Crocs' E-Commerce Efforts Are Paying Off

Footwear company Crocs (CROX +0.00%) reported its third-quarter results before the market opened on Nov. 7. Revenue slumped due to weak wholesale performance in Asia and retail store closings, but the e-commerce business partially offset those declines with double-digit growth. Crocs is closing stores, cutting costs, and focusing on its core products, and the results of those efforts are starting to show up in the bottom line. Here's what investors need to know about Crocs' third-quarter results.

Crocs results: The raw numbers

Data source: Crocs. EPS = earnings per share.

Image source: Crocs.

What happened with Crocs this quarter?

• Crocs produced third-quarter revenue above its guidance range of $230 million to $240 million. On a constant currency basis, revenue decreased by 1.6% year over year.
• Gross margin was 50.8%, up 100 basis points year over year. The company pointed to improved inventory management and a focus on the core molded product as the main drivers behind the increase.
• Wholesale revenue slumped 2.2% year over year to $106.8 million. A 10% decline in the Asia-Pacific region was partially offset by an 8.9% jump in Europe and a 0.6% rise in the Americas.
• Retail revenue slipped 7.2% year over year, with a 1.4% increase in the Americas more than offset by a 20.8% drop in the Asia-Pacific region and a 5.8% decrease in Europe.
• E-commerce sales rose 25.2% year over year, with 28.5% growth in the Americas, 17.8% growth in the Asia-Pacific region, and 26.2% growth in Europe.
• Crocs ended the quarter with 474 company-operated stores, down from 503 at the end of the second quarter and 558 at the end of 2016.
• Comparable retail sales rose 0.4% globally during the third quarter, excluding e-commerce.

Crocs provided the following guidance for the fourth quarter and the full year:

• Fourth-quarter revenue is expected between $180 million and $190 million, compared to $187 million during the fourth quarter of 2016.
• Fourth-quarter gross margin is expected to be around 43%, a 100-basis-point improvement year over year.
• The company expects to shave $3 million off its selling, general, and administrative spending in the fourth quarter compared to the prior-year period, driven by its cost reduction plan.
• Full-year revenue is expected to be down a low single-digit percentage, unchanged from previous guidance.
• Full-year gross margin is expected to be roughly 50%.
• Full-year selling, general, and administration expense is expected between $490 million and $495 million, which includes $10 million of charges related to the cost reduction plan. This compares to $503 million of spending in 2016.

What management had to say

Crocs CEO Andrew Rees expressed optimism about upcoming products during the conference call:

Looking ahead to Spring/Summer 2018, I am particularly excited about the introduction of LiteRide. This new collection is a fresh addition to our line bringing newness, innovation and a premium offering to clogs and sandals. The LiteRide collection uses a proprietary new material to create an extremely lightweight, highly cushioned footbed, while introducing simple modern styling. By incorporating innovative new technology and great new styling, the LiteRide collection helps us elevate the Crocs brand.

Rees also discussed progress revitalizing the company's image:

From a brand building and marketing perspective, we are also making measurable gains. We recently completed our annual brand survey. The results were terrific. We achieved double-digit gains in brand desirability, brand relevance and brand consideration demonstrating that our new product and marketing initiatives are resonating with consumers.

Looking forward

Crocs' e-commerce business accelerated during the third quarter, with 25.2% growth far faster than the 14.5% growth reported during the second quarter. Comparable retail sales were also up slightly, although store closings pushed overall retail sales lower.

These developments, along with the cost-cutting effort, show that the company is moving in the right direction. When, or whether, these steps will ultimately return Crocs to growth and profitability remains to be seen.