Crocs Blames Q3 Loss on China Inventory Glut

Crocs Blames Q3 Loss on China Inventory Glut

Crocs Blames Q3 Loss on China Inventory Glut
SportsOneSource Media     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