Crocs Inc. reported third-quarter earnings on an adjusted basis nearly tripled on a 19.8 percent revenue gain. Both earnings and sales topped estimates and the full-year outlook was again raised.

Andrew Rees, president and chief executive officer, said, “We delivered an excellent quarter highlighted by 20 percent top-line growth and record third quarter revenues of $313 million. Our Americas business delivered exceptional growth, driven in part by another highly successful back to school season. Based on the strength of our recent performance and start to the fourth quarter, we are raising our full year guidance to 11 percent to 12 percent revenue growth over 2018, which would result in record annual sales for our company. The Crocs brand momentum continues to gain pace, and for 2020, we anticipate revenue growth over 2019 of 12 percent to 14 percent.”

Third Quarter 2019 Operating Results:

  • Revenues were $312.8 million, growing 19.8 percent over the third quarter of 2018, or 21.0 percent on a constant currency basis. Currencies negatively impacted its revenues by approximately $3.0 million, while store closures reduced its revenues by approximately $4.0 million. Wholesale revenues grew 25.4 percent, e-commerce revenues grew 28.2 percent, and retail comparable store sales grew 12.5 percent.
  • Gross margin was 52.4 percent, compared to 53.3 percent in last year’s third quarter. Adjusted gross margin, which excludes 120 basis points of non-recurring expenditures related to the relocation of its U.S. distribution center, was 53.6 percent. Adjusted gross margin rose 30 basis points compared to last year’s third quarter. Lower promotions and higher clog sales in the Americas and savings from exiting its company-operated manufacturing facilities last year more than offset various headwinds, including channel mix, higher distribution costs, and 130 basis points of reduced purchasing power associated with currency.
  • Selling, general and administrative expenses (“SG&A”) were $123.9 million, down from $125.2 million in the third quarter of 2018. Non-recurring charges were $0.8 million compared to $5.7 million in last year’s third quarter. SG&A improved 830 basis points and represented 39.6 percent of revenues compared to 47.9 percent in the third quarter of 2018, as Crocs continued to drive leverage across the business. Its adjusted SG&A improved 640 basis points to 39.4 percent of revenues versus 45.8 percent in last year’s third quarter.
  • Income from operations rose 187.0 percent to $39.9 million from $13.9 million in the third quarter of 2018, and operating margin rose 750 basis points to 12.8 percent. Excluding non-recurring gross margin and SG&A charges, adjusted income from operations rose 126.9 percent to $44.4 million and adjusted operating margin was 14.2 percent compared to 7.5 percent in the third quarter of 2018.
  • Net income attributable to common stockholders was $35.7 million, up from $6.5 million in the third quarter of 2018. Excluding non-recurring gross margin and SG&A charges and pro forma adjustments related to the company’s previously outstanding Series A Preferred Stock, adjusted net income attributable to common stockholders was $40.2 million and $14.8 million in the third quarters of 2019 and 2018, respectively.
  • Diluted earnings per share rose to $0.51, up from $0.07 in the third quarter of 2018. Excluding non-recurring gross margin and SG&A charges and pro forma adjustments related to the Series A Preferred Stock, adjusted diluted earnings per share was $0.57 compared to $0.19 in the third quarter of 2018.

Crocs had projected sales to $295 and $305 million, adjusted gross margin to be approximately 51.5 percent and SG&A to be approximately 40 percent of revenues. Crocs does not provide an earnings target. Wall Street was expecting 41 cents on average on revenues of $302 million.

Balance Sheet and Cash Flow Highlights:

  • Cash and cash equivalents were $87.9 million as of September 30, 2019, compared to $203.0 million as of September 30, 2018. During the third quarter of 2019, the company repurchased approximately 1.0 million shares of its common stock for $25.0 million.
  • Inventory increased 18.8 percent to $139.8 million as of September 30, 2019 compared to $117.7 million as of September 30, 2018, while its inventory turnover ratio increased to 4.5 turns per year.
  • Capital expenditures during the nine months ended September 30, 2019 were $32.9 million compared to $5.2 million during the same period in 2018. The increase primarily reflects expenditures on the relocation of the company’s U.S. distribution center from California to Ohio.
  • At September 30, 2019, there were $185.0 million of borrowings outstanding on the company’s credit facility.

Share Repurchase Activity:

  • During the third quarter of 2019, the company repurchased approximately 1.0 million shares of its common stock for $25.0 million, at an average price of $23.99 per share. As of September 30, 2019, approximately $522 million remained of the company’s share repurchase authorization.

Financial Outlook:

Fourth Quarter 2019:

With respect to the fourth quarter of 2019, the company expects:

  • Revenues to be between $245 and $255 million compared to $216.0 million in the fourth quarter of 2018. The company expects fourth quarter 2019 revenues to be negatively impacted by approximately $2 million of currency changes and approximately $2 million resulting from store closures.
  • Adjusted gross margin to be approximately 50 percent compared to 46.2 percent in the fourth quarter of 2018. Gains from increased pricing and higher clog sales plus leveraging our fixed supply chain costs are expected to more than offset approximately 100 basis points of reduced purchasing power associated with currency, along with changes in channel mix. On a GAAP basis, gross margin is expected to be approximately 49 percent, which includes 100 basis points of non-recurring charges associated with the company’s new U.S. distribution center.
  • SG&A to be approximately 47 percent of revenues compared to 52.7 percent of revenues in 2018. Non-recurring charges during the quarter are expected to be immaterial compared to $4.6 million in the fourth quarter of 2018.

Full Year 2019:

With respect to 2019, the company now expects:

  • Revenues to grow 11 percent to 12 percent over 2018 revenues of $1,088.2 million, compared to prior guidance of 9 percent to 11 percent. The company expects 2019 revenues to be negatively impacted by approximately $28 million of currency changes and approximately $20 million resulting from store closures.
  • Adjusted gross margin to be approximately 51 percent, compared to prior guidance of 50.5 percent, reflecting the increased strength of the Americas business. The 50 basis point reduction from 51.5 percent in 2018 reflects an expectation of approximately 120 basis points of reduced purchasing power associated with currency, along with higher freight and distribution costs and channel mix, partially offset by higher clog sales, higher pricing, reduced promotions, and savings from exiting our company-operated manufacturing facilities last year. On a GAAP basis, gross margin is expected to be approximately 50 percent, reflecting non-recurring charges of approximately 100 basis points associated with the company’s new U.S. distribution center.
  • SG&A to be approximately 40 percent of revenues, unchanged from prior guidance. Non-recurring charges in 2019 are expected to be approximately $3 million. In 2018, SG&A was 45.7 percent of revenues and included $21.1 million of non-recurring charges.
  • Adjusted operating margin to be approximately 11 percent, which meets the company’s near-term target of returning to a low double-digit operating margin. Including the non-recurring charges associated with the new U.S. distribution center and certain SG&A costs, the company now anticipates a GAAP operating margin of approximately 10 percent.
  • A 2019 tax rate of approximately 12 percent, down from our prior guidance of 15 percent.
    Capital expenditures to be approximately $60 million, compared to prior guidance of approximately $65 million, reflecting the movement of certain expenditures into 2020, and up from $12 million in 2018.

2020 Preview:

  • With respect to 2020 revenues, the company expects 12 percent to 14 percent growth over 2019 revenues. This estimate assumes that currency will negatively impact results by approximately $10 million.