Earnings Call: Q1 2014

May 1, 2014

Welcome to the Crocs First Quarter 2014 Earnings Conference Call. I would like to remind everyone that this conference is being recorded. It is my pleasure to turn the conference over to William Kent, Senior Director of Investor Relations. Mr. Kent, please go ahead. Thank you, Dawn, and thank you all for joining us today for our Q1 2014 earnings conference call. Yesterday evening, we announced our Q1 20 14 financial results. A copy of the press release can be found on our website at crocs.com. We would like to remind everyone that some information provided in this call will be forward looking and accordingly are subject to Safe Harbor provisions of the federal securities law. These statements include, but are not limited to, statements regarding future revenue and earnings, backlog and future orders, prospects and product pipeline. We caution you that these statements are subject to a number of risks and uncertainties described in the Risk Factors section of the company's 2013 report on Form 10 ks filed on February 25, 2014 with the Securities and Exchange Commission. Accordingly, all actual results could differ materially from those described in this call. Those listening to the call are advised to refer to Crocs' Annual Report on Form 10 ks as well as other documents filed with the SEC for additional discussion of these risk factors. Crocs is not obligated to update these forward looking statements to reflect the impact of future events. The company may refer to certain non GAAP metrics on this call, including operating income, tax expense, net income and EPS. Explanation of these metrics can be found on the earnings release filed today yesterday. I'll now turn the call over to Jeff Lascher. Good morning and thank you for joining us today to review the Q1 2014 financial results of Crocs Incorporated. I will go over the Q1 financial results of operations, the transition of the earnings per share calculations and projections for Q2 2014 revenue. In total, 1st quarter revenues increased $800,000 or 0.2 percent to $312,400,000 compared with 2013. Despite unfavorable exchange rates between the Russian ruble and Japanese yen, year over year revenues grew in both the European and Asia Pacific regions in our Q1. We continue to face macroeconomic challenges in our Japan segment including the recent change to the consumption tanks, lower purchasing power of the yen and lackluster consumer sentiment. The decline of the Japanese yen and Russian ruble adversely impacted year over year March quarter revenues by almost $4,000,000 and operating income by approximately $1,000,000 In addition, we continue to see challenges in our Americas wholesale channel as accounts remain lean on inventory. Despite the timing of the Easter holiday and difficult retail markets in certain areas around the globe, we experienced a $6,100,000 or 8.6 percent increase in retail channel revenues on a constant currency basis. This was primarily driven by the addition of 76 global retail locations net of store closures, offset partially by 1.5% decrease in comparable store sales compared to prior year. Internet sales for the quarter were down 3% from prior year. With regards to products, the Q1 revenue growth was predominantly driven by a global average selling price increase of 2.5%, primarily driven by new product introductions and the mix shift from clogs to non clog styles such as men's loafers and women's wedges. Unit volume decreased 2% to just under 15,000,000 pairs. As we continue to diversify our product line with new footwear lines such as the Stretch Slow and Busy Day and carryover products such as the Horace and Ailey wedge, we are experiencing a reduction in clog sales as a percentage of revenues. During the 3 months ended March 31, 2014 clog sales represented approximately 42% of sales as compared with 47% in 2013. This decrease in clog sales and higher percentage of loafers and other non fully molded casual footwear styles contributed to lower margins. As a result, gross profit decreased $9,600,000 or 5.8 percent to $156,200,000 Gross margin decreased 320 basis points to 50%. The decline in gross margin is primarily driven by the evolution of our product assortment and the impacts of product mix, currency and slightly higher production cost. As we expand our product lines, product mix shifts into styles that may utilize more labor and more expensive materials such as textile fabric and leather compared to the traditional clog. These styles carry lower margins on a percentage basis. Selling, general and administrative expenses increased $11,000,000 or 8.7 percent to $139,400,000 compared to 20.13. These expenses continued to rise as a result of global retail expansion, which will require corrective action going forward. In addition, we experienced several charges including restructuring charges as a result of transition activities, additional operating expenses related to our ERP implementation, charges related to ongoing litigation and a liability for certain store closures in Europe. We expect future corrective to result in additional restructuring charges as we start executing on a profitable revenue growth strategy. Expenses not associated with direct to consumer activities increased a nominal 1% over last year, primarily from increased market activity. Operating income on a GAAP basis was $16,800,000 in the quarter. Excluding cash expense of $7,100,000 primarily related to restructuring, ERP implementation and certain legal contingency accruals and non cash charges of approximately $1,100,000 primarily related to store closures and accelerated depreciation, non GAAP operating income was $25,000,000 For the quarter, we incurred income taxes of $5,400,000 which equates to an effective tax rate of 37%. This higher than expected tax rate in the quarter is directly attributable to the charges I just highlighted. Excluding such items, the effective tax rate was 24% on a non GAAP basis in the Q1. Earnings per share in the quarter were $0.06 on a GAAP basis and $0.14 on a non GAAP fully diluted basis. On a year over year comparable basis excluding the overall impact of the preferred share issuance in January, non GAAP EPS is 0 point year. It is important to understand the pieces that make up the GAAP EPS calculation, including the impact of the Blackstone preferred stock investment. Please refer to the non GAAP included in our press release for further details. GAAP net income for the quarter was $9,000,000 Dividends and dividend equivalents of $2,800,000 related to Series A preferred stock issued to Blackstone were deducted from this amount, leaving GAAP net income for common shareholders of $6,400,000 An additional $900,000 or 13.5 percent was deducted from the $6,400,000 as undistributed earnings related to the preferred stock. This is based on the 2 class method, leaving $5,500,000 for common shareholders and for EPS calculations. Weighted average shares used in the EPS calculation was 89,500,000 shares, once again based on the 2 class method. Finally, we repurchased just under 1,000,000 shares at an average price of $15 for an aggregate price of approximately $13,000,000 excluding related commission charges. Under our publicly announced $350,000,000 repurchase plan, the company repurchased approximately another 300,000 shares in April and will continue to be patient, methodical and opportunistic in the execution of this in the execution of this buyback plan. We ended the quarter with $412,000,000 of cash on the balance sheet. While our inventories and accounts receivable were slightly higher than Q4, the increase is in line with operating activities in prior year patterns as much of our deliveries occurred in the latter part of the quarter. Following the closing of the Blackstone investment and the announcement of the retirement of our President and CEO, we have identified key areas of focus for the business going forward. We are entering a time of transition as we focus on our strategy on enhancing returns for shareholders and becoming the leading brand in casual lifestyle footwear. We believe the investment by Blackstone conveys a strong financial commitment in our brand together with our strong balance sheet that will enhance our long term growth strategy and shareholder returns. We have implemented several strategic initiatives that we believe will drive more profitable revenue growth, while improving the operational and technological efficiency of the business. In 2014, as we intend to increase focus on profitability and retail excellence, we may moderate the pace of our investments in new retail stores as well as consolidate some existing locations. We will provide this in more detail as we move forward during the year. In the Q1, we accelerated 2 store closures in Europe. We ended the quarter with 6 23 stores, up 4 from the end of 2013. This includes the 34th Street flagship store in New York City, which opened in the quarter. We remain in the testing and development phase of our ERP system implementation. We went live with SAP in Australia on April 1 without significant issues. A successful global ERP system implementation is our top short term operational priority. As previously referenced, we expect to undergo some strategic transitioning during the next year to refine our strategic and long our short term and long term growth strategies, which will include prioritizing earnings growth and our focus on becoming a leading brand in casual lifestyle footwear. Entering the 2nd quarter, our backlog was up approximately $57,000,000 to just over 350,000,000 dollars We expect GAAP revenue of approximately $370,000,000 to $375,000,000 in the Q2 of 2014, driven by strong contributions from Asia and Europe. However, we expect that our Japan business will be impacted by the increase in consumer taxes and we believe the Americas region likely will be flat in the Q2 as South America continues to suffer from economic and distribution challenges. Currency rates assumed in our projections are $1.38 to the euro and $102 to the dollar. Overall, the organization is focused on delivering shareholder value through our focus on casual lifestyle footwear sales and balancing long term global growth with improving operating margin. Lastly, we also announced that our Chairman, Tom Smack will serve as will also serve as Interim Chief Executive Officer until such time as the Board appoints a permanent President and or Chief Executive Officer. The company will make an announcement when the search is successfully concluded. We hope to provide some additional updates in the very near term. This ends our prepared remarks and our Q1 call. Thank you all for attending. Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.