While noting major progress on its transformation efforts at its annual analyst meeting last week, Crocs Inc. also lowered its guidance for revenues in the third quarter. The revision was attributed to unfavorable foreign currency exchange rates and the company's decision to hold back orders to select China distributors in the third quarter.
Revenues for the third quarter are now expected to reach $270 million to $280 million, from the prior range of $280 million to $290 million. The company reaffirmed its mid-term operating margin target range of 10 percent to 12 percent as early as 2018. Crocs also forecast top-line growth to start growing at a rate over 8 percent beginning in 2018.
At the analyst meeting, Gregg Ribatt, Crocs CEO, said second-quarter sales were impacted by approximately $4 million in unfavorable changes in foreign currencies since July 30. The company also decided to hold back roughly $6 million of potential shipments to some of Chinese distributors.
“Obviously, we are working hard at our near-term financial results, while we are aggressively pushing to transform our brands and business for the future,” said Ribatt.
Elaborating on the causes of the shortfall, Mike Smith, SVP finance and interim CFO, noted that 65 percent of Crocs its sales are done outside the U.S. The five primary currencies impacting its business are the Japanese yen, the euro, the Russian ruble, the Brazilian real and the Korean won, and two of those currencies have declined nearly 60 percent in the last four years.
Since 2011, Crocs has lost 14 percent across currencies due to the strengthening of the U.S. dollar, of which nearly half of happened in the current year. From the peak of 2012, Crocs has seen a 400 basis point decline in gross margins just because of currency changes.
Regarding China’s challenges, Andrew Rees, president, said that from 2000 to 2014, the region was “both fast-growing and extremely profitable” for Crocs with the brand reaching over 800 points of single-branded distribution, with 48 different distributors.
However, the slowdown in China that started appearing early in 2014 led to distribution partners who were undercapitalized and over-inventoried. Crocs moved to help support them selling through overstocks through incentives, discounts and promotions while also slowing sell-ins in the first part of 2015. The moves wound up “helping some of the partners work through their inventory, but not all.” Crocs is also further pushing to consolidate its partner base “to fewer more better capitalized, more effective partners.”
Overall, Rees remains bullish that China will again provide “meaningful growth and meaningful profit in the future” for the brand.
“If you kind of step way back to the 50,000, 60,000 foot level, the brand is extremely well-positioned, the brand works extremely well for the Chinese consumer, and a rapidly emerging middle class,” said Rees. “And although China is experiencing a broad macroeconomic impact currently, I think everybody in this room would probably agree, over the long term, will be a powerful economic growth engine in the world.”
For much of the presentation, Crocs officials discussed the progress made over the last 12 to 18 months. Said Ribatt, ““We are in the midst of a pretty significant turnaround.”
Ribatt said the company’s initial priority was to first strengthen its management team, ensure a smooth transition and implementation of SAP, and to drive significant cost savings. Crocs more recently has focused on elevating all of its consumer connections by increasing its marketing and product capabilities and execution.
On the positive side, Ribatt noted that Crocs does business in more than 90 countries, has high awareness, appeals to the whole family, and despite its size and scale, has relatively low market share in all of the markets in which its compete. Said Ribatt, “And therefore when we add the right capabilities, we have significant growth potential across the globe.”
In the second quarter, its core global business, which excludes closed stores, and exited product lines, grew in the low single digits. Its direct consumer business in the quarter had a comp of plus 4 percent in the Americas and plus 6 percent in Europe while its global e-commerce business was up nearly 30 percent on a currency-neutral basis.
Rees said its rejuvenated spring/summer 2016 line is being received particularly well. Along with improved styling, SKUs for the spring/summer 2016 has been reduced by over 40 percent to improve production efficiencies and support more cohesion in presentations globally.
“Our wholesale customers reacted extremely well,’ said Rees. “They reacted well in family channel in North America. The distributors in Southeast Asia have reacted well, and the department stores in Korea have also shown significant increases. The fastest growth we see is in both the Americas and in Asia, where we believe our spring summer 2016 line will allow us to grow at wholesale in today's dollars at low double-digit rates.”
While Crocs in 2014 and 2015 has focused on elevating the product and marketing capabilities and overall operational capabilities, 2016 will be when Crocs will start to leverage its enhanced infrastructure and repositioning efforts to drive sustaining growth.
“Despite near-term headwinds and challenges, we feel really good about the direction we're heading and the impact it's going to have on the business in the near-term,” said Ribatt.
