Crocs Inc. sales slid 7.6 percent in the third quarter as a 67.7 percent jump in online sales was unable to offer declines at wholesale and physical retail. Profits improved sharply due to higher gross margins and expense controls.
Andrew Rees, president and chief executive officer, said, “Amidst unprecedented market conditions globally, we delivered exceptional performance in our Americas and e-commerce businesses and increased profit despite a very challenging environment. Our performance demonstrates the strength of the Crocs brand and underscores the work we’ve done expanding the desirability, relevance and consideration of our brand and product offering globally.”
- Global revenues were $331.5 million, declining 7.6 percent from the second quarter of 2019, or 6.0 percent on a constant- currency basis. Four-out-of-five key geographies delivered revenue growth – the United States, Korea, China, and Germany.
- Global e-commerce revenue increased by 67.7 percent with strong growth in all regions.
- The operating margin rose approximately 380 basis points to 17.1 percent, and the adjusted operating margin increased approximately 800 basis points to 22.3 percent.
- Diluted earnings per share grew 50.9 percent to 83 cents, or 71.2 percent, to $1.01 on an adjusted basis.
- Cash flow from operations nearly doubled.
Results were way above Wall Street’s consensus estimates that called for adjusted earnings of 14 cents on sales of $250 million.
COVID-19 Update On Operations
As described during its first-quarter earnings conference call and subsequent updates, COVID-19 impacted the Crocs business globally including store closures, or reduced operating hours, and decreased retail traffic. Most of its 360 company-operated stores were closed for some period during the second quarter as well as partner stores and wholesale customer doors. As of June 30, 2020, 98 percent of its company-operated stores were open.
- Americas – Its company-operated stores closed in mid-March and started to reopen in mid-May. Currently, the majority of its stores in the United States are open.
- Asia – Outside of China and Korea, most of its company-operated stores were closed for the majority of the quarter.
- EMEA – Its company-operated stores in Western Europe closed in mid-April and reopened in mid-May, while stores in Russia closed in early April and reopened in early June.
While many brick & mortar stores were closed, Crocs.com and other digital commerce platforms remained open. Crocs saw record quarterly sales in e-commerce as well as strong sell-through in e-tail and wholesale partner e-commerce sites, as consumers migrated to online shopping. These strong growth rates have recently started to temper as brick & mortar has started to reopen.
As outlined during its first-quarter earnings call, Crocs focused on positioning the business for both short- and long-term success. Its leadership quickly established both a defensive and offensive playbook that Crocs began to implement in early March. The defensive measures are now complete, and its offensive playbook has started to show results as evidenced by its second-quarter performance.
Second Quarter 2020 Operating Results
- Revenues were $331.5 million, a decline of 7.6 percent from the second quarter of 2019, or 6.0 percent on a constant- currency basis. E-commerce revenue grew 67.7 percent, while wholesale revenue declined 19.5 percent and retail revenue declined 41.8 percent due to COVID-19 related store closures. Retail comparable store sales on a constant-currency basis grew 10.5 percent upon re-opening.
- Gross margin was 54.3 percent, an increase of 150 basis points from last year’s second quarter. The adjusted gross margin was 55.2 percent, which excludes $3.2 million or 100 basis points of non-recurring expenditures for COVID-19-related inventory charges in Asia and costs related to its U.S. distribution center. Adjusted gross margin rose 160 basis points compared to last year’s second quarter, benefiting from product mix, higher prices on certain products, and lower levels of promotions and discounts.
- Selling, general and administrative expenses (SG&A) were $123.3 million, down from $141.5 million in the second quarter of 2019, as expenses were reduced during the pandemic. SG&A included non-GAAP adjustments of $14.0 million compared to $0.2 million in last year’s second quarter. Most charges were a result of $8.2 million of frontline healthcare product donations. Its adjusted SG&A was or 33.0 percent of revenues versus 39.4 percent, in last year’s second quarter.
- Income from operations increased 18.3 percent to $56.6 million from $47.8 million in the second quarter of 2019, and the operating margin rose 380 basis points to 17.1 percent. Excluding non-GAAP gross margin and SG&A charges, adjusted income from operations rose 44.2 percent to $73.8 million, and adjusted operating margin was 22.3 percent compared to 14.3 percent in the second quarter of 2019.
- Diluted earnings per share increased 50.9 percent to $0.83, as compared with $0.55 in the second quarter of 2019. Excluding non-GAAP charges, adjusted diluted earnings per share were $1.01, or 71.2 percent, above the $0.59 in the second quarter of 2019.
Balance Sheet And Cash Flow Highlights
- Cash and cash equivalents were $151.4 million as of June 30, 2020, compared to $108.3 million as of December 31, 2019.
- Inventory decreased to $146.8 million as of June 30, 2020, compared to $172.0 million as of December 31, 2019.
- Capital expenditures during the six months ended June 30, 2020, were $24.3 million, compared to $18.7 million during the same period in 2019.
- At June 30, 2020, there were $275.0 million of borrowings outstanding on its credit facility after reducing borrowings by $75.0 million during the second quarter. Crocs have ample liquidity, including $151.4 million in cash and cash equivalents and up to $224.4 million of available borrowings under its facility.
Share Repurchase Activity
As previously announced, Crocs temporarily suspended share repurchases to preserve maximum liquidity and flexibility. During the second quarter of 2020, Crocs did not repurchase any shares. As of June 30, 2020, approximately $469 million remained on its share repurchase authorization.
Investments to Support Long-Term Growth
During the second quarter of 2020, Crocs opened its new global headquarters in Broomfield, CO, less than 20 miles outside of downtown Denver. The facility will allow Crocs to expand its ability to attract talent. Crocs also entered into a lease for a new distribution center adjacent to its existing facility in Dayton, OH. The new facility will be dedicated to e-commerce fulfillment and will increase its distribution capacity in the Americas. Finally, Crocs anticipates completing the relocation of its distribution center in the Netherlands in 2021.
Given the continued disruption and global uncertainty related to COVID-19, Crocs previously withdrew the guidance provided on February 27, 2020. It is not providing third-quarter guidance; however, excluding the impact of any future shutdowns in major markets for full-year 2020, Crocs expects:
- Revenue for the remainder of 2020 to be approximately flat compared to the back-half of 2019;
- A tax rate of 11 percent for 2020;
- Inventory to be constrained throughout the remainder of 2020 reflecting its decision to significantly reduce inventory purchases as a result of COVID-19; and
- Approximately $50 million, which reflects investment to support future growth that Crocs had previously deferred in capital expenditures.
Photo courtesy Crocs