Crocs Inc. (Nasdaq:CROX) swung to a net loss of $27.8 million in the third quarter ended Sept. 30, 2015 – versus a quarterly gain of $12 million a year ago – after holding back shipments to Chinese distributors, facing currency headwinds, closing stores and delaying more-timely new products.

Third-quarter revenue also fell for the Niwot, CO footwear company, down 9.4 percent (or 0.8 percent in currency-neutral terms) to $274.1 million.

Despite the struggles, Crocs CEO Gregg Ribatt was optimistic with investors that many of the problems were being remedied – including new production and distribution plans, a 40 percent SKU reduction and fresher styles for 2016. Crocs also announced additions to its senior leadership team, including new CFO Carrie Teffner (who previously served in the same position at PetSmart and Timberland) and new CIO Donna Flood (who previously served as COO for Easton-Bell).

Ribatt said unfavorable currency exchanges made the biggest impact in the third quarter – reducing sales by $26 million “as the dollar strengthened significantly since July against several specific currencies including the Korean won, the Chinese RMB, the Brazilian real, and the Canadian dollar.”

Hurdles in China
In China, the company said it was transitioning away from under-performing distributors.

“We faced some difficult decisions in China and as a result we increased reserves for doubtful accounts by $19 million at the end of the third quarter,” Ribatt said “We also held shipments to several of our China distributors, which negatively affected Q3 revenue by $4 million. However, these actions set us up for improved business performance in the future. We now expect to return China to growth in the back half of 2016.”

Crocs President Andrew Rees said the company named new leadership in China and narrowed its product line to be more consistent with its global range. A fragmented team of 48 distributors will be reduced to “align with fewer, more experienced, and stronger partners,” Ress said. “And we're planning to operate more retail stores ourselves in strategic cities where we have existing infrastructure.”

Reduction in SKUs; updated more often
While it worked through transitions in 2015, Ribatt said Crocs had lengthened its time between updating product, leaving more dated styles on the shelves and leading to increased discounted, which negatively affect margins by 300 basis points.

That will change next year, Ribatt said: “As we enter 2016, 60 percent of our spring/summer product range is new, reinvigorated product versus roughly 30 percent in 2015. It will also be a smaller collection, with a 40 percent reduction in SKUs.

“This significantly simplifies product development, costing, forecasting, and inventory management,” Rees said, adding that it will also lead to better customer service and supply-chain issues.

E-commerce stays strong
The bright spot for Crocs in rough third quarter was the brand’s direct e-commerce sales, which grew on a comparable-site basis 31 percent in constant currency, with the Americas up 33 percent, Europe up 19 percent, and Asia up 42 percent.

Overall, global direct-to-consumer comp revenues, including Crocs stores were up 4.7 percent. During the quarter, Crocs closed 13 stores and opened 11, bringing its store count to 557 at the end of the third quarter. “We anticipate closing another 15 to 20 stores during Q4,” Rees said.

Stores in U.S. tourist destinations took a particular hit (down 5.3 percent on a comp basis during the quarter) as the strengthening dollar gave foreign visitors less buying power.

Looking ahead
“Despite challenging headwinds, we are confident that we can drive 2016 revenues up in the mid-single digits based on current exchange rates,” Ribatt said. “We expect 2016 gross margins to be flat to 2015, as the currency impact of approximately 250 basis points at today's rates is offset by product margin and operational improvements.”

–David Clucas