shortages in core inventory, we feel it is more important to keep inventory lean and to turn up the majority of our focus to 2021.

12:57 We're incredibly optimistic about 2021, and we will continue to execute our growth plan, which is clearly working. Our four key product pillars, clogs, standards, gibbets, and comfort technology, and our powerful social and digital marketing are clearly creating consumer engagement. From a channel and regional perspective, our digital first strategy and our growth focus in Asia will lead our future growth. We believe we have a clear path to return to revenue growth in 2021. Before I turn the call over to Anne, I want to express my gratitude to the entire Cross organization for the hard work and commitment to delivering exceptionally strong results in the face of such adversity. A special thanks to those in our distribution centers and retail stores.

13:44 Without you, it would not have been possible to serve our consumers, and perhaps more importantly, our frontline healthcare community for much of Q2. With that, Anne will now review our financial results in more detail.

13:58 Thank you, Andrew, and good morning, everyone. I'll begin with a short recap of our second quarter results. For reconciliation of the non-GAAP amounts mentioned to their equivalent GAAP amounts, please refer to our press release. We had exceptional profits in the second quarter. The Americas delivered revenue growth even with retail stores closed in the region for half the quarter. Growth in Americas was offset by COVID-19-driven weakness in Asia and EMEA, resulting in softer top-line results versus the second quarter of 2019. Bottom line results were outstanding as we grew operating margins and EPS versus the second quarter of 2019. Second quarter revenues came in at $331.5 million compared to $358.9 million in the second quarter of 2019, a 7.6% decrease or 6% on a constant currency basis.

14:50 Currency negatively impacted our revenues by approximately $5.9 million. We sold 16.3 million pairs of shoes, A decrease of 14.6% over last year's second quarter. Our average footwear selling price during Q2 increased 10.3% to $20.29, with the increase attributable to higher prices, lower discounting, increased sales of charms per shoe, and channel mix. Second quarter wholesale channel revenue fell 19.5% following last year's reported growth of 9.4%. The Q2 softness was primarily driven by our Asian business, with the largest decline in Japan, India, and our Southeast Asia distributor market.

15:36 The declines in Americas and in Myanmar wholesale were less than anticipated, as strong retail performance helped offset store closures of our brick-and-mortar partners and weakness in distributor markets. Second quarter retail sales fell 41.8% globally, driven by COVID-19 closures in all regions. However, retail comp store growth, which excludes store closures of more than three days in a given month, with an increase of 10.5% on top of 11.8% comp growth in prior years. We saw record-breaking e-commerce sales growth of 67.7% on top of 18% growth last year. As Andrew noted, America's e-commerce sales grew triple digits, or 102.2%, while Asia and EMEA each grew strong double digits.

16:25 This represents our 13th consecutive quarter of double-digit e-commerce growth. Digital revenue as a percentage of total revenue, which includes Crocs.com and marketplaces reported in e-commerce, and our retail revenue included in our wholesale channel was 56.1% in the second quarter, as compared with 32.6% in the same period last year. Our strong digital sales were aided by brick-and-mortar closures. The pandemic accelerated digital penetration So it is not clear yet if that trend will continue. Now, let's review our results by region. As I mentioned earlier, the Americas had another strong quarter, with revenues up 0.7% to $171.6 million and minimal impact from currency. High single-digit growth in the U.S.

17:13 was somewhat offset by weakness in our Latin American distributor of business. Retail comps increased 18.2% upon reopening. Gross is phenomenal in e-commerce and stronger than anticipated in wholesale, led by e-tail and the dot-com size of our brick-and-mortar partners. Our performance in the U.S. is the direct result of our commitment to driving relevance with the consumer through great product and marketing. In Asia, Q2 revenues were $93.6 million, down 21% from last year's second quarter. Strong e-commerce growth at 31.7%, with offset by a 44.8% decline in wholesale. They are encouraged by the growth we saw in China and Korea and the more recent improvement we are seeing in Japan. All three markets had positive retail comps and overall Asia delivered 8.5% retail comp growth versus last year's comp growth of 0.7%.

18:07 EMEA's revenues declined 5.1% or 2% on a constant currency basis versus last year's second quarter to $66.4 million. Revenue growth in all of our direct markets was offset by declines in our distributor market. Declines of 60.8% in retail were partially offset by our double-digit e-commerce sales of 52.4% for this prior year and strong retail sell-through. Our EMEA business is benefiting from growing grantees and our continued focus on digital commerce. Our second quarter adjusted gross margin was 55.2%, up 160 basis points from last year's 53.6%, driven by a product mix higher prices on certain products and lower levels of promotions and discounts in the Americas.

18:56 One-time items that impacted reported growth margin by 100 basis points are largely attributable to COVID-related inventory impairment charges in Asia. Our adjusted SG&A fell to 33% of revenue versus 39.4% in last year's second quarter. The decreases in adjusted SG&A is a result of the immediate actions we took to reduce costs in anticipation of lower revenues as the pandemic worsened. Some costs were added back when we reopened stores, so we expect more normalized SG&A levels going forward. Second quarter GAAP SG&A included $14 million of charges, most of which were recognized as a result of COVID-19, including donations of inventory of $8.2 million, employee separation costs and restructuring of $3 million, and bad debt reserves of $1.7 million.

19:51 Our second quarter operating income increased 18.3% to $56.6 million and operating margin increased 380 basis points to 17.1%. Adjusted operating margin increased 800 basis points to 22.3% as cost savings added to the positive leverage in gross margin. For Q2, we recorded a tax benefit of $1.9 million as we accrued more tax than necessary in Q1 in anticipation of weaker profitability than realized. Second quarter diluted earnings per share rose 50.9% to 83 cents compared to 55 cents last year. Excluding non-GAAP adjustments, diluted earnings per share increased 71.2% to $1.01 compared to non-GAAP earnings per diluted share of 59 cents a year ago.

20:45 We significantly strengthened our balance sheet in the second quarter. We ended the quarter with $151.4 million in cash and $275 million in outstanding borrowing. Our strong performance in cash flow allowed us to reduce our borrowing by $75 million during the quarter. We did not repurchase any shares during the quarter as we sought to maximize liquidity and flexibility. We ended the quarter with over $375 million of liquidity between cash and available borrowings. Inventory on June 30, 2020 was $146.8 million, down from $195.8 million in the first quarter, but up from $134.6 million in the second quarter last year. The decrease versus first quarter was aided by sell-through as well as cancellations to deliveries that were scheduled to arrive in mid-June.

21:38 As Andrew touched on earlier, there are many uncertainties throughout the world, and we all continue to lack visibility. As a result, we will not be providing the full third quarter 2020 guidance. However, I would like to share our current high-level outlook. Barring significant additional closure to the second half of 2020, we expect revenue to be approximately flat. We anticipate the sharpest revenue decline to be behind us in Q2. Our normalized tax rate is approximately 17%. However, we expect our tax rate to be 11% for 2020 as we project to utilize deferred tax that were subject to evaluation allowance. We now expect capital expenditures to be approximately $50 million, which reflects investments to support long-term growth that we had initially deferred.

22:25 As we have shared, we are relocating and expanding our EMEA distribution center in the Netherlands. We are also opening a facility adjacent to our Ohio distribution center that will significantly increase our capacity in the Americas. This new facility will be dedicated to e-commerce and will open later this year. We expect to generate strong, positive cash flows throughout the remainder of the year. In summary, in spite of the COVID-19 disruption globally, the Cross Brand and our fundamentals are incredibly strong. At this time, I'll turn the call back over to Andrew for his final thoughts.

23:01 Thank you, Anna. As our 2019 performance indicated, we had great momentum in our business. Cross Brand has never been stronger with iconic products at moderate price points Our company quickly adapted to the COVID-19 crisis and has delivered exceptional Q2 top and bottom line performance in unprecedented times. We remain cautious for the second half of 2020, but incredibly optimistic about continuing to deliver long-term profitable growth. Operator, please open the call for questions. certainly at this time as a reminder if you would like to ask a question please press star then the number one on your telephone keypad we will pause for just a moment to compile the Q&A roster your first question comes from the line of Erin Murphy from Piper Sandler your line is open great thanks good morning and congratulations on the solid results um I guess Andrew my question is really around inventory and just the constraints that you're seeing

24:09 I guess, how are you thinking about prioritizing inventory between your partner doors as well as your own stores into the back half? And how quickly can you get back into styles?

24:20 Yeah, great question, Erin. So we are in a constrained position. I would say we are chasing pretty rapidly core inventory. So our core styles, I think our classic clog, which you can see on our website, is stocked out at this point or is broken in certain colors. And we're hopeful that we will get more inventory in a short period of time. In terms of how we are portioning that inventory, we're trying to be pretty democratic about that. We want to support our wholesale both in our stores and on our website. So, you know, from time to time we are stocked out on our own website, but we also think it's important to honor the commitments that we've made to some of our wholesale partners as well.

25:18 So we're trying to balance that. So I think I'd much rather be in this position, frankly. I would hate to be in a position where we had piles of excess inventory and discounting it. Obviously the position we're in has allowed us to ensure that our gross margins remain strong.

25:35 Okay. And just to maybe pile onto that, you said a short period of time. Can you clarify, is that two months? Is that four months? And then have you needed or do you need to air freight any product to keep up with where the demand has been?

25:48 Yeah. In terms of timing, it's probably later in the third quarter into the fourth quarter is when we will get into a much better position. And I would say it With all of the passenger flights not operating, which is where a lot of the air freight capacity resides below deck, air freight rigs are through the roof. And for our price of product, that's just not enough.

26:16 Okay. And then my second question is just around digital, you know, clearly very strong in the quarter. You know, when you look longer term, you know, what do you think digital should be as a percent of the mix? and maybe for Anne, if you think about the expansion of the DC here in the United States, you know, any puts and takes we need to be aware of for the model as we think about that in the third quarter in particular. Thank you.

26:41 Yeah, let me just hit the digital point and then I'll pass it over to Anne to talk about the DC expansion. So, firstly, I would say I think our strength in digital and our commitment to digital over many years at this point is one of have all done such a great Q2 and really flourish in the environment that we're in today. We intend to continue to make that commitment. And as we look at the way we define digital, which is both our own e-commerce and our e-tail partners, obviously that was a very large percentage of our sales, over 50% of our sales in Q2. I think it has that potential in the long term. I don't think it will be, it won't be that high as we go forward because we obviously opened our stores and self partners have opened up. But I think over the long term, we have that kind of potential and I think that is very much in sync with how the consumer wishes to shop in the future. So I'll leave it to Anne to talk about our DC expansion book here and in the Netherlands.

27:45 Yeah, so from the perspective of the U.S., we're really excited about expanding our DC in Ohio that we opened last year. I think what you've seen with the increased growth in our e-commerce business. Even last year, as you remember, we experienced delays through Cyber Monday. Just that huge ramp of volume was difficult to satisfy consumers in a reasonable SLA. And so while we're not going to build to the peak of our business, we do think that e-commerce continues to become a bigger and bigger part of our mix, and we need to support that. And so it made sense to build out additional capacity just dedicated to our e-commerce business. As far as a margin impact, I wouldn't say that it really is going to impact the market in a significant way because it's really going to be absorbed by additional e-commerce volume.

28:31 So I wouldn't think about it in that way.

28:35 Great. Thank you both. All the best.

28:36 Thanks, Sara. Your next question comes from the line of Laura Champine from Loop Capital. Your line is open.

28:47 Thanks for taking my question this morning. It's really to dig a little deeper into your revenue guide for the back half. How does that square with your current sales run rate and maybe you can comment in more detail about percentage of stores that are closing again or what's your total because your press release says almost all stores were open at the end of June, but now the majority are in the Americas. So I just want to get a sense of are you being conservative about a potential resurgence closing some of your partner stores and your own stores, or is this just a reflection of where the trend for top line is right now?

29:34 Yes. Hi, Laura. So I think just starting with, you know, we don't really give commentary within the month, but just stepping back and thinking about our stores, I think we have less than 15 stores closed at this point. Some of them are closed in the U.S., just, you know, having to do with the resurgence of the virus. And we expect that to continue just ongoing throughout small closures. We're not anticipating any large-scale closures. And that was pretty consistent with where we ended June. I think at the end of June we had all of our stores open and then we closed a few. From a run rate perspective and how we're thinking about the back half, the best way to think about it is we do believe that we'll continue to see e-commerce continue to outperform.

30:19 And we're a little more conservative on the retail front. And then from a wholesale perspective, as we talked about, we will continue to see our retail part of our wholesale business outperform while our distributors will take a little bit longer to recover. And then, you know, just on a follow-up to Andrew and when he was talking about chasing replenishment inventory, we are chasing replenishment inventory for core styles. So if we can secure that a little bit earlier than what we're thinking now and the timing works, we know that there's additional demand and that could actually lead to some revenue upside versus the flat back half we got it.

30:59 Got it. So does that entail your guidance for flat in the back half? Would that still equate to Crocs gaining share in footwear overall? So are you saying the industry is going to be down but we're going to be flat? Or what's happening from a share standpoint? I'm just trying to square the long-term growth outlook with the outlook for the back half.

31:24 Yeah. Laura, I can say unequivocally, we are gaining share. You know, we see that in the marketplace. We hear that from all of our wholesale partners. We are absolutely gaining share in the marketplace. I think we'll see over the next, you know, week to 10 days, the Q2 results from many of our competitors, and I highly doubt any of them will be close to our sales trajectory. So I think we're absolutely gaining share. In the back half of this year, demand will certainly exceed supply. So we will manage that carefully. Again, once again, I would much rather be in that situation than the opposite situation. And then as we look to 21, we think we're very, very optimistic about continuing our growth trajectory in 21.

32:16 Got it. Thank you. Your next question comes from the line of Jonathan Komp from Baird. Your line is open.

32:29 Yeah, hi, thank you. Andrew, maybe a bigger picture question. I mean, it looks like Crocs brought momentum into the crisis and is regaining some momentum coming out. I'm curious just how you think about the duration of this broader trend you're seeing for the brand, if anything's changed or changed You know, in your shift back to offense, if anything will look different than you might have expected, you know, several quarters ago before this all started.

33:00 Yeah, I think the way we think about it, Jonathan, is a few things. Number one, I think, you know, our defensive and offensive plans, our defensive playbook is really largely completed. and I think has served us very well in terms of making sure we had the right liquidity and we could get on the offense as soon as possible. As we think about the offensive playbook, I think we're seeing some of that play out, but a lot of that really leverages our core strategy. It really leverages our core strategy around clubs, around personalization, around sandals, et cetera. And I think, I actually think that the pandemic and how the consumer is trending puts us in an even stronger position than we might have thought we were in before.

33:50 I think it's pushing the consumer to a very casual place. I think we see casual rapidly taking share from dress or more formal attire. So I think the consumer's becoming more casual. They're looking for comfort. They're looking for value. They're looking for great storytelling. They're looking for personalization and inspiration. and I think as a brand, perhaps uniquely amongst the footwear space, we provide a lot of those aspects. So I think the consumers are coming in our direction and I think all the work we've done on the company over the last several years puts us in a fantastic position to take advantage of that. So we think that provides a runway for sustainable growth over a significant period of time.

34:39 Okay, great. That's helpful. Maybe a follow-up then on margin. Just curious if anything's changed in your outlook for SG&A that you outlined the last quarter for this year and then some of the cuts there. And then, Anne, I know you mentioned a return to top-line growth next year. I don't think you commented on margin at all. So just any broader thoughts on how the margin outlook longer term may be impacted by some of the shifts you see?

35:12 Sure. So just starting with short-term, from an SG&A standpoint, we had previously guided $440 to $460 million. And given that revenue was stronger than what we had originally anticipated, and we did have a number of short-term reductions in Q2 just related to our scores being closed and some defensive actions we took. So we do think that SG&A will return to more historical percentages in Q3 and Q4 of this year. And then from an operating margin standpoint, we're really pleased with the way that the quarter shaped out from an operating margin perspective. I think it really shows all the work that we've done on the business, in particular scaling both SG&A and growth margins. So last year, we were excited to hit our double-digit operating margins, and we certainly think long-term there's further expansion to be had in margins.

36:04 Okay. And just to clarify, do you still expect to be within 440 to 460, or just to clarify that comment?

36:12 So 440 to 460 was our previous guide, and we're now just saying that we think the back half will be in line with historical SG&A percentages.

36:24 Okay. All right. Thanks for all the perspective.

36:27 Thank you. Your next question comes from the line of Mitch Kumitz from Pivotal Research. Your line is open.

36:37 Yeah, thanks for taking my questions. You may have addressed that. I had to step away from my phone for a couple seconds to go chase a squirrel off my bird feeder. But when Laura was asking about back half growth, I was curious if you talked a little bit about Q3 versus Q4. Because, Andrew, as it relates to your inventory comments, it sounds like maybe you'd be better positioned with inventory in the fourth quarter than the third quarter. And then as it relates to Q3, I'm just wondering how you guys are thinking about back to school and potentially schools being online versus in person and if that has any impact on your business.

37:11 Yeah, thanks, Mitch. So we didn't actually give any specifics when you were chasing the squirrel, but I think your assumption is correct, right? So we think back half flat, but, yeah, we get back in inventory position later in Q3 into Q4, and we feel much better about that. That would indicate that probably Q4 would be a little stronger

37:34 than Q3. Yeah, back to school. Yep.

37:37 Yeah, so from a back-to-school perspective, look, it's incredibly uncertain as we, I think we're all experiencing right now those kids. We don't know what's going on, and it's incredibly uncertain. I do think what we're in certain categories that it's still, even if kids don't go back to school in person, it is still a pivot point. that requires, that we're not necessarily required, but there is renewal of wardrobe that goes on, right? And I still think, we still think that we will see a strong back to school period in terms of consumer shopping. So we're not overly concerned about whether kids go back or kids don't go back. We don't think that's a huge driver for us.

38:22 I think it would be a little bit better if they didn't go back, but it's incredibly uncertain. And I think, you know, look, school districts are frankly changing their minds on it daily Your next question comes from the line of Susan Anderson from B. Reilly FBR. Your line is open.

38:48 Hi, good morning. Thanks for taking my question. Nice job on the quarter. I guess just to follow up on that last question, have you guys talked about how much of your third quarter business historically came from back to school and then have follow up after that?

39:05 Yeah, I think, Susan, the way we think about that and what we've seen over time is last year was probably the first year we saw a very kind of significant factor school bump. Historically, it hasn't been a critical shopping occasion for Croft, but it has become certainly more important. And, you know, so I think, you know, it's really become more important for us. We've been improving our Q3 last year. So we think it's an important shop indication for us and we're very confident in terms of where we like at this point in time.

39:47 Great. And then can you talk about the variances to the wholesale performance across the regions? And I guess if you were not chasing product right now, would you say that orders have returned to normal or how should we think about that?

40:02 Yeah, I think orders, yes, I think there's a few things I would call out in terms of the variance across regions, and I'll get to kind of order cadence. One of the biggest things that you see in terms of variance across regions is the amount of distributor business that shows up in our wholesale sales across regions. So the greatest impact in Asia where we serve a lot of wholesale distributors, particularly in Southeast Asia, which tend to be highly tourist-orientated markets, think about Thailand, think about Philippines, et cetera, Obviously, tourists are not traveling to those markets, and those distributors have been severely impacted. We took a very deliberate decision to not ship to those distributors, right? So, we took cancellations and, in some cases, proactively canceled their orders because, frankly, we could use the inventory elsewhere.

41:10 I think we highlighted in our prepared remarks, we have seen our business grow in four of our top five markets. So those are our direct markets. In terms of order cadence, I would say as we look at particularly our direct markets and our traditional retail and brick-and-mortar wholesalers, I think we're seeing a strong order book. We're seeing both orders for future seasons. We're looking into The biggest challenge, frankly, is our own availability of supply.

41:51 Great. That's very helpful. Thanks so much. Good luck next quarter.

41:55 Thank you. There are no further questions. I turn the call to the presenters for any closing comments.

42:04 All I'd like to say is we're thrilled that we had such an incredible quarter two. That concludes today's conference call. You may now disconnect.