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Crocs (NASDAQ:CROX)

Q4 2013 Earnings Call

February 20, 2014 8:30 am ET

Executives

William Kent

John P. McCarvel - Former Chief Executive Officer, President, Director and Chairman of Information Technology Steering Committee

Jeffrey J. Lasher - Chief Financial Officer, Principal Accounting Officer and Senior Vice President of Finance

Operator

Welcome to the Crocs Fourth Quarter and Year End 2013 Earnings Conference Call. [Operator Instructions] 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.

William Kent

Thank you, and thank you, all, for joining us today for our fourth quarter and year end 2013 earnings conference call. Earlier this morning, we announced our fourth quarter and year end 2013 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 the 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 2012 report on Form 10-K filed on February 26, 2013, with the Securities and Exchange Commission. Accordingly, all 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 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 gross profit, SG&A, tax expense and net income. Explanation of these metrics can be found on the earnings release filed earlier today.

I will now turn the call over to John McCarvel.

John P. McCarvel

Thanks, Will. Thank you for joining us this morning on the fourth quarter earnings call. With me today on the call is Jeff Lasher, Crocs' Chief Financial Officer. I'll begin the call today with commentary on the fourth quarter and the full year, followed by Jeff, who will review the financial results in more detail.

Earlier today, we announced our fourth quarter and full year financial results. As stated in the press release, 2014 will be a significant transitionary period for the company. While the CEO search for my successor is going on, the work at the company has not subsided. I'm still fully engaged with the business and Blackstone is actively involved already, adding significant value in many aspects of our business. Together, we are working with the reconstituted board to refine our short-term and long-term strategic plans, which has started by undertaking a full strategic and operational review in order to maximize our long-term shareholder value.

Our aim will be a sharper focus on earnings growth with less emphasis on top line growth. Looking forward, we will focus on improving financial performance, particularly in the Americas and in the Japan regions, as well as enhancing our global retail execution.

As we increasingly focus on profitable growth and retail excellence, we have moderated the pace of our investments in new retail stores, as well as consolidating some of our existing locations. While the company will remain focused on creating long-term value for our shareholders, given the transition that the company will be going through, we will not be providing earnings guidance in 2014, and we will not have a Q&A session as we believe our press release and prepared statements will be sufficient.

I would now like to share with you at a high-level overview our results for the fourth quarter and full year for 2013. Despite ongoing macroeconomic changes around the globe and challenges that we face in certain segments, we delivered record revenues and footwear unit sales. Our full year revenues increased to a record $1,196,000,000, a 9% increase on a constant currency basis, and footwear unit sales in 2013 increased 9% over 2012 to a record 54.3 million pairs sold. Our Q4 revenue increased on a constant currency basis by 4% compared with the fourth quarter in 2012.

Our global retail comp store sales were down 4% in the fourth quarter and down 3% for the full year. All of our comp store sales results are reported in constant currency.

Our Internet sales in the quarter were up 10% and wholesale revenues for the quarter were up 4%.

I'll now turn the call over to Jeff to go through financial information in more detail.

Jeffrey J. Lasher

Thank you, John. Several nonrecurring, unusual or infrequent items were included in our results. Excluding these items, our fourth quarter loss was $0.20 per share, in line with our expectations. As John mentioned, our revenue was up 4% on a constant currency basis and 9% for the full year. Gross margin decreased year-over-year by 180 basis points to 52.3%. The decline in gross margin is primarily driven by rising product costs, the evolution of our changing product assortment and the continual impact of unfavorable currency trends.

In the full year of 2013, selling, general and administrative expenses increased $89 million, or 19%, to $549 million compared with the full year 2012. As we will detail later, about $20 million of this increase was associated with the nonrecurring, unusual or infrequent items in Q4. Excluding these items, SG&A increased 16% in 2013.

Our global retail presence has increased our full year SG&A expenses by $40 million. We had increased marketing spend of $7 million and $3 million of additional spend in product development efforts globally.

In addition to these ongoing items, we also had expenses such as the $6 million resolution of the statutory audit in Brazil and operating expenses related to our ERP implementation of $9 million. Excluding nonrecurring, unusual or infrequent items, our non-GAAP gross profit for the year was up $15 million. Non-GAAP SG&A expenses were $72 million higher and our non-GAAP tax expense was $3 million lower than 2012 levels. As a result, non-GAAP net income decreased $56 million in 2013 compared to 2012.

A total of about $20 million of nonrecurring, unusual or infrequent SG&A expenses and asset impairment charges were recorded in the quarter including: retail asset impairments of $11 million for 59 stores, of which 35 are in Europe and 22 are in Americas; expenses in accelerated depreciation associated with our new ERP system of $2 million; contingency accruals and other changes of $7 million related to certain legal matters. In cost of goods sold, we had $3 million of nonrecurring charges associated with the impairment of obsolete inventory, primarily related to accessories in children's. [ph]

Finally, a total of $27 million for certain unusual tax-related items impacted the quarter and were associated with our repatriation efforts in valuation allowances for deferred tax assets in the United States. Excluding unusual items, we think our normalized tax rate will be approximately 30% going forward.

To review the Blackstone investment for just a moment, the preferred shares were issued at the end of January. We will have a 6% cash payment dividend starting in April. This dividend will be recorded in shareholders' equity. Our share count has been impacted by the issuance of these preferred shares and on a pro forma basis, including the preferred shares we issued to Blackstone, we have about 103 million shares outstanding, which will impact our EPS in 2014.

The shares outstanding will decline throughout the year as we plan to repurchase up to $350 million of shares, which at today's price would reduce our share count to about 80 million shares. We will be patient, methodical and opportunistic in the execution of this buyback plan.

Global cash ended the quarter at $317 million. And while the quarter had charges of $50 million in the quarter, these did not significantly impact cash levels as approximately $46 million of these charges were for noncash items.

Inventory at the end of the year was slightly lower than 2012 levels as we tightly managed unit inventory in the flow of product.

Turning to regional results. In the quarter, we saw solid growth in wholesale volume in Europe and Asia, as well as increased revenue in Europe's direct-to-consumer channels. Our Asia segment remains the key component of the business and a fundamental driver of our growth strategy as all revenue channels experienced double-digit growth within the region. The year-over-year increase in wholesale revenue was primarily due to the expansion of wholesale doors, partner stores in the region and the continued support from our existing customers.

Growth in retail revenue for the quarter and full year was primarily due to our focus on and the expansion of the retail channel.

Asia comparable store sales for the quarter increased 5% and 7% for the full year. Our Europe segment experienced significant improvement in 2013 compared to the prior year as we obtained growth in all 3 revenue channels. Revenue in the Europe region increased 46% in the quarter and increased 28% for the full year. Full year revenues increased primarily due to a 42% increase in footwear unit sales, driven by wholesale doors expansion and market recovery. The traditional clog continues to generate the majority of footwear sales in Europe, making up approximately 70% of total footwear unit sales during the year. However, the company did experience unit improvements in other footwear models during the year, including boots and flip-flops.

Europe comparable store sales for the quarter increased 1% and for the full year, they were up 2%.

Our retail store count increase contributed to an overall retail segment growth, but also positively impacted our overall market presence in Europe.

Our Japan segment was impacted by the decrease in value of the Japanese yen relative to the U.S. dollar. Based on this decline, our year-over-year revenues in our Japan segment decreased $30 million and this adversely impacted our consolidated gross margins and operating income. On a constant currency basis, revenue increased 2% in the quarter and was flat for the full year, driven by unit growth in the market.

During the quarter and for the full year, the decrease in wholesale revenue was mainly due to a soft wholesale market and slow sell-through of inventory. Retail revenue for the quarter decreased 15% and 5% for the full year as comparable store sales for the quarter decreased 10% and 15% for the full year.

Specific challenges in our Americas segment included our wholesale accounts remaining lean on inventory, resulting in a revenue decrease of 4% in the quarter on a constant currency basis. Further, our retail channel in the Americas was impacted by the less-than-stellar holiday season and continued economic pressure on our core consumer. This region's results were also impacted by economic and market conditions in Latin America as our revenue was constrained because of import restrictions, currency devaluation and lower market demand. In addition, the company ceased the partnership with its Chile distributor and stopped importing product into Argentina. We expect these present items to have a $10 million annual impact on revenue.

During the fourth quarter, we opened 20 net retail locations globally. 54% of these were in Asia.

On a constant currency basis, our direct-to-consumer channels sales grew 11%, primarily through the addition of 82 global retail locations net of store closures, partially offset by a decrease in global comparable store sales of 3%.

Despite conservative at-once ordering and inventory levels from our wholesale partners, for the year, we experienced a 7% increase in wholesale revenue on a constant currency basis, driven by efforts in Europe. As we look out into 2014, we believe our Spring/Summer product line will expand our regions' new product categories and segments. Our new Stretch Sole product, for example, expands our already successful loafer business. The women's Busy Day product expands our casual women's shoe products and carryover products such as the Huarache and A-Leigh wedge lines are proving more successful in their second seasons.

For the first quarter of 2014, we expect revenues to be $305 million to $315 million globally, reflecting the shift in the Easter holiday, weather patterns and the timing of wholesale orders.

I will now turn the call back to John for some closing comments.

John P. McCarvel

Thank you, Jeff. As you know, I've announced my plans to retire and step down from the Crocs board as of the end of April.

Since its inception in 2002, Crocs has sold more than 300 million pairs of shoes in more than 90 countries. Our brand is a global leader in casual, lifestyle footwear dedicated to bringing color, comfort, fun and innovation to the world's feet. Our product line today is broader and deeper than ever before, and consumer demand continues to grow around the world as our most recent results have shown.

I believe our best days are ahead, and I'm proud to have been part of the team responsible for building such a powerful, enduring brand and business in such a short period of time. I am proud of this global management team and all of our global Crocs colleagues that have created this global omni-channel business and have turned this company around in the past 4 years.

I'd also like to take this opportunity to say thank you to all of our valued wholesale partners and our many trusted long-term suppliers. I also wanted to thank our loyal shareholders for their ongoing support. It's been an honor to work with all of you, and I look forward to watching Crocs continue to grow, evolve and prosper in the years to come.

With that, operator, I'll turn the call back to you.

Operator

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.

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