Crocs (CROX) Q2 2019 Earnings Call Transcript

Crocs (CROX -2.26%)
Q2 2019 Earnings Call
Aug 01, 2019, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning. My name is James, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Crocs, Inc. second-quarter 2019 earnings call.

[Operator instructions] Thank you. Marisa Jacobs, global head of investor relations, you may begin your conference.

Marisa Jacobs -- Global Head of Investor Relations

Good morning, everyone, and thank you for joining us today for the Crocs' second-quarter 2019 earnings call. Earlier this morning, we announced our latest quarterly results, and a copy of the press release can be found on our website at crocs.com. We would like to remind you that some of the information provided on this call is forward-looking and accordingly is subject to the Safe Harbor provisions of the federal securities laws. These statements include, but are not limited to, statements regarding future revenues, gross margins, SG&A as a percent of revenues, operating margins, capex, and our product pipeline.

Crocs is not obligated to update these forward-looking statements to reflect the impact of future events. We caution you that our forward-looking statements are subject to risks and uncertainties described in the risk factors section of our annual report on Form 10-K. Accordingly, actual results could differ materially from those described on this call. Please refer to Crocs' annual report on Form 10-K, as well as other documents filed with the SEC for more information relating to these risk factors.

Adjusted gross margin, income from operations, operating margin, net income and earnings per diluted common share are non-GAAP measures. A reconciliation of these amounts to their GAAP counterpart are contained in the press release issued earlier this morning. Joining us on the call today are Andrew Rees, president and chief executive officer; and Anne Mehlman, executive vice president and chief financial officer. Following their prepared remarks, we will open the call for your questions.

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

Andrew Rees -- President and Chief Executive Officer

Thank you, Marisa, and good morning, everyone. I'm thrilled with our year-to-date performance and we expect to grow at an even faster pace in the back half of 2019. We are raising our full-year revenue growth expectations for the second time, and now anticipate growth of 9% to 11% reflecting the strength of our business. We are successfully executing against our strategic priorities, particularly those focused on driving revenue growth by prioritizing clogs, sandals, visible comfort technology and personalization, while also driving overall profitability.

Demand for our product is strong and our brand heat is rising. Given our consistent track record over the past two years, I'm more confident than ever that we will continue to drive top and bottom-line growth for years to come. During Q2, we grew global revenues 9.4% and 12.5% on a constant-currency basis. Excluding the combined impact of currency and store closures, second-quarter revenues grew approximately 14%, making it our fourth consecutive quarter of double-digit organic revenue growth.

Our operating margin rose 200 basis points to approximately 13%, while our EPS rose 57% to $0.55. Our marketing and product teams did a tremendous job last quarter, as we rolled out an unprecedented number of collaborations and marketing activities and the response was phenomenal. As we have discussed on previous calls, collaborations are a great way to reach new consumers and build brand heat. Our diverse slate of collaborations speak to different audiences, reflecting the democratic nature of our brand.

We recently did targeted launches with AJIO brands like Chinatown Market, and partnership with Urban Outfitters at ComplexCon upon classic clog for Barneys New York and a clog style for country musician Luke Combs at the CMA fest. Representing a larger commercial opportunity was the Vera Bradley x Crocs collection, which engage a lot of our core fans. It was sold in our direct to consumer channels and also in Vera Bradley stores and their dotcom site. We are starting to use the same playbook in our international markets.

We're raising our profile and spreading awareness of the brand through regional collaborations for designers and retailers, like Vivienne Tam and Beams. The increasing pace of our international collaborations and marketing investment is consistent with our belief that Asia represents our greatest long-term growth opportunity. In terms of product, our focus remains on our key growth drivers, clogs, sandals, visible comfort technology and personalization. During Q2, clogs continue to be in high demand.

Clog revenues grew approximately 18% and made up 57% of our footwear sales, up from 52% during last year's second quarter. The biggest uptick in demand has been for our classic clog and we've more than doubled our production capacity this year. Demand for a few core colors is continuing to exceed supply. We're working closely with our suppliers to further boost production levels and are confident in our ability to meet demand contemplated in our guidance.

Sandals remain a key area of focus during Q2, and consumers continue to respond favorably to our spring/summer 2019 Collection. Sandal revenues grew approximately 11% even as weather in North America and Europe closed the sandal season to get off to a later start on last year. Sandal revenues generated 27% of our footwear revenues compared to 26% in the second quarter of 2018. It's a ninth consecutive quarter of double-digit sandal revenue growth as we continue to grow global awareness across sandals.

Visible comfort technology continues to be an important consumer purchase criteria. The Reviva franchise, which focuses on flips and slides has been well received, and we recently rolled out kids LiteRide. For 2019, we expect LiteRide sales to be at least double 2018 levels. I've spoken before about the importance of personalization.

The global trend that keeps growing in relevance. Over the past few quarters, we've steadily increased the size of our Jibbitz charms collection. We're rolling out new charms monthly to stay on top of emerging trends and testing different ways to further enable personalization. Our consumers are clearly embracing Jibbitz charms to personalize their crocs, which is driving brand engagement higher.

I'm going to turn briefly to our sales channels. While we continue to sterning strong results across the board, second-quarter wholesale growth exceeded 9%, as customers continued to place at once orders for spring/summer 2019 product to meet expanding consumer demand. This growth came on top of 7% wholesale growth we delivered in Q2 of 2018. Our DTC comp which combines our retail and e-commerce results was approximately 14%.

We grew our e-commerce business 18%, a great result coming on top of almost 24% growth during last year's second quarter. This represents our ninth consecutive quarter of double-digit e-commerce growth with brand heat continuing to drive more traffic to our site. Retail comps were approximately 12%, our eighth consecutive quarter of positive comps, and our total retail sales rose 4%, even while continuing to absorb the impact of last year's store closures. In terms of our outlook for the year, we now see growth accelerating in the back half of the year, particularly in North America.

In response, we are raising our full-year guidance for the second time to a levels that are significantly higher than those we outlined last November and in February of this year. Our growth algorithm drives sustainable profitable revenue growth through the lens of product, channel, region and supported by impactful marketing. From a channel perspective, our plans anticipate that e-commerce will remain our fastest growing channel. The e-tailers and distributors will deliver the most significant wholesale growth and that retail will continue to benefit from shifting to outlets and rightsizing our store fleet.

Our regional perspective is unchanged. We expect the positive momentum in the Americas and EMEA to continue and over the long-term, our significant growth potential is in Asia. In Korea and Japan, our business grew nicely. As we discussed on our last call, we have formed a China Growth Committee, our focus there is an elevating clogs and sandals and creating the same brand heat around classic clog that is driving our business in Americas.

In addition, we are updating our store design to drive consumer engagement and investing in more marketing in China. We're confident that these actions similar in nature to those that we have already executed elsewhere around the world will ignite long-term growth in China. Lastly, from a marketing perspective, our Come As You Are campaign will continue to unveil exciting new content and collaborations throughout the year to further boost consumer awareness and engagement. The year is off to a terrific start.

Our great results are a testament to the enormous dedication of our extraordinary team, and I want to thank them for everything they have done and continue to do. At this time, I'll turn the call over to Anne to review our second quarter results and guidance.

Anne Mehlman -- Executive Vice President and Chief Financial Officer

Thank you, Andrew, and good morning, everyone. I'll begin with a short recap of our second-quarter 2019 performance. For a reconciliation of any non-GAAP amounts to their equivalent GAAP amounts, please refer to our press release. We had a very good second quarter, coming in at the high end of our revenue guidance, exceeding both our gross margin and SG&A guidance and growing EPS by 57%.

Starting with the fourth quarter of 2016, we now have met or exceeded our revenue and gross margin guidance for 11 consecutive quarters. During the second quarter, revenues were $358.9 million compared to $328 million in the second quarter of 2018. This represented an increase of 9.4% or 12.5% on a constant-currency basis. Currency negatively impacted our results by approximately $10 million, while store closures reduced revenues by approximately $6 million in the quarter.

We sold 19 million pairs of shoes, an increase of 6.7% over last year's second quarter, our average selling price for footwear during Q2 increased 1.9% to $18.39 with higher prices on certain products and less discounting more than offsetting the negative impact of currency. The Americas had a phenomenal quarter, we grew revenue 23.7% to $170.4 million with minimal impact from currency, every channel grew at double-digit rates with wholesale and e-commerce approaching 30% growth. Our retail comp was 17.6%, clog demand continued to climb particularly for classic's. Revenues from high-margin Jibbitz sales rose significantly, driven by an uptick in unit sales and a price increase.

In Asia, revenues for the second quarter were $118.4 million, down 3.2% compared to last year's second quarter, excluding $5.4 million of negative impact from currency, Asia revenues grew 1.3%. Our e-commerce channel delivered mid-single-digit increases and our retail comp was approximately 1%. Wholesale growth throughout much of the region was offset by China, where we continue laying the foundation for future growth. In EMEA revenues grew 3.4% over last year's second quarter to $70 million, excluding $3.8 million of negative impact from currency, EMEA revenues grew 9.1%.

This growth came on top of the 17.6% growth last year. E-commerce had another great quarter growing almost 25%, our retail comps were up more than 8% and our wholesale business after turning in an excellent first quarter continued to grow. Moving on to the rest of our P&L. Our adjusted gross margin for the second quarter was 53.6%, well above our guidance of 52.2%, a higher margin in the Americas and lower-than-expected air in general freight costs contributed to the stronger than expected adjusted gross margin.

On a year-over-year basis, reduced purchasing power associated with the strengthening of the U.S. dollar drove 150 basis points of the 170-basis-point decline. Additional freight and distribution costs were somewhat offset by increased pricing and reduced promotions. Our second-quarter SG&A expense was $141.5 million.

By continuing to drive leverage across the business, we beat our guidance and reduced SG&A as a percent of revenues by 460 basis points, down to 39.4% from 44%. Nonrecurring charges in this year's Q2 were immaterial compared to $8.4 million in last year's second quarter. Our operating margin rose 200 basis points to 13.3%, while our adjusted operating margin improved 40 basis points to 14.3%. Our diluted earnings per share increased 57% to $0.55 compared to $0.35 in the second quarter of 2018.

Our adjusted diluted earnings per share increased 9% to $0.59 compared to $0.54 last year. During Q2, we repurchased approximately 2.5 million shares of our common stock on the open market for $55 million, at an average share price of $21.89, that left us with approximately $547 million available under our plan for future share repurchases. Year to date, we have repurchased 4.6 million shares for approximately $108 million at an average of $23.35 per share. Our balance sheet continues to be very strong.

We ended the quarter with $107.8 million in cash. Our outstanding borrowings are at $215 million, and are unchanged from the end of Q1. In July, we entered into a new $450 million credit facility, which replaces our $300 million facility. This new facility carries lower borrowing rates and contains less restrictive covenants, so that we will have more flexibility in terms of managing our capital structure.

Inventory at the end of the quarter was 3.6% higher than at the same time last year. And our inventory turns are running above four times as demand continues to steadily rise. In summary, we feel great about the quarter and there are few milestones worth noting. Growth in the Americas was almost 24% with wholesale and e-commerce growth, almost 30%, and our retail comp approached 18%.

On top of that, our overall performance resulted in our operating margin rising 200 basis points to 13.3%. As we turn to guidance. I want to remind you that our guidance is based on current currency rates. For 2019, we are increasing our guidance as follows: Revenues are now expected to grow 9% to 11%, compared to our prior guidance of 5% to 7% growth.

We continue to anticipate that 2019 revenues will be negatively impacted by approximately $25 million of currency changes and approximately $20 million resulting from store closures. Our gross margin guidance is unchanged. We continue to expect an adjusted gross margin of 50.5% and a GAAP gross margin of 49.5%. The flow through from raising our full-year revenue guidance is expected to be offset in the back half of the year by reduced purchasing power associated with the strength of the U.S.

dollar and the strengthening of our wholesale revenues, which carry a lower gross margin. We now expect that SG&A will be approximately 40% of revenues. This represents a 100-basis-point improvement over our prior guidance, reflecting the success we are having leveraging top-line growth, including strong wholesale growth which carries lower SG&A than our other channels. Our updated guidance now contemplates nonrecurring charges of $2 million.

In 2018, SG&A was 45.7% of revenues and included $21.1 million of nonrecurring charges. We now anticipate, that our adjusted operating margin will exceed 10%, which achieves our interim target of returning to a low double-digit operating margin. Our GAAP operating margin is now expected to be approximately 9%, including non-recurring charges associated with our new distribution center and certain SG&A costs. This is up from our prior GAAP operating margin guidance of eight and a half percent.

Our tax rate is now expected to be approximately 15%, down from our prior guidance of 25%. The decrease in our anticipated effective annual tax rate relates to higher than anticipated U.S. profits for 2019, giving rise to an ability to use various tax benefits accumulated during prior years. With respect to the third quarter, we expect revenues to be between $295 million and $305 million, compared to $261.1 million in last year's third quarter.

Our guidance incorporates the loss of approximately $2 million from negative currency impact and $3 million from revenues associated with our reduced store count. At the midpoint of our guidance, this represents growth of approximately 15%. Adjusted gross margin for the third quarter is expected to be approximately 51.5% compared to 53.3% in last year's third quarter. Reduced purchasing power is expected to account for approximately 150 basis points of the decline.

The balance reflects higher freight and distribution costs, as well as our expectations for strong wholesale growth, which carries a lower gross margin. This decline will be partially offset by gains from pricing and reduced promotions along with efficiencies from closing our owned manufacturing facilities. Our gross margin is expected to be approximately 50% with non-recurring charges relating to our new distribution center, accounting for the 150-basis-point differential between GAAP and adjusted gross margin. Q3 will be our largest quarter of non-recurring charges relating to our new distribution center.

SG&A is expected to be approximately 40% of revenues compared to 47.9% in last year's third quarter as we continue to leverage top-line growth, including strong wholesale growth which carries lower SG&A than our other channels. This guidance also includes an increase in our marketing spend over last year, resulting from incremental investments we are making to support and accelerate our growing brand momentum. We had a great spring/summer season executing well on all fronts. That set us up well for a strong second half in which we are anticipating accelerated growth meting the excellent 2019 financial results.

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

Andrew Rees -- President and Chief Executive Officer

Thank you, Anne. Year to date, our business has performed very well. And I'm confident that this performance will accelerate through the second half of the year. The product and brand building work in the past few years has been transformational.

Our product is in great demand and our brand is harder than ever. Combined with the strong SG&A controls, our growth is driving strong operating leverage and higher levels of profitability. By a gearing to our strategic priorities, we believe we will drive top and bottom-line growth and increase shareholder value in the future. Operator, please open the call for questions.

Questions & Answers:

Operator

[Operator instructions] And your first question comes from the line of Jonathan Komp from Baird. Go ahead please. Your line is open.

Jonathan Komp -- Robert W. Baird -- Analyst

Yeah, hi. Thank you. I wanted to start off just asking about -- a little bit more about the brand heat that you're seeing. And I know you raised the full-year outlook for revenue by a pretty significant amount.

And that's all implied from the second half. So could you maybe just talk more about kind of what that implies about the response to some of your ongoing brand actions? And then also related to how you're viewing the sustainability of some of the heat that you've driven?

Andrew Rees -- President and Chief Executive Officer

Yeah. Thank you, Jonathan. I think what we've seen in the first half of the year is really very, very strong traction on our product and marketing strategies, I would say, particularly in the US and EMEA, where we've had a really excellent first half. And we've seen that across channels.

We've seen that in our DTC channels. We've seen it very strongly in wholesale and we're feeling really confident about the trajectory of the business. I think this is a result of a lot of the hard work we've done in the last several years repositioning our product and brand, and as we look at the back half, we're really seeing that continue. We're seeing that continue from a wholesale perspective, we're seeing that continue from a DTC perspective, I would say a lot of it is pivoted around clogs, sandals, personalization are really driving that growth.

And as we look at our traffic to our websites, we look at traffic to our stores, we're really seeing very significant and continued interest in the brand. I think a part of your question was sustainability and we also feel very confident about that. We feel confident about the diversity of consumers that we're attracting to the brand, we think about our consumer is kind of in two big buckets, are feel goods and explorers, feels goods maybe more traditional and all the consumer, we're seeing traction with that group. Feel goods a little bit more urban younger, and we're seeing traction with that group.

So we really see the traction is pretty broad base, which is what gives us the confidence in the back half rates.

Jonathan Komp -- Robert W. Baird -- Analyst

OK, great. And maybe as a follow-up. More specifically related to some of the channel call-outs that you've had. I know the DSC business has been strong for a while, but just wanted to ask more about the strengthening of the wholesale business that you've signaled and maybe if you could talk a little bit more specifically, any more color where you're seeing the strength? And then also kind of how much support you have in terms of order book and forward indications for that business?

Andrew Rees -- President and Chief Executive Officer

Yeah, I think so. And maybe I kind of break that down into two -- into few pieces. So I would say in Q2, the real strength that we saw in wholesale was within Americas. And as we look at where that comes from, we see that it's pretty broad base.

As we've talked about before, as we think about our wholesale business, particularly in the Americas, we focused on three key channels, we're focused on our digital channel, the broad-based e-tailers, we're focused on family, and we're focused on sporting goods and we saw strength across all of those three major channels, both in terms of pre-orders for product, but also fill in orders and not once through the quarter and we see that continuing. If we talk about EMEA, EMEA had a really strong Q1 driven a lot by pre-books. We -- a little bit flatter growth from a wholesale perspective, but if you look at H1 in EMEA, it was very, very strong. If we look at Asia, we really see strength in our wholesale business in Japan, Korea, and to some degree in our Southeast Asia distributor business.

So we see it as pretty broad-based in terms of wholesale.

Jonathan Komp -- Robert W. Baird -- Analyst

OK. Great. Thank you.

Andrew Rees -- President and Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Erinn Murphy with Piper Jaffray. Go ahead please. Your line is open.

Erinn Murphy -- Piper Jaffray -- Analyst

Great. Thanks. Good morning, and nice quarter. I guess my question, Andrew for you is on the Jibbitz business.

You talked about that really driving significant results and just bringing in more monthly newness. Can you talk more about the purchasing behavior behind that consumer? Are you seeing consumers come in and coincidentally buy Jibbitz, while they're buying clogs or are you seeing consumers come more frequently just to look at the newness, just would love to hear how you're thinking about that opportunity and the behavior today? And then can you talk about potentially looking at wholesale as a channel for Jibbitz, and I think you saw on a few of the dotcoms partners, but just curious on what that could look like? Thank you.

Andrew Rees -- President and Chief Executive Officer

Yeah, I think so Jibbitz, as you said Erinn, is very important to us, right. What we're doing there is tapping into a global mega trend. As a global megatrends personalization. You can see it in footwear category, you can see it across many other categories, and particularly, your younger consumer is very focused on buying, not necessarily a generic product, but they are looking to buy a product that's personalized for them.

Our way of enabling that and I think it's a very compelling way is Jibbitz. It allows the consumer to make that purchase, a unique purchase to them, it allows them to express key attributes that they want to express about themselves to others and then frankly to change that over time. So what we're seeing in terms of purchasing dynamics, we're seeing that evolve. So I think initially, if -- you've been following the company for a long period of time.

So initiatives it was a very child orientated add on. We evolve that dramatically to be much more child and adult in terms of the types of Jibbitz that we're producing, so we're appealing to a much, much wider audience. I think initially we saw it more as an add-on to purchase as you kind of alluded to. So the customer would purchase a clog or increasingly -- an increasingly a wider range of Jibbitable product if that's a phrase, a product that has been specifically designed to allow that personalization.

I think we are starting to see that evolve with consumers coming particularly through our DTC environments actually to purchase new Jibbitz specifically to change out that may be a product that they already have. As you know, we really like this because it drives a lot of brand engagement. It is also a very highly profitable product category for our cost of goods is low and we can get a lot of value for it and the consumer sees a lot of value in it. You also alluded in your question the wholesale.

Historically, it's been a challenging category for wholesale, because it's very hard to manage, right? It's a lot of small items, but we've worked closely with a range of wholesale is to produce options for them, a form factors for them that allow them to manage it and I think we were -- they were really pushing us to do that for them because they saw the consumer engagement that was taking place in our DTC environments and we wanted to participate in that. So we are increasingly working with a range of wholesalers to allow them to sell and showcase Jibbitz in their stores.

Erinn Murphy -- Piper Jaffray -- Analyst

Got it. Thank you. And then just a couple of follow-ups, just in terms of the model, maybe just first -- second quarter revenue. How inventory or style constrained were you still in the classic clog.

And did that impact your revenue growth at all? And then I guess the second modeling question, Anne for you on the gross margin, you maintained your full year, so that implies roughly 300 basis points for the fourth quarter in terms of a bump in gross margin on an adjusted basis. Just curious of the building blocks are there?

Andrew Rees -- President and Chief Executive Officer

OK. Yeah, let me talk about the classic clogs and then I'll pass it over to Anne, Erinn. Yes, I would say we continue to be constrained through the quarter in terms of classic clog, it's mainly in a few core colors, probably two to three core colors and I would say it was sporadic through the quarter. The underlying situation that we're experiencing is the growth continues.

The growth in demand continues to exceed our growth in supply. I note that in my prepared remarks, we have more than doubled supply, but obviously, there is a little bit of a lag in terms of some of that supply reaching the U.S., and we continue to add supply to make sure that we can keep up with future demand. I would say, we anticipate continuing to experience sporadic constraints through -- for the classic clog. And this is really early in the Americas through Q3, but we're very confident that the amount of supply that we have meets the guidance that we provided.

So I think, a really high-class problem and one that we are proactively addressing and kind of understand what the opportunity is. I think -- and your question was also, did it constrained revenue in Q2? Yes, I would say somewhat, but we're working diligently against this, and I'll pass it over to Anne.

Anne Mehlman -- Executive Vice President and Chief Financial Officer

Yeah. Hi, Erinn. From a currency perspective, we will see gross margins get a pickup in Q4 from less currency pressures. So why we still expect to have negative currency pressure, if you think through our overall currency guidance, it's going to impact our margins of 130 basis points.

That's -- first half is 140 basis points, H2 is 110 basis points with Q3 having 150 basis points. So there is some piece of Q4 that currency. And then the other piece of Q4 is really we're driving a lot more volume in Q4, so we're driving a lot more leverage on our fixed gross margin cost structure. Those are the pieces that drive Q4 margin.

Erinn Murphy -- Piper Jaffray -- Analyst

OK. And Anne, just the last question for you on tax rate, obviously, it was significantly lower than we anticipated for the year, and I think you guys referenced in your prepared remarks just some tax benefits you're pulling forward given the profitability in the Americas. Does that continue into 2020? Or would you expect tax rate to bounce back to kind of the mid 20s that you had seen before? Just trying to understand that because it does move our models pretty significantly?

Anne Mehlman -- Executive Vice President and Chief Financial Officer

Yeah, it's a good question. So our tax rate, we guided 15%, down from 25%, which is you mentioned reflects the higher-than-anticipated U.S. profits, which give rise for us to use various tax benefits accumulated during prior years. While we do expect that our tax rate, we'll continue to decline from the 25%.

We're not going to provide long-term guidance yet on tax rate. But we will guide for tax rate when we get to 2020 guidance.

Erinn Murphy -- Piper Jaffray -- Analyst

OK. But so it should be above 15%, but below 25%, I mean, it just -- it does move our model so significantly given it's a thousand...

Anne Mehlman -- Executive Vice President and Chief Financial Officer

I think that's the right way to think about it, yes.

Erinn Murphy -- Piper Jaffray -- Analyst

OK, OK. Fair enough. Thank you guys and all the best.

Anne Mehlman -- Executive Vice President and Chief Financial Officer

Thanks, Erinn.

Andrew Rees -- President and Chief Executive Officer

Thanks, Erin.

Operator

Your next question comes from the line of Mitch Kummetz from Pivotal Research. Go ahead please. Your line is open.

Mitch Kummetz -- Pivotal Research -- Analyst

Yeah, thanks for taking my questions. Andrew, on Q3, you guys are obviously looking for some strong growth in the quarter. You're up against a pretty tough comparison, I know back to school was very strong last year. So I'm just hoping you could tell us what gives you the confidence in that outlook? And obviously at this point, you've got one month in the books.

I'm just wondering if there's anything you can say about what you're seeing for early back to school, and to what extent you're kind of extrapolating that over the balance of back-to-school season?

Andrew Rees -- President and Chief Executive Officer

Yeah. I would say Mitch, it's a -- I would say we're very confident in the guidance that we've provided. I know the external investor community have been concerned about our back-to-school compare. I would say we are not at all concerned about our back-to-school compare.

I think -- we think our opportunity to grow in this timeframe is very significant. Frankly, this year and for years to come. We have a very player -- a good role in that back-to-school business, where we haven't in the past and that will continue. What we're seeing, I would say supports that.

As you rightly point out, we're kind of a month into the quarter and back-to-school is in full flight in many channels and we see this, we continue to see very strong sellthroughs in all of our core channels of the product that we have on the shelf. And I would say healthy reorders for that product. So we're very confident.

Mitch Kummetz -- Pivotal Research -- Analyst

OK, that's helpful. And then you referenced Vera Bradley colab in your prepared remarks. Can you sort of speak to kind of how the Paragon compares that to like a Post Malone, I assume it's a lot more pairs? And do you have any kind of similar colabs in the pipeline for the back half where you're doing maybe more pairs than things you've done in the past?

Andrew Rees -- President and Chief Executive Officer

Yeah, I mean, I think we're not going to talk about the Paragon on our different colabs, it was obviously bigger, right. So we sold it in our stores, we sold it online. Vera Bradley sold in their stores and online. I think Vera Bradley's own-retail and e-com environments sold out very quickly.

We have sold out essentially on our e-comm sites to still have Paragon store and I would say their sellthrough rates, as you look at the week sellthrough rates are very, very good. So we feel like it was a great call out, it really hit. Our core consumer, we weren't really kind of reaching to new consumers. It really hit our core consumer and we knew we had high overlap between our core consumer and where-about, these core consumers, so it was really very well done.

And I would say, our strategy against colabs is to appeal to our very democratic and of the consumer base. So they will be at the high end, they'll be with designers, they'll be with musicians, they'll be with other brands, they'll be with retailers and we think that portfolio is a very powerful portfolio and there will be others that are more significant in the future, absolutely, but there'll be mixed in with others that are very focused in niche.

Mitch Kummetz -- Pivotal Research -- Analyst

And then lastly on Europe, you had another nice quarter in Europe particularly e-comm and wholesale. Can you speak a little bit to where you're seeing the most growth and maybe kind of a country-by-country basis, are there certain countries that stand out and others that are maybe still lagging that you still need to bring along?

Andrew Rees -- President and Chief Executive Officer

Yeah. I mean, I think -- so as we think about Europe, it's -- or EMEA -- it's Turkey, right?

Mitch Kummetz -- Pivotal Research -- Analyst

Yeah.

Andrew Rees -- President and Chief Executive Officer

So as Americans, we kind of think about that as an amalgamous environment, but it's not at all, right. You really have to focus your sales and marketing efforts country by country. Germany is a particular focus for us, it's our biggest part of that business. So we do focus very hard on Germany and put a lot of our marketing and sales efforts into Germany.

So I'd say that has grown nicely. I would say also in our EMEA business is a pretty significant distributor business where we service distributors in the Middle East, in Southern Europe and in Eastern Europe, and I'd say we've seen good growth in that. So if you were to kind of take away a headline, I would say distributors, I would say, Germany and also in that business is our Russia business, and I say, we've seen very good digital and e-comm growth in Russia.

Mitch Kummetz -- Pivotal Research -- Analyst

OK. Great. All right. Thanks.

Good luck.

Operator

And your next question comes from the line of Sam Poser from Susquehanna. Go ahead please. Your line is open.

Sam Poser -- Susquehanna International Group -- Analyst

Than you for taking my question. Good morning. Anne, you talked about the 11 quarters of beating on sales and gross margin guidance, why would in Q3 be another one of those quarters? I mean, are you adjusting the manner by which you're guiding now?

Anne Mehlman -- Executive Vice President and Chief Financial Officer

Hi, Sam. Thanks for the question. Yes, we're very confident in our Q3 guidance, as you pointed out, we've consistently met our guidance or beat our guidance expectations and we continue to guide what we see at the time that we have visibility. So we're confident in our Q3 and full-year guidance.

Sam Poser -- Susquehanna International Group -- Analyst

As you were before in Q2, and it sounds like the momentum especially in clogs is improving, which is your highest-margin business, got additional air freight. I'm just want to walk through sort of the components of it?

Anne Mehlman -- Executive Vice President and Chief Financial Officer

Yeah. You want to walk through the components of gross margin?

Sam Poser -- Susquehanna International Group -- Analyst

I want to sort of get the puts and takes off of this improved demand the acceleration in the overall sales, especially in the wholesale business, which should give you leverage on your fixed cost. And -- so you're saying that your headwind on gross margin in Q3 is going to be worst than it was in Q2. I'm just trying to understand how the staffing...

Anne Mehlman -- Executive Vice President and Chief Financial Officer

Yeah, let me let me walk you through it. So our gross charging for Q2 was 53.6%, which -- all right, it was higher than our guidance by 140 basis points. And really what that came down to is we had better than expected gross margins from the Americas. As you mentioned, we had strong pricing and strong sell-through of clogs, which is high margin, and we had less discounting and promotions associated with the strength in the Americas business.

In addition, we had a little bit less freight that we expected, we've less air and our underlying inbound freight rates were -- we've seen them come back in the line a little bit. So even though they are still impacting year over year. They are a little bit lower than what we had initially projected. From a Q3 perspective, we have that currency of 150 basis points, which is a little bit stronger than what we had anticipated originally, and the balance of really why is getting more -- is higher wholesale, which carries a lower gross margin.

So it's very accretive overall to the bottom line because it allows us to leverage our SG&A. And that's why we were able to take down our expectations for SG&A rate, so that -- it's great, but it does mix out a little bit of a negative on the gross margin line.

Sam Poser -- Susquehanna International Group -- Analyst

OK. OK, thank you. And were there any -- were there any impact of revenue due to the Easter shift. Does that help second quarter at all or at what degree did it help?

Andrew Rees -- President and Chief Executive Officer

Yeah, I would say, look, we had a really good Easter. So we were really pleased with our, particularly our DTC performance during Easter. So it was strong, but I would also say, it was continue to be strong throughout the quarter. So it wasn't -- I wouldn't interpret our comps in Q2 as Easter driven, I would say they were strong during Easter, but they were strong the rest of the quarter also.

Sam Poser -- Susquehanna International Group -- Analyst

Thank you. And then one last thing, you said in your -- in the investor presentation about the Americas that you wanted to maximize clog growth. Is there a maximum level that -- is that possible, is there a maximum level, is there is a ceiling? Or was that just verbiage?

Andrew Rees -- President and Chief Executive Officer

Yeah, I think what we're trying to say there, Sam, is we want to get our supply to catch up with -- the growth in supply to catch up with our growth in demand. I think what you're alluding to a little bit. So the way we think about it is core colors, we frankly want every to be -- everybody to be in-stock at all times. There's no reason to be out of blackout of why that's not a strategy, whereas I would say fashion or seasonable colors.

We do see that there is a limited supply that we want to provide on those and we want those to sell through and sell-out and then be replaced by the next seasonal color or graphic. And where we are right now is we are seeing periodic out of stocks in our core colors, which we don't think is the right way to treat our consumer or the right way to maximize our business. But -- and we're also seeing very strong sort of sell-through on our seasonal colors and sell out of a seasonal colors, which is intentional.

Sam Poser -- Susquehanna International Group -- Analyst

OK. Thank you. And one last thing, are you seeing any concessions from your Chinese suppliers given that you're, -- you've increased this manufacturing, there is a little bit higher now than it was planned originally?

Andrew Rees -- President and Chief Executive Officer

I would say concessions. I would say, look, I think we have a very strong partnership with our sourcing base. We work with a handful of very large and multi-country suppliers. So the Chinese suppliers that we work with, are the same suppliers we work with in Vietnam and other places.

It's the same groups, and the benefit of working with those large and pretty sophisticated groups is that you can move production around and get incremental capacity when you need it.

Sam Poser -- Susquehanna International Group -- Analyst

Thank you very much on your continued succes.

Anne Mehlman -- Executive Vice President and Chief Financial Officer

Thanks.

Andrew Rees -- President and Chief Executive Officer

Thank you Sam.

Operator

Your next question comes from the line of Jonathan Komp from Baird. Go ahead please. Your line is open.

Jonathan Komp -- Robert W. Baird -- Analyst

Yeah, hi. Thank you. Just wanted to ask a couple of follow-ups. First on the margin outlook.

I just wanted to clarify since you have the table in the back of the ROEs, but on a GAAP basis for the year, you're saying 49 and a half percent gross margin and 40% SG&A, but 9% operating margins. So I just wanted to clarify that?

Anne Mehlman -- Executive Vice President and Chief Financial Officer

Yes. So -- on a GAAP basis in the back of the release, we walk at, right, so we have, we're -- on a GAAP basis, we're projecting our gross margins at 49 and a half percent. And then you add back in the one-time recurring charges, which is about 100 basis points associated with our new DC relocation, which it takes us to about 50.5%. We didn't walk non-GAAP, SG&A rate.

So when you take out it's about 40%. We just took it at the mid range of where we get to our GAAP operating margin.

Jonathan Komp -- Robert W. Baird -- Analyst

OK. I guess, I was just asking, so 49 and a half percent gross margin and you subtract out 40% SG&A and I think it'd be more like nine and a half percent GAAP operating margin versus 9%. So just wanted to make sure I wasn't missing anything?

Anne Mehlman -- Executive Vice President and Chief Financial Officer

Yeah. We just did approximately in a non-GAAP reconciliation. So you're correct.

Jonathan Komp -- Robert W. Baird -- Analyst

OK. And then so you're adding 120 basis points and you'd be more in the mid 10% range than the 10.2% listed?

Anne Mehlman -- Executive Vice President and Chief Financial Officer

Correct.

Jonathan Komp -- Robert W. Baird -- Analyst

OK. And then I don't wanted to follow-up since you're above 10% now on a non-GAAP basis, like how are you thinking ultimately the direction, or the longer-term opportunity from a further margin expansion opportunity?

Anne Mehlman -- Executive Vice President and Chief Financial Officer

Yeah. So as you pointed out for some time we've been focused on achieving our double-digit operating margin and we're thrilled to achieve it in 2019. And we're confident that we can drive revenue growth to continue to drive leverage and we'll give more color when we provide 2020 guidance.

Jonathan Komp -- Robert W. Baird -- Analyst

OK. And last follow-up I had was just on the revolver. I'm not sure if you mentioned it. Sorry, if you did.

But just the recent increase in the capacity there, could you share any thoughts on kind of the motivation for that especially since -- obviously, we're buying back stock still fairly aggressively in the first half?

Anne Mehlman -- Executive Vice President and Chief Financial Officer

Yeah. From a capital structure perspective, we're focused on maximum flexibility. So the market was very good for us to get a refinance. We got home a lot more flexibility and we got better rates and the ability to borrow more, which allows us to invest in our business, buy back shares are doing a number of different things.

And so it was really focused around maximum flexibility. And then also it simplified our overall revolver structure.

Jonathan Komp -- Robert W. Baird -- Analyst

OK. Great. Appreciate it. Thank you.

Anne Mehlman -- Executive Vice President and Chief Financial Officer

Thank you.

Operator

Your next question comes from the line of Steve Marotta from C.L. King & Associates. Go ahead please. Your line is open.

Steve Marotta -- C.L. King and Associates -- Analyst

Good morning, Andrew, Anne and Marisa. Andrew, I know that you do not disclose backlogs or talking about next year, but given the acceleration in the back half of this year and going up against the order book last year, and I'm sure being better anticipated in stocks for the first half of next year. Can you talk at all about how the bookings are at least early on for the first half of next year, again, without specificity or giving away something competitive? Can you talk a little bit about how things are being received next year in the wholesale channels?

Andrew Rees -- President and Chief Executive Officer

Yeah. So you're right, Steve. We don't disclose backlog and certainly not going to start. But I'll give you a little color.

Yes, I would say, look, I think the very strong sell-throughs that we're seeing at wholesale today and the clear opportunity our wholesale partners see to increase order quantity is to drive in-stocks and drive improved sell-through in the future is playing well to our future order book, right? I would also say that some of the new product that we have in our pipeline for spring '20 is also being well received. So the sell-through they are really seeing is a kind of on our core clog, in our core business. So those things do build to I would say, high level of confidence and optimism associated with future orders.

Steve Marotta -- C.L. King and Associates -- Analyst

That's really helpful. And Anne, could you -- I know you don't guide, of course, EPS for the quarters, but can you talk a little bit about what you anticipate average shares outstanding would be in the third quarter and year end, given what the share repurchase activity has been for the year?

Anne Mehlman -- Executive Vice President and Chief Financial Officer

Yeah. So as you mentioned, we purchased 2.5 million shares during the quarter for $55 million, at $21.89 a share. So that takes our diluted weighted average share count in the quarter was 71.9 million shares. And then we ended at 69.6 million shares.

So you can take that and model that through adding in any dilution from the fully diluted basis.

Steve Marotta -- C.L. King and Associates -- Analyst

That's terrific. Thank you very much. I appreciate it.

Andrew Rees -- President and Chief Executive Officer

Thanks.

Operator

Your next question comes from the line of Jim Chartier from Monness, Crespi, Hardt. Go ahead please. Your line is open.

Jim Chartier -- Monness,Crespi, Hardt

Hi, good morning. Thanks for taking my question. As you mentioned in your remarks here, you still selling seeds for growth in China and I believe you said that China was still a drag on the Asia business. So is there anything you're seeing that gives you confidence that that business is stabilizing potentially set to inflect in the near term? And then in terms of distributors, anything on the horizon in terms of adding some new distributors there? Thanks.

Andrew Rees -- President and Chief Executive Officer

Yeah, great question. Yes, as we look at Asia, the way we think about Asia, as we have three key markets, Japan, Korea and China. So Japan and Korea are growing nicely and we feel really good about the trajectory we're on there. And as you also said, look, it's clear that China is -- in this quarter was a bit of a drag.

I would say we are putting in place all of the same strategies that we had put in place in the Americas, in EMEA, and our other Asian markets, around focusing on clogs and sandals, on working with our distributors to clean up their inventories and reposition their store base. I'd say we had a -- we put a lot of effort into this during the last six months and we are seeing, I think we believe we are starting to see real traction with those distributors. And as you alluded to, we also have the opportunity to add some new distributors to reach some territories, that we are currently not penetrated into. So I think, we feel really good about the work that we've done.

We feel really good about, how we're positioned and we think that we will yield growth in the future. So -- and I think we also have confidence that the playbook has worked pretty much everywhere else. So we have no reason to believe that it will not work in China and it's just taken us a little time to get around to really having the resources to devote to this in a very focused way.

Jim Chartier -- Monness,Crespi, Hardt

Great. Thank you.

Operator

Your next question comes from the line of Jim Duffy with Stifel. Go ahead please. Your line is open.

Jim Duffy -- Stifel Financial Corp. -- Analyst

Thank you. Good morning. So guys, clog demand remains strong. I'm curious within clogs, have you seen any change in consumer demand patterns? Are people buying the same colors and styles? Is it really the core colors? Or is it new products and colors that's driving the business here?

Andrew Rees -- President and Chief Executive Officer

So I would say there's two things to talk about, Jim. One is the classic. On classic, we're seeing very strong demand on core. So just think a black, white, blue, brown core colors and real growth in those core.

We're also seeing very rapid sell-throughs on seasonal. So think melon, lemon, tie-dye, etc., where we are hitting kind of seasonal colors, where we're hitting things that are kind of current in the season or in the fashion world. And so we're seeing very rapid sell through on those. So it's really a combo effect which is, I guess, I would say is the strategy, is the plan.

You bring excitement and newness to the core through the seasonal and the graphics, and the sort of the marquee product. And then the second piece of clog is also LiteRide. So I don't want to lose focus on LiteRide. LiteRide, we introduced last year, it will more than double this year.

There are two big components to LiteRide, clog is a also very big, pacer is also doing well and we introduced Kids LiteRide this last quarter, both in clog and pacer and I would say that's doing very well. So LiteRide is -- think about LiteRide is double last year. So that is also providing growth. It is also a higher priced product.

So it drives ASPs too. So it's both classic and LiteRide are driving a lot of clog relevance and traction.

Jim Duffy -- Stifel Financial Corp. -- Analyst

Great. And then, Andrew, you said nice progress in the sandals up double digits year to year. Is that geographically diverse in terms of the strength? Or is it concentrated in one particular region?

Andrew Rees -- President and Chief Executive Officer

I would say that is geographically diverse. So we are seeing double-digit growth across all regions. I think the growth in Americas and Europe was a muted in the quarter. The spring season for sandals because of weather.

It didn't get started until kind of later in the quarter. So we felt like we missed a little bit of traction earlier in the quarter. I think it was less to do with what we were offering a more to do with the overall sandal business, but even given that it is geographically diverse, we're seeing within traction against sandal in each region.

Jim Duffy -- Stifel Financial Corp. -- Analyst

Great. And then last one for me, still on product mix. I know clogs and sandals, have been the point of strategic emphasis. The remainder of the business is about 16% of the mix now, things that are neither clogs nor sandals, is how do you think about that going forward.

Andrew? Is that about the right contribution to mix? Or do you see that continuing to mix down?

Andrew Rees -- President and Chief Executive Officer

I would say in the short term, it will probably continue to mix down a tad. There are a couple of key franchises in that other business. So I would say kind of loafers and flats. I think we are much more optimistic about the long-term prospects of flat as the fashion cycle potentially returns.

We think Crocs is very relevant in flats, molded is very relevant than flats, but it has been -- out of cycle from a fashion perspective for some time now. So that was to come back that will be an opportunity to drive that component of the other. I think the loafer business is -- unless distinctive business for Crocs, I think we have some ideas and points of view and how to develop that in the future, but it's really not a focus at this stage.

Jim Duffy -- Stifel Financial Corp. -- Analyst

Thank you.

Andrew Rees -- President and Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Mitch Kummetz from Pivotal Research. Go ahead please. Your line is open.

Mitch Kummetz -- Pivotal Research -- Analyst

Yeah. Thanks. I just had a quick follow up on one of Duffy's questions, he is talking about -- asking about the clogs heat and Andrew you talked about rapid sell-through of seasonal and I think you mentioned the tie-dye there. It seems to me that you guys are doing a lot more print, I think Vera Bradley is a great example, what you're capable of there.

So I'm just trying to understand how much of that -- how much is like prints an incremental driver which is the clog business, you feel like you're still sort of early innings on that, is that something that you're doing more of in the back half and then also into next year?

Andrew Rees -- President and Chief Executive Officer

Yeah. But we've always done a good amount of print. So the beauty of the clog and the beauty particularly of the classic clog is it a great vehicle, it can carry lots of things, right. It can carry color, it can carry print, it can carry Jibbitz.

So I think this is a very versatile chassis and we are -- so that's really appealing. I think we will continue to do prints and I think they will grow. I think we will also continue to make sure that they are -- they do sell-through, right. They have a life cycle.

I would sort of highlight in one sense that we have a core print that have sold for a long, long time in terms of our Realtree franchise where we printed product in designated channels that is kind of always in stock and does extremely well. But -- so I wouldn't say it's going to mix up. But I think it's an important component of the overall mix.

Anne Mehlman -- Executive Vice President and Chief Financial Officer

Right. And we do see print and -- seasonal colors and prints drive purchase frequency. It is important.

Mitch Kummetz -- Pivotal Research -- Analyst

Thank you.

Andrew Rees -- President and Chief Executive Officer

Great. Thanks.

Operator

And it looks like we have time for one last question. Your last question comes from the line of Erinn Murphy with Piper Jaffray. Go ahead please. Your line is open.

Erinn Murphy -- Piper Jaffray -- Analyst

Great. Thanks for letting me follo up. Just two small follow-ups. One, Andrew for you on the Blackstone share lockup.

I believe that's coming due this month. Just any thoughts around that? And then the second question is on price increases. You've done price increases. I believe, in North America, the last two years as you've gone into the next coming year.

Do you see any opportunity further to price increase within classic's or is $39.99 kind of the right place to be?

Anne Mehlman -- Executive Vice President and Chief Financial Officer

Yes. Hi, Erinn. I'll start with the Blackstone market. So as you remember, we converted the Preferred Shares back in December and about half of those shares were 6.9 million approximately shares.

The lockup expires this month shortly. And Blackstone has been a great partner. They remain on our Board and it's a very -- it's a small piece of our overall flow and we're excited about what the future holds for our cap structure. But we don't comment specifically on Blackstone plans.

Erinn Murphy -- Piper Jaffray -- Analyst

Fair enough. And then anything on the price increases, like how we should think about like kind of is there more opportunity? Or are you guys at the sweet spot now just being slightly shy of $40 on your core classic?

Andrew Rees -- President and Chief Executive Officer

Yeah. No, I think the way to think about this, Erinn is, look, I think -- as we think about -- kind of when we look about pricing, we're really focused on our consumer and making sure that we're giving great value to our consumer, but we're also capturing the value that we deserve for the brand. I think the price increases that we have executed historically have worked really well, and we've captured incremental value for the brand. And frankly, the rate of sale was accelerated.

So I think the consumer is telling us in spades. They still see great value in the product. As a strategy, we look at pricing on a market-by-market basis. So we look to understand where we sit relative to competitive brands and competitive products and how we are positioned in an appropriate way, given that market.

So you do see, for example, the Classic and LiteRide kind of key franchises price slightly differently in different markets and we will continue that. And we'll continue to evaluate, select price changes market by market, I would say, -- as we kind of look at the North American market, I think we've talked to our customers and we've talked to a number of you about. We are anticipating a price increase in Classic for early next year.

Erinn Murphy -- Piper Jaffray -- Analyst

OK. Thank you.

Operator

And with that, I'd like to turn the call back over to Andrew Rees.

Andrew Rees -- President and Chief Executive Officer

Great. So I just want to wrap up by thanking everybody for their ongoing interest in the company. And thank you very much.

Operator

[Operator signoff]

Duration: 61 minutes

Call participants:

Marisa Jacobs -- Global Head of Investor Relations

Andrew Rees -- President and Chief Executive Officer

Anne Mehlman -- Executive Vice President and Chief Financial Officer

Jonathan Komp -- Robert W. Baird -- Analyst

Erinn Murphy -- Piper Jaffray -- Analyst

Mitch Kummetz -- Pivotal Research -- Analyst

Sam Poser -- Susquehanna International Group -- Analyst

Steve Marotta -- C.L. King and Associates -- Analyst

Jim Chartier -- Monness,Crespi, Hardt

Jim Duffy -- Stifel Financial Corp. -- Analyst

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