Boosted by double-digit growth in e-commerce, Crocs' results for the second quarter exceeded its own guidance and financial analysts' projections. They led to an improved forecast for the full financial year, with the management predicting adjusted Ebitda of $95 million and low single-digit growth in sales to at least $1,023.5 million.
Meanwhile, the company announced that it began to close down in June its 25-year-old Italian factory, EXO Italia, which it acquired in 2006. The company will thus become a completely outsourced operation on the manufacturing side. In its ongoing efforts to simplify the business and improve profitability, Crocs closed its manufacturing facilities in Mexico in May. Its Mexican distribution center is expected to shut down before the end of the third quarter.
Reaching a level of $328 million in the quarter, the company's revenues rose by 4.7 percent from the year-ago period, growing by 2.3 percent on a constant-currency basis. Crocs' operating profit rose by 25.8 percent to $37.1 million in the quarter, and its net earnings jumped by 57.8 percent to $34.4 million, exceeding Wall Street's expectations.
The growth was achieved despite charges of approximately $22 million due to operating fewer stores and changes in the business model. Last year, after booking a loss of $31.7 million in 2016, the management announced that it would close its subsidiary in Taiwan and shut down 160 stores globally by the end of 2018.
During the latest quarter, Crocs closed a net quantity of 27 stores, leaving 398 company-operated stores. The emphasis in retailing has shifted to full-price stores, which now make up only one-third of the fleet, to outlet stores, which represent more than half of the total store count. The balance consists of kiosks and shop-in-shops.
In Crocs' retail segment, comparable store sales rose by 7.1 percent in the second quarter, representing the fourth consecutive quarter of same-store growth. However, global retail sales were down by 8.0 percent in absolute terms to $99.5 million, as the company operated 105 fewer stores as compared to the end of the first quarter of 2017.
In constant currencies, retail sales in the Americas improved by 1.7 percent, while they decreased by 9.1 percent in Europe and by 25.0 percent in the Asia-Pacific region. On the other hand, on a comparable store basis, currency-neutral retail sales went up by 7.5 percent in the Americas, by 16.4 percent in Europe and by 2.9 percent in Asia-Pacific.
In contrast with the declining revenues from Crocs' own remaining stores, e-commerce saw sales rocket by 23.8 percent to $63.9 million, with currency-neutral increases of 17.2 percent in the Americas, 18.4 percent in Europe and 23.2 percent in Asia-Pacific. Combining retail and e-commerce, direct-to-consumer (DTC) sales went up by 10.4 percent in the Americas, by 18.0 percent in Europe and by 11.6 percent in Asia-Pacific.
The management noted that the focus is shifting heavily toward marketing, as Crocs looks to more efficiently acquire new customers and grow brand share. Marketing efforts include the company's “Come As You Are” campaign, which features the actress Drew Barrymore. The campaign has helped Crocs accelerate the company's digital footprint and attract more PR coverage, the management said.
In the wholesale segment, the company's revenues went up by 7.2 percent to $164.6 million. In local currencies, Europe saw sales jump by 12.3 percent at the wholesale level. In the Americas, they declined by 1.0 percent, but improved by 0.5 percent in Asia-Pacific.
In terms of product, the management said it prioritized molded footwear, particularly clog and sandal silhouettes, introducing more creativity in clogs and adding new sandal styles. During the second quarter, the company sold 17.8 million pairs of shoes, an increase of 2.4 percent over last year's second quarter. The average selling price increased by 2.2 percent to $18.05.
The clogs category - which grew by 11.4 percent - made up the largest portion of the company's revenues in the quarter, with its share rising to 52 percent from 48.8 percent in last year's second quarter. Sales of Classic and Crocband clogs increased, driven by consumer demand for traditional colors along with new seasonal colors, graphics and on-trend embellishments.
Sandals represented 26.2 percent of Crocs' footwear sales, up by 3 percentage points from last year's second quarter. Overall, sandal revenues grew by 17.9 percent. Standouts for the quarter included the Swiftwater sports sandal and two women's models, Capri and Sanrah.
Regionally speaking, Europe fared well, with revenues going up by 17.6 percent in reported dollars to $61.5 million, reflecting the increasing popularity of the brand, better execution and great summer weather. Currency rates had a positive impact of $3.1 million.
Wholesale revenues in the region benefited from high demand for core products, such as the LiteRide, and stronger results with European e-tail partners. On a comparable store basis, retail sales rose by 16.4 percent in local currencies in Europe. The strong growth of the e-commerce business in the region was partly due to reduced promotional activities and higher traffic driven to the site by more effective marketing.
Overall, Crocs' gross margin for the quarter improved by 1.1 percentage points to 55.3 percent, which the company attributed to the shift to molded products and to a more disciplined promotional cadence in its DTC channels. For the full year, it is expected to further improve by between 0.7 and 1 percentage point from last year's level of 50.5 percent.
The management announced that its chief financial officer, Carrie Teffner, will resign next April to “pursue strategic board and advisory work,” after three years in that position. Her successor is Anne Mehlman, who will assume the role of executive vice president and CFO effective Aug. 24. She joins the team from Zappos.com, where she was CFO, confirming the brand's new, more digital orientation.