With marked softness in the U.S. making up for a healthier performance overseas, Crocs, Inc. reported earnings tumbled 78.0 percent in the first quarter, to $6.4 million, or 6 cents a share.
Excluding certain charges, the company reported a non-GAAP net income per share of 14 cents, representing a decline of 57.6 percent versus the year-ago period. Results fell short of Wall Street’s consensus target by 3 cents a share.
Revenues inched up 0.2 percent to $312.4 million, in line with previous guidance. On a constant currency (c-n) basis, revenue increased 1.5 percent.
The quarter included $8.1 million in non-GAAP charges (of which $1.1 million were non-cash charges) for restructuring, ERP implementation and certain legal contingency accruals. It also included $2.8 million of dividends and dividend equivalents on the preferred stock that was issued in the first quarter as part of its Blackstone Group investment. As part of the deal announced on Dec. 29, Blackstone purchased $200 million of Crocs' newly issued series A convertible preferred stock, taking a 13 percent ownership in the cushy shoemaker.
On a conference call with analysts, Jeff Lasher, Crocs CFO, noted that despite unfavorable exchange rates between the Russian ruble and Japanese yen, year-over-year revenues grew in both the European and Asia-Pacific regions in our first quarter. Russia represents about 15 percent of its business in Europe.
On the downside, Crocs continued to face macroeconomic challenges in Japan, including the recent change to the consumption tax, lower purchasing power of the yen and lackluster consumer sentiment. The decline of the Japanese yen and Russian ruble adversely impacted year-over-year quarterly revenues by almost $4 million and operating income by approximately $1 million.
Lasher added that Crocs continued, “to see challenges in our Americas wholesale channel as accounts remain lean on inventory.”
Total wholesale sales were down 1.4 percent to $217.3 million and were down 0.5 percent on a c-n basis, dragged down by a sharp decline in the Americas.
Total retail sales were up 6.3 percent to $75.6 million and gained 8.6 percent c-n. Lasher said the addition of 76 global retail locations net of store closures offset a 1.5 percent decrease in comparable store sales, which was impacted by the shift of the Easter holiday from March into April and “difficult retail markets in certain areas around the globe.” Total Internet sales were down 3.3 percent to $19.6 million and declined 1.9 percent c-n.
Total sales in the Americas region declined 9.5 percent to $117.1 million and were down 8.2 percent on a c-n basis. Wholesale revenues fell 14.0 percent to $70.2 million, retail was up 1.9 percent to $36.6 million, and Internet sales slumped 13.1 percent to $10.4 million. On a c-n basis, sales in the Americas were down 12.6 percent at its wholesale segment and slumped 12.1 percent in its Internet segment while rising 3.0 percent at retail. Comparable-store sales were down 5 percent on a reported basis and lost 10.3 percent c-n.
Internationally, Asia Pacific led the way with sales ahead 12.6 percent to $101.9 million and a gain of 13.8 percent c-n. Japan was down 4.3 percent to $29.1 million but gained 5.4 percent on a c-n basis. Europe's sales were up 4.5 percent to $64.1 million and showed a 1.8 percent gain on a c-n basis.
From an overall product perspective, revenue growth was predominantly driven by a global average selling price increase of 2.5 percent, primarily driven by new product introductions and a mix shift from clogs to non-clogs styles such as men's loafers and women's wedges. Unit volume decreased 2 percent to just under 15 million pairs. With its expansion to lines such as the Stretch Sole and Busy Day and carryover products such as the Huarache and A-Leigh Wedge, clog sales shrunk to 42 percent of sales compared with 47 percent in the 2013 first quarter.
Gross margins, however, decreased 320 basis points to 50 percent partly due the higher percentage of loafers and other non-fully molded casual footwear styles. The new styles generally incur slightly higher production cost since they often utilize more labor and more expensive material such as textile fabric and leather than the traditional clog. Currency headwinds also impacted margins.
SG&A expenses increased 8.7 percent, to $139.4 million as a result of global retail expansion, as well as charges tied to restructuring, its ERP implementation, ongoing litigation, and a liability for some store closures in Europe. Additional restructuring charges are expected this year.
Crocs announced that its chairman, Tom Smach, will also serve as interim CEO until a permanent president and/or CEO is hired. At the same time as the Blackstone deal was announced, Crocs announced the retirement of its president and CEO, John McCarvel, effective Apr. 30.
With Blackstone’s support and a “strong” balance sheet, Crocs expects to “to undergo some strategic transitioning during the next year.” Although more details will be coming through the year, it intends to “increase focus on profitability and retail excellence. We may moderate the pace of our investments in new retail stores, as well as consolidate some existing locations.”
Entering the second quarter, Crocs backlog was up approximately $57 million to just over $350 million. Revenues are projected to reach approximately $370 to $375 million in the second quarter of 2014, which compares to $363.8 million a year ago. The gains will be driven by Asia and Europe. Japan is expected to be impacted by the increase in consumer taxes “and we believe the Americas region likely will be flat in the second quarter as South America continues to suffer from economic and distribution challenges.”
