08 Aug Crocs Q2 Exceeds Expectations, CFO To Resign
Crocs Inc. reported earnings jumped 68.0 percent in the second quarter on a 4.7 percent revenue gain, exceeding Wall Street’s targets. The footwear maker also announced that the copmany’s Chief Financial Officer Carrie Teffner will resign next year.
Andrew Rees, president and chief executive officer, said, “I’m very pleased with our most recent quarter. Revenues and gross margin exceeded our guidance, and our diluted earnings per share were 75 percent above last year’s second quarter based on the strength of our product and the growing demand for our brand. Our clogs and sandals continue to perform well, and we are well-positioned for the back half of the year.”
Second Quarter 2018 Operating Results
- Revenues were $328.0 million, growing 4.7 percent over the second quarter of 2017, or 2.3 percent on a constant currency basis. This growth was achieved despite the loss of approximately $22 million due to operating fewer stores and business model changes. E-commerce grew 23.8 percent, wholesale grew 7.2 percent, and retail comparable store sales increased 7.1 percent.
- Gross margin was 55.3 percent, improving 110 basis points over last year’s second quarter.
- Selling, general and administrative expenses (SG&A) were $144.3 million compared to $140.4 million in the second quarter of 2017. As a percent of revenues, SG&A improved 80 basis points and represented 44.0 percent of revenues. Second quarter 2018 results included $8.4 million of non-recurring charges compared to $1.8 million in last year’s second quarter. Those charges consisted of $7.1 million incurred in connection with the closure of the company’s manufacturing facilities, approximately $1.1 million of which were non-cash, and $1.3 million associated with our SG&A reduction plan.
- Income from operations of $37.1 million increased 25.9 percent compared to $29.4 million in last year’s second quarter. Net income attributable to common stockholders was $30.4 million, or 35 cents per diluted share, compared to $18.1 million, or 20 cents per diluted share, in last year’s second quarter. Crocs had 71.5 million and 74.6 million weighted average diluted common shares outstanding during the three months ended June 30, 2018 and 2017, respectively.
Wall Street’s consensus estimate had been 29 cents a share. In its guidance, Crocs had projected revenues in the range of $315 to $325 million, gross margins to be slightly above last year’s 54.2 percent rate and SG&A to be approximately flat. Crocs doesn’t provide EPS guidance.
Balance Sheet and Cash Flow Highlights
- Cash provided by operating activities increased 3.8 percent to $40.9 million during the second quarter of 2018 compared to $39.4 million during the second quarter of 2017.
- Cash and cash equivalents as of June 30, 2018 increased 9.3 percent to $171.5 million compared to $157.0 million as of June 30, 2017.
- Inventory declined 16.6 percent to $129.9 million as of June 30, 2018 compared to $155.7 million as of June 30, 2017, reflecting the company’s continued focus on inventory management.
- Capital expenditures during the first six months of 2018 were $3.2 million compared to $12.2 million during the same period in 2017, as the company opened fewer stores, completed fewer store remodels, and incurred lower technology-related expenditures.
Share Repurchase Activity
During the second quarter of 2018, the company repurchased approximately 378,000 shares of its common stock for approximately $6 million, at an average price of $15.55 per share. During the 12-month period ended June 30, 2018, the company repurchased approximately 6.1 million shares for approximately $66 million, at an average price of $10.86 per share. At June 30, 2018, approximately $193 million of the company’s $500 million share repurchase authorization remained available for future share repurchases.
Closure of company-Operated Manufacturing Facilities
In connection with ongoing efforts to simplify the business and improve profitability, during the second quarter, the company closed its manufacturing facility in Mexico and moved ahead with plans to close its last manufacturing facility, which is located in Italy. Related non-recurring charges are included in the company’s second quarter SG&A results and the SG&A outlook.
Financial Outlook
Third Quarter 2018
With respect to the third quarter of 2018, the company expects:
- Revenues of $240 to $250 million compared to $243.3 million in the third quarter of 2017.
- Gross margin to be approximately 50 basis points above last year’s 50.8 percent rate.
- SG&A to be slightly higher than last year’s third quarter SG&A of $120.8 million. This includes non-recurring charges of approximately $6 million, compared to $3.6 million in the third quarter of 2017. These non-recurring charges consist of approximately $5 million relating to the closure of our manufacturing facilities, approximately $4 million of which will be non-cash and approximately $1 million associated with the company’s SG&A reduction plan.
Full Year 2018
With respect to 2018, the company now expects:
- Revenues to increase low single digits over 2017 revenues of $1,023.5 million, as the company expects double digit e-commerce growth and moderate wholesale growth to more than offset lower retail revenues due to operating fewer stores and business model changes.
- Gross margin to increase approximately 70 to 100 basis points over 2017 gross margin of 50.5 percent.
- SG&A to be slightly higher than our prior guidance of $485 million, compared to $499.9 million last year. This includes approximately $18 million of non-recurring charges, compared to our prior guidance of approximately $15 million and $17 million of non-recurring charges in 2017. These non-recurring charges consist of approximately $14 million relating to the closure of our manufacturing facilities, approximately $8 million of which will be non-cash and approximately $4 million associated with our SG&A reduction plan.
- Income from operations to be approximately $50 million compared to $17.3 million in 2017.
- 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.
Chief Financial Officer Transition
Carrie Teffner, executive vice president and chief financial officer, has announced her intention to resign from Crocs effective April 1, 2019 to pursue strategic board and advisory work. Anne Mehlman has been named Teffner’s successor and will assume the executive vice president and chief financial officer role effective August 24, 2018. Upon Mehlman’s arrival, and to ensure a seamless transition, Teffner will transition into the role of executive vice president finance and strategic projects.
Mehlman brings more than 15 years of global financial and operational experience to her role. She will join Crocs from Zappos.com Inc., an online shoe retailer owned by Amazon, where she is chief financial officer. Before joining Zappos.com, Inc. in 2016, Mehlman was a member of the Crocs management team for over five years, most recently as vice president corporate finance. Earlier in her career, she served as division finance director at RSC Holdings Inc., a construction and industrial equipment rental company (acquired by United Rentals Inc.) and as Northeast regional controller at Corporate Express, an international B2B seller of office supplies (acquired by Staples Inc.).
Andrew Rees said, “Carrie originally joined Crocs as a board member in 2015 and stepped into the CFO role to assist with the company’s transformation. During this time, we have made significant progress, including a return to topline growth and significantly improved profitability. Carrie’s contributions have been invaluable and, on behalf of the entire Crocs team, I want to express our gratitude for her leadership, dedication and commitment. We are now in a great position for a CFO transition and are thrilled to welcome Anne back to Crocs as our new CFO. Anne has a terrific background, made even stronger by her time at Zappos leading the finance and supply chain tea. We will benefit from her experience as we continue to pursue our strategic priorities, grow our top line and improve our profitability.”
Tom Smach, chairman of the board of directors, said, “We are extremely appreciative of the roles that Carrie has played at Crocs, both as a board member and as CFO. She has made tremendous contributions in both capacities, stabilizing the business and positioning Crocs for sustainable, profitable growth.”
Teffner said, “I am extremely proud of our accomplishments at Crocs over the past three years, and I’ve enjoyed collaborating with Andrew to lead the company through a successful transformation. I will be leaving behind a fantastic company with a great culture and an exciting future. Anne and I worked together before she joined Zappos, and I consider her a great choice to partner with Andrew and the Crocs leadership team.”