Crocs, Inc. nearly doubled its sales in the fourth quarter, capping a year in which it went from a U.S. to an international phenomenon. But the company's inventory and accounts receivable grew even faster and headcount swelled by 83%, prompting investors to sell enough of the stock within two days of the CROX earnings release to shave $8, or nearly 24%, off its share price for the week. Accounts receivable rose 133% and inventory was up 188% at year-end. Employee count at the company swelled to 5,300 from 2,900 at the end of 2006.
The fourth quarter marked the company's seventh consecutive quarter of record sales since going public in 2006, powered by strong sales of the company's Alice, Troika and the fleece-lined Mammoth lines, according to company CEO Ron Snyder. Because Crocs loaded the retail channel with its older lines in the third quarter, it was able to dedicate more of its production capacity to the popular Mammoth line to capture reorders of the popular shoe prior to the holidays. Crocs shipped three million pairs of the shoe in the third and fourth quarter, or 30x what it expected after launching the style at trade shows last summer, Snyder said.
That success helped boost revenues for the fourth quarter ended December 31 by 99.1% to $224.8 million, compared to $112.9 million for the year earlier quarter. Domestic sales rose approximately 47% to $115.8 million, compared to $78.8 million a year ago, while International sales jumped 221% to $109 million from $34 million a year ago.
Net income for the quarter increased 84.2% to $38.3 million, or 45 cents per diluted share, compared to $20.8 million, or 26 cents per diluted share, for the prior-year period, after adjusting for a two-for-one stock split in June 2007.
Gross margins slipped 170 basis points to 56% for the quarter, in part because Crocs had to air ship Mammoths to meet demand. SG&A expenses, meanwhile, doubled to $71.9 million, pushing SG&A as a percentage of revenues up 110 basis points to 32%.
Although the Mammoth did cannibalize sales of other Crocs shoes domestically, sales of the company's Beach, Cayman, Athens and Mary Jane shoes took off in the international markets. Snyder predicted that many Mammoth customers will return to stores in the spring to buy other Crocs shoes.
The company has been racing to boost its global manufacturing and distribution capabilities to meet anticipated growth, which will be spurred this year by the opening of Brazil, China and Russia.
“We have increased our current global production capacity by 80%, and can make approximately 7.2 million pairs of shoes per month versus about 4 million this time a year-ago,” Snyder said. Three-quarters of the company's manufacturing capacity is with third-party plants.
Snyder said Crocs still has no plans to sell to discount channels, but the company has opened eight outlet stores since 2006 and expects to have 20 in all in North America by year-end. It is also opening outlets stores in Europe and Asia that it will use to move off-price products “should that arise.”
Snyder said there were very strong indications from retailers, “that there is not an overabundance of inventory in retail.”
Snyder said about 40% of Crocs sales are booked in the pre-season, not including shipments sent to its own stores, or twice the percentage of a year ago.
“We had very strong sell-through as you can see by our numbers through Q4,” Snyder said. “So we've continued to ship through January, February and orders are – and pre-books are – increasing, as we move through and into the spring and summer season.”
Crocs also expects growth from Ocean Minded and Bite, two shoe lines acquired last year. Crocs has already designed half a dozen new modes for Bite and began design of a Crocs golf shoe in the last month that will hit store shelves by spring.
“Bite will emerge as more of an outdoor brand for us,” said Snyder. Applications could include hiking, running, fishing, boating and other outdoor sports.
Essentially, Crocs appears to be betting that by boosting inventory it can capture business it lost last year due to lack of product and be able to meet demand offshore, which it expects to grow substantially this year.
“We've got some real nice potential in some of the new markets that we've moved into just last year,” Snyder said. “So, we have a fairly large mix of product. In order for our products to sell well at retail, we need to get the whole color pallets out on the stands. And it drives sales like crazy. So obviously, we're hoping that we're a little bit off on our inventory calculations and we'll need some more.
