Crocs Inc. reported a steep loss in the fourth quarter due to a charge related to its buy back of some of the preferred shares held by Blackstone Group LP. The loss before charges came in better than Wall Street’s consensus target as sales grew 8.5 percent.
Andrew Rees, president and chief executive officer, said, “Our fourth quarter results contributed to what was a very successful year. We had record revenues in many key markets, with the U.S. market leading the way. We have hit multi-year highs in revenues and gross margin, while at the same time significantly reducing our SG&A run rate. Global demand for our brand remains strong, and as a result, we anticipate delivering revenue growth of 5 percent to 7 percent in 2019.”
Fourth Quarter 2018 Operating Results:
- Revenues were $216.0 million, growing 8.5 percent over the fourth quarter of 2017, or 11.3 percent on a constant currency basis. Store closures and business model changes reduced Crocs’ revenues by approximately $7 million. Wholesale business grew 9.7 percent, e-commerce businesses grew 18.9 percent and retail comparable store sales grew 13.4 percent.
- Gross margin was 46.2 percent, an increase of 80 basis points over last year’s fourth quarter. This increase was driven by strong sales of high-margin clogs, the strength of its direct-to-consumer business and a disciplined approach to promotions.
- Selling, general and administrative expenses (SG&A) were $113.8 million compared to $120.7 million in the fourth quarter of 2017. As a percent of revenues, SG&A improved 790 basis points to 52.7 percent as we continued to take costs out of the business and leverage expenses. Fourth quarter 2018 results included $4.6 million of non-recurring charges compared to $9.4 million in the fourth quarter of 2017. Crocs’ adjusted SG&A as a percent of revenues was 50.6 percent in the fourth quarter of 2018, an improvement of 530 basis points over the fourth quarter of 2017.
- Loss from operations declined 54.1 percent, coming in at $13.9 million compared to $30.4 million in the fourth quarter of 2017. Excluding non-recurring SG&A charges, Crocs’ adjusted loss from operations declined 55.3 percent to $9.4 million.
- Net loss attributable to common stockholders, primarily related to the December 2018 repurchase and conversion of the company’s preferred stock (“the Blackstone Transaction”) previously owned by Blackstone Capital Partners VI L.P. and certain of its affiliates and transferees (“Blackstone”), was $118.7 million compared to $28.3 million in the fourth quarter of 2017. After adjusting for non-recurring SG&A charges in the fourth quarters of 2018 and 2017, and for the non-recurring accounting adjustments related to the Blackstone Transaction, Crocs’ non-GAAP net loss attributable to common stockholders were $7.7 million and $18.9 million in the fourth quarters of 2018 and 2017, respectively.
- Crocs’ diluted net loss per common share was $1.72 for the fourth quarter of 2018, compared to a diluted net loss per common share of $0.41 in the fourth quarter of 2017. After adjusting for non-recurring SG&A and the Blackstone Transaction,Crocs’ non-GAAP diluted net loss per common share was $0.10, compared to a non-GAAP diluted net loss per common share of $0.27 in the fourth quarter of 2017.
The adjusted loss of 10 cents a share was better than Wall Street’s estimate of a loss of 24 cents. Revenues of $216.0 million were above average estimates of $213.18 million.
2018 Operating Results:
- Revenues were $1,088.2 million, growing 6.3 percent over 2017, or 5.2 percent on a constant currency basis. Store closures and business model changes reduced revenues by approximately $60 million. Crocs’ wholesale business grew 7.8 percent, e-commerce business grew 22.5 percent and retail comparable store sales grew 10.8 percent.
- Gross margin was 51.5 percent, an increase of 100 basis points over 2017.
SG&A was $497.2 million compared to $499.9 million in the prior year. Results for 2018 included $21.1 million of non-recurring charges compared to $17.0 million in 2017. As a percent of revenues, SG&A improved 310 basis points to 45.7 percent. Excluding non-recurring charges, adjusted SG&A as a percent of revenues was 43.8 percent, an improvement of 340 basis points over 2017.
- Income from operations grew 263.1 percent, coming in at $62.9 million compared to $17.3 million in 2017, and the operating margin was 5.8 percent, compared to 1.7 percent in 2017. Excluding non-recurring SG&A charges, adjusted income from operations grew 144.8 percent to $84.0 million
- Adjusted operating margin for 2018 was 7.7 percent compared to 3.4 percent in 2017.
- Net loss attributable to common stockholders was $69.2 million, compared to $5.3 million in 2017. After adjusting for the non-recurring SG&A charges and accounting adjustments relating to the Blackstone Transaction, Crocs’ non-GAAP net income attributable to common stockholders was $65.9 million and $9.8 million in 2018 and 2017 respectively.
- Crocs’ diluted net loss per common share was $1.01 in 2018 as a result of the accounting adjustments related to the Blackstone Transaction. Diluted net loss per common share was $0.07 in 2017. Crocs’ non-GAAP diluted net income per common share was $0.86 compared to $0.13 in 2017.
Balance Sheet and Cash Flow Highlights:
- Cash provided by operating activities increased 16.2 percent to $114.2 million during 2018 compared to $98.3 million during 2017.
- Cash and cash equivalents were $123.4 million as of December 31, 2018 compared to $172.1 million as of December 31, 2017. During the fourth quarter of 2018, the company repurchased shares of its common stock on the open market and shares of its preferred stock pursuant to the Blackstone Transaction.
- Inventory declined 4.5 percent to $124.5 million as of December 31, 2018 compared to $130.3 million as of December 31, 2017, reflecting strong fourth quarter performance.
- Cash paid for capital expenditures for 2018 was $12.0 million compared to $13.1 million in 2017.
- At December 31, 2018, there were $120.0 million in borrowings outstanding on the $250 million credit facility. During the first quarter of 2019, Crocs’ borrowing capacity on the credit facility was increased to $300 million.
Share Repurchase Activity and the Blackstone Transaction:
During the fourth quarter of 2018, the company repurchased 1.2 million shares of its common stock for $26.1 million, at an average price of $21.05 per share. For the full year, the company repurchased 3.6 million shares of its common stock for $63.1 million, at an average price of $17.44 per share. At year end, $156 million of the company’s $500 million share repurchase authorization remained available for future repurchases.
In December 2018, in connection with the Blackstone Transaction, the company repurchased half of its outstanding Series A Convertible Preferred Stock (the “Preferred Shares”), representing approximately 6.9 million common shares on an as-converted basis, for $183.7 million, or $26.64 per share. In addition, the company paid Blackstone a one-time additional payment of $15.0 million to induce the conversion of the remaining Preferred Shares into approximately 6.9 million shares of the company’s common stock.
Distribution Center Investment:
The company has begun to invest in a new distribution center in Dayton, Ohio. By the end of 2019, this new facility is expected to completely replace the company’s existing facility located outside of Los Angeles, California. The new distribution center will be approximately 40 percent larger than Crocs’ existing facility, and includes automation, which the company expects will increase throughput by approximately 50 percent. Its central location will also significantly improve delivery times to customers. This project is contingent upon the approval of state and local incentives.
Full Year 2019:
With respect to 2019, the company expects:
- Revenues to be up 5 percent to 7 percent over 2018 revenues of $1,088.2 million. The company anticipates 2019 revenues will be negatively impacted by approximately $20 million resulting from store closures and approximately $20 million of currency changes.
- Gross margin of approximately 49.5 percent compared to 51.5 percent in 2018. The projected decline reflects Crocs’ expectations for (i) higher freight costs; (ii) reduced purchasing power associated with the strengthening of the U.S. dollar; and (iii) non-recurring charges relating to the company’s new distribution center, which are expected to reduce gross margin by approximately 100 basis points.
- SG&A to be approximately 41 percent of revenues. This includes non-recurring charges of $3 to $5 million related to various cost reduction initiatives. In 2018, SG&A was 45.7 percent of revenues and included $21.1 million of non-recurring charges.
An operating margin of approximately 8.5 percent which includes non-recurring charges associated with Crocs’ new distribution center and SG&A cost reduction initiatives. Excluding those non-recurring charges, we expect to achieve our interim target of a low double digit operating margin.
- Capital expenditures 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.
First Quarter 2019:
With respect to the first quarter of 2019, the company expects:
- Revenues to be between $280 and $290 million compared to $283.1 million in the first quarter of 2018. The company anticipates revenues for the first quarter of 2019 will be negatively impacted by approximately $6 million due to store closures and by approximately $10 million due to currency changes. Revenues are also expected to be impacted by strong demand in last year’s fourth quarter, which constricted inventory available for certain at-once orders, as well as the timing of Easter.
- Gross margin to be approximately 45.5 percent compared to 49.4 percent in the first quarter of 2018. This decline reflects four things: (i) higher freight costs, including air freight to replenish fast selling items; (ii) the negative impact of the stronger U.S. Dollar; (iii) the late Easter, causing higher direct-to-consumer sales associated with the holiday to shift into the second quarter; and (iv) non-recurring charges relating to the new distribution center that will reduce gross margin by approximately 50 basis points.
- SG&A to be between 37 percent and 38 percent of revenues. This includes non-recurring charges of approximately $1 million related to various cost reduction initiatives. In the first quarter of 2018, SG&A was 40.2 percent of revenues and included $2.5 million of non-recurring charges.
Image courtesy Crocs