Crocs Inc. reported revenues grew 9.9 percent in its second quarter, but earnings fell 42.4 percent due to lower than expected gross margins, a one-time net charge of $6.1 million related to the resolution of a statutory tax audit in Brazil.
Second Quarter 2013 Review
- Record revenue of $363.8 million
- Gross Margin of 55.2 percent
- Net income of $35.4 million
- Earnings per diluted share of 40 cents
- Non-GAAP adjusted net income1 per diluted share of 48 cents
“Our second quarter revenue grew 12.5 percent on a constant currency basis and reflects the global appeal of the Crocs brand, the success of our new spring/summer collections, including the Huarache, A-Leigh, Beach Line Boat and Retro collections, combined with the ongoing strength of our core product line-up,” said John McCarvel, president and CEO. “Globally, our direct to consumer channel continues to be a key component of our success. Our Asia Pacific region remains a fundamental driver of our growth strategy as all channels in the region continue to exceed expectations.”
“During the quarter we strategically managed our global sales channels and balance sheet. Our direct to consumer channel performed very well, growing nearly 20 percent on a constant currency basis, with positive same store sales in Asia, the Americas and Europe. Wholesale revenue was higher globally, but margins in this channel, particularly in the Americas and Europe, were down due to lower than anticipated late season at-once revenue and increased discount activity late in the quarter, which negatively impacted earnings per share. Challenges during the quarter included continued weakness in consumer spending in the U.S., Europe and Japan, compounded by colder than normal temperatures during April and May in the U.S. and Europe. Our cash balance at quarter-end was $289 million, and inventory decreased to $161 million or 2.5 percent from December 31, 2012, as inventory turns increased to 3.8.”
Second Quarter Results
Revenue for the second quarter of 2013 increased 9.9% to $363.8 million compared with revenue of $330.9 million reported in the second quarter of 2012. On a constant currency basis revenue increased 12.5% for the second quarter of 2013.
For second quarter of 2013, the company had net income of $35.4 million or $0.40 per diluted share, compared with net income of $61.5 million or $0.68 per diluted share in the prior year period. Diluted earnings per share during the second quarter of 2013 were negatively impacted by lower than expected gross margins, a one-time net charge of $6.1 million related to the resolution of a statutory tax audit in Brazil, which reduced earnings by 7 cents per share, and a higher than anticipated tax rate of 29 percent, which reduced earnings by 2 cents per share.
Adjusting for the impact of the statutory tax audit in Brazil and $1.6 million relating to the implementation of a new ERP system including non-cash accelerated depreciation and cash expenses for program management, training and other non-capitalized costs, the company had Non-GAAP adjusted net income of $43.1 million in the quarter or $0.48 per diluted share.
Mr. McCarvel continued, “When we look back on the second quarter we had various items impact our results versus our guidance. Those included lower gross margins, the resolution of the tax audit in Brazil and a higher tax rate. Together with year-over-year impacts of currency which reduced our earnings per share by $0.06 plus our investments in our new ERP system and increased marketing, the impact of these items totaled $0.17 per share in the quarter.”
Margins
Gross profit for the second quarter of 2013 increased 2.4 percent to $200.9 million, or 55.2% as a percentage of sales, compared with $196.1 million, or 59.3% as a percentage of sales in the prior year period. The year- over-year decrease in gross profit as a percentage of sales was primarily related to slower late season at-once revenue and increased discounting late in the quarter in the Americas and Europe. Selling, General & Administrative (“SG&A”) expenses increased 20.5 percent to $150.2 million compared with $124.7 million a year ago, reflecting increases in retail store space, marketing expenses, resolution of the Brazil tax audit, and the company’s ERP project. As a percentage of sales, SG&A increased to 41.3 percent compared with 37.7 percent in the second quarter of 2012. The impact of the non-recurring Brazil expense and the ERP expense contributed approximately 200 basis points to the increase in SG&A expense as a percentage of sales in the quarter.
Second Quarter Revenue Results
The following tables detail the company’s second quarter 2013 and 2012 revenues:
| Three Months Ended June 30, | Change | Constant Currency Change(1) | ||||||||||||||||||
| ($ thousands) | 2013 | 2012 | $ | % | $ | % | ||||||||||||||
| Channel revenues: | ||||||||||||||||||||
| Wholesale: | ||||||||||||||||||||
| Americas | $ | 69,089 | $ | 62,369 | $ | 6,720 | 10.8 | % | $ | 7,041 | 11.3 | % | ||||||||
| Asia Pacific | 67,383 | 54,285 | 13,098 | 24.1 | 12,080 | 22.3 | ||||||||||||||
| Japan | 31,053 | 39,335 | (8,282 | ) | (21.1 | ) | (1,228 | ) | (3.1 | ) | ||||||||||
| Europe | 33,742 | 32,490 | 1,252 | 3.9 | 623 | 1.9 | ||||||||||||||
| Other businesses | 98 | 47 | 51 | 108.5 | 44 | 93.6 | ||||||||||||||
| Total Wholesale | 201,365 | 188,526 | 12,839 | 6.8 | 18,560 | 9.8 | ||||||||||||||
| Consumer-direct: | ||||||||||||||||||||
| Retail: | ||||||||||||||||||||
| Americas | 61,041 | 54,952 | 6,089 | 11.1 | 6,243 | 11.4 | ||||||||||||||
| Asia Pacific | 40,871 | 35,002 | 5,869 | 16.8 | 5,375 | 15.4 | ||||||||||||||
| Japan | 12,327 | 13,357 | (1,030 | ) | (7.7 | ) | 1,844 | 13.8 | ||||||||||||
| Europe | 18,050 | 9,163 | 8,887 | 97.0 | 8,814 | 96.2 | ||||||||||||||
| Total Retail | 132,289 | 112,474 | 19,815 | 17.6 | 22,276 | 19.8 | ||||||||||||||
| Internet: | ||||||||||||||||||||
| Americas | 16,125 | 17,290 | (1,165 | ) | (6.7 | ) | (1,140 | ) | (6.6 | ) | ||||||||||
| Asia Pacific | 3,578 | 2,338 | 1,240 | 53.0 | 1,166 | 49.9 | ||||||||||||||
| Japan | 2,092 | 2,540 | (448 | ) | (17.6 | ) | 35 | 1.4 | ||||||||||||
| Europe | 8,378 | 7,774 | 604 | 7.8 | 411 | 5.3 | ||||||||||||||
| Total Internet | 30,173 | 29,942 | 231 | 0.8 | 472 | 1.6 | ||||||||||||||
| Total revenues: | $ | 363,827 | $ | 330,942 | $ | 32,885 | 9.9 | % | $ | 41,308 | 12.5 | % | ||||||||
