Crocs Lifts Outlook As Revenue Gains Pick Up Steam

Crocs Lifts Outlook As Revenue Gains Pick Up Steam

Crocs Inc. raised its guidance for the year after reporting a surprise profit in the third quarter on strong demand for its clogs and sandals. Sales in the period accelerated to 9.3 percent growth on a currency-neutral basis and Crocs said it expects a mid-single digit revenue increase in 2019.

Andrew Rees, president and chief executive officer, said, “By executing against our strategic priorities, we drove strong quarterly performance with revenues up 7.3 percent, gross margin increasing 250 basis points to 53.3 percent and income from operations increasing 418 percent to $13.9 million. Our diluted EPS was $0.07, improving significantly compared to last year’s third quarter $0.03 loss. We achieved these strong results by continuing to grow our brand strength and demand for our clogs and sandals. We anticipate a strong finish to the year and have increased our 2018 guidance accordingly, and we are excited about our growth prospects for 2019.”

Third Quarter 2018 Operating Results:

  • Revenues were $261.1 million, a 7.3 percent increase over the third quarter of 2017, or 9.3 percent on a constant currency basis. This growth was achieved despite the loss of approximately $15 million due to operating fewer stores and business model changes. Currency-neutral growth accelerated from a 2.3 percent gain in the second quarter and 0.7 percent increase in the first quarter.
  • E-commerce grew 23.2 percent, wholesale grew 9.3 percent, and retail comparable store sales increased 15.0 percent.
  • Gross margin was 53.3 percent, improving 250 basis points over last year’s third quarter.
  • Selling, general and administrative expenses (SG&A) were $125.2 million compared to $120.8 million in the third quarter of 2017. This was higher than guidance due to incentive compensation and other variable costs associated with higher revenues. As a percent of revenues, SG&A improved 170 basis points to 47.9 percent. Third quarter 2018 results included $6.3 million of non-recurring charges compared to $3.6 million in last year’s third quarter. Those charges consisted of $5.0 million incurred in connection with the closure of the company’s manufacturing facilities, approximately $3.7 million of which were non-cash, and $1.3 million associated with the company’s SG&A reduction plan.
  • Income from operations increased to $13.9 million from $2.7 million in last year’s third quarter.
  • Net income attributable to common stockholders was $6.5 million, or 7 cents per diluted share, compared to a loss of $2.3 million, or a 3 cents loss per diluted share, in last year’s third quarter. Crocs had 72.8 million and 71.9 million weighted average diluted common shares outstanding during the three months ended September 30, 2018 and 2017, respectively.

Earnings of 6 cents a share exceeded Wall Street’s consensus estimate of 2 cents. Under its guidance, Crocs had expected revenues in the range of $240 to $250 million, gross margin to expand approximately 50 basis points and SG&A to be slightly higher.

Balance Sheet and Cash Flow Highlights:

  • Cash and cash equivalents as of September 30, 2018 increased 13.9 percent to $203.0 million compared to $178.2 million as of September 30, 2017 in response to higher sales and gross margins in combination with a disciplined approach to expenses. At September 30, 2018, there were no borrowings outstanding on its credit facility, and in November 2018, Crocs increased the size of the facility to $150 million from $100 million.
  • Inventory declined 16.1 percent to $117.7 million as of September 30, 2018 compared to $140.3 million as of September 30, 2017, reflecting the company’s continued focus on inventory management.
  • Cash provided by operating activities increased 6.8 percent to $85.9 million during the first nine months of 2018 compared to $80.4 million during the first nine months of 2017.
  • Capital expenditures during the first nine months of 2018 were $5.2 million compared to $14.3 million during the same period in 2017, as the company incurred lower technology-related expenditures.

Share Repurchase Activity:

During the third quarter of 2018, the company repurchased 604,000 shares of its common stock for $11.1 million, at an average price of $18.39 per share. As of September 30, 2018, approximately $182 million of the company’s current $500 million share repurchase authorization remained available for future share repurchases.

Financial Outlook:

Fourth Quarter 2018:

With respect to the fourth quarter of 2018, the company expects:

  • Revenues of $195 to $205 million compared to $199.1 million in the fourth quarter of 2017, including a negative currency impact estimated at $5 million.
  • Gross margin to be approximately 80 to 100 basis points above last year’s 45.4 percent rate.
  • SG&A to be approximately $10 million below last year’s fourth quarter SG&A of $120.7 million. This includes non-recurring charges of approximately $2 million compared to $9.4 million of non-recurring charges in the fourth quarter of 2017.

Full Year 2018:

With respect to 2018, the company now expects:

  • Revenues to be 4 to 5 percent higher than 2017 revenues of $1,023.5 million, up from prior guidance of a low single digit increase based on the strength of its results.
  • Gross margin to increase approximately 100 basis points over 2017 gross margin of 50.5 percent, up from its prior guidance of a 70 to 100 basis point increase.
  • SG&A to be approximately $495 million compared to last year’s $499.9 million and prior guidance calling for SG&A to be slightly higher than $485 million. This change reflects increased incentive compensation and other variable costs associated with higher revenues. Non-recurring charges are expected to be $19 million. Approximately $13 million of that amount relates to the closure of its manufacturing facilities, approximately $6 million of which will be non-cash. Non-recurring charges in 2017 were $17 million.
  • Income from operations to be slightly under $60 million compared to $17.3 million in 2017 and the prior guidance of $50 million.
  • Depreciation and amortization to be approximately $30 million compared to $33.1 million in 2017.
  • Income tax expense of approximately $17 million compared to $7.9 million in 2017.

2019 Preview:

With respect to 2019 revenues, the company expects a mid-single digit increase over 2018 revenues. Crocs anticipates that e-commerce and wholesale growth will more than offset lower retail revenues associated with the reduced store count, which we expect to reduce revenues by approximately $25 million. Adding back that $25 million reduction, 2019 revenues are expected to be up mid to high single digits over anticipated 2018 revenues.