Exceeded All Guidance Metrics; GAAP EPS Increased 120% from First Quarter 2018
Share Buyback Authorization Increased by $500 Million 2019 Guidance Reaffirmed
Crocs, Inc.a world leader in innovative casual footwear for men, women, and children, today announced its first quarter 2019 financial results.
Andrew Rees, President and Chief Executive Officer, said, “2019 is off to a great start. Revenues exceeded expectations as demand for our product and excitement around the brand continued to yield accelerated sell-throughs. We were particularly pleased with the exceptional direct to consumer performance successfully comping an earlier Easter last year. We have now delivered five consecutive quarters of double-digit DTC comp growth. I am more confident than ever in the strength of our brand and our future. As a reflection of our optimism, our Board of Directors has increased our share buyback authorization by $500 million.”
First Quarter 2019 Operating Results:
- Revenues were $295.9 million, growing 4.5% over the first quarter of 2018, or 9.0% on a constant currency basis. Store closures and business model changes reduced our revenues by approximately $6 million. Wholesale revenues grew 5.2%, e-commerce revenues grew 16.5%, and retail comparable store sales grew 8.7%.
- Gross margin was 46.5%, compared to our guidance of 45.5%, a decrease of 290 basis points from 49.4% in last year’s first quarter. Non-recurring expenditures related to the relocation of our Americas distribution center reduced gross margin by 40 basis points, resulting in an adjusted gross margin of 46.9%, 250 basis points below last year’s first quarter. Factors impacting our adjusted gross margin were currency, freight, and distribution center costs. Currency moves negatively impacted results by 140 basis points. For a reconciliation of gross margin to adjusted gross margin, see the ‘Non-GAAP cost of sales and gross margin reconciliation’ schedule below.
- Selling, general and administrative expenses (“SG&A”) were $105.0 million, down from $114.0 million in the first quarter of 2018, with improvements stemming from the Company’s SG&A reduction program and the movement of some marketing expenses into the second quarter. SG&A improved 470 basis points and represented 35.5% of revenues compared to our guidance of 37% to 38% and 40.2% in the first quarter of 2018. Excluding $0.7 million of non-recurring charges, adjusted SG&A improved by 410 basis points to 35.3% of revenues compared to 39.4% in last year’s first quarter, as detailed on the ‘Non-GAAP selling, general and administrative expenses reconciliation’ schedule below.
- Income from operations rose 25.7% to $32.6 million from $25.9 million in the first quarter of 2018. Excluding non-recurring gross margin and SG&A charges, adjusted income from operations rose 21.5% to $34.5 million. Our adjusted operating margin was 11.7%, up from 10.0% in the first quarter of 2018, as detailed on the ‘Non-GAAP income from operations and operating margin reconciliation’ schedule below.
- Net income was $24.7 million, up from $12.5 million in the first quarter of 2018. After adjusting for non-recurring gross margin and SG&A charges incurred in the first quarter of 2019 and 2018 respectively, and for the first quarter 2018 pro forma adjustments related to previously outstanding Series A Preferred Stock, adjusted net income was $26.7 million and $17.5 million in the first quarters of 2019 and 2018, respectively, as detailed on the ‘Non-GAAP earnings per share reconciliation’ schedule below.
- Diluted net income per common share was $0.33 for the first quarter of 2019, up from $0.15 in the first quarter of 2018. After adjusting for non-recurring charges relating to gross margin, SG&A, and the pro forma adjustments for Series A Preferred Stock, adjusted diluted net income per common share was $0.36 compared to $0.23 in the first quarter of 2018, as detailed on the ‘Non-GAAP earnings per share reconciliation’ schedule below.
Balance Sheet and Cash Flow Highlights:
- Cash and cash equivalents were $86.3 million as of March 31, 2019, compared to $102.0 million as of March 31, 2018. During the first quarter of 2019, the Company repurchased 2.1 million shares of its common stock, as detailed below.
- Inventory decreased 6.1% to $139.2 million as of March 31, 2019 compared to $148.2 million as of March 31, 2018.
- Capital expenditures during the first quarter of 2019 were $10.6 million compared to $1.7 million during the same period in 2018. The increase primarily reflects expenditures on the planned relocation of the Company’s Americas distribution center from California to Ohio.
- At March 31, 2019, there were $215.0 million in borrowings outstanding on the Company’s credit facility. During the first quarter of 2019, borrowing capacity on that facility was increased from $250 to $300 million.
Share Repurchase Activity; Increase in Share Buyback Authorization:
During the first quarter of 2019, the Company repurchased approximately 2.1 million shares of its common stock for $53.5 million, at an average price of $25.07 per share. As of March 31, 2019, approximately $102 million of the Company’s $500 million share repurchase authorization remained available for future share repurchases.
The Board of Directors recently approved an increase of $500 million to the existing $500 million share repurchase program. This leaves the Company with approximately $600 million available for future share repurchases. This program does not obligate the Company to acquire any stated amount of common stock, and may be suspended at any time at the Company’s discretion.
Full Year 2019: With respect to 2019, the Company continues to expect:
- Revenues to be up 5% to 7% over 2018 revenues of $1,088.2 million. The Company now anticipates 2019 revenues will be negatively impacted by approximately $25 million of currency changes and approximately $20 million resulting from store closures.
- Gross margin of approximately 49.5% compared to 51.5% in 2018. The projected decline reflects our expectations relating to (i) non-recurring charges associated with the Company’s new distribution center, which we anticipate will reduce gross margin by approximately 100 basis points in 2019, (ii) reduced purchasing power associated with the strengthening of the U.S. Dollar, and (iii) higher freight and distribution costs.
- SG&A to be approximately 41% of revenues. This includes non-recurring charges of $3 to $5 million related to various cost reduction initiatives. In 2018, SG&A was 45.7% of revenues and included $21.1 million of non-recurring charges.
- An operating margin of approximately 8.5% including non-recurring charges associated with our new distribution center and SG&A cost reduction initiatives. Excluding those non-recurring charges, we expect to achieve our interim target of a low double digit operating margin.
- Capital expenditures to be approximately $65 million, compared to $12.0 million in 2018. The new distribution center will account for approximately $35 million of the total. The remainder relates to information technology and infrastructure projects, some of which were deferred from 2018, along with routine capital expenditures.
Second Quarter 2019: With respect to the second quarter of 2019, the Company expects:
- Revenues to be between $350 and $360 million compared to $328.0 million in the second quarter of 2018. The Company anticipates revenues will be positively impacted by the Easter shift, but negatively impacted by approximately $6 million due to store closures and $10 million due to the stronger U.S. Dollar as compared to last year. This guidance reflects constrained levels of Classic clogs as a result of surging demand; however, inventories are expected to be restored to appropriate levels by the end of the quarter.
- Gross margin to be approximately 51% compared to 55.3% in the second quarter of 2018. This decline reflects (i) non-recurring charges relating to the new distribution center, which are expected to reduce gross margin by approximately 120 basis points, (ii) a negative impact from the stronger U.S. Dollar of approximately 150 basis points, which we expect to have a disproportionately negative impact on the first and second quarters of 2019, and (iii) a negative impact of approximately 160 basis points from higher freight and distribution costs in the Americas.
- SG&A to be approximately 40% of revenues. This includes non-recurring charges of approximately $2 million related to various cost reduction initiatives. In the second quarter of 2018, SG&A was 44.0% of revenues and included $8.4 million of non-recurring charges.
Impact of New Lease Accounting Rules
On January 1, 2019, we adopted new GAAP lease accounting rules which resulted in a significant increase in our reported assets and liabilities associated with our leases. The recognition of rent expense and payments associated with these lease assets and liabilities will not result in material differences to operating income or cash flows compared to the previous accounting rules. The adoption of the new accounting rules will not impact our credit facility covenants.