Margins Improve as Crocs Bets on Clogs and Sandals

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Footwear company Crocs (NASDAQ: CROX) reported its fourth-quarter results before the market opened on Feb. 28. Both the top and bottom lines improved in the seasonally weak quarter, despite aggressive store closings. The company expects a lower store count to prevent revenue from growing this year, but both gross margin and operating expenses are set to improve. Here's what investors need to know about Crocs' fourth-quarter results.

Crocs results: The raw numbers

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Metric

Q4 2017

Q4 2016

Year-Over-Year Change

Revenue

$199.1 million

$187.4 million

6.2%

GAAP net income

($28.3 million)

($44.5 million)

N/A

GAAP EPS

($0.41)

($0.60)

N/A

What happened with Crocs this quarter?

  • Crocs managed to grow revenue despite losing about $14 million in sales due to fewer stores. On a constant currency basis, revenue was up 3.8% year over year.
  • Gross margin was 45.4%, up 340 basis points compared with the fourth quarter of 2016. Prioritizing high-margin molded products, improving go-to-market capabilities, better managing of promotions, and favorable currency rates were responsible for the increase.
  • Selling, general, and administrative expenses were $120.7 million, up from $118.5 million in the prior-year period. As a percentage of revenue, SG&A expenses decreased by 260 basis points year over year.
  • Wholesale revenue rose 15.5% year over year, with a 29.1% increase in the Americas and a 9.9% increase in the Asia-Pacific region offsetting a 4.4% decline in Europe.
  • Retail revenue dropped 6.3% year over year, with a steep 23.1% decline in the Asia-Pacific region overwhelming small increases elsewhere. Comparable retail store sales rose 3.7% globally, with a strong 7% increase in the Americas.
  • E-commerce sales rose 11.6% year over year, with a 36.1% increase in Europe and a 13% increase in the Americas offsetting a 1.4% decline in the Asia-Pacific region. This growth is not as strong as the 25.2% increase Crocs reported in the third quarter.
  • Crocs ended the quarter with 447 company-operated stores, down from 558 at the end of 2016 and 474 at the end of the third quarter of 2017.

Crocs provided the following guidance for the first quarter and 2018:

  • First-quarter revenue is expected between $265 million and $275 million, compared with $267.9 million in the prior-year period.
  • First-quarter gross margin is expected to be 49%, down from 49.9% in the first quarter off 2017. A change in inventory costing methodology will be responsible for this decline.
  • Full-year revenue is expected to be relatively flat compared with 2017. Revenue will be negatively impacted by business model changes and store closures to the tune of $60 million.
  • Full-year gross margin is expected to rise between 70 and 100 basis points compared with 2017, and SG&A expenses are expected to decline by about $25 million to $475 million.

What management had to say

During the conference call, Crocs CEO Andrew Rees discussed the company's plans to downsize its retail operation:

Rees also pointed to strong growth in sandal sales: "We are continuing to grow our sandal business. Sandal revenues increased 44% in the fourth quarter and represented 15% of our total footwear sales, up from 11% in 2016's fourth quarter."

Looking forward

While Crocs' top line will be hit by store closings this year, leading to flat revenue in 2018, the company is making meaningful progress boosting its margins. Not only is gross margin improving, which is the result of shifting toward higher-margin products, but the company's cost-cutting initiatives are also starting to take hold.

Crocs' turnaround won't be a success until the company can return to revenue growth. But with wholesale, e-commerce, and comparable retail sales growing in the fourth quarter, the company is well on its way.

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Timothy Green has no position in any of the stocks mentioned. The Motley Fool recommends Crocs. The Motley Fool has a disclosure policy.