Shares of Crocs Inc. (Nasdaq:CROX) plummeted more than 23 percent to $8.44 on August 3, after the cushy shoe maker missed top and bottom line expectations for the second quarter and lowered its guidance for the year.
Net income attributable to common stockholders on a GAAP basis increased 21.1 percent, to $11.7 million or 13 cents per share, but missed Wall Street’s consensus target of 15 cents a share. Revenue decreased 6.3 percent to $323.8 million.
Revenues missed the Street’s target of $348.5 million, and also missed Crocs’ internal guidance that had called for sales to land in the range of $340 million to $350 million. On a currency-neutral basis and excluding the sale of its South Africa business, revenue was down 5.4 percent.
“While revenue fell short of our expectations, we believe the shortfall relative to our guidance was primarily tied to industry softness in the quarter and our continued distributor challenges in China rather than the overall health of our brand or specific product performance,” Crocs CEO Gregg Ribatt said on a conference call with analysts. In addition, Ribatt pointed to a number of positive signs of Crocs’ progress, including marking its fifth consecutive quarter of positive direct-to-consumer (DTC) comp performance. Gross margin showed significant sequential improvement in the quarter, expenses were managed effectively, inventories were reduced and deals have been executed with the majority of its challenged China distributors.
Ribatt added, “As indicated on our last earnings call, we continue to have strong delivery performance and feedback on our new product remains very positive.” Relative to expectations, wholesale was negatively impacted by lower at-once orders, particularly in the Americas, given retailers’ caution around open-to-buy dollars. In addition, China under-performed versus expectation, with the resolution of its challenged distributors taking longer than planned.
Ribatt noted that while agreements have been reached with most of its distributors, “we still have more work to do to re-establish growth in our China wholesale business. That said, despite these challenges in the wholesale side of the business, our DTC business in China continues to be very strong.”
Gross margins were up 600 basis points sequentially from Q1 and came in approximately 150 basis points better than expectations due to less discounting as well as a higher mix of DTC revenue. Adjusted SG&A spending came in below expectations, reflecting an $8.7 million reduction to the prior year. As a result of improved operations, inventories were reduced 7 percent to last year despite the revenue shortfall.
DTC comps were up 2.9 percent despite the continued decline in retail traffic. Retail comps decreased 3.4 percent, due primarily to declines in Asia and the Americas, as increased conversion and units per transaction were not enough to offset the decline in retail traffic during the quarter. E-commerce grew 19.5 percent, reflecting growth in all regions.
Global wholesale revenue was down 12.4 percent for the quarter versus last year. The majority of the decline in the second quarter was primarily due to shortfalls in its China business, resulting from changes being implemented with distributors in that market. For the first half, global wholesale was down 3.1 percent versus last year.
“Despite disappointing topline results in Q2, I believe our results show that we’re making significant strategic progress, including managing our business tightly, and we’re committed to maintaining this operating discipline going forward,” said Ribatt.
On the positive side, Ribatt noted that the better-than-expected improvement in gross margins stems from a shift to its higher margin molded product and a more disciplined approach to discounting and promotional activity. With a tighter product line, a more molded product mix, less discounts and better inventory discipline, year-over-year gross margin improvements going forward are expected.
Also, continued SG&A improvement is expected in the second half due to expense-control efforts, including leveraging more efficient and effective operating capabilities while managing costs.
Finally, Ribatt said Crocs “will continue to manage inventory closely, balancing it with demand while delivering service at industry benchmark levels or better. Fewer SKUs, leveraging a common global platform along with tighter processes and procedures are providing improved operational performance.”
Looking to 2017, retailer feedback on its current and spring 2017 line “is very strong,” Ribatt said.
He added that continued growth in its global DTC business based on new product, strong marketing and continued operational improvements should continue to pay benefits. He nonetheless said that given the overall retail environment, it’s “prudent to be more conservative” with company guidance.
“Our product, our marketing and our service levels are better than they have been in our recent history,” said Ribatt. “I’m proud of the work our team has done over the past 18 months to 24 months, which is showing up in our gross margins, our SG&A, our working capital and our service levels. We remain committed to the pillars of the strategy that we have laid out previously. And while we’ve made substantial progress in each of these areas, the work continues. And despite recent challenges, we continue to see many positive signs, which gives us confidence in the direction we’re heading and seeing the results reflected in our operating performance.”
In recognition of the soft macroeconomic conditions and the cautious retail environment, Crocs said it expects third quarter 2016 revenue in the $245.0 million to $255.0 million range, down from $274.1 million in the third quarter 2015. For the full year, the company expects revenue to be down low single digits, reflecting the more cautious retail environment and the slower turnaround in China. Previously, it expected mid-single-digit growth.
Lead photo courtesy Crocs
