26/07/2013

Business news : Crocs Q2 Earnings Slide on Margin Pressures

Crocs Q2 Earnings Slide on Margin Pressures
SportsOneSource Media     Posted: 7/24/2013

Crocs Inc. reported revenues grew 9.9 percent in its second quarter but earnings fell 42.4 percent due to lower than expected gross margins, a one-time net charge of $6.1 million related to the resolution of a statutory tax audit in Brazil.

Second Quarter 2013 Review
  • Record revenue of $363.8 million
  • Gross Margin of 55.2 percent
  • Net income of $35.4 million
  • Earnings per diluted share of 40 cents
  • Non-GAAP adjusted net income1 per diluted share of 48 cents
“Our second quarter revenue grew 12.5 percent on a constant currency basis and reflects the global appeal of the Crocs brand, the success of our new spring/summer collections, including the Huarache, A-Leigh, Beach Line Boat and Retro collections, combined with the ongoing strength of our core product line-up,” said John McCarvel, president and CEO. “Globally, our direct to consumer channel continues to be a key component of our success. Our Asia Pacific region remains a fundamental driver of our growth strategy as all channels in the region continue to exceed expectations.”

“During the quarter we strategically managed our global sales channels and balance sheet. Our direct to consumer channel performed very well, growing nearly 20 percent on a constant currency basis, with positive same store sales in Asia, the Americas and Europe. Wholesale revenue was higher globally, but margins in this channel, particularly in the Americas and Europe, were down due to lower than anticipated late season at-once revenue and increased discount activity late in the quarter, which negatively impacted earnings per share. Challenges during the quarter included continued weakness in consumer spending in the U.S., Europe and Japan, compounded by colder than normal temperatures during April and May in the U.S. and Europe. Our cash balance at quarter-end was $289 million, and inventory decreased to $161 million or 2.5 percent from December 31, 2012, as inventory turns increased to 3.8.”
 
Second Quarter Results
Revenue for the second quarter of 2013 increased 9.9% to $363.8 million compared with revenue of $330.9 million reported in the second quarter of 2012. On a constant currency basis revenue increased 12.5% for the second quarter of 2013.

For second quarter of 2013, the company had net income of $35.4 million or $0.40 per diluted share, compared with net income of $61.5 million or $0.68 per diluted share in the prior year period. Diluted earnings per share during the second quarter of 2013 were negatively impacted by lower than expected gross margins, a one-time net charge of $6.1 million related to the resolution of a statutory tax audit in Brazil, which reduced earnings by 7 cents per share, and a higher than anticipated tax rate of 29 percent, which reduced earnings by 2 cents per share.

Adjusting for the impact of the statutory tax audit in Brazil and $1.6 million relating to the implementation of a new ERP system including non-cash accelerated depreciation and cash expenses for program management, training and other non-capitalized costs, the company had Non-GAAP adjusted net income of $43.1 million in the quarter or $0.48 per diluted share.

Mr. McCarvel continued, “When we look back on the second quarter we had various items impact our results versus our guidance. Those included lower gross margins, the resolution of the tax audit in Brazil and a higher tax rate. Together with year-over-year impacts of currency which reduced our earnings per share by $0.06 plus our investments in our new ERP system and increased marketing, the impact of these items totaled $0.17 per share in the quarter.”
 
Margins
Gross profit for the second quarter of 2013 increased 2.4 percent to $200.9 million, or 55.2% as a percentage of sales, compared with $196.1 million, or 59.3% as a percentage of sales in the prior year period. The year- over-year decrease in gross profit as a percentage of sales was primarily related to slower late season at-once revenue and increased discounting late in the quarter in the Americas and Europe. Selling, General & Administrative (“SG&A”) expenses increased 20.5 percent to $150.2 million compared with $124.7 million a year ago, reflecting increases in retail store space, marketing expenses, resolution of the Brazil tax audit, and the company’s ERP project. As a percentage of sales, SG&A increased to 41.3 percent compared with 37.7 percent in the second quarter of 2012. The impact of the non-recurring Brazil expense and the ERP expense contributed approximately 200 basis points to the increase in SG&A expense as a percentage of sales in the quarter.
 
Second Quarter Revenue Results
The following tables detail the company’s second quarter 2013 and 2012 revenues: 



  Three Months Ended June 30,   Change   Constant Currency Change(1)
($ thousands)
2013   2012
$   %
$   %
Channel revenues:











Wholesale:











Americas
$ 69,089
$ 62,369
$ 6,720

10.8 %
$ 7,041

11.3 %
Asia Pacific

67,383

54,285

13,098

24.1


12,080

22.3
Japan

31,053

39,335

(8,282 )
(21.1 )

(1,228 )
(3.1 )
Europe

33,742

32,490

1,252

3.9


623

1.9
Other businesses
  98
  47
  51  
108.5  
  44  
93.6  
Total Wholesale

201,365

188,526

12,839

6.8


18,560

9.8
Consumer-direct:











Retail:











Americas

61,041

54,952

6,089

11.1


6,243

11.4
Asia Pacific

40,871

35,002

5,869

16.8


5,375

15.4
Japan

12,327

13,357

(1,030 )
(7.7 )

1,844

13.8
Europe
  18,050
  9,163
  8,887  
97.0  
  8,814  
96.2  
Total Retail

132,289

112,474

19,815

17.6


22,276

19.8
Internet:











Americas

16,125

17,290

(1,165 )
(6.7 )

(1,140 )
(6.6 )
Asia Pacific

3,578

2,338

1,240

53.0


1,166

49.9
Japan

2,092

2,540

(448 )
(17.6 )

35

1.4
Europe
  8,378
  7,774
  604  
7.8  
  411  
5.3  
Total Internet
  30,173
  29,942
  231  
0.8  
  472  
1.6  
Total revenues:
$ 363,827
$ 330,942
$ 32,885  
9.9 %
$ 41,308  
12.5 %












 












 


Three Months Ended June 30,
Change
Constant Currency Change(1)
($ thousands)
2013
2012
$
%
$
%
Regional Revenue:











Americas
$ 146,255
$ 134,611
$ 11,644

8.7 %
$ 12,144

9.0 %
Asia Pacific

111,832

91,625

20,207

22.1


18,621

20.3
Japan

45,472

55,232

(9,760 )
(17.7 )

651

1.2
Europe

60,170

49,427

10,743

21.7


9,848

19.9
Other businesses
  98
  47
  51  
108.5  
  44  
93.6  
Total Revenues
$ 363,827
$ 330,942
$ 32,885  
9.9 %
$ 41,308  
12.5

(1) 
 Current period results have been restated using 2012 average foreign exchange rates for the comparative period to enhance the visibility of the underlying business trends excluding the impact of foreign currency exchange rate fluctuations.
 
Other Financial Information
 
Comparable Store Sales Results2
Comparable store sales on a constant currency basis for the second quarter of 2013 compared to the second quarter 2012 were as follows: Global increased 1.0%, Americas increased 1.5%, Asia Pacific increased 8.3%, Japan decreased 19.5% and Europe increased 1.0%. Excluding Japan, comparable store sales growth increased 4.4%. 



  Constant Currency   Constant Currency


Three Months Ended
Three Months Ended
Comparable store sales growth
June 30, 2013
June 30, 2012
Americas
1.5 %
(1.2 )%
Asia Pacific
8.3

11.5
Japan
(19.5 )
(11.3 )
Europe
1.0  
8.7  
Total
1.0 %
1.8 %
             

Mr. McCarvel continued, “We saw same store sales growth accelerate throughout the quarter with improved weather. Our Asia Pacific business expanded 8 percent on a same store sales basis with limited discounting or promotional activity.”
Balance Sheet

Cash and cash equivalents at June 30, 2013 decreased 1.7% compared with December 31, 2012. During the first six months of 2013 the Company repurchased approximately 834,000 shares of common stock for an aggregate of approximately $12.5 million in cash.
Inventories at June 30, 2013 were $160.8 million, down 2.5% compared with inventory at December 31, 2012.
 
Backlog
Backlog at June 30, 2013 was $161.0 million, down 6.7% compared with $172.6 million in the prior year period. On a constant currency basis backlog at June 30, 2013 was lower by an estimated 3% compared with the prior year period. The Company believes the decline in backlog is reflective of wholesale accounts taking a cautious view towards fall holiday 2013 orders based on weaker than expected spring 2013 sales and also the desire of some accounts to order product more on an at-once basis.
 
Financial Outlook
For the third quarter of 2013, the company expects revenue between $300 million and $310 million and diluted earnings per share between $0.20 and $0.23. This outlook includes $(0.02) per share of ERP implementation expense and reflects an impact of $(0.04) for currency translation.
 
Conference Call Information
A conference call to discuss Crocs’ second quarter 2013 results is scheduled for today (July 24, 2013) at 5:00 PM Eastern Time. A webcast of the call will take place simultaneously and can be accessed by clicking the ‘Investor Relations’ link under the Company section on www.crocs.com and at www.earnings.com. An audio replay of the webcast will be available on the Crocs website for one year.
Interested parties are advised to log on to the live webcast at least fifteen minutes prior to the call in order to download the necessary software.

About Crocs, Inc.
Crocs, Inc. is a world leader in innovative casual footwear for men, women and children. Crocs offers several distinct shoe collections with more than 300 four-season footwear styles. All Crocs™ shoes feature Croslite™ material, a proprietary, revolutionary technology that gives each pair of shoes the soft, comfortable, lightweight, non-marking and odor-resistant qualities that Crocs fans know and love. Crocs fans “Get Crocs Inside” every pair of shoes, from the iconic clog to new sneakers, sandals, boots and heels. Since its inception in 2002, Crocs has sold more than 200 million pairs of shoes in more than 90 countries around the world.

Visit www.crocs.com for additional information.

The matters regarding the future discussed in this news release include “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include, but are not limited to, statements regarding future revenue and earnings, backlog, future orders, prospects, investments in our business, outlook and product pipeline. These statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performances, or achievements expressed or implied by the forward-looking statements. These risks and uncertainties include, but are not limited to, the following: macroeconomic issues, including, but not limited to, the current global financial conditions; the effect of competition in our industry; our ability to effectively manage our future growth or declines in revenue; changing fashion trends; our ability to maintain and expand revenues and gross margin; our ability to accurately forecast consumer demand for our products; our ability to develop and sell new products; our ability to obtain and protect intellectual property rights; the effect of potential adverse currency exchange rate fluctuations and other international operating risks; our ability to open and operate additional retail locations; and other factors described in our most recent annual report on Form 10-K under the heading “Risk Factors” and our subsequent filings with the Securities and Exchange Commission. Readers are encouraged to review that section and all other disclosures appearing in our filings with the Securities and Exchange Commission.

All information in this document speaks as of July 24, 2013. We do not undertake any obligation to update publicly any forward-looking statements, including, without limitation, any estimate regarding revenues or earnings, whether as a result of the receipt of new information, future events, or otherwise.
 
1 Non-GAAP adjusted net income is a financial measure not calculated in accordance with U.S. Generally Accepted Accounting Principles (non-GAAP). See the non-GAAP reconciliations set forth later in this press release for additional information.
 
2 Comparable store status is determined on a monthly basis. Comparable store sales begin in the thirteenth month of a store's operation. Stores in which selling square footage has changed more than 15% as a result of a remodel, expansion or reduction are excluded until the thirteenth month they have comparable prior year sales. Temporarily closed stores are excluded from the comparable store sales calculation during the month of closure. Location closures in excess of three months are excluded until the thirteen month post re-opening. Current period results have been restated using 2012 average foreign exchange rates for the comparative period to enhance the visibility of the underlying business trends excluding the impact of foreign currency exchange rate fluctuations.


CROCS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
 

  Three Months Ended Six Months Ended


June 30,
June 30,
($ thousands, except per share data)
2013   2012
2013   2012
Revenues
$ 363,827

$ 330,942

$ 675,483

$ 602,740
Cost of sales
  162,960  
  134,857  
  308,767  
  261,856  
Gross profit

200,867


196,085


366,716


340,884
Selling, general and administrative expenses

150,246


124,718


278,445


229,009
Asset impairment
  202  
  106  
  202  
  819  
Income from operations

50,419


71,261


88,069


111,056
Foreign currency transaction (gains) losses, net

814


(1,627 )

3,414


2,649
Interest income

(517 )

(549 )

(823 )

(907 )
Interest expense

266


132


475


179
Other (income) expense, net
  195  
  (520 )
  167  
  (761 )
Income before income taxes

49,661


73,825


84,836


109,896
Income tax expense
  14,305  
  12,301  
  20,519  
  20,026  
Net income
$ 35,356  
$ 61,524  
$ 64,317  
$ 89,870  
Net income per common share:







Basic
$ 0.40  
$ 0.68  
$ 0.73  
$ 1.00  
Diluted
$ 0.40  
$ 0.68  
$ 0.72  
$ 0.99  
















 

 
CROCS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

 
 


June 30,
December 31,
($ thousands, except number of shares)
2013
2012
ASSETS



Current assets:



Cash and cash equivalents
$ 289,354

$ 294,348
Accounts receivable, net of allowances of $16,918 and $13,315, respectively

162,263


92,278
Inventories

160,763


164,804
Deferred tax assets, net

5,628


6,284
Income tax receivable

12,307


5,613
Other receivables

17,293


24,821
Prepaid expenses and other current assets
  31,051  
  24,967  
Total current assets

678,659


613,115
Property and equipment, net

88,770


82,241
Intangible assets, net

64,082


59,931
Deferred tax assets, net

33,283


34,112
Other assets
  54,167  
  40,239  
Total assets
$ 918,961  
$ 829,638  




 
LIABILITIES AND STOCKHOLDERS’ EQUITY



Current liabilities:



Accounts payable
$ 76,666

$ 63,976
Accrued expenses and other current liabilities

90,963


81,371
Deferred tax liabilities, net

2,388


2,405
Income taxes payable

25,363


8,147
Current portion of long-term borrowings and capital lease obligations
  3,031  
  2,039  
Total current liabilities

198,411


157,938
Long term income tax payable

32,129


36,343
Long-term borrowings and capital lease obligations

6,899


4,596
Other liabilities
  13,913  
  13,361  
Total liabilities
  251,352  
  212,238  




 
Commitments and contingencies



Stockholders’ equity:



Preferred shares, par value $0.001 per share, 5,000,000 shares authorized, none outstanding

-


-
Common shares, par value $0.001 per share, 250,000,000 shares authorized, 91,565,533 and 88,345,143 shares issued and outstanding, respectively, at June 30, 2013 and 91,047,297 and 88,662,845 shares issued and outstanding, respectively, at December 31, 2012


92


91
Treasury stock, at cost, 3,220,390 and 2,384,452 shares, respectively

(56,343 )

(44,214 )
Additional paid-in capital

316,111


307,823
Retained earnings

398,329


334,012
Accumulated other comprehensive income
  9,420  
  19,688  
Total stockholders’ equity
  667,609  
  617,400  
Total liabilities and stockholders’ equity
$ 918,961  
$ 829,638  




 


CROCS, INC. AND SUBSIDIARIES
NON-GAAP NET INCOME RECONCILIATIONS (UNAUDITED)
(In thousands)
 
The Company prepares and reports its financial statements in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”). Internally, management monitors the operating performance of its business using the non-GAAP metrics constant currency and Non-GAAP adjusted net income. Constant currency excludes the effects of foreign exchange rate fluctuations by restating current period results using the prior year average exchange rates. Non-GAAP adjusted net income excludes the impact of new enterprise resource planning system (“ERP”) implementation expenses, a one-time net expense related to the resolution of a statutory tax audit in Brazil and the accelerated depreciation and amortization of our current ERP system. In management’s opinion, these non-GAAP measures are used by, and are useful to, investors and other users of our financial statements in evaluating operating performance by providing better comparability between reporting periods because they exclude items that may not be indicative of overall business trends and provide a better baseline for analyzing trends in our operations. The Company does not, nor does it suggest that investors should, consider such non-GAAP financial measures in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. The Company believes the disclosure of the effects of these items increases the reader’s understanding of the underlying performance of the business and that such non-GAAP financial measures provide investors with an additional tool to evaluate our financial results and assess our prospects for future performance.
The following is a reconciliation of our net income, the most directly comparable U.S. GAAP measure, to Non-GAAP adjusted net income:

 
 


Three Months Ended June 30,
Six Months Ended June 30,
Reconciliation of GAAP Net Income to Non-GAAP Adjusted Net Income:
2013   2012
2013   2012
GAAP net income
$ 35,356
$ 61,524
$ 64,317
$ 89,870
New ERP implementation (1)

715

-

1,846

-
Brazil tax credits (2)

6,094

-

6,094

-
Depreciation and amortization (3)
  913
  -
  1,635
  -
Non-GAAP adjusted net income
$ 43,078
$ 61,524
$ 73,892
$ 89,870


 
 
 
 
Non-GAAP adjusted net income per diluted share
$ 0.48
$ 0.68
$ 0.83
$ 0.99



(1) This proforma adjustment in the GAAP to Non-GAAP reconciliations above represents expenses related to the implementation of a new ERP system.
 
(2) This proforma adjustment in the GAAP to Non-GAAP reconciliations above represents a one-time net expense related to the resolution of a statutory tax audit in Brazil. In April 2013, the State of Sao Paulo, Brazil government (“Brazil”) assessed sales taxes, interest and penalties for the period April 2009 to May 2011. We had previously tendered these taxes using Brazil obligations purchased from third parties at a discount. On May 22, 2013, we applied for amnesty in order to receive a significant reduction in penalties and interest, agreed to amend our 2009 through 2012 tax returns to remove the Brazil obligations, and agreed to settle the assessment in cash to Brazil. In June 2013, cash payment was made to Brazil, in full satisfaction of the Brazil assessment. Brazil is making court-ordered payments to holders of the Brazil obligations along with accrued interest. The Company anticipates that the Brazil obligations (plus accrued interest) will be paid by Brazil in accordance with the court-orders. The Company is carrying the Brazil obligations at the original discounted cost to the Company and intends to hold the Brazil obligations until paid by Brazil.

 
(3) This proforma adjustment in this GAAP to Non-GAAP reconciliation represents the add-back of accelerated depreciation and amortization on tangible and intangible items related to our current ERP system and supporting platforms that will no longer be utilized once the implementation of a new ERP is complete. 

 
CROCS, INC. AND SUBSIDIARIES
RETAIL STORE COUNTS
(UNAUDITED)
 

  June 30,  
 
  June 30,
Company-operated retail locations:
2012
Opened
Closed
2013
Type:







Kiosk/Store in Store
153
30
(58)
125
Retail Stores
220
108
(23)
305
Outlet Stores
111
39
(5)
145
Total
484
177
(86)
575
Operating segment:







Americas
197
45
(35)
207
Asia Pacific
201
52
(47)
206
Japan
32
18
(1)
49
Europe
54
62
(3)
113
Total
484
177
(86)
575








 

 
CROCS, INC. AND SUBSIDIARIES
BACKLOG
(UNAUDITED)

 
 


June 30,
($ thousands)
2013
2012
Americas
$ 58,628
$ 68,613
Asia Pacific

53,430

50,459
Japan

28,748

32,265
Europe
  20,230
  21,249
Total backlog (1)
$ 161,036
$ 172,586




 


(1) Backlog numbers represent preseason wholesale orders, generally four to six months prior to shipment. Backlog as of a particular date is affected by a number of factors, including seasonality, manufacturing schedules and the timing of product shipments. Further, the mix of future and immediate delivery orders can vary significantly period over period. Due to these factors and since unfulfilled orders can be canceled by our customers at any time prior to shipment, backlog may not be a reliable measure of future sale and comparison of backlog from period to period may be misleading.

By press release

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