Crocs, Inc.
Q1 2018 Earnings Call Transcript

Published: 8 May 2018

[Operator:]

Welcome to the [Technical Difficulty] (00

[Marisa Jacobs:]

Good morning, everyone, and thank you for joining us today for the Crocs' first quarter 2018 earnings call. Earlier this morning, we announced our first quarter results and a copy of the press release can be found on our website at crocs.com. We would like to remind you that some of the information provided on this call is forward-looking and accordingly is subject to the Safe Harbor provisions of the federal securities law. These statements include, but are not limited to, statements regarding future revenues, gross margins, SG&A expenses, income from operations, adjusted EBITDA, and our product pipeline. Crocs is not obligated to update these forward-looking statements to reflect the impact of future events. Adjusted EBITDA is a non-GAAP measure. A reconciliation of this amount to income from operations is contained in the Crocs' investor presentation posted on our website. We caution you that all forward-looking statements are subject to risks and uncertainties described in the Risk Factors section of our Annual Report on Form 10-K. Accordingly, actual results could differ materially from those described on this call. Please refer to Crocs' Annual Report on Form 10-K as well as other documents filed with the SEC for more information relating to these risk factors. Joining us on the call today are Andrew Rees, President and Chief Executive Officer; and Carrie Teffner, Executive Vice President and Chief Financial Officer. Following their prepared remarks, we will open the call for your questions. At this time, I'll turn the call over to Andrew.

[Andrew Rees:]

Thank you, Marisa and good morning everyone. 2018 is off to a strong start. We delivered great products including launching our new LiteRide collection. We continued to enhance the Crocs brand with the second year of a highly successful Come As You Are campaign. And by executing against our strategic priorities, we once again delivered financial results that exceeded our guidance. This morning I will speak to you about our brand building and product success and update you on our three strategic priorities. I also want to provide you with additional details regarding our decision to close our Mexico manufacturing and distribution facilities, as we continue to simplify our business to enhance profitability. Carrie will then review our first quarter financial results and our latest guidance. As a refresher, our three overarching strategic priorities are

[Carrie W. Teffner:]

Thank you, Andrew. First quarter revenues were $283.1 million, up $15.2 million or 5.7% from a year ago. This exceeded our guidance of $265 million to $275 million. We delivered solid results across all channels, despite store closures and business model changes, which reduced revenues by approximately $12 million. Our DTC comp was a positive 11.2% and currency positively impacted first quarter revenues by $13.4 million. We sold approximately 17 million pairs of shoes in the quarter, an increase of 3.9% over last year's first quarter. Our average selling price for footwear was $16.28, a 1.1% increase compared to the $16.11 in last year's first quarter. The positive reception to our Spring/Summer 2018 collection drove strong results across each of our three channels. Global wholesale sales increased by 6.5%. Success with last year's Fall/Holiday line and an enthusiastic response to our Spring/Summer 2018 collection led many of our accounts to increase their pre-books over last year's first quarter, particularly in the Americas. And as Andrew touched on earlier, the LiteRide introduction drove incremental sales, as accounts added the LiteRide franchise to their Crocs lineup. Our retail comp was 7.6%, our third consecutive quarter of positive comps. While the Easter shift had a modest impact, our strong retail comp was driven by higher traffic due to the strength of our product, more impactful marketing, and improved retail operations. Global retail sales were down 3.7%, as we operated 117 fewer stores compared to the end of the first quarter of 2017. Our e-commerce business grew 24.1% during the quarter, and we generated double-digit growth in every region. This was our fourth consecutive quarter of double-digit e-commerce growth. Strong product was central to this progress. In addition, the digital marketing and social media activations that took place in Q1 relating to LiteRide, Drew Loves Crocs, and our latest Come As You Are campaign materials, including Crocs

[Andrew Rees:]

Thank you, Carrie. As I mentioned at the start of today's call, I'm very pleased with our first quarter results. I want to acknowledge the hard work of our associates throughout the world. Without them, we wouldn't be making such great progress. The response to our Spring/Summer 2018 collection has been very positive and we're extremely encouraged by the LiteRide launch. Year two of our Come As You Are marketing campaign is also performing very well, as it continues to drive engagement, build our brand and drive sales. We believe that our strategic priorities have us focused on what is important to consumers and customers and our success in driving growth more quickly than previously anticipated is reflected in our increased guidance for 2018. Operator, please open the call for questions.

[Operator:]

Thank you. We will now begin the question-and-answer session. We have a question from Mitch Kummetz from Pivotal Research.

[Mitch Kummetz:]

Yeah. Thanks for taking my questions, and congrats on the quarter. So, first question, just trying to have a better understanding as to kind of what assumptions are embedded in your Q2 outlook. Can you say what percent, like, of your wholesale businesses outlines kind of how you're thinking about at-once in the quarter and then also kind of what your DTC comp assumption is for Q2? And then I have a follow-up.

[Andrew Rees:]

Great. Thank you, Mitch. So, yeah, I mean, Q2 is a slightly bigger at-ones quarter than the average quarter. So as we kind of look at our business in Q2, it's roughly 70

[Mitch Kummetz:]

Okay. And then I know that you guys, you've put a lot of metrics around sort of channel and geography. Is there anything that you can say about the performance that you're experiencing kind of by gender, let's say men's, women's, kids? Are you seeing strength more in one area versus the other?

[Andrew Rees:]

Yeah. I think we do see a few trends, Mitch. I mean, I think you saw in Q1, Crocs performed better than they have in the recent quarters and 12% growth was really strong. So Crocs generally go to market, not all of them, but most of them go to market as unisex, which we see as a competitive advantage, they're sized that way and then we blend the colors so that they appeal to men and women. And I think that business bias is towards men. The sandal business bias is heavily towards women. So different parts of the business I think respond to different genders. And I would say our kids business has been pretty stable. We're one of the few brands that have a robust business across men, women and kids.

[Mitch Kummetz:]

Actually let me ask that question a different way and then I'll get off. But in terms of some of the – you talked about better brand perception and engagement, all those things, a lot of those metrics are way up. Are you seeing any differences across gender with that feedback?

[Andrew Rees:]

Yeah, I would say we are seeing higher female engagement. I think that's what you're driving at. And as we kind of look at our marketing campaign Come As You Are, we look at the product we have in the marketplace, we are driving higher female engagement.

[Mitch Kummetz:]

Okay. Great. Thank you.

[Operator:]

We have a question from Jim Duffy from Stifel. Please go ahead.

[James Vincent Duffy:]

Thanks. Good morning. Congratulations to you guys on a great start to the year. You've done a terrific job. My first question, can you speak to the pricing influence on the quarter? The 1.1% ASP increase on a year-to-year basis was maybe not as much as I might have thought given the introduction of LiteRide and some of the pricing action that you've taken.

[Carrie W. Teffner:]

Yeah, keep in mind the pricing action that we took on clogs was primarily the Classic in the Crocs brand and predominantly just in North – it was just a North America price increase, so, obviously, not impacting all of the revenue in the marketplace. The other thing impacting the overall ASP is the mix of sandals. So, given that sandals grew 21% in the quarter and is now 26% of the footwear sales, that's going to bring the average ASP down. And you'll see when you look at the 10-Q that on a constant currency basis, we're actually down a little bit in ASP and that's really the product mix.

[James Vincent Duffy:]

Okay. So, the sandal is lower ASP than the clog?

[Carrie W. Teffner:]

Yeah. But as you know, but again it's high margin (30

[James Vincent Duffy:]

Okay. And then, can you speak to the AUR trends that you're seeing in the stores? Are you still seeing a good attach rate on the charms and is that helping the AUR?

[Carrie W. Teffner:]

Yeah. So, AURs, definitely we're seeing progress. It varies by market obviously. But we're seeing good conversion rates and higher units per transaction. I would say predominantly North America, again, in retail is where we're having the most success and really the most focus right now in building out the charm business. And that's continued to generate a lot of excitement about the brand. It's also driving increase in UPT. And we're continuing to build that out here and then. Ideally we transport that into the European and Asia markets.

[Andrew Rees:]

We're definitely leaning into a pretty significant trend there around personalization. So, charms is our way of helping our consumers personalize a product and we think that has a nice impact on AURs, but frankly has also a very nice impact on brand engagement.

[James Vincent Duffy:]

Great. And then last question from me and perhaps you addressed this and I missed it, but can you speak to the disconnect between the direct-to-consumer trends that you're seeing in Asia and the wholesale trends that you're seeing in Asia?

[Andrew Rees:]

Yeah, I think so as we kind of look at our Asia business, and the – first is as we look at the marketplace, we see e-commerce, whether it'd be single-branded e-commerce, whether it'd be marketplaces, whether it'd be multi-brand e-commerce websites, really accelerating in Asia and we've leaned into that trend. So we're putting a lot of time, effort and resources into making sure that we can capitalize on that. And as we look at our wholesale business, there's still a number of transitions going on in the marketplace. We can see strong growth in our distributor business as we talked about, which is predominantly in Southeast Asia. We see strong growth in some of our other marketplaces. But we do have marketplaces, as we talked about on prior quarters, where we're going through a wholesale transition. And that particularly in Japan where we're transitioning more from a mono brand distributor business to a multi-brand retail business. So we planned that business down. It is meeting our expectations. It's exactly what we thought it was going to be, but that obviously a shrinking of our wholesale business, so, in that marketplace.

[James Vincent Duffy:]

Very good. Thank you.

[Andrew Rees:]

Thank you.

[Operator:]

We have a question from Jonathan Komp from Baird.

[Jonathan R. Komp:]

Yeah. Hi. Thank you. Carrie, first question I have, just the revenue guidance increase for the year, could you give a little more color by geography and by channel, what's driving the increase versus the prior guidance for about flat?

[Carrie W. Teffner:]

Yeah, so it's obviously as we outperform Q1 versus our expectations and with our view now on Q2, and in calling Q2 at $315 million to $325 million which is an increase over prior year as well, that's translating essentially into our perspective on the full year being up low-single digit. Relative to channel, I would say, we, it's really a little bit stronger in the retail. We've planned that fairly modestly. And we certainly came out strong in Q1, continued double-digit e-commerce performance and moderate wholesale growth. So that's kind of consistent, and it's really consistent across the region.

[Jonathan R. Komp:]

Okay, great. And then a follow-up question on the gross margin outlook. Q2, I think you said up slightly. I thought you'd be getting the accounting benefit in Q2, the inverse of what you saw in the first quarter from the inventory cost being changed. So just want to clarify that, what you're seeing on an underlying basis for Q2? And then also what you're seeing in the back-half of the year that gives you confidence in growing gross margin as you're projecting for the full year?

[Carrie W. Teffner:]

Sure. So, yeah, so we – when we look at the full year just kind of reiterate, our full-year guidance is the same, up 70 to 100 basis points. And as I mentioned on the Q1 call, the changed accounting methodology to FIFO has no impact on the full year. And you're right, we took about an 80 basis point hit in the first quarter related to that, but little bit less than what we had originally expected. And so less of a flip as we go through the Q2 portion of the year. That said, the other element that is impacting Q2 is we are heavily impacted in Q2 by the store closings. So it's one of our biggest quarter's impact thus far, was about $23 million in retail revenue loss associated with the store closures, that's kind of creating a drag on that. And then your other part of your question is the back-half of the year, again, it's trending the same thing, slight improvement over the prior year, which gets us to the 70 to 100 basis points on a full year. And it's really product mix as we move through the balance of the year.

[Jonathan R. Komp:]

Okay. Great. Last one from me, on the SG&A, it sounds like the underlying improvement now $45 million is increased slightly for the year. Just want to ask if that's reflective of achieving some savings quicker, and if so where? Or are you seeing even deeper cost savings as you work through some of the actions?

[Carrie W. Teffner:]

Yeah. So it's a – and a little bit goes a long way against the SG&A base. So as we continue to really focus on the control over spending, I think we're tracking right. We're essentially where we had projected to be in terms of store closures at this point. And so, the additional savings are really gets across a number of things, less travel and expense, less, you know, it's a variety of discretionary spend that we're able to tighten up on.

[Jonathan R. Komp:]

Okay. Great. Thank you.

[Operator:]

The next question comes from Steve Marotta from C.L. King & Associates.

[Steven L. Marotta:]

Good morning, Andrew and Carrie. Carrie, you mentioned that the goal for SG&A as a percent of total sales is 40% and that the SG&A program that you have in place to reduce cost is expected to be completed in fiscal 2019. Can we assume that fiscal 2020 on a full-year basis would be 40% or less SG&A cost as a percent of sales?

[Carrie W. Teffner:]

Yeah. So, to clarify, our expectation in terms of our model to get the double-digit EBIT margin is gross margins in the low-50s and SG&A in the low-40s. So, I'm not committing to 40%. So, definitely in the low-40s. And we're tracking along those lines to be able to get to those levels in the timeframe that you outlined.

[Steven L. Marotta:]

Okay. All right. That's – so without offering fiscal 2020 guidance to assume based on the fact that the SG&A reduction program will be completed next year, that SG&A in the low-40s in fiscal 2020 is a reasonable assumption?

[Carrie W. Teffner:]

Yes.

[Andrew Rees:]

Yes.

[Steven L. Marotta:]

Okay.

[Andrew Rees:]

That's a reasonable assumption, Steve.

[Steven L. Marotta:]

The other question I had is, I know that for years Crocs has knocked on the door of fall/winter product and I don't think anyone has answered unfortunately. Is there anything that is in the research and development stages that makes you a little bit more optimistic for heavier weight product in the back-half of the year to reduce seasonality a little bit, particularly from an earnings standpoint and obviously by extension from a sales point as well?

[Andrew Rees:]

Yeah. So, thank you. As you currently look at the business strategically, the first thing that we're focused on is driving growth where we can most reliably and with the highest probability to drive growth. And frankly that's in the summer season. That's where we can see the biggest gains. That's where the brand is well-positioned. So, that's our primary focus. Then we're focused as you know on clogs and sandals and as you kind of see in our Q1 results. And frankly, as you also saw in Q4 of last year, those initiatives are working. And so, in terms of that, that does lead us to have a seasonal business and so we're accommodating that as best we can. As we look at the fall/winter, we're not developing specific fall/winter products. But we do believe clogs, lined clogs and sandals can sell well, and as they have sold well in the back end of last year in that season. And we have a lot of business outside the United States in warm weather parts of the world. As you look at Southeast Asia and as you look at the southern hemisphere, we really rely on those markets to counteract slower business in the northern hemisphere.

[Steven L. Marotta:]

That's very helpful. Thank you.

[Andrew Rees:]

Thanks.

[Operator:]

We have a question from Erinn Murphy from Piper Jaffray.

[Eric Johnson:]

Hi, guys. It's Eric on for Erinn. Thanks for taking our questions. I have two. First, can you guys comment a little bit more on what you're seeing with LiteRide? How that's trending across age buckets, genders or the three kind of core styles you've launched with? Has it been more or less cannibalistic than you originally thought?

[Andrew Rees:]

Yeah, we are really pleased with LiteRide launch. So, launched March 1, so, you're seeing a pretty small amount of it in Q1. I would say it's exceeded our expectations kind of across the board from a sell-through perspective, from a regional performance perspective and also from a channel performance perspective. I think we can see is it – what's resonating with the consumers is the comfort technology, the visible comfort technology, plus also the updated styling. And so, we do actually see it bringing new consumers to the brand. We think – the analysis we've done is the cannibalization is very, very modest. Obviously, it does impact a couple of styles that we have in the marketplace, but it's really modest. And at this point, we're really chasing products so that we can maximize its success. And in terms of styles that are selling, I think it was part of your question, the clogs and the sandals, right. So, there's really big three parts to LiteRide. There's a clog, there's a number of sandals and there are some athletic silhouettes. I would say the clog is driving the largest portion of the revenue and the athletic silhouettes that we have, we plan them to be pretty small. They are dramatically exceeding expectations, but that's a relatively small expectation.

[Eric Johnson:]

Great. Thank you. And then, second on Mexico production. How important was that to the overall mix? And if it was, where is this volume going to be diverted? And then is there any risk that it compromises your ability to fulfill in-season demand in sort of the Americas region?

[Andrew Rees:]

Yeah, so I think if you look in our K, Mexico was about a 11% of our overall production, that's what we called out. We're shifting that volume largely to Asia. As you're aware we have a series of large partners in Asia that outsource our manufacturing to both in China and Vietnam. This obviously has been planned over some period of time, so that we don't anticipate any supply risk from this shift. And obviously as Carrie outlined, we see a future financial benefit in terms of lower cost of goods and higher gross margin. So we think this is a positive shift for the company. Obviously, we're extremely appreciative of the work that our associates in Mexico have done and the contribution they've made to the company, but we think this is the right move as we continue to simplify the business.

[Eric Johnson:]

Thanks, guys.

[Carrie W. Teffner:]

Sure.

[Operator:]

We have a question from Sam Poser from Susquehanna.

[Sam Poser:]

Good morning. Thank you for taking my questions. I just have a question about the way you're reporting the numbers. I mean, you have these non-recurring charges built in, but the sort of underlying business on a go forward, why not give us just non-GAAP numbers and give us the adjusted SG&A and everything else, that way everybody will be thinking about it the same way, because I know we're thinking about it differently when we look at like around $0.16 of earnings in the quarter, not $0.15, when you take out the $2.5 million – the SG&A adjustment in the quarter for the non-recurring charges?

[Carrie W. Teffner:]

Sure, Sam. Obviously it's a choice, but I would say, obviously, we're much more biased to GAAP measures to comply with SEC requirements. And so, we want to make sure that as we convey our numbers in our script, it aligns pretty well to what we're putting forward in terms of our 10-Q as well as our earnings release. So it's really a choice and I think we're doing a really good job of actually breaking out the pieces so that we can make it very clear what the amount is, what the one-time charges are, the non-recurring charges are as well as the total. So we're trying to make it as easy as we can. I know some would prefer we would do adjusted. But we've made the decision to try to do as much as we can according to GAAP.

[Sam Poser:]

Okay. And then the tax rate, it looks like the tax rate. Could you explain – the tax rate seems a little bit higher than what we would have anticipated.

[Carrie W. Teffner:]

Yeah.

[Sam Poser:]

Can you give us sort of what that underlying tax rate is, and why it is what it is?

[Carrie W. Teffner:]

Sure. So the tax rate in the quarter – and the Q was out and the detail is in there as well. But the tax rate in the quarter was a little bit higher than what we had originally anticipated, and that was really associated with the new tax regimes, specifically around the GILTI tax, which is essentially a global – a tax that's designed to tax global intangible low-tax income. And we've made an election to take that as a period expense, so we kind of have a higher impact in Q1, which will dissipate as we go through the year. So, when you get to the differential of the tax rate, we were at about a 31% tax rate last year in Q1. I think we had about a 34% tax rate this year. The differential is approximately $2 million. So it's really essentially tied to that GILTI tax.

[Sam Poser:]

And then, when we think about – you said the tax – you would have $17 million of taxes for the full year based on – I mean, I guess this thing, what's your sort of go-forward tax rate when you make money? I mean (46

[Carrie W. Teffner:]

Yeah. It's a fair question, Sam. I just think it's not as – it's easy an answer just because we are working through the impact of the Tax Act. And then it does matter significantly in terms of the geography of where our earnings occur. So, we've guided this year at $17 million. And so we're kind of in that – we're in that 30% – low-30% range right now. And as we get additional information, we'll be happy to provide it.

[Sam Poser:]

And then – so basically though next year should be lower just made up for that additional adjustment in the quarter and so on and so forth?

[Carrie W. Teffner:]

I think it will depend on how the GILTI – I think there are some unintended consequences associated with the Tax Act that everyone is kind of trying to work through in the first half of the year, and as that kind of fleshes out, we'll get better line of sight to what that means for next year.

[Sam Poser:]

All right. And, again, following up on somebody else's question earlier, 2020 will be sort of the first clean year. There should not be any headwinds or other sort of non-recurring charges related to SG&A reduction and other things like that. That should be the first clean year of numbers without various adjustments or closings and so on and so forth. Am I thinking about that correctly?

[Andrew Rees:]

Yeah. I mean I think as we – we work through – I don't think we said that. I think what we said is that by the end of 2018, we'll have completed our SG&A reduction plan. We're confident that we'll yield the SG&A reductions that were outlined within that. And we've outlined our model associated to getting the double-digit EBIT margins, which is gross margins in the low-50s, SG&A in the low-40s. I think that's how this company can operate. What happens in the world between now and 2020, that's (48

[Carrie W. Teffner:]

Yeah. But to be clear, I think, maybe it will be helpful, based on the SG&A reduction plan that we've outlined, those costs will all be completed in 2018.

[Andrew Rees:]

Right.

[Carrie W. Teffner:]

There will be no additional non-recurring charges associated with the SG&A reduction plan that we've announced that will linger into 2019. In addition, as we think about the store closures and business model changes, we will have that impact in 2019 based on the closures that occur in 2018 as well as the shifts like we had with (49

[Sam Poser:]

Just confirming. As of now, it looks like it will be apples to apples 2020 to 2019, of course things could change?

[Carrie W. Teffner:]

That seems reasonable, yes.

[Andrew Rees:]

Yes.

[Sam Poser:]

Okay. Thank you, and good luck.

[Carrie W. Teffner:]

Thanks, Sam.

[Operator:]

We have a question from Mitch Kummetz from Pivotal Research.

[Mitch Kummetz:]

Yeah. Thanks. Andrew, I just had a follow-up question just kind of regarding broader market dynamics. I know like a year or two ago, you spoke about the impact, kind of negative impact to you guys of sort of growing athletic penetration across some of your wholesale accounts, I think particularly kind of the family channel, that was sort of stealing open-to-buy dollars away from sort of non-athletic brands. I'm just wondering kind of how you're viewing that dynamic today. Is that still happening? Is it still sort of hurting the non-athletic segment? Or at this point, if those dollars aren't coming from you guys, because you guys have just had this sort of resurgence and things are better kind of maybe you can go into that a little bit?

[Andrew Rees:]

Yeah. That's a good question. So, I think the way we see it is, we feel like the overall market has firmed up a little bit. So, I think if we look at sort of 2016 into 2017 and the overall footwear market was going through some big shifts and was frankly soft. So, – or you kind of look across the industry, I think back-end of last year into early part of this year, we feel like the market is firmed here in the U.S. and frankly overseas as well. Athletic is still a major trend. So, as you can see some very strong results from some of the large athletic players, athletic is still a strong trend, and the portion of open-to-buy available to casual brand is, I don't think it's shrinking as it was. But certainly we're very much aware we need to have great product, great marketing and be aggressive to get our product placed, which is I think what we're doing and that's why we're showing success.

[Sam Poser:]

Okay. That's helpful. Thanks and good luck.

[Andrew Rees:]

Thank you.

[Carrie W. Teffner:]

Thank you.

[Andrew Rees:]

Great. Since there is no more questions, thank you very much for joining us on our call today and your continued interest in Crocs. Thank you all.

[Operator:]

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.