01 Aug Crocs Hikes Guidance After Q2 Earnings Beat
Crocs Inc. sharply raised its guidance for the year after reporting second-quarter earnings that handily topped Wall Street’s target.
Andrew Rees, President and Chief Executive Officer, said, “We had a terrific quarter, as demand for our product and brand heat continued to climb. With strong revenue growth and better than expected gross margins, we expanded our operating margin 200 basis points to approximately 13 percent of sales and grew our diluted earnings per share 57 percent compared to last year’s second quarter. We expect our revenue growth in the back half of the year to significantly outpace the first half; accordingly, we are increasing our full year outlook.”
Second Quarter 2019 Operating Results:
- Revenues were $358.9 million, growing 9.4 percent over the second quarter of 2018, or 12.5 percent on a constant currency basis. Store closures reduced our revenues by approximately $6 million. Wholesale revenues grew 9.4 percent, e-commerce revenues grew 18.0 percent, and retail comparable store sales grew 11.8 percent.
- Gross margin was 52.8 percent, compared to 55.3 percent in last year’s second quarter. Non-recurring expenditures related to the relocation of our Americas distribution center reduced gross margin by 80 basis points, resulting in an adjusted gross margin of 53.6 percent. Adjusted gross margin was 170 basis points below last year’s second quarter, primarily due to reduced purchasing power associated with the strength of the U.S. Dollar. For a reconciliation of gross margin to adjusted gross margin.
- Selling, general and administrative expenses (“SG&A”) were $141.5 million, down from $144.3 million in the second quarter of 2018, as non-recurring charges were immaterial compared to $8.4 million in last year’s second quarter. SG&A improved 460 basis points and represented 39.4 percent of revenues compared to 44.0 percent in the second quarter of 2018, as we continued to drive leverage across the business.
- Income from operations rose 29.0 percent to $47.8 million from $37.1 million in the second quarter of 2018, and operating margin rose 200 basis points to 13.3 percent. Excluding non-recurring gross margin charges, adjusted income from operations rose 12.7 percent to $51.2 million and adjusted operating margin was 14.3 percent compared to 13.9 percent in the second quarter of 2018.
- Net income attributable to common stockholders was $39.2 million, up from $30.4 million in the second quarter of 2018. After adjusting for non-recurring gross margin and SG&A charges and for pro forma adjustments related to the company’s previously outstanding Series A Preferred Stock, adjusted net income attributable to common stockholders was $42.6 million and $41.3 million in the second quarters of 2019 and 2018, respectively.
- Diluted earnings per share rose 57 percent to $0.55, up from $0.35 in the second quarter of 2018. After adjusting for non-recurring charges relating to gross margin, SG&A, and the pro forma adjustments for the Series A Preferred Stock, adjusted diluted earnings per share was $0.59 compared to $0.54 in the second quarter of 2018.
Adjusted earnings of 59 cents exceeded Wall Street’s consensus estimate of 45 cents. Revenues of $358.9 million were just below consensus targets of $360.0 million. When it reported first-quarter results on May 7, Crocs projected sales in the range of $350 and $360 million, gross margins between 51 percent compared to 55.3 percent, and SG&A to be approximately 40 percent of revenues.
Balance Sheet and Cash Flow Highlights:
- Cash and cash equivalents were $107.8 million as of June 30, 2019, compared to $171.5 million as of June 30, 2018. During the second quarter of 2019, the company repurchased 2.5 million shares of its common stock for $55.0 million.
- Inventory increased 3.6 percent to $134.6 million as of June 30, 2019 compared to $129.9 million as of June 30, 2018.
- Capital expenditures during the six months ended June 30, 2019 were $18.7 million compared to $3.2 million during the same period in 2018. The increase primarily reflects expenditures on the relocation of the company’s Americas distribution center from California to Ohio.
- At June 30, 2019, there were $215.0 million of borrowings outstanding on the company’s credit facility.
On July 26, 2019, the company amended and restated its revolving credit facility with PNC Bank, National Association, and a consortium of other lenders (the “Credit Facility”). The Credit Facility matures in July 2024 and was increased to $450 million from $300 million. The Credit Facility carries lower costs and more flexible terms than its predecessor.
Share Repurchase Activity:
During the second quarter of 2019, the company repurchased approximately 2.5 million shares of its common stock for $55.0 million, at an average price of $21.89 per share. As of June 30, 2019, approximately $547 million of the company’s $1 billion share repurchase authorization remained available for future share repurchases.
Full Year 2019:
With respect to 2019, the company now expects:
- Revenues to grow 9 percent to 11 percent over 2018 revenues of $1,088.2 million, compared to prior guidance of 5 percent to 7 percent. The company continues to expect 2019 revenues to be negatively impacted by approximately $25 million of currency changes and approximately $20 million resulting from store closures.
- Gross margin guidance for 2019 to be unchanged from previous guidance. Adjusted gross margin is expected to be approximately 50.5 percent, down 100 basis points from 51.5 percent in 2018. The flow through from raising our full year revenue guidance is expected to be offset in the back half of the year by reduced purchasing power associated with the strength of the U.S. Dollar and the unexpected strength of our wholesale revenues, which carry a lower gross margin. On a GAAP basis, gross margin is expected to be approximately 49.5 percent, which includes non-recurring charges of approximately 100 basis points associated with the company’s new distribution center.
- On a GAAP basis, SG&A to be approximately 40 percent of revenues, down from prior guidance of 41 percent of revenues. This includes non-recurring charges of approximately $2 million, down from prior guidance of $3 to $5 million. In 2018, GAAP SG&A was 45.7 percent of revenues and included $21.1 million of non-recurring charges.
- An adjusted operating margin above 10 percent, which would achieve the company’s interim target of a low double digit operating margin. Including the non-recurring charges associated with the new distribution center and certain SG&A costs, the company now anticipates a GAAP operating margin of approximately 9.0 percent, up from prior guidance of 8.5 percent.
- A 2019 tax rate of approximately 15 percent, down from prior guidance of 25 percent.
- 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.
Third Quarter 2019:
With respect to the third quarter of 2019, the company expects:
- Revenues to be between $295 and $305 million compared to $261.1 million in the third quarter of 2018. The company expects third quarter 2019 revenues will be negatively impacted by approximately $2 million of currency changes and approximately $3 million resulting from store closures.
- Adjusted gross margin to be approximately 51.5 percent compared to GAAP gross margin of 53.3 percent in the third quarter of 2018. This decline reflects reduced purchasing power of approximately 150 basis points associated with the strengthening of the U.S. Dollar, higher freight and distribution costs, and strong growth in wholesale revenues, which carry a lower gross margin. This will be partially offset by gains from pricing and reduced promotions, along with efficiencies from closing company-operated manufacturing facilities. On a GAAP basis, gross margin is expected to be approximately 50 percent, which includes non-recurring charges of approximately 150 basis points associated with the company’s new distribution center.
- On a GAAP basis, SG&A to be approximately 40 percent of revenues. Non-recurring charges during the quarter are expected to be immaterial. In the third quarter of 2018, GAAP SG&A was 47.9 percent of revenues and included $6.3 million of non-recurring charges.
- To incur a charge of approximately $400,000 in interest expense in connection with the amended and restated Credit Facility.