Led by continuing momentum in the Americas, Crocs’s fourth quarter marked the fourth consecutive quarter that the company exceeded its revenue and gross margin guidance.

Fourth quarter 2017 highlights:

  • Revenues grew 6.2 percent to $199.1 million, or 3.8 percent, on a constant currency basis. The gains came despite the loss of $14 million due to operating fewer stores and absorbing the impact of the sales of the Taiwan and Middle East businesses. Wholesale and e-commerce grew at double-digit rates and retail delivered positive comparable store sales.
  • Gross margin expanded 340 basis points to 45.4 percent. This improvement was driven by efforts to continue to prioritize high-margin molded product, improving go-to-market capabilities and better managing promotions. Favorable currency rates drove approximately 100 basis points of the improvement;
  • SG&A expenses rose 1.9 percent to $120.7 million, but was reduced as a percent of sales to 60.6 percent of revenues from 63.2 percent a year ago. The latest period included charges of $3.1 million for its SG&A reduction plan and $6.3 million in connection with a non-cash impairment charge and a contract termination. Fourth quarter 2016 results included $1.4 million of non-recurring charges.
  • The operating loss was cut to $30.4 million from $39.8 million.
  • The net loss came to $28.3 million, or 41 cents per share, compared to a net loss of $44.5 million, or 60 cents, a year ago.

Sales and gross margins were well above guidance while SG&A fell short, although costs under its SG&A reduction plan were higher than planned.

When it reported third-quarter results on November 7, Crocs said it expected fourth quarter revenues to be between $180 and $190 million, gross margin to be approximately 43 percent and SG&A of approximately $115 million, including approximately $2 million of charges associated with its SG&A reduction plan.

For the year, Crocs’ revenues were down 1.2 percent to $1.02 billion and dipped 1.7 percent on a currency-neutral basis. Net income came to $5.3 million, or 7 cents a share, compared to a net loss of $31.7 million, or 43 cents, in 2016.

On a conference call, Andrew Rees, CEO, noted that the quarter said a primary driver of Crocs’ improvement has been efforts to close unproductive stores along with the related infrastructure and overhead and pursue operational efficiencies as part of its SG&A reduction plan. Inventory has been reduced and the quality of the remaining inventory has been improved through improved processes and systems.

Also helping was reducing sales in discount channels and investing more in its “newest, fastest earning and highest margin product.” Finally, Crocs remains focused on continuing to strengthen its relationship with consumers. Said xx, “The key to this is clogs and sandals, where we have a strong positioning, a distinctive offering that is in demand, supported by our marketing investments in our Come As You Are campaign which has been extremely successful in driving engagement and sales since its launch this past April.”

By channel in the quarter, global wholesale was up 15.2 percent while DTC comps were ahead 6.2 percent.

The wholesale helped its customers and distributor partners by embracing the brand’s “Always Summer” positioning and expanding their assortments, placing product in additional doors and keeping Crocs’ product on shelves longer.

Retail comped positive 3.7 percent while retail sales declined 6.3 percent as the company has 111 fewer stores at the end of 2017 compared to the same time in 2016. Said Carrie Teffner, CFO, “Customers embraced our Fall/Holiday 2017 collection, which emphasized clogs and sandals, and we continued to improve execution resulting in higher conversion rates.”

E-commerce grew 11.6 percent during the quarter with a strong growth in the Americas and Europe.

Approximately 11 million pairs of shoes were sold in the quarter, an increase of 10.3 percent year-over-year. Average selling price on footwear declined 5.6 percent to $17.54 due to a focus on molded product over more expensive cut-and-sold style and of having fewer stores.

By region, sales grew 13.6 percent in the Americas to $105.8 million. Wholesale revenues grew 29.1 percent, driven by at-once sales, which came in higher than expected as consumers continue to purchase clogs and sandals despite winter weather, and vendors restocked shelves. DTC comp in the Americas was a positive 8.9 percent.

Said Teffner, “Our retail and e-commerce businesses both benefited from our decision to capitalize on the clog and sandal momentum from summer; a price increase on key styles put into place shortly before Thanksgiving did not slow that momentum.”

The price increase impacted approximately 20 percent of its revenue base and most notably included its classic and Crocband styles. Crocs also expanded its our focus on its Jibbitz charms collection to encourage personalization among teens and adults in addition to children, and this contributed to the increase in clog sales.

Structuring promotions effectively helped drive retail comps in the Americas ahead 7 percent while preserving strong margins in the Americas. The Americas saw its best comp quarter of the year and the third quarter in a row of positive comps. Total retail sales grew by 2 percent despite having 15 fewer stores than in last year’s fourth quarter. T E-commerce sales in the Americas increased 13 percent.

In other regions, Asia’s revenues of $66.6 million declined 3.2 percent. Wholesale grew 9.9 percent, again driven by at-once orders, while retail sales declined 23.1 percent due to store closures.

Europe’s revenues grew 3.7 percent to $26.3 million and benefited from local management’s heightened focus on clogs and sandals and capitalizing on Europe’s growing enthusiasm for Black Friday and Cyber Monday. Russia also returned to growth.

On the product side, Clogs represented approximately 57 percent of its fourth quarter footwear sales, and 51 percent of its full year sales, reflecting growth in both periods compared to the prior year. Said Rees, “In our 2018 assortment, we have great new colors, graphics and styles to boost clog relevancy even further.”

Sandal revenues increased 44 percent in the fourth quarter and represented 15 percent of its total footwear sales, up from 11 percent in 2016’s fourth quarter. For the full year, sandals grew 26 percent and represented approximately 20 percent of its footwear sales compared to 16 percent in 2016. Said Rees, “For Spring/Summer 2018, we expanded the number of sandal SKUs in our collection by approximately 15 percent, adding greater variety to address additional wearing occasions.”

A big launch is planned in March around LiteRide, a premium-priced collection of clogs and sandals that combines a proprietary new material with Croslite for an “extremely lightweight shoes with a highly cushioned foot pad.”

In marketing, the Come As You Are campaign that focuses on clogs and sandals continues into its second year with Drew Barrymore, Yoona Lim and Henry Lau continuing as brand ambassadors. Said Rees, “We have a lot of exciting impactful new content to roll out during the year.”

The Drew Barrymore Loves Crocs collection launched earlier this month has generated positive brand coverage both here and abroad.

Rees claimed that overall Crocs expects its fastest growth to be driven by digital commerce, which involves its own e-commerce sites, fast-growing e-tailers and third-party marketplaces. Said Rees, “Rapidly expanding third-party marketplaces such as Rakuten in Japan, Coupang in South Korea and Zalando in Europe are one of our highest priorities for 2018. We intend to play a much more active role in marketing Crocs on those sites.”

Rees concluded, “We have made significant progress in our product to marketing efforts, as well as our strategic initiatives to simplify the business and generate cost savings. As we look forward, we’re focused on sustainable profitable revenue growth. We are confident that our product, marketing and distribution channel initiatives will deliver that growth, and that the benefits from this work will drive meaningful EBITDA increases in the future.”

The outlook for 2018 calls for:

  • Revenues to be relatively flat to the prior year with about $60 million impacted by business model changes and store closures.
  • Gross margin to be up approximately 70 to 100 basis points over its 2017 gross margin of 50.5 percent.
  • SG&A in 2018 to be approximately $475 million, including $5 million of non-recurring charges associated with the SG&A reduction plan and approximately $5 million of additional expense associated with changes in foreign exchange rates. That compares to $499.9 million in 2017, which included $17.0 million of non-recurring charges.
  • Income from operations to be approximately $50 million, compared to $17.3 million in 2017.

First quarter projections call for:

  • Revenues to be between $265 and $275 million compared to $267.9 million;
  • Gross margin to be approximately 49 percent compared to 49.9 percent in the first quarter of 2017. Absent a change in accounting method for inventories, gross margin is expected to be up modestly;
  • SG&A of approximately $115 million compared to $118.0 million last year. Both years include approximately $2 million of non-recurring charges incurred in connection with its SG&A reduction plan.

Photo courtesy Crocs