Crocs Eyes Return To Double-Digit Top-Line Growth For 2019

By Thomas J. Ryan

<span style="color: #999999;">Crocs Inc. sharply raised its revenue targets for the full year after reporting second-quarter earnings that handily topped Wall Street’s target.

Crocs now expects revenues for the year to grow 9 percent to 11 percent, compared to prior guidance of 5 percent to 7 percent.

On a conference call with analysts, Andrew Rees, president and CEO, said the higher guidance reflects the overall strength of the business.

“We are successfully executing against our strategic priorities, particularly those focused on driving revenue growth by prioritizing clogs, sandals, visible comfort technology and personalization, while also driving overall profitability,” said Rees. “Demand for our product is strong and our brand heat is rising. Given our consistent track record over the past two years, I’m more confident than ever that we will continue to drive top and bottom-line growth for years to come.”

In the quarter, revenues were $358.9 million, growing 9.4 percent over the second quarter of 2018, or 12.5 percent on a constant currency basis. When it reported first-quarter results on May 7, Crocs projected sales in the range of $350 and $360 million. The consensus target was $360.0 million.

Store closures reduced revenues by approximately $6 million. Wholesale revenues grew 9.4 percent, e-commerce revenues grew 18.0 percent, and retail comps gained 11.8 percent.

In terms of product, key growth drivers were clogs, sandals, visible comfort technology and personalization.

During Q2, clog revenues grew approximately 18 percent and made up 57 percent of its footwear sales, up from 52 percent during the last year’s second quarter. The biggest uptick in demand has been for the Classic Clog and the company has more than doubled production capacity for the item this year.

Said Rees, “Demand for a few Clog colors is continuing to exceed supply. We’re working closely with our suppliers to further boost production levels and are confident in our ability to meet demand contemplated in our guidance.”

Sandal revenues grew approximately 11 percent, marking the ninth consecutive quarter of double-digit sandal revenue growth, even as weather in North America and Europe caused the sandal season to get off to a later start than last year. Sandal revenues generated 27 percent of footwear revenues compared to 26 percent in the second quarter of 2018.

The Reviva franchise, which focuses on Flips and Slides, has been well received  and continues to show that visible comfort technology continues to be an important purchasing factor. The Kids’ LiteRide was recently rolled out and overall LiteRide sales this year are expected to be least double 2018 levels.

On personalization, Crocs has steadily increased the size of its Jibbitz Charms collection. Rees said, “We’re rolling out new Charms monthly to stay on top of emerging trends and testing different ways to further enable personalization. Our consumers are clearly embracing Jibbitz Charms to personalize their Crocs, which is driving brand engagement higher.

By channels, wholesale growth exceeded 9 percent, as retail customers continued to place at once orders for Spring Summer 2019 product to meet expanding consumer demand. This growth came on top of 7 percent wholesale growth delivered in Q218.

Direct-to-Consumer (DTC) comps, combining retail and e-commerce, were up 14 percent. E-commerce grew 18 percent on top of 24 percent growth last year and representing the ninth consecutive quarter of double-digit e-commerce growth Retail comps were up 12 percent, the eighth consecutive quarter of positive comps. Total retail sales rose 4 percent despite last year’s store closures.

By region, revenues in the Americas jumped 23.7 percent to $170.4 million with minimal impact from currency. Every channel grew at double-digit rates with wholesale and e-commerce approaching 30 percent growth. Americas’ retail comped up 17.6 percent. Clog demand continued to climb particularly for Classics in the Americas. Revenues from high-margin Jibbitz sales rose significantly Americas, driven by an uptick in unit sales and the price increase.

In Asia, revenues for the second quarter were $118.4 million, down 3.2 percent. Excluding $5.4 million of negative impact from currency, Asia grew 1.3 percent. E-commerce channel delivered mid single-digit increases and retail comp was approximately 1 percent. Wholesale growth throughout much of the region was offset by China, “where we continue laying the foundation for future growth,” said Anne Mehlman, EVP and CFO.

In EMEA, revenues grew 3.4 percent over last year’s second quarter to $70 million. Excluding $3.8 million of negative impact from currency, EMEA revenues jumped 17.6 percent. E-commerce vaulted almost 25 percent. Retail comps were up more than 8 percent and wholesale business “after turning in an excellent first quarter, continued to grow,” said Mehlman.

Companywide, gross margin was reduced to 52.8 percent from 55.3 percent in last year’s second quarter. The rate still exceeded guidance calling for gross margins of approximately 51 percent.

Crocs said non-recurring expenditures related to the relocation of its Americas distribution center reduced the gross margin by 80 basis points, resulting in an adjusted gross margin of 53.6 percent. Adjusted gross margin was 170 basis points below last year’s second quarter, primarily due to reduced purchasing power associated with the strength of the U.S. dollar.

SG&A expenses were reduced to $141.5 million from $144.3 million a year ago as non-recurring charges were immaterial compared to $8.4 million in last year’s second quarter. The SG&A rate improved 460 basis points due to operating leverage and represented 39.4 percent of revenues. Guidance had called for SG&A to be approximately 40 percent of revenues.

Operating profit rose 29.0 percent to $47.8 million, and operating margin rose 200 basis points to 13.3 percent. Excluding non-recurring gross margin charges, adjusted income from operations rose 12.7 percent to $51.2 million and adjusted operating margin was 14.3 percent compared to 13.9 percent a year earlier.

Net income improved 28.9 percent to $39.2 million, or 55 cents a share. After adjusting for non-recurring gross margin and SG&A charges and for pro forma adjustments related to the company’s previously outstanding Series A Preferred Stock, adjusted net income improved 3.1 percent to $42.6 million, or 59 cents a share, easily ahead of Wall Street’s consensus estimate of 45 cents.

Inventory increased 3.6 percent at the quarter’s end.

For 2019, the full revised outlook includes:

• Revenues are now expected to expand 9 percent to 11 percent compared to prior guidance of 5 percent to 7 percent.
• Gross margin guidance for 2019 was unchanged. Adjusted gross margin is expected to be approximately 50.5 percent, down 100 basis points from 51.5 percent in 2018. The benefit of raised top-line guidance is expected to be offset in the back half of the year by reduced purchasing power associated with the strength of the U.S. dollar and the unexpected strength of our wholesale revenues, which carry a lower gross margin. On a GAAP basis, gross margin is expected to be approximately 49.5 percent, which includes non-recurring charges of approximately 100 basis points associated with the company’s new distribution center.
• On a GAAP basis, SG&A is expected to be approximately 40 percent of revenues, down from prior guidance of 41 percent. This includes non-recurring charges of approximately $2 million, down from prior guidance of $3 to $5 million. In 2018, GAAP SG&A was 45.7 percent of revenues and included $21.1 million of non-recurring charges.
• An adjusted operating margin above 10 percent, which would achieve the company’s interim target of a low double-digit operating margin. Including the non-recurring charges associated with the new distribution center and certain SG&A costs, GAAP operating margin is expected to be approximately 9.0 percent, up from prior guidance of 8.5 percent.
• A 2019 tax rate of approximately 15 percent, down from prior guidance of 25 percent.
• Capital expenditures is still expected to be approximately $65 million, compared to $12.0 million in 2018. The new distribution center will account for approximately $35 million of the total. The remainder relates to information technology and infrastructure projects, some of which were deferred from 2018, along with routine capital expenditures.

For the third quarter, Crocs expects revenues to be between $295 and $305 million compared to $261.1 million in the third quarter of 2018. Third-quarter 2019 revenues will be negatively impacted by approximately $2 million of currency changes and approximately $3 million resulting from store closures.

Adjusted gross margin in the third quarter is expected to be approximately 51.5 percent compared to GAAP gross margin of 53.3 percent in the third quarter of 2018. Approximately 150 basis points of the decline reflects the strengthening of the U.S. dollar, higher freight and distribution costs, and strong growth in wholesale revenues, which carry a lower gross margin. This will be partially offset by gains from pricing and reduced promotions, along with efficiencies from closing company-operated manufacturing facilities.

On a GAAP basis, gross margin is expected to be approximately 50 percent, which includes non-recurring charges of approximately 150 basis points associated with the company’s new distribution center.

On a GAAP basis, SG&A in the third quarter is projected to be approximately 40 percent of revenues. Non-recurring charges during the quarter are expected to be immaterial. In the third quarter of 2018, GAAP SG&A was 47.9 percent of revenues and included $6.3 million of non-recurring charges.

Crocs also said it expects to incur a charge in the current quarter of approximately $400,000 in interest expense in connection with the amended and restated credit facility.

Photo courtesy Crocs