Crocs Inc.’s first-quarter earnings slumped on a 5 percent revenue decline as it faced pressure from store closures in March due to COVID-19. Highlights in the quarter, however, included Americas’ revenues increasing 14.4 percent and e-commerce revenues rising 15.8 percent. A steeper decline in sales was forecast for the second quarter.
Andrew Rees, president and chief executive officer, said, “Amidst unprecedented market conditions globally, our total revenue held up well with exceptional performance in our Americas and e-commerce businesses that was overshadowed by COVID-19 related store closures. Despite this recent softness, Crocs remains a strong, vibrant brand that is very well positioned. In the near-term, we have no liquidity concerns and have taken quick action to ensure we will be strongly cash flow positive for the remainder of the year. Over the long-term, we are confident we will restore our momentum in 2021 and continue our positive growth trajectory for years to come.
“Our immediate focus remains on the well-being of our customers, employees, and communities. We are particularly proud of the support we are providing to our healthcare community with our “A Free Pair for Healthcare” and “One for You, One for a Hero” donation programs that to date have contributed over 450,000 pairs of shoes globally. This community has our deepest respect, and we are humbled to be able to help keep its workers and their families safe during this unprecedented time,” Rees continued.
As described during its fourth-quarter earnings conference call and subsequent updates, COVID-19 has impacted the Crocs business globally, including through store closures or reduced operating hours and decreased retail traffic. Many of the 367 company-operated stores, as well as many partner stores and wholesale customers’ stores, were closed at some point during the first quarter and many remain closed today. In all geographies where stores are closed, stores will remain closed until it is safe, and in line with local regulations, to reopen. At this time, the company estimates that stores will begin to open in stages over the coming months.
Crocs said it expect revenue declines to continue in its retail and wholesale channels as “social distancing” practices remain in effect. Further, Crocs said it expects a larger decline in revenues in the second quarter of 2020, as the majority of its retail and partner stores may be closed for the whole period. Crocs said it is beginning to see some recovery in-store traffic and sales in China and Korea where almost all stores are now open. However, Crocs said it is also seeing declines in Japan, India, and much of Southeast Asia, areas that have been impacted by a second wave of the virus. While many brick-and-mortar stores have been closed, Crocs.com and other digital commerce have remained open. Strong trends in its e-commerce channel are expected to continue, as consumers migrate to online shopping.
The company has focused on positioning its business for both short- and long-term success. Its leadership quickly established both a defensive and offensive playbook that it began to implement in early March.
With regard to the defensive measures, Crocs is taking precautionary measures to address the impact of COVID-19 and the recessionary environment that may follow. To efficiently manage the business, enhance liquidity, and maintain maximum flexibility, we have taken or are taking the following actions:
- Board of Directors and Executive Compensation: The compensation for its Board of Directors and senior leadership has been significantly reduced for the foreseeable future.
- Retail: Crocs said it has temporarily furloughed retail employees but has retained store managers and assistant store managers, albeit with reduced hours in North America. These employees continue to receive benefits. In other parts of the world, retail employees are receiving full or reduced pay in accordance with local government regulations.
- Distribution Centers: The company’s owned distribution centers globally are operational. In the U.S., its distribution center qualifies as an “essential business” and is being used to distribute and supply companies with essential products for healthcare workers during the pandemic. To help ensure the well-being of its associates, Crocs has enhanced safety protocols in place, including temperature checks, strict social distancing, hand sanitizer in all areas, and heightened cleaning of the facility in accordance with the Center for Disease Control and Prevention and state guidelines.
- Corporate Offices: Many of the company’s corporate offices are closed or have enhanced safety protocols in place to ensure the well-being of Crocs’ employees. The company has been able to successfully conduct business virtually.
Other Compensation Measures: Across the company for 2020, Crocs has reduced hiring and suspended the annual increases, market adjustments and promotions that were scheduled to go into effect in 2020. The company also has asked some employees to shift to a reduced workday, has placed certain employees on temporary unpaid leave, and has eliminated select roles as it adjusts to an organization structure for the future.
- Operating Expenses: Selling, general and administrative expenses (“SG&A”) for 2020 are now expected to be between $440 and $460 million, which is approximately $30 to $50 million lower than the prior-year and approximately $100 million lower than its original plan for 2020. The savings are primarily comprised of reduced compensation, lower marketing investment, and fewer discretionary expenses. Additionally, the company began to implement travel restrictions in January, which has also reduced its expected SG&A.
- Working Capital: The company is tightly managing inventories by reducing supply, rebalancing existing inventory, and consolidating future seasonal collections. Crocs is also working closely with both its customers and vendors to manage accounts receivable and accounts payable.
- Capital Expenditures: Capital expenditures for 2020 are expected to be approximately $30 million, compared to prior guidance of approximately $50 to $60 million. This reduction reflects the deferral or cancellation of certain investments that Crocs said it is making to support growth.
- Credit Facility: As previously announced, the Company amended and restated its revolving credit facility with PNC Bank, National Association, and a consortium of other lenders (the “Credit Facility”) on March 26, 2020. The Credit Facility was increased to $500 million from $450 million. In addition, the amended Credit Facility has a modified leverage ratio of 4.00x for the second and third quarters of fiscal 2020, after which the leverage ratio decreases to 3.50x through the fourth quarter of 2021 and 3.25x thereafter. The Credit Facility maturity date of July 2024 remains unchanged.
- Share Repurchase: As previously announced, the company has temporarily suspended share repurchases to preserve maximum liquidity and flexibility. During the first quarter of 2020, the company repurchased approximately 1.6 million shares of its common stock for $39.2 million, at an average price of $25.13 per share. As of March 31, 2020, approximately $469 million remained on the company’s share repurchase authorization.
The company will provide more detail on the financial and operational impacts of COVID-19 during its first-quarter earnings conference call today.
First Quarter 2020 Operating Results
- Revenues were $281.2 million, declining 5.0 percent from the first quarter of 2019, or 3.3 percent on a constant currency basis. Currency negatively impacted its revenues by approximately $5.2 million. Wholesale revenues declined 5.6 percent and retail comparable store sales grew 7.5 percent with total retail revenues down 15.0 percent due to COVID-19 closures.
- The decline in wholesale and retail are partially offset by e-commerce revenue growth of 15.8 percent.
- By region, sales were up 14.4 percent on a reported basis and 15.2 percent on a currency-neutral basis in the Americas. Sales were down 28.1 percent on a reported basis and slumped 25.9 percent on a currency-neutral basis in Asia Pacific. Sales were off 10.3 percent on a reported basis and declined 7.6 percent on a currency-neutral basis in EMEA.
- Gross margin was 47.7 percent, compared to 46.5 percent in last year’s first quarter. Adjusted gross margin, which excludes 30 basis points of non-recurring expenditures related to its U.S. and EMEA distribution centers, was 48.0 percent.
- Adjusted gross margin rose 110 basis points compared to last year’s first quarter, benefiting from product mix, higher prices on certain products, and lower levels of promotions and discounts in the Americas, somewhat offset by 50 basis points of currency.
- Selling, general and administrative expenses (“SG&A”) were $113.4 million, up from $105.0 million in the first quarter of 2019, as Crocs continued to invest in marketing prior to the pandemic worsening. Non-recurring charges that primarily relate to bad debt expense and donations were $4.6 million compared to $0.7 million in last year’s first quarter. The company has committed to total donations of up to $11.0 million, the majority of which will be reflected in second-quarter non-recurring charges. SG&A represented 40.3 percent of revenues compared to 35.5 percent in the first quarter of 2019. Croc’s adjusted SG&A was 38.7 percent of revenues versus 35.3 percent, in last year’s first quarter.
- Income from operations declined 36.1 percent to $20.8 million from $32.6 million in the first quarter of 2019, and operating margin fell 360 basis points to 7.4 percent. Excluding non-recurring gross margin and SG&A charges, adjusted income from operations fell 23.7 percent to $26.4 million and adjusted operating margin was 9.4 percent compared to 11.7 percent in the first quarter of 2019.
- Diluted earnings per share fell to 16 cents per share, as compared with 33 cents in the first quarter of 2019. Excluding non-recurring gross margin and SG&A charges, adjusted diluted earnings per share were 22 cents compared to 36 cents in the first quarter of 2019, a decline of 38.9 percent.
Balance Sheet and Cash Flow Highlights
- Cash and cash equivalents were $107.0 million as of March 31, 2020, compared to $108.3 million as of December 31, 2019.
Inventory increased to $195.8 million as of March 31, 2020, compared to $172.0 million as of December 31, 2019.
- Capital expenditures during the three months ended March 31, 2020 were $16.1 million, compared to $10.6 million during the same period in 2019. Nearly all of the expenditures this quarter related to accrued capital expenditures in the fourth quarter of 2019 that were paid this quarter for the relocation of the company’s new corporate headquarters.
- At March 31, 2020, there were $350.0 million of borrowings outstanding on the company’s credit facility, with $150.0 million remaining for borrowing.
Given the continued disruption and uncertainty globally related to COVID-19, Crocs previously withdrew the guidance it provided on February 27, 2020. Crocs is also not providing full second quarter or full-year guidance at this time beyond what is outlined above.
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