Crocs Inc. reduced its loss in the fourth quarter ended December 31 as sales grew 6.2 percent and both gross margins and its SG&A rates improved significantly.
Andrew Rees, president and chief executive officer, said, “We had a strong final quarter of the year, which enabled us to meet or exceed our revenue and gross margin guidance for the fourth consecutive quarter. Throughout 2017, we focused on our strategic objectives: simplifying our business to reduce costs, improving the quality of our revenues and positioning ourselves to drive sustainable, profitable growth. Looking at 2018, our Spring/Summer collection is being well received. We expect moderate wholesale and double-digit e-commerce growth to be offset by the loss of retail revenues associated with store reductions. We also anticipate delivering continued gross margin gains and completing our SG&A reduction plan. This lays the groundwork for generating top line growth in 2019 and, ultimately, delivering double-digit EBIT margins.”
Fourth Quarter 2017 Operating Results:
- Revenues were $199.1 million, growing 6.2 percent over the fourth quarter of 2016, or 3.8 percent on a constant currency basis. Top line growth was achieved despite the loss of approximately $14 million due to operating fewer stores and absorbing the impact of the sales of the Taiwan and Middle East businesses. The wholesale and e-commerce businesses grew at double-digit rates and the retail business delivered positive comparable store sales.
- Gross margin was 45.4 percent, an increase of 340 basis points over last year’s fourth quarter. This improvement was driven by continuing to prioritize high margin molded product, improving go-to-market capabilities and better managing promotions. Favorable currency rates drove approximately 100 basis points of the improvement.
- Selling, general and administrative expenses (“SG&A”) were $120.7 million compared to $118.5 million in the fourth quarter of 2016. As a percent of revenues, SG&A improved 260 basis points. Fourth quarter 2017 results included $9.4 million of non-recurring charges. The non-recurring charges associated with our SG&A reduction plan came in at $3.1 million. In addition, $6.3 million of non-recurring charges were incurred in connection with a non-cash impairment charge and a contract termination. Fourth quarter 2016 results included $1.4 million of non-recurring charges.
- The loss from operations of $30.4 million improved by 23.7 percent compared to last year’s fourth quarter loss from operations of $39.8 million.
- Net loss attributable to common stockholders was $28.3 million, or $0.41 per diluted share, compared to a net loss attributable to common stockholders of $44.5 million, or $0.60 per diluted share, in last year’s fourth quarter. We had 69.5 and 73.5 million weighted average diluted common shares outstanding on December 31, 2017 and 2016, respectively.
Sales and gross margins were well above guidance while SG&A fell short, although costs under its SG&A reduction plan were higher than planned.
When it reported third quarter results on November 7, Crocs said it expected fourth quarter 2017 revenues to be between $180 and $190 million; gross margin to be approximately 43 percent, or 100 basis points above last year’s 42 percent gross margin and SG&A of approximately $115 million, including approximately $2 million of charges associated with its SG&A reduction plan.
2017 Operating Results:
- Revenues were $1,023.5 million. On a constant currency basis, revenues decreased 1.7 percent compared to the prior year.
- Gross margin was 50.5 percent, an increase of 220 basis points over the prior year.
- SG&A was $499.9 million compared to $506.3 million in the prior year. Results for 2017 included $17.0 million of non-recurring charges compared to $2.2 million in 2016.
- Income from operations was $17.3 million compared to a loss from operations of $6.2 million in 2016.
- Net loss attributable to common stockholders was $5.3 million, or $0.07 per diluted share, compared to a net loss attributable to common stockholders of $31.7 million, or $0.43 per share, in 2016. They had 72.3 and 73.4 million weighted average diluted common shares outstanding on December 31, 2017 and 2016, respectively.
Balance Sheet and Cash Flow Highlights:
- Cash provided by operating activities increased 147.2 percent to $98.3 million during 2017 compared to $39.8 million during 2016.
- Cash and cash equivalents as of December 31, 2017 increased 16.6 percent to $172.1 million compared to $147.6 million as of December 31, 2016, despite having repurchased $50.0 million of common stock during the year. This growth reflects the successful execution of the company’s strategic objectives along with improved working capital management.
- Inventory declined 11.3 percent to $130.3 million as of December 31, 2017 compared to $147.0 million as of December 31, 2016, reflecting the continued focus on inventory management.
- Capital expenditures for 2017 were $13.1 million compared to $22.2 million in 2016, as the company opened fewer stores, completed fewer store remodels and had lower technology-related expenditures.
- At December 31, 2017, there were no borrowings outstanding on the $100 million credit facility.
Share Repurchase Activity and Increased Share Repurchase Authorization:
During the fourth quarter of 2017, the company repurchased 2.2 million shares of its common stock for $22.9 million, at an average price of $10.22 per share. For the full year, the company repurchased 5.7 million shares of its common stock for $50.0 million, at an average price of $8.82 per share. At year end, $69 million of the company’s $350 million share repurchase authorization remained unexercised.
The Board of Directors recently increased the share repurchase authorization to $500 million. With this increase, $219 million remains available for future share repurchases.
First Quarter 2018:
With respect to the first quarter of 2018, the company expects:
- Revenues to be between $265 and $275 million compared to $267.9 million in the first quarter of 2017.
- Gross margin to be approximately 49 percent compared to 49.9 percent in the first quarter of 2017. At the beginning of the first quarter of 2018, the company changed its inventory costing methodology from average cost to first-in-first-out, or FIFO. This change will result in timing-related charges to cost of sales in the first quarter, but has no impact on the full year. Absent these charges, the company would expect first quarter gross margin to be up modestly to prior year.
- SG&A of approximately $115 million compared to $118.0 million last year. Both years include approximately $2 million of non-recurring charges incurred in connection with our SG&A reduction plan.
Full Year 2018:
With respect to 2018, the company expects:
- Revenues to be relatively flat to the prior year. Revenues in 2018 will be negatively impacted by approximately $60 million compared to 2017 due to the impact of business model changes and store closures.
- Gross margin to be up approximately 70 to 100 basis points over our 2017 gross margin of 50.5 percent.
- SG&A is expected to be approximately $475 million. This includes approximately $5 million of non-recurring charges associated with the SG&A reduction plan and approximately $5 million of additional expense associated with changes in foreign exchange rates. This compares to $499.9 million in 2017, which included $17.0 million of non-recurring charges.
- Income from operations to be approximately $50 million, compared to $17.3 million in 2017.
- Depreciation and amortization to be approximately $30 million compared to $33.1 million in 2017.
- Income tax expense of approximately $13 million compared to $7.9 million in 2017.
Photo courtesy Crocs