Crocs, Inc.
Q4 2011 Earnings Call Transcript

Published: 24 Feb 2012

[Operator:]

Welcome to the Crocs Incorporated fiscal 2011 fourth quarter and full year earnings conference call. [Operator instructions.] Earlier this afternoon, Crocs announced its fourth quarter and full year 2011 financial results. A copy of the press release can be found on the company’s website at www.crocs.com. The company would like to remind everyone that some of the information provided in this call will be forward-looking, and accordingly are subject to the Safe Harbor Provisions of the Federal securities laws. The statement include, but are not limited to statements regarding future revenue and earnings, backlog and future orders, prospects, and product pipeline. Crocs cautions you at these statements and are subject to a number of risks and uncertainties described in the risk factors section of the Company’s 2010 annual report on Form 10-K, filed on February 25, 2011 with the Securities and Exchange Commission. Accordingly, actual results could differ materially from those described on this call. Those listening to the call are advised to refer to Crocs’ annual report on Form 10-K, as well as other documents filed with the SEC for additional discussions of these risk factors. Crocs intends that all of its forward-looking statements in this call will be protected by the Safe Harbor provisions of the Securities and Exchange Act of 1934. Crocs is not obligated to update its forward-looking statements to reflect the impact of future events. Now, at this time, I would like to turn the call over to Mr. John McCarvel, chief executive officer of Crocs. Please go ahead, sir.

[John McCarvel:]

Thank you, and thanks for joining us today for Crocs’ fourth quarter conference call. With me today is Jeff Lasher, our chief financial officer. In early January, we announced that the fourth quarter sales would be toward the high end of the guidance range, putting our annual sales above the $1 billion mark for the first time ever. This is a tremendous milestone for Crocs, and one that we take great pride in achieving, particularly given the fact that the company is just 10 years old and that we’ve only been selling shoes in a meaningful way for the past seven years. I think what really stands out about the $1 billion in sales is how diverse the contributions were this year. Amazingly, we had been on a similar path just a few years ago. However, back then our business was extremely concentrated in terms of products, namely our Classics and Core; regions, primarily the US; and channels, almost entirely wholesale. Today, we sell more than 300 different styles, and only two styles represent more than 5% of sales. In 2011, approximately 65% of our sales came from outside the United States, and broken down by channel, wholesale represented 61%, retail 30%, and internet 9%. Over the past few years, we’ve made very good progress shedding the image that Crocs is a one-dimensional company. We have successfully transformed our global operations to development what has been a very strong brand. We’ve added strong leadership to several key areas of the business. We’ve upgraded our systems, and improved our processes to better support a global company of our size and implemented sound long term strategies that we believe can continue to drive growth forward at a solid pace off our strong $1 billion foundation. We know there are still areas that need more work, and that greater efficiencies can be driven throughout the entire organization in order to increase our profit margin. We are focused on enhancing all aspects of the business and expect our efforts will yield positive results again in 2012 and over the years ahead. Jeff will now go through detailed financials from the fourth quarter and outline our guidance. Then I’ll provide color on the key growth drivers for 2012, after which we’ll be happy to take questions. Jeff?

[Jeff Lasher:]

Thank you John. Hello everyone, and thanks for joining us. This afternoon, I’ll be discussing fourth quarter and full year 2011 results. Revenue for the quarter increased by $25 million, or 14%, to $204 million. This is against a 32% top line increase from a year ago. As John said, for the year, we were able to exceed $1 billion in revenues, with strong growth [unintelligible]. We also executed on our eighth consecutive quarter of revenue growth in each of our geographic regions. As we have discussed on prior calls, in the fourth quarter stronger growth in the Americas and Asia were tempered by slower growth out of Europe. Sales in the Americas increased 10% to $104 million, Asia increased 22% to $76 million, and Europe increased 6% to $24 million. For the year, sales in the Americas increased 19% to $448 million, Asia increased 34%to $382 million, and Europe increased 34% to $171 million. Turning to the Americas region, our direct-to-consumer channel drove Q4 revenues as our internet sales grew 21% during Q4. While sales from wholesale were relatively flat, retail sales in the Americas region increased 17%, while store count was flat at the end of the quarter at 197 locations. The 17% increase in retail sales in the Americas was from a combination of larger locations, product breadth, and higher average footwear selling prices. In the USA, revenue was up 10% for the quarter, and represented 41% of total global sales. For the year, revenues in the USA represented 35% of total global sales. In 2012 we will be closing about half of our remaining 50 kiosk locations in the USA. Some of these will be converted into stores within the same shopping center, but some centers will be exited altogether. Moving forward, changes in our retail formats and portfolio of stores will periodically result in certain one-time expenses. We expect this to impact Q1 EPS by $0.01 to $0.02, which is included in our guidance. For the full year 2012, we anticipate opening about 25-50 stores in the Americas before the kiosk closings. Sales from the Asia segment were strong across all channels. For the fourth quarter, Asia grew 22% from last year, Japan grew 19% during the quarter, closing out a successful year as the nation continues its recovery efforts and the favorable direction of the yen. For the year, Japan represented about 15% of our global revenues, up from 14% in 2010. Asia retail sales were up 37% during the quarter, as we ended with 198 stores, up from 159 in the prior year. In 2012, we plan on opening 25-50 stores in Asia. In Europe, sales grew by 6% versus prior year, despite the current macroeconomic environment. During the quarter, results were driven by growth in our retail business, while wholesale and internet channels were about flat. This was consistent with our expectations and prior comments on a moderation of our Europe growth rates in the back half of 2011. However, as we enter into 2012, the backlog for Europe is down versus the same time last year. In the retail channel, we experienced improved results, with sales up 37% during the quarter as store count finished 2011 at 35, up from 22 at the end of 2010. Retail locations in Europe are expected to increase by 20-25 in the year. Our focus in the 2012 retail expansion will be to expand stores in Northern Europe, where our stores are presently concentrated in countries such as Germany, UK, France, Finland, and the Netherlands. In addition, we have 13 retail locations in Russia that continue to perform well. Specific to the retail channel, fourth quarter retail sales increased 24% to $74 million. While retail locations were up 14% as we ended the quarter, with a total of 430 company owned retail locations, up from 378 last year at the end of last December, and up 20 locations from Q3 2011. This includes 180 full-price stores, 101 store-in-stores, 92 factory-direct stores or outlets, and 57 kiosks. Our percentage of revenue derived from our clog category fell from 55% to 48% in the quarter and from 54% to 48% for the year. This shift, combined with channel mix and pure price changes, increased average selling price in Q4 to $21.09, up $2.80, or 15%, compared to last year in the same period. Global footwear unit sales in the quarter were 9.2 million units, and 47.7 million units during the year. Our new product introductions globally represented about 31% of our Q4 unit sales. Gross profit for Q4 2011 was $100 million, up from $86 million in the fourth quarter of 2010. Gross margin was 49% in Q4 versus 48.2% in the prior year. For the year, gross margin was 53.6% compared to 53.5% in 2010. Fourth quarter 2011 SG&A increased 17% to $95 million, compared to $81 million in Q4 2010. As a percentage of sales, SG&A was 46.6%, up from 45.3%. The major of our SG&A increase was driven by operating additional retail locations in 2011. As a percentage of sales, SG&A for fiscal 2011 decreased 310 basis points to 40.2%. We invested $40 million in marketing for 2011, or about 4% of revenue, which compares to $44 million in fiscal year 2010 or about 5.5% of revenue. We plan on generally maintaining marketing spend as a percentage of revenue in 2012. Q4 operating profit was positively impacted by $1.6 million in FX gains from restatements of certain balance sheet items and timing of intercompany settlements. For the year 2011, we benefitted a total of $5.4 million from such currency gains. Moving to the bottom line, net income for Q4 2011 improved to $5.6 million, or $0.06 per diluted share on 90.9 million shares compared to $4.7 million, or $0.05 per share in the prior year. For the year, diluted earnings per share improved from $0.76 to $1.24, representing a 63% increase. Now turning to our balance sheet, we ended Q4 with a record $258 million in cash, a 77% improvement from 2010 levels of $146 million. We ended the quarter with inventory of $130 million, down $21 million from Q3 2011. On a year over year comparison, inventories increased 7%. Please keep in mind that about 91% of cash reported on our balance sheet is held in international locations and is subject to certain restrictions that constrain our ability to move cash back to the USA without tax expenses and payments. In 2011, total capital spending was $42 million, compared to depreciation and amortization expense of $37 million. Moving on to bookings, we ended the quarter with backlog of $307 million, which represents about a 19% growth rate over last year. The 19% increase is on top of a 57% increase from a year ago. Of the backlog, orders for Q1 deliveries are up about 18% to $190 million. Orders for Q2 deliveries are up about 21% to $117 million. ASPs in our backlogs are about $18.71 compared to about $16.50 last year. For the first quarter of 2012, we expect to generate revenues in the range of $263 million to $268 million, with EPS estimated in the $0.24 to $0.26 per share range. We expect gross margins to be consistent with last year and foresee an increase in our effective tax rate to 24%. Currency estimates used for the quarter are $1.32 US dollars to euro and 77 yen to the US dollar. Now I’ll turn the call back to John. Thank you very much.

[John McCarvel:]

Thanks Jeff. Our plan for growing the business remains consistent

[Operator:]

We’ll take our first question from Jeff Klinefelter with Piper Jaffray.

[Jeff Klinefelter:]

I want to ask a question and just get some more color around the bookings number, and the relationship between bookings and wholesale growth. You know, since there are a lot of questions on that this afternoon. Given, John, that you were up low 30s and now up 19, and just looking back at the relationship of bookings versus wholesale growth, could you provide a little bit more color on why the change in the last 90 days, from 30 to 19, how that is expected to translate to wholesale growth. And maybe also how that ties into the fact that you’re running inventory a lot tighter, up kind of single digits.

[John McCarvel:]

You know, when we reported at the end of Q3, just keep in mind that that does also include a backlog for Q4. When we look at the first half of the year, backlog is up overall about 20%, and on average we are seeing some weakness in the European market - that is, negative backlog growth year over year. However, this was offset by more than favorable growth to 25% in Asia and 32% in our Americas business. So when we look at this on aggregate, I think what we see is the downdraft of the current European situation kind of causing that number to be a little bit less than before.

[Jeff Klinefelter:]

Okay, just maybe a little bit further, John. I mean, watching the inventory levels and recognizing that they’re up only 7% at this point, and knowing that you’ve been working the last couple years on kind of migrating this more to a balanced pre-book versus in-season, is there something that we should read into that as well? Are we getting to sort of a point of normalization where there won’t be as much shifting forward to pre-book on a year over year comparable basis, and it will be more normalized going forward? Or said another way, will the bookings growth be more closely translating into actual wholesale good results than it would have been the last couple of years?

[John McCarvel:]

Yes. What I think Jeff tried to say in his comments earlier is when you’re comparing the backlog growth this year versus what was a shifting year in 2011, where we really saw pre-books and backlog becoming more industry standard, and I think you saw the bigger shift. What we believe now is that as we go into the first half of the year, there will be some at-once business and we will continue to be a little bit more at-once in the second quarter. But I think you’re going to see a much more predictive model to our business going forward.

[Jeff Klinefelter:]

Just to clarify, in the bookings split you said about 20% kind of on balance for the first half of the year. You said Americas up 32%, Asia up 25%? Is that correct?

[Jeff Lasher:]

Yes. What we say is, if you think about growth, 18% is growth for the first quarter, 21% in backlog on the second quarter.

[Jeff Klinefelter:]

But then splitting into the regions again. Europe is down pretty significantly if Americas is up 32%...

[Jeff Lasher:]

Well, what we said is Europe is down about 9%, just a little bit short of 9%. Americas was up 32%, and Asia was up 25%.

[Jeff Klinefelter:]

And then just a couple other things. One on the quarter, on the first quarter. You’re guiding to a 24% tax rate, higher than prior years. I would imagine that has a lot to do with the mix of Europe being lower versus the Americas. Also, did I hear that correctly, Jeff, that there’s a -you said $0.01 to $0.02 charge? So incremental SG&A hit, from the closing charges for the kiosks?

[Jeff Lasher:]

Yes Jeff. So, I think the key message here is on the tax rate. Our tax rate shifts throughout the year and as we go through time, as we make more money in certain taxing jurisdictions, our tax rate will go up, most notably in the US. Also, remember that last year we benefited in Q2 from the one-time tax income in Q2. That’s not effective in Q1. But to answer your specific tax question, yeah, we think it’s going to be about 24% in Q1 and range about 22-24% for the whole of 2012.

[Jeff Klinefelter:]

And maybe just lastly, two things, John. You said 15-20%. I think that was a comment and a reference to kind of medium-term annual top line growth. Is that correct? Is that kind of over the next few years that would be the average top line growth you’d expect?

[John McCarvel:]

That’s what we said. That’s correct.

[Jeff Klinefelter:]

And then lastly, on leverage, I think Jeff you’ve talked about this, and John, in the past. The expense leverage potential now that we have a color on your marketing dollars and what you’re attempting to do and planning to do there. What is sort of the leverage inherent in your model for both the retail side and the wholesale corporate side. What sort of passthrough should you get from your top line growth?

[Jeff Lasher:]

Thanks for asking, Jeff. I think when we look at it, we think that the leverage that we can get on the indirect SG&A runs about two-thirds of the growth rate of our revenue increase. On the retail side, just like any other retailer, SG&A goes up in correlation with our new stores and we do get some leverage off of the same-store sales we see in the marketplace. And that’s kind of how we think of the SG&A as we go into 2012.

[Operator:]

We’ll take the next question from Jim Chartier with Monness, Crespi, and Hardt. Please go ahead.

[Jim Chartier:]

The first question, on the first quarter guidance, Jeff, I think you said gross margins would be flat to last year?

[Jeff Lasher:]

Yeah, in general around flat to the gross margin line.

[Jim Chartier:]

Okay, so just kind of running through the model quickly, it looks like about 100 basis points of deleverage on SG&A on 17% or so sales growth in the first quarter?

[Jeff Lasher:]

So, like we said in the script, Jim, we will see some expenses associated with closing the kiosks. And that will be about $0.01 to $0.02 per share, and that has a downdraft impact on our EPS. And then also on the tax line, going up on a year over year basis, last year our first quarter tax rate was 23%, and this year we’re at 24%.

[Jim Chartier:]

Yeah, so even after accounting for those items, just in my model I’m looking at about 100 basis points of deleverage on SG&A. So I’m just wondering if there’s any other items in there that we should be thinking about.

[Jeff Lasher:]

Yeah, and Jim, it’s also important to remember that we’ve opened a lot of stores on a year over year basis, so our portfolio of stores is higher, and as you’ll see, hopefully, in the second quarter, as we look out, that leverage will be a little bit better as we have our seasonal high points in Q2.

[Jim Chartier:]

Okay, and then on Europe, I think on the last call you kind of talked about the actual end-user takeaways in Europe not being as bad as what the bookings indicated. Is that still the case? And if it is, would you be willing to maybe spec on a little bit of inventory thinking that the [unintelligible] could be a little bit better there?

[John McCarvel:]

Jim, I think yes, there’s going to be a little bit more inventory in channel for Europe given some of the indications that we see. With the weak fall/winter season for products there, we are seeing - because our deliveries in Europe hit 115, 215 into retailers. We are seeing more product hitting windows and display and retail stores a little bit earlier than what it has been in prior seasons. You know, we’ll just kind of wait and see what the weather situation turns out to be there in February and March. But yes, we are prepared to be a little bit more at-once this year with inventory than we had in previous years.

[Operator:]

[Operator instructions.] We’ll go next to Reed Anderson with Northland.

[Reed Anderson:]

Question on pricing. What is kind of baked into your thoughts right now in terms of either the first quarter or really the year in terms of ASPs. I think you said it was up 15% in the fourth quarter, and I’m just curious what that looks like over the near term.

[John McCarvel:]

You know, we haven’t really seen any kind of cost increases from our suppliers. In fact, in 2012 we expect to move between 10% and 14% of our production from China down to Vietnam with our same key, core suppliers. So we think our cost base is fairly stable, Reed, therefore our pricing has been fairly stable year over year. We do get a few products where we have increased price on, but generally from a pricing standpoint, we’re not seeing any need to increase prices for inflation 2012. Now, we haven’t made final pricing decisions on all of our products for fall/winter, some of which are only sold in our retail stores. We’ll make that final determination here in the next about two months. But most of the ASP growth that you’re seeing is coming from new products, higher priced products.

[Reed Anderson:]

Mix. And so would that to start to then probably normalize more as we get into the year?

[John McCarvel:]

We see a 13% increase in our ASP in our backlog, so that’s really kind of the leading indicator for you.

[Reed Anderson:]

Perfect. That’s great. Thank you. And then back to the margin question. Again, I think you said flattish. I was inferring that you meant kind of for the year as well. But are there meaningful puts and takes in there? It sounds like from John’s comment just a second ago that the cost side’s pretty stable. Is mix a bit of a headwind? Just any thoughts, if there are puts and takes to the margin expectation essentially being flat.

[Jeff Lasher:]

You know, I think, Reed, as we look at it and try to look out into the year, as John mentioned, we haven’t really seen any significant manufacturing increases. We’ve shifted some of our product into Vietnam. About 14% of our production in 2012 will come out of Vietnam. We continue to try to optimize our supply chain. So we’re working really hard to drive our gross margin and offset any increases that we would see from our higher content products. In addition, a 13% increase in ASP allows us to leverage our fixed supply chain cost. So we kind of look out into 2012 and feel like we’ve got a pretty good gameplan to address those cost increases that we have seen around in 2011 and try and drive cost reductions in 2012.

[Reed Anderson:]

I dropped on the call just a little bit late, but did you say what the impact of currency was in the fourth quarter?

[Jeff Lasher:]

So, Reed, we did say that for the quarter we saw benefit from FX on our balance sheet of about $1.6 million, and that’s from restatements of certain balance sheet items and timing of the intercompany settlements. As far as the updraft associated with currency, for the quarter it was relatively minor. Typically we do talk about that on these calls, but in the Q4 period, because of the weakness in the euro, and the relative strength in the yen on a year over year basis, it was basically a push.

[Reed Anderson:]

That makes sense. And then lastly, just on the store growth, you’ve got the new store prototypes now, and I’m sure that’s always an evolving process, but as you think about this big block of stores you’re going to open in ’12, are those going to evolve toward that? What are your thoughts on the format of a lot of these new stores you’re coming out with now?

[John McCarvel:]

It will be both, Reed. So I think we’ve built three stores. We’ve learned a lot about what we think works and what doesn’t work. It’s a much warmer - the merchandising in the stores is much more consumer-friendly. Some boxed products, some hung product. But there’s learning that, of course, always goes on when you launch a new format. So we’ll continue to refine that over 2012. So most of the new stores that come online in Q1 will have some elements that came out of the three new stores in Q4. We’ll have some elements of the new design, but I think you’ll see that evolve until we get to the end of 2012.

[Operator:]

We’ll go next to Scott Krasik with BB&T Capital Markets.

[Kelly:]

Hi, thank you. This is Kelly for Scott. Just wanted to talk a little bit more about Europe, and specifically in the wholesale piece. I know after a tough fall, just want to talk - how do we think about European wholesale in terms of the product penetration? Is it going to be something that you could see results now - once we get through this difficult time and start to see a turnaround in the back half of the year? Or is this going to be something that we’re going to have to wait and see retail stores open and really kind of win over your wholesale customers?

[John McCarvel:]

Well, you know, Kelly, I think we’ve had a fairly strong business in Europe for a period of time now. If you think about when we first opened - this is about our seventh year in operation, and in Europe last year we did $170 million. And we do expect overall growth in the European market this year, for 2012. It’s just how that comes about, what comes through the direct channel, what comes through wholesale. So when we talk about wholesale growth, I think most of the wholesale accounts are still a little bit unsure what Q1, what Q2 sales are going to look like. I think the earlier question that we had from Jim on inventory positioning is consistent with what a lot of other brands are being asked to do by major retailers in Europe. We are opening this year in the first quarter, Decathlon, in France, which has not been a retailer that we’ve been in in the kind of sporting goods arena. We’ve been primarily in department stores, in Printemps and Galeries Lafayette. And so we have a fairly good presence there. I think that there’s just a certain amount of reluctance by majors over the first half of the year. Because our brand isn’t as strong as some of the other brands in the back half of the year, more the fall/winter brands. I don’t know. We’re going to wait and see what the uptake is on what our new line of fall/winter products are for ’12. But I think for us, the retail stores did well in 2011, and we’ve taken the head of our retail group from the United States, and runs our global retail. She’s relocated to Europe in January and will spend the year working with them to develop our direct-to-consumer business. And I think we see a number of stores opening in the first quarter and the first half of the year in markets where we feel we just don’t have the distribution today, but we do have consumer demand. And we learned that in a lot of different ways from internet purchases and prior experience. So I think that’s kind of our feeling on the European market.

[Kelly:]

And just switching to more geographically speaking, it seems like you’re going to grow a lot in your existing markets. Can you talk about any opportunities with new markets in Europe?

[John McCarvel:]

I don’t know. Again, when you think about how long we’ve been there - you know, major markets that were once distributor markets still offer the largest area of growth for us. The UK, France, and Germany are still markets that have significant upside. I think the Southern European markets are a bit challenged right now, and so we think we’ll see what that’s going to look like over time. Eastern Bloc countries, Poland, a lot of the Balkan countries, is a market that’s been slowly and methodically growing, especially Balkan countries - a little bit warmer weather, a little bit more seasonal for us, where we’ve done better. And then this year we go back into a market that was very good for us three or four years ago, that was exited by our distributor partner, and that’s in Sweden. We opened up our first store in Stockholm here in the second quarter. And we also reenter Ireland, which was once a good market for us but again, had kind of a void created by the distributor exiting that market.

[Operator:]

Our next question comes from Sam Poser with Sterne Agee.

[Sam Poser:]

I was just wondering if you could - I don’t know if you did this already, because I got on late. Could you break out the backlog by quarter? You know, how Q1 looks versus Q2 and so on? And then can you give us some more details as to why you’re going to delever the SG&A in the quarter? And I’ve got one other question as well.

[Jeff Lasher:]

Okay Sam, I think in the script, just to answer your first question about bookings, we said that we ended the quarter with a backlog of $307 million. It represents about a 19% growth in that $190 million would be delivered in Q1. That’s up about 18% year over year. And $117 million would be delivered in Q2, and that’s up about 21% versus prior year. And I don’t know if you were on for the conversation that we had with Mr. Klinefelter, but we did talk about the geographic look at where those backlogs are coming from, and in general Europe is down about 9% on a year over year basis, Asia is up about 25%, and the Americas region is up 32%. Then, in a separate Q&A question we had later, someone asked about SG&A - the deleverage that we’re seeing - and in the prepared remarks we did talk about the impact of closing the kiosks and other retail portfolio shifts and changes throughout 2012 as we manage the 400 stores. We think that will provide a little bit of EPS downdraft in Q1, about $0.01 to $0.02 per share. And then as far as the leverage in the organization, going forward on the indirect SG&A line we think we can get about two-thirds of the revenue growth increase in SG&A, but then on the retail side we believe that our SG&A increases will be relatively in line with the retail store expansion on a year over year basis. In addition to that, we talked about in the Q1 impact of …

[Sam Poser:]

I can do this offline with you, because you already said it to everybody, and everybody’s probably bored out of their mind listening to what you already said. Is that fair?

[Jeff Lasher:]

Okay.

[Sam Poser:]

I had one other question though. With your smaller accounts, and so on, do you have any incremental allowances in place now for doubtful accounts? Does that affect anything? Or are you planning things differently, especially maybe with your smaller accounts in Europe given the weakness over there?

[Jeff Lasher:]

Nothing material on a year over year basis. We do talk about that in the K, which will be filed shortly as well. So there’s a lot of detail, but nothing material, Sam.

[Operator:]

And at this time we have no questions. I’ll turn the call back to management for any closing comments.

[John McCarvel:]

Thank you. You know, in closing, I’d like to reiterate a couple of items. We are really proud of the accomplishments within Crocs during the past year. I think achieving the $1 billion mark, in virtually seven years, $1.24 EPS, diversification of our product portfolio, to run a global development of a business across three channels, is not easy. Evolution and development of a world-class management team. I think these are significant accomplishments for any company, let alone one of seven years or 10 years old. And so I think we feel like we’re in a very good position entering the year, and hopefully the European market will move in the right direction for all of us. We look forward to 2012 and speaking to you all again on the April Q1 earnings call. Thank you for joining us today.