Crocs Salvages Q1 But Increasingly Fierce Headwinds Loom

By Eric Smith

<span style="color: #969696;">A strong start to the first quarter helped Crocs Inc. build enough of a cushion to withstand the severe financial hit that began in March, the final month of the period, as the coronavirus sparked rampant store closures and declining consumer spending.

While those pressures did sag net income, earnings per share and overall revenue, which dipped 5 percent, the Niwot, CO-based company—whose plans to move its corporate headquarters to nearby Broomfield have been delayed by the coronavirus—salvaged its first-quarter performance with solid showings elsewhere in its balance sheet.

For example, the company notched a 14.4 percent revenue increase in the Americas region and a 15.8 percent revenue increase in e-commerce, which grew to 30 percent of revenue from 25 percent as online became the only viable channel. These emerged as bright spots in an otherwise gloomy demand environment for the footwear brand.

But global economic softness and the slow reopening of businesses in many of the markets where Crocs operates will provide significantly fiercer headwinds for the company.

“Amidst unprecedented market conditions globally, our total revenue held up well with exceptional performance in our Americas and e-commerce businesses that was overshadowed by COVID-19 related store closures,” said Andrew Rees, president and CEO. “Despite this recent softness, Crocs remains a strong, vibrant brand that is very well positioned. In the near-term, we have no liquidity concerns and have taken quick action to ensure we will be strongly cash flow positive for the remainder of the year. Over the long-term, we are confident we will restore our momentum in 2021 and continue our positive growth trajectory for years to come.”

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Crocs reported Q1 revenue of $281.2 million, down 5 percent from the year-ago quarter, or 3.3 percent on a constant-currency basis. Wholesale revenues were down 5.6 percent. Retail comparable store sales grew 7.5 percent though total retail revenues were down 15 percent due to COVID-19 closures. E-commerce growth partially offset wholesale and retail declines.

Almost a month into Q2, the slow reopening of businesses and sagging consumer confidence is problematic Crocs, which withdrew guidance for Q2 and full-year 2020. Crocs outlined the specific coronavirus threats to its business in the coming quarters, starting with store closures or reduced operating hours and decreased retail traffic.

“Many of the 367 company-operated stores, as well as many partner stores and wholesale customers’ stores, were closed at some point during the first quarter and many remain closed today,” the company said. “In all geographies where stores are closed, stores will remain closed until it is safe, and in line with local regulations, to reopen. At this time, the company estimates that stores will begin to open in stages over the coming months.”

Crocs expects revenue declines to persist in its retail and wholesale channels amid social distancing guidelines in much of the country, though some of those could be relaxed in the next few weeks. However, some Crocs retail and partner stores could be closed for the entire second quarter, April through June.

While Crocs is beginning to see some recovery in-store traffic and sales in China and Korea, where almost all stores are now open, the company is also seeing declines in Japan, India and in swaths of Southeast Asia—areas that have seen a second wave of the coronavirus.

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In addition to emphasizing its e-commerce channel, the company has adopted a series of measures to cope with the new normal of the coronavirus-challenged environment, a playbook that is reminiscent of others in this space. Crocs said it has:

• Significantly reduced compensation for its board of directors and senior leadership “for the foreseeable future.”
• Temporarily furloughed retail employees, though it retained store managers and assistant store managers with reduced hours in North America.
• Maintained operations at the company’s owned distribution centers globally with enhanced safety protocols.
• Closed most corporate offices and begun conducting business virtually.
• Reduced hiring and suspended the annual increases, market adjustments and promotions that were scheduled to go into effect in 2020.
• Asked some employees to shift to a reduced workday, placed certain employees on temporary unpaid leave and eliminated select roles.
• Lowered SG&A expenses by about $30 million to $50 million, including reductions in compensation, marketing, travel and other expenses; SG&A is now expected to be between $440 and $460 million in 2020.
• Reduced supply, rebalanced existing inventory and consolidated future seasonal collections.
• Reduced capital expenditures for 2020 to be approximately $30 million, down from $50 million to $60 million.
• Amended and restated its revolving credit facility, which was increased to $500 million from $450 million.
• Temporarily suspended share repurchases to preserve maximum liquidity and flexibility.

The company is facing difficult days ahead, not only as customer spending habits change but with elevated inventory risk due to slowing demand.

“Disruption timing for CROX is particularly challenging with 2Q the largest quarter of the year and inventory imbalances are likely to linger into FY21,” Jim Duffy of Stifel wrote in a note to investors.

However, as Baird analyst Jon Komp noted, the company’s “aggressive” actions that should help Crocs live up to its expectations of being “strongly cash-flow positive” for the remainder of the year.

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Throughout this crisis, Crocs found a way to give back to front line health care workers. Its “A Free Pair for Healthcare” and “One for You, One for a Hero” donation programs have contributed more than 450,000 pairs of shoes globally.

“This community has our deepest respect, and we are humbled to be able to help keep its workers and their families safe during this unprecedented time,” Rees said.

Crocs is only the third active-lifestyle public companies to report in the current earnings season, Wolverine World Wide and Delta Apparel, so look for this theme to continue as more companies announce coronavirus-impacted financial performance in the coming weeks.

The company’s shares (Nasdaq: CROX) were down in the low-double digits in Thursday’s morning and midday trading.

Photo courtesy Crocs