Crocs' Turnaround Starts to Take Shape

Footwear company Crocs (CROX -0.32%) reported its first-quarter results before the market opened on May 8. Revenue grew despite a headwind created by store closings, with solid wholesale and e-commerce sales offsetting a lower store count. The bottom line surged as well, with Crocs' multiyear cost-cutting effort knocking down expenses. Here's what investors need to know about Crocs' first-quarter report.

Crocs results: The raw numbers

Data source: Crocs.

What happened with Crocs this quarter?

• Revenue jumped by 0.7% year over year on a constant currency basis. This growth was despite the loss of about $12 million of sales due to fewer stores and business model changes.
• Wholesale revenue was up 6.5%, with an increase of 22.9% in Europe, 2.3% in the Americas, and 1.1% in the Asia-Pacific region.
• Retail revenue was down 3.7%, with a 3.3% dip in Europe, a 5.7% increase in the Americas, and an 18.2% decline in the Asia-Pacific region.
• Comparable retail store sales surged 7.6% globally, led by a 10.9% increase in the Americas. Comps grew by 4.7% in the Asia -Pacific region and declined by 2.6% in Europe.
• E-commerce sales climbed by 24.1%, with growth of 31.2% in Europe, 18.5% in the Americas, and 33% in the Asia-Pacific region.
• Gross margin was 49.4% during the quarter, down 50 basis points year over year. The entire decline was due to a change in inventory costing methodology that will have no impact on the full-year results.
• Selling, general, and administrative expenses were $114.0 million, down from $118.0 million in the first quarter of 2017.
• Crocs ended the quarter with 425 company-operating retail locations, down from 447 at the end of 2017.
• Crocs decided to close its manufacturing and distribution facilities in Mexico in order to improve profitability and simplify the business. Manufacturing has already stopped, and the distribution center will be closed by the end of the third quarter.

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

• Second-quarter revenue is expected between $315 million and $325 million, up from $313.2 million in the prior-year period.
• Gross margin is expected to slightly improve compared to the prior-year quarter's 54.2% rate.
• SG&A expenses are expected to be roughly flat year over year at $140.4 million, including about $5 million of charges related to the Mexico facility closings.
• Full-year revenue is forecast to grow by a low-single-digit percentage from 2017, with double-digit e-commerce growth and moderate wholesale growth offsetting lower retail revenue.
• Full-year gross margin is expected to be 70 to 100 basis points higher than in 2017. SG&A expenses of $485 million are expected, down from $499.9 million in 2017. This number includes $10 million related to the Mexico facility closings.

Image source: Crocs.http://media.corporate-ir.net/media_files/IROL/19/193409/src/crocs-logo.svg

What management had to say

During the earnings call, Crocs CEO Andrew Rees gave an update on the sandals business, one of the company's key growth drivers: "In the first quarter, sandals represented 26% of our footwear sales, up from 22% in last year's first quarter. And in total, our sandal revenues grew 21% in the quarter. This was on top of growing 26% in 2017; more evidence that sandals are a category where we can take share."

Rees also provided details on its ongoing cost reduction initiative: "We are in year two of our SG&A reduction plan, and are on track to deliver more than half of the $75 million to $85 million of annual expense reduction by the end of this year. We are also on track to deliver the full amount by 2019." He added, "A key component of our SG&A reduction plan is to reduce our retail fleet to under 400 stores. Since the end of 2016, we have lowered our store count from 558 to 425, including 22 store closures in the first quarter of this year."

Looking forward

Currency drove most of Crocs' revenue growth during the quarter, but solid wholesale and e-commerce results, as well as comparable-store sales growth, pushed the top line higher despite store closings. Second-quarter guidance paints a similar picture.

Crocs now expects to grow revenue in 2018, up from a previous outlook calling for roughly flat revenue. With most of the planned store closings now complete, that sales headwind won't persist for too much longer. With solid first-quarter results, Crocs' turnaround appears to be picking up steam.