Crocs, Inc. reported earnings in the fourth quarter that topped Wall Street’s targets as sales expanded 21.8 percent to cap off a strong year. Crocs officials, however, warned that sales in the first quarter would be hurt by $20 million to $30 million due to disruptions in Asia from the coronavirus.

Andrew Rees, president and chief executive officer, said, “Our record fourth quarter and full-year top-line combined with our double-digit operating margin underscores the progress we have made executing our key strategic initiatives. Focusing on our core clog and sandal categories and further igniting brand heat through impactful marketing campaigns and collaborations are fueling strong revenue growth. Equally important, the work we’ve done reducing our expense structure is allowing us to translate our top-line success into even stronger earnings growth as we continue to make important investments in the business.”

“Although we begin the new year with great momentum and exciting plans in place to build on our recent growth, our immediate focus is with everyone affected by the coronavirus and ensuring that our employees in China, along with our partners, safely navigate the risks associated with this global health epidemic. Despite this difficult situation, we continue to be very optimistic about our long-term growth prospects in China and our Asia region,” said Rees.

Fourth Quarter 2019 Operating Results

  • Revenues were $263.0 million, growing 21.8 percent over the fourth quarter of 2018, or 22.7 percent on a constant currency basis. Currencies negatively impacted its revenues by approximately $2.0 million, while store closures reduced its revenues by $2.0 million. Wholesale revenues grew 22.4 percent, e-commerce revenues grew 34.3 percent, and retail comparable store sales on a constant currency basis grew 16.0 percent.
  • Gross margin was 48.0 percent, compared to 46.2 percent in last year’s fourth quarter. Adjusted gross margin, which excludes 130 basis points of expenses primarily related to the relocation of its distribution centers in the U.S. and the Netherlands, was 49.3 percent. Adjusted gross margin rose 310 basis points, driven by favorable product mix, price increases on certain products, lower levels of promotions and discounts, and greater volume helping to leverage its fixed costs.
  • Selling, general and administrative expenses (“SG&A”) were $117.9 million compared to $113.8 million in the fourth quarter of 2018. Non-recurring charges were $1.2 million compared to $4.6 million in the fourth quarter of 2018. SG&A improved 790 basis points and represented 44.8 percent of revenues compared to 52.7 percent in the fourth quarter of 2018, as Crocs continued to drive leverage across the business. Crocs’ adjusted SG&A improved 620 basis points and represented 44.4 percent of revenues compared to 50.6 percent in the fourth quarter of 2018.
  • Income from operations was $8.4 million compared to loss from operations of $13.9 million in the fourth quarter of 2018. Excluding expenses incurred in connection with the relocation of its distribution centers in the U.S. and the Netherlands and non-recurring SG&A charges, our adjusted income from operations was $12.9 million.
  • Crocs’ diluted net income per common share was 29 cents for the fourth quarter of 2019, compared to a diluted net loss per common share of $1.72 in the fourth quarter of 2018. Excluding expenses primarily incurred in connection with the relocation of its distribution centers in the U.S. and the Netherlands and non-recurring SG&A charges, adjustments to income tax expense (benefit), and pro forma adjustments related to its previously outstanding Series A Preferred Stock, Crocs adjusted diluted net income was $8.63 million, or 12 cents a share, compared to a non-GAAP loss of $7.74 million, or 10 cents, in the fourth quarter of 2018.

Sales of $263.0 million topped company guidance calling for sales in the range of $245 and $255 million. The adjusted gross margin of 49.3 percent was below the guidance of  50%.  SG&A at 44.8 percent of sales was better than guidance calling for 47 percent. Crocs does not provide EPS guidance but adjusted earnings of 12 cents was ahead of Wall Street’s consensus target of 7 cents. Wall Street was expecting $260.0 million on average for revenues.

2019 Operating Results

  • Revenues were $1,230.6 million, growing 13.1 percent over 2018, or 15.6 percent on a constant currency basis. Store closures reduced its revenues by $17.2 million. Crocs’ wholesale revenues grew 13.5 percent, its e-commerce business grew 24.2 percent, and our retail comparable store sales grew 12.4 percent.
  • Gross margin was 50.1 percent compared to 51.5 percent in 2018, while gross profit increased $56.9 million. Adjusted gross margin, which excluded 90 basis points of expenses primarily related to the relocation of its distribution centers in the U.S. and the Netherlands, was 51.1 percent. Adjusted gross margin declined 40 basis points, driven by reduced purchasing power related to currency, offset in part by a higher margin product mix, price increases on certain products, and lower levels of promotions and discounts.
  • SG&A was $488.4 million compared to $497.2 million in 2018. Results for 2019 included $2.9 million of non-recurring charges compared to $21.1 million in 2018. As a percent of revenues, SG&A improved 600 basis points to 39.7 percent. Excluding non-recurring charges, adjusted SG&A as a percent of revenues was 39.5 percent, an improvement of 430 basis points over 2018.
  • Income from operations of $128.6 million grew 104.4 percent, compared to $62.9 million in 2018, and operating margin was 10.5 percent, compared to 5.8 percent in 2018. Excluding expenses primarily incurred in connection with the relocation of its distribution centers in the U.S. and the Netherlands and non-recurring SG&A charges, adjusted income from operations grew 70.2 percent to $143.0 million. Adjusted operating margin for 2019 was 11.6 percent compared to 7.7 percent in 2018.
  • Crocs’ diluted net income per common share was $1.66 in 2019 compared to a diluted net loss per common share of $1.01 in 2018. Excluding expenses primarily incurred in connection with the relocation of its distribution centers in the U.S. and the Netherlands and non-recurring SG&A charges, adjustments to income tax expense (benefit), and pro forma adjustments related to our previously outstanding Series A Preferred Stock, Crocs’ adjusted diluted net income per common share was $1.61 compared to $0.86 in 2018.

Balance Sheet and Cash Flow Highlights

  • Cash and cash equivalents were $108.3 million as of December 31, 2019, compared to $123.4 million as of December 31, 2018. The change in cash and cash equivalents was driven primarily by share repurchases and capital expenditures, partially offset by cash generated from operating activities.
  • Cash provided by operating activities decreased 21.2 percent to $90.0 million during 2019 compared to $114.2 million during 2018.
  • Inventory increased 38.2 percent to $172.0 million as of December 31, 2019 compared to $124.5 million as of December 31, 2018, while its inventory turnover ratio increased to 4.3 turns per year.
  • Capital expenditures, including accruals, during the year ended December 31, 2019 were $50.6 million compared to $10.9 million during 2018. The increase primarily reflects expenditures for the relocation of its U.S. distribution center from California to Ohio.
  • At December 31, 2019, there were $205.0 million of borrowings outstanding on Crocs’ $450.0 million credit facility.

Share Repurchase Activity
During the fourth quarter of 2019, we repurchased 0.4 million shares of Crocs’ common stock for $13.7 million, at an average price of $34.73 per share. For the full year, we repurchased 6.1 million shares of its common stock for $147.2 million, at an average price of $24.20 per share. At year-end, $508.6 million of our $1 billion share repurchase authorization remained available for future repurchases.

Distribution Center Investment
The company completed the relocation of its U.S. distribution center from California to Ohio during the fourth quarter of 2019. In 2019, Crocs entered into a lease to relocate its distribution center in the Netherlands to a larger facility in 2021. We are evaluating similar investments this year and beyond designed to support Crocs’ anticipated growth.

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Financial Outlook | First Quarter 2020

With respect to the first quarter of 2020, Crocs expects:

  • Revenues to be between $305 and $325 million compared to $295.9 million in the first quarter of 2019. Crocs anticipates revenues for the first quarter of 2020 will be negatively impacted by approximately $20 to $30 million due to disruptions to its Asia business from COVID-19 (the “coronavirus”) and by approximately $3 million due to currency;
  • Many of Crocs’ partner stores in China are closed temporarily. For those that remain open, they are operating on a reduced schedule and experiencing lower than usual traffic levels. Crocs is also seeing the broader impact as Crocs is experiencing traffic declines throughout many of Crocs’ key countries in Asia.
  • Operating margin to be between 9 percent and 12 percent, including $3 million of non-recurring expenses for store closures and other provisions in Asia as a result of business disruptions from the coronavirus.

Full Year 2020

With respect to 2020, Crocs expects:

  • Revenues to be up 8 percent to 12 percent over 2019 revenues of $1,230.6 million. Crocs anticipates 2020 revenues will be negatively impacted by $40 to $60 million as a result of disruptions to its Asia business from the coronavirus and approximately $10 million of currency;
  • An operating margin of between 11 percent and 13 percent, which includes expenses associated with its new distribution center in the Netherlands and charges for store closures and other provisions in Asia as a result of business disruptions from the coronavirus;
  • Interest expense of approximately $9 million; and
  • A tax rate of approximately 17 percent.