Crocs, Inc. hit reverse Tuesday, saying it will trim its product line, close stores, cut back on direct investment overseas and focus on efficiency. The latest restructuring plan coincided with release of the company’s financial results for the second quarter ended June 30, 2014.
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The company’s strategic plans comprise four key initiatives, including: (1) streamlining the global product and marketing portfolio, (2) reducing direct investment in smaller geographic markets, (3) creating a more efficient organizational structure including reducing duplicative and excess overhead which will also enhance the decision making process, and (4) closing or converting approximately 75 to 100 Crocs branded retail stores around the world. The company expects cost savings associated with the reduction in force of $4.0 million in 2014 and $10.0 million in 2015. Further, the company expects store closings will reduce revenue by approximately $35.0 to $50.0 million and reduce SG&A expense by approximately $17.0 to $25.0 million with an insignificant impact on future operating income.
Second quarter financial highlights:
GAAP revenue increased 3.6 percent in the second quarter of 2014 to $376.9 million. On a constant currency basis, revenue increased 3.5 percent in the second quarter of 2014. Shares repurchased in the quarter were 2.3 million, bringing the year-to-date repurchases to 3.2 million shares. GAAP net income per common share was $0.19, and excluding certain charges, the company reported a non-GAAP net income per common share of $0.36.
"Crocs' performance in the second quarter demonstrates the underlying potential of our global brand and business and the need for dynamic change in our strategy, organization and approach to the market," said Crocs President Andrew Rees. "Overall, revenue was in line with our expectations, and we have set a course for meaningful change going forward."
Strategic Performance Improvement Initiatives Underway
The company undertook a comprehensive strategic review of the business and its operations globally and identified four key areas of opportunity in the business.
First, Crocs intends to focus on its core molded footwear heritage, as well as develop innovative casual footwear platforms. The company will streamline the product portfolio, eliminate non-core product development and will explore strategic alternatives for non-core brands. This more centralized product line control will also result in (i) a reduction of the SKU proliferation that has occurred over the past few years, (ii) a simplified and efficient supply chain and (iii) a reduction in overall product line costs and inventory levels.
Further, the company intends to drive cohesive global brand positioning from region to region and year to year to create a clearer and consistent product portfolio and message, resulting in a more powerful consumer connection to the brand. This strategy will be accomplished through developing powerful product stories supported with effective, consistent and clear marketing. Finally, the company will increase working marketing spend, defined as funds that put marketing messages in front of consumers, by about 50 percent, funded primarily from a reduction of marketing overhead.
Second, the company will refine its business model around the world, prioritizing direct investment in larger-scale geographies to focus the company's resources on the biggest opportunities, moving away from direct investment in the retail and wholesale businesses in smaller markets and transferring significant commercial responsibilities to distributors and third-party agents. These re-alignments are already underway in Brazil, Taiwan and other markets around the globe. Further the company intends to expand engagement with leading wholesale accounts in select markets to drive sales growth, optimize product placement and enhance brand reputation.
Third, Crocs has reorganized key business functions to improve efficiency, having eliminated 183 global positions of which the majority took place today, reducing structural complexity, size and cost. The company expects cost savings associated with the reduction in force of $4.0 million in 2014 and $10.0 million in 2015. In addition, Crocs will open a Global Commercial Center in the Boston area in late 2014, housing key merchandising, marketing and retail functions. The Boston location was chosen in order to attract experienced senior footwear and retail management talent. The Global Commercial Center in Boston will join the Product Creation and Global Shared Services Center in Niwot, Colo., the cornerstone of support for Crocs' global business. The company will strengthen Regional Commercial Centers in the Netherlands, Singapore and Japan with responsibility for managing Crocs' global business.
Fourth, Crocs will rationalize under-performing business units, in order to re-align its cost-structure and place greater focus on assets and operations with higher profit potential. This action will enable the company to gain greater strategic and economic leverage from its direct-to-consumer assets, including owned retail and e-commerce stores. The company intends to close or convert approximately 75 to 100 company-owned retail locations around the world, with 18 stores already closed or converted to partner stores in the second quarter of 2014. The company is also focused on various initiatives to improve four-wall retail store performance, such as merchandising, inventory planning, as well as the benefits from the above-mentioned product and marketing actions, to drive same-store sales growth over time. The impact of these closures and conversions is expected to reduce annual revenue by approximately $35.0 to $50.0 million and reduce SG&A expense by approximately $17.0 to $25.0 million, with an insignificant impact on future operating income. Crocs also will consolidate global company-operated e-commerce sites from 21 to 11.
"We have identified the key strategic and structural improvements that we expect will allow the company to achieve its potential," Rees said. "We have a clear, well-defined strategy for addressing these issues and improving performance. Work is underway already to drive significant change throughout our company in four key areas. Our objective is to create a more efficient organization that can sustain profitable growth in a multi-channel global business model.
"We look forward to the opening of our new Global Commercial Center in Boston late this year," Rees continued. "We anticipate 50 to 75 employees to be located there over time, some of whom may relocate from Niwot. We remain committed to Colorado, and our existing offices here will house our Product Creation and Global Shared Services Center. Regional Commercial Centers in the Netherlands, Singapore and Japan will increasingly focus on our retail, wholesale and partner activities.
"Our clearer strategic focus will simplify our work flow, allowing us to develop and execute more powerful and cohesive global brand stories," Rees added. "By clearly defining our core products, it will allow us to focus our growth initiatives around products where we are competitively well positioned for success while exiting less profitable products and business lines, thereby maximizing our profit growth potential."
"This is an exciting time of transition for Crocs," Rees said. "Our near-term focus is controlling costs and re-organizing for better operating margins, which will prepare us for future revenue growth from our core products and markets. The actions that we are announcing today are expected to result in the return to industry leading operating margins of more than 12 percent over time. We expect that 2015 revenue will be impacted by store closures before revenue growth resumes in 2016 and beyond.
"We are confident we have the right plan for driving performance improvements at Crocs, with critical implementation steps already underway," Rees added. "We will continue to move quickly to build a world-class leadership and commercial team globally while implementing our transformation plan. Crocs is a powerful global lifestyle brand with strong potential. I am excited to work with our team to realize that potential and create improved returns for our shareholders."
"The business performance improvement plans announced by the company today represent the next stage of a Crocs transformation which began with Blackstone's investment late last year," said Thomas J. Smach, chairman of the board of directors. "The board has confidence in the plan and the leadership team, and we look forward to realizing the tangible positive impacts on our business in order to increase shareholder value."
Smach added that the company's search for a permanent chief executive officer continues to progress and updates will be provided as appropriate. Second quarter operating results
In the second quarter of 2014, the company reported GAAP operating income of $41.9 million compared with $50.4 million in the second quarter of 2013.
The company had GAAP net income attributable to common stockholders of $19.5 million compared with net income of $35.4 million in the prior year period.
The company recorded $16.8 million in non-GAAP charges (of which $7.3 million were non-cash charges). The company also recorded $3.0 million of dividends in the second quarter of 2014.
"Our second quarter 2014 financial results were driven by a number of factors, most significantly strength in our Europe business coupled with a renewed focus on profitability above revenue growth," said Jeff Lasher, Crocs chief financial officer. "Our direct-to-consumer business experienced strength in Europe; however, our Asia Pacific business was weaker than expected due to China and Korea comparable store performance. Our Americas business on a comparable store basis exhibited continued weakness due primarily to the company's highly promotional stance in the prior year period. That said, excluding certain charges our non-GAAP operating income exceeded last year's level."
Balance sheet
Cash and cash equivalents at June 30, 2014 were $409.0 million, an increase of 28.9 percent compared with December 31, 2013. This increase is primarily attributable to the sale of preferred stock in January of 2014 and also reflects the impact of the company's purchase of approximately $50.0 million of common stock during the year under the company's stock repurchase plan which is detailed below. Inventories increased 18.1 percent during the second quarter of 2014 to $191.6 million compared with inventory at December 31, 2013.
Margins
Gross profit for the second quarter of 2014 increased 0.8% to $202.6 million, or 53.7 percent as a percentage of sales, compared with $200.9 million, or 55.2 percent as a percentage of sales in the prior year period. The year-over-year decrease in gross margin was primarily related to increased shipping costs globally offset by a decrease in promotional and clearance activity. SG&A expenses were $160.7 million compared with $150.4 million a year ago. This increase is primarily attributable to restructuring costs, retail store impairments and the company's enterprise resource planning ("ERP") project. As a percentage of sales, SG&A increased to 42.6 percent compared with 41.4 percent in the second quarter of 2013. The impact of the restructuring expenses, retail store impairments and the ERP expense contributed approximately 300 basis points to SG&A expense as a percentage of sales in the quarter.
