What to Look for When Crocs Reports Earnings

By Markets Fool.com

Image Source: Crocs.

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Footwear company Crocs (NASDAQ: CROX) is set to report its second-quarter results before the market opens on Wednesday. Crocs has been engaged in a turnaround effort for the past couple of years, and while the first quarter showed signs of improvement, the company will need to keep the momentum going.

Crocs expects to report second-quarter revenue between $340 million and $350 million, roughly flat year over year at the midpoint. Crocs grew revenue by 6.5% during the first quarter, or by 9.2% on a constant-currency basis, but favorable timing of some wholesale shipments boosted the company's first-quarter numbers and will negatively impact the second-quarter results. During the first half of the year, Crocs expects to grow revenue by a mid-single-digit percentage year over year.

Crocs' turnaround effort has been a slog, with the company posting a revenue decline in 2015 along with a net loss, the second in a row. Improvements were apparent in the first quarter, though, with CEO Gregg Ribatt highlighting five key areas where the company was moving forward.

  • Growth in the Americas was strong, with revenue growing by 19.5% year over year on a constant-currency basis. All channels, including wholesale, e-commerce, and retail, experienced growth, with the strong results more than counteracting weakness in Europe. The Americas accounted for about 44% of the company's revenue during the first quarter.
  • Direct-to-consumer comparable sales grew in all of Crocs' regions. E-commerce sales grew by a double-digit percentage in all regions, with total e-commerce sales jumping 34.3% year over year on a constant-currency basis. Comparable retail sales also grew in all regions, with the company posting 3.1% global comparable-store sales growth. That compares to a 5.3% decline during the first quarter of 2015.
  • Operating expenses were down in absolute terms and as a percentage of revenue. SG&A costs declined by 8.8% year over year during the first quarter. As a percentage of revenue, SG&A costs declined to 41.2%, down from 48% during the prior-year period.
  • Supply chain execution and on-time delivery performance improved substantially.
  • Inventory management was improved, with inventory growing by less than 1% year over year compared to 6.5% revenue growth.

Crocs will need to continue to show progress in all of these areas during the second quarter. The company has been reducing its retail footprint over the past couple of years, a process that has contributed to its poor results. With that effort now largely over, the company can focus on improving sales in its remaining stores while continuing to grow out its e-commerce business. E-commerce represented just 8.2% of total revenue during the first quarter.

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Crocs has so far succeeded in streamlining its business and right-sizing its retail footprint. The company has returned to revenue growth, and it's producing profits once again. There's still plenty of work to do: Gross margin is still well below levels from just a few years ago, and certain regions like China are still causing problems. But the numbers are moving in the right direction. The second quarter will be another chance for the company to prove to investors that its turnaround is taking shape.

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Timothy Green has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Crocs. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.