05 Nov Crocs Blames Q3 Loss on China Inventory Glut
Crocs Blames Q3 Loss on China Inventory Glut
Posted: 11/5/2015
Crocs Inc. swung to a net loss of $27.8 million in the third quarter ended Sept. 30 after holding back shipments to Chinese distributors.
The Niwot, CO footwear company reported revenue of $274.1 million, down 9.4 percent, or 0.8 percent in currency-neutral terms.
Excluding certain non-recurring and special charges, the company reported a non-GAAP adjusted net loss attributable to common shareholders of $19.2 million.
“We delivered third quarter sales in line with our revised expectations reflecting challenges in China and currency,” said CEO Gregg Ribatt.
For the third quarter, revenue on a constant currency basis and adjusted for business model changes was up 3.7 percent.
A mess in China
“Our China business is undergoing changes as we transition away from under-performing distributors,” Ribatt said. “We faced some difficult decisions in China and as a result we increased reserves for doubtful accounts by $19 million at the end of the third quarter. We also held shipments to several of our China distributors, which negatively affected Q3 revenue by $4.0 million. However, these actions set us up for improved business performance in the future.”
Crocs aggressively cleared out aged and excess inventory which impacted margins in the quarter, in a move Ribatt said positions the company for improved results in 2016.
“Our core business continues to stabilize around the globe and we believe the strategy we outlined last July is positioning Crocs for sustained success in the future,” said Ribatt. “The company continues to make meaningful progress implementing our strategy which includes: strengthening our brand; elevating our product stories; evolving our international business to focus on our six core markets; strengthening our relationships with key wholesale partners; improving our direct to consumer capabilities; simplifying our business model; enhancing our supply chain and building a best in class management team.”
The following tables summarize our total revenue by channel for the three and nine months ended September 30, 2015 and 2014:
| Three Months Ended September 30, |
Change |
Constant Currency Change (1) |
||||
| 2015 | 2014 | $ | % | $ | % | |
| (in thousands) | ||||||
| Wholesale: | ||||||
| Americas | $ 48,880 | $ 53,097 | $ (4,217) | (7.9)% | $ (1,629) | (3.1)% |
| Asia Pacific | 53,411 | 63,972 | (10,561) | (16.5) | (4,343) | (6.8) |
| Europe | 30,260 | 33,691 | (3,431) | (10.2) | 2,442 | 7.2 |
| Other businesses | 418 | 435 | (17) | (3.9) | (31) | (7.1) |
| Total wholesale | 132,969 | 151,195 | (18,226) | (12.1) | (3,561) | (2.4) |
| Consumer-direct: | ||||||
| Retail: | ||||||
| Americas | 59,468 | 61,721 | (2,253) | (3.7) | (1,455) | (2.4) |
| Asia Pacific | 38,374 | 44,387 | (6,013) | (13.5) | (1,786) | (4.0) |
| Europe | 13,813 | 19,494 | (5,681) | (29.1) | (1,561) | (8.0) |
| Total retail | 111,655 | 125,602 | (13,947) | (11.1) | (4,802) | (3.8) |
| E-commerce: | ||||||
| Americas | 16,321 | 12,657 | 3,664 | 28.9 | 3,891 | 30.7 |
| Asia Pacific | 7,094 | 5,487 | 1,607 | 29.3 | 2,192 | 39.9 |
| Europe | 6,049 | 7,460 | (1,411) | (18.9) | (91) | (1.2) |
| Total e-commerce | 29,464 | 25,604 | 3,860 | 15.1 | 5,992 | 23.4 |
| Total revenues | $ 274,088 | $ 302,401 | $ (28,313) | (9.4)% | $ (2,371) | (0.8)% |
| Revenues: | ||||||
| Americas | $ 124,669 | $ 127,475 | $ (2,806) | (2.2)% | $ 807 | 0.6% |
| Asia Pacific | 98,879 | 113,846 | (14,967) | (13.1) | (3,938) | (3.5) |
| Europe | 50,122 | 60,645 | (10,523) | (17.4) | 791 | 1.3 |
| Total segment revenues | 273,670 | 301,966 | (28,296) | (9.4) | (2,340) | (0.8) |
| Other businesses | 418 | 435 | (17) | (3.9) | (31) | (7.1) |
| Total consolidated revenues | $ 274,088 | $ 302,401 | $ (28,313) | (9.4)% | $ (2,371) | (0.8)% |
(1) Reflects year over year change as if the current period results were in “constant currency,” which is a non-GAAP financial measure. See “Use of Non-GAAP Financial Measures” above for more information.
Third quarter financial results & Balance Sheet
In the third quarter of 2015, the company reported a GAAP net loss attributable to common stockholders of $27.8 million, or $0.37 per share, compared with net income of $12.0 million or $0.12 per diluted share in the same quarter of the prior year.
The company recorded $8.6 million in non-recurring and special charges in the third quarter of 2015 compared with $17.4 million in non-recurring and special charges in the third quarter of 2014. Excluding these items the company reported:
- Non-GAAP operating loss of $12.1 million versus net income of $18.5 million in the comparable prior year period.
- On a comparable basis, non-GAAP adjusted net loss attributable to common shareholders of $19.2 million in the quarter versus net income of $29.4 million in the third quarter of 2014.
Cash and cash equivalents at Sept. 30, 2015, were $168.5 million. Inventory was $190.8 million compared with $171.0 million on Dec., 2014.
“Despite near term challenges in the business from global currencies and macro level economic conditions in China, we continue to make steady progress in the strategic transformation of Crocs,” Ribatt said. “The full impact of our transformation will be seen during the first half of 2016 as we complete the 18-24 month turnaround process that we have been discussing over the past year. As part of this process, our new product and marketing initiatives are driving favorable wholesale bookings that we have seen from customers around the globe. We believe we are on the verge of meaningful growth, as our Spring/Summer 2016 line begins to ship. This is the first product line that our new management team will have had a chance to impact and we believe this new product slate will have a positive impact on our operating results.”
New CFO
Carrie Teffner is joining the company as chief financial officer from the company’s board of directors effective December 16, 2015. Teffner is the former chief financial officer of PetSmart, Weber-Stephens, and Timberland. In conjunction with Teffner’s new appointment she will be stepping down from the company’s board of directors.
Financial Outlook
The company expects Q4 revenue in the $200 to $210 million range compared to $206.5 million last year.
| CROCS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) ($ thousands, except per share data) |
||||
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||
| 2015 | 2014 | 2015 | 2014 | |
| Revenues | $ 274,088 | $ 302,401 | $ 881,952 | $ 991,750 |
| Cost of sales | 153,267 | 146,801 | 443,891 | 475,323 |
| Restructuring charges | — | 583 | — | 2,612 |
| Gross profit | 120,821 | 155,017 | 438,061 | 513,815 |
| Selling, general and administrative expenses | 135,110 | 143,719 | 429,815 | 434,244 |
| Restructuring charges | 981 | 7,585 | 7,454 | 13,895 |
| Asset impairment charges | 5,460 | 2,600 | 7,535 | 5,830 |
| Income (loss) from operations | (20,730) | 1,113 | (6,743) | 59,846 |
| Foreign currency transaction gain (loss), net | (2,908) | (1,290) | (2,631) | (4,278) |
| Interest income | 268 | 424 | 752 | 1,304 |
| Interest expense | (171) | (366) | (650) | (685) |
| Other income (loss), net | 405 | 217 | (6) | 388 |
| Income (loss) before income taxes | (23,136) | 98 | (9,278) | 56,575 |
| Income tax benefit (expense) | (888) | 15,669 | (3,745) | (8,407) |
| Net income (loss) | $ (24,024) | $ 15,767 | $ (13,023) | $ 48,168 |
| Dividends on Series A convertible preferred stock | (3,000) | (3,067) | (8,833) | (8,233) |
| Dividend equivalents on Series A convertible preferred shares related to redemption value accretion and beneficial conversion feature | (752) | (691) | (2,209) | (2,030) |
| Net income (loss) attributable to common stockholders | $ (27,776) | $ 12,009 | $ (24,065) | $ 37,905 |
| Net income per common share: | ||||
| Basic | $ (0.37) | $ 0.12 | $ (0.32) | $ 0.38 |
| Diluted | $ (0.37) | $ 0.12 | $ (0.32) | $ 0.37 |