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CROX > SEC Filings for CROX > Form 10-Q on 30-Oct-2012All Recent SEC Filings

Show all filings for CROCS, INC.

Form 10-Q for CROCS, INC.


30-Oct-2012

Quarterly Report


ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. This Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations" contains forward-looking statements. In addition, we may make other written and oral communications from time to time that contain such statements. Forward-looking statements include statements as to industry trends and our future expectations and other matters that do not relate strictly to historical facts and are based on certain assumptions of our management. These statements are often identified by the use of words such as "may," "will," "expect," "believe," "anticipate," "intend," "could," "estimate," or "continue," and similar expressions or variations. These statements are based on the beliefs and assumptions of our management based on information currently available to us. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. Important factors that could cause actual results to differ materially from the forward-looking statements include, among others, the risks described in the section entitled "Risk Factors" under Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2011 and subsequent filings with the Securities and Exchange Commission. We caution the reader to carefully consider such factors. Furthermore, such forward-looking statements speak only as of the date of this report. We undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

Business Overview

We are a designer, manufacturer, distributor, worldwide marketer and brand manager of footwear, apparel and accessories for men, women and children. We strive to be the global leader in molded footwear design and development. We design, manufacture and sell a broad product offering that provides new and exciting molded footwear products that feature comfort, fun, color and functionality. Our products include footwear and accessories that utilize our proprietary closed cell-resin, called Croslite. Our Croslite material is unique in that it enables us to produce an innovative, lightweight, non-marking, and odor-resistant shoe.

Since the initial introduction and popularity of our Beach and Crocs Classic designs, we have expanded our Croslite products to include a variety of new styles and products and have extended our product reach through the acquisition of brand platforms such as Jibbitz, LLC ("Jibbitz") and Ocean Minded, Inc. ("Ocean Minded"). We intend to continue to expand the breadth of our footwear product lines, bringing a unique and original perspective to the consumer in styles that may be unexpected from Crocs. In part, we believe this will help us to continue to build a stable year-round business as we move towards becoming a four-season brand.

We currently sell our Crocs-branded products globally through domestic and international retailers and distributors. We also sell our products directly to consumers through our webstores, company-operated retail stores, outlets and kiosks. The broad appeal of our footwear has allowed us to market our products to a wide range of distribution channels, including department stores and traditional footwear retailers as well as a variety of specialty and independent retail channels.

As a global company, we have significant revenues and costs denominated in currencies other than the U. S. dollar. Sales in international markets in foreign currencies are expected to continue to represent a substantial portion of our revenues. Likewise, we expect our subsidiaries with functional currencies other than the U.S. dollar will continue to represent a substantial portion of our overall gross margin and related expenses. Accordingly, changes in foreign currency exchange rates could materially affect revenues and costs or the comparability of revenues and costs from period to period as a result of translating our financial statements into our reporting currency.

Financial Highlights

During the three months ended September 30, 2012, revenues increased $20.7 million to $295.6 million, net income increased $14.9 million to $45.1 million and diluted earnings per share increased $0.16 to $0.49 compared to the same period in 2011. During the nine months ended September 30, 2012, revenues increased $101.1 million to $898.3 million, net income increased $27.7 million to $135.0 million and diluted earnings per share increased $0.30 to $1.48 compared to the same period in 2011.

Despite current macroeconomic conditions, we were able to generate strong increases in both revenue and diluted earnings per share period over period. The increase in revenues for the three months ended September 30, 2012 compared to the same period in 2011 were driven by increased sales in all three channels of business. On a percentage basis, sales growth was driven by a 17.7% increase in retail revenue coupled with a 6.0% increase in internet revenue and a 1.5% increase in wholesale revenue.


Table of Contents

Results of Operations

Comparison of the Three Months Ended September 30, 2012 and 2011




                                                         Three Months Ended
                                                            September 30,                          Change
($ thousands, except per share data)                   2012              2011                $                 %
Revenues                                            $   295,569       $   274,897       $    20,672               7.5 %
Cost of sales                                           134,826           127,722             7,104               5.6

Gross profit                                            160,743           147,175            13,568               9.2
Selling, general and administrative expenses            120,729           111,672             9,057               8.1
Asset impairment                                             -                495              (495 )          (100.0 )

Income from operations                                   40,014            35,008             5,006              14.3
Foreign currency transaction (gains) losses, net             21            (2,358 )           2,379            (100.9 )
Other (income) expense, net                                 (80 )             335              (415 )          (123.9 )
Interest expense                                            377               204               173              84.8

Income before income taxes                               39,696            36,827             2,869               7.8
Income tax expense (benefit)                             (5,384 )           6,620           (12,004 )          (181.3 )

Net income                                          $    45,080       $    30,207       $    14,873              49.2 %

Net income per common share:
Basic                                               $      0.50       $      0.34       $      0.16              47.1 %

Diluted                                             $      0.49       $      0.33       $      0.16              48.5 %

Gross Margin                                               54.4 %            53.5 %             0.9 %             1.7 %
Operating Margin                                           13.5 %            12.7 %             0.8 %             6.3 %
Footwear unit sales                                      12,420            11,715               705               6.0 %
Average footwear selling price                      $     22.77       $     22.18       $      0.59               2.7 %

Total Revenues by Channel




                            Three Months Ended
                               September 30,                            Change
  ($ thousands)           2012              2011                 $                  %
  Channel revenues:
  Wholesale:
  Americas            $      56,445     $      55,430      $       1,015                1.8 %
  Asia                       76,976            71,286              5,690                8.0
  Europe                     22,667            27,343             (4,676 )            (17.1 )
  Other businesses              161               (80 )              241             (301.3 )

  Total Wholesale           156,249           153,979              2,270                1.5
  Consumer-direct:
  Retail
  Americas                   58,798            52,407              6,391               12.2
  Asia                       41,826            36,245              5,581               15.4
  Europe                     11,550             6,649              4,901               73.7

  Total Retail              112,174            95,301             16,873               17.7
  Internet
  Americas                   16,705            15,010              1,695               11.3
  Asia                        4,893             3,654              1,239               33.9
  Europe                      5,548             6,953             (1,405 )            (20.2 )

  Total Internet             27,146            25,617              1,529                6.0

  Total Revenues      $     295,569     $     274,897      $      20,672                7.5 %


Table of Contents

Revenues. During the three months ended September 30, 2012, revenues increased $20.7 million, or 7.5%, compared to the same period in 2011, due to an increase of 2.7% in average footwear selling price and an increase of 0.7 million, or 6%, in footwear unit sales.

During the three months ended September 30, 2012, revenues from our wholesale channel grew by $2.3 million, or 1.5%, compared to the same period in 2011, which was primarily driven by continued strong demand in both the Americas and Asia operating segments. Revenues from our retail channel grew by $16.9 million, or 17.7%, compared to the same period in 2011, due to a net increase of 89 global company-operated retail locations and growth in comparable store revenues (defined below) of 1.0%. We continue to close certain kiosks and open more branded stores where we can better merchandise the full breadth and depth of our product line. Revenues from our internet channel grew by $1.5 million, or 6.0%, compared to the same period in 2011, primarily as a result of increased brand awareness in the Americas.

The table below sets forth information about the number of company-operated retail locations as of September 30, 2012 and 2011 and comparable store sales growth for the three months ended September 30, 2012 compared to the same period in 2011.

                                                                                                                                    Comparable
                                                                September 30,            September 30,                              store sales
Company-operated retail locations by operating segment:             2012                     2011                Change             growth (1)
Americas                                                                   189                      195               (6 )                   5.5 %
Asia                                                                       233                      182               51                    (6.3 )
Europe                                                                      77                       33               44                     0.9

Total company-operated retail locations                                    499                      410               89                     1.0 %

(1) Comparable store status is determined on a monthly basis. Comparable store sales begin in the thirteenth month of a store's operation. Stores in which selling square footage has changed more than 15% as a result of a remodel, expansion or reduction are excluded until the thirteenth month in which they have comparable prior year sales. Temporarily closed stores are excluded from the comparable store sales calculation during the month of closure. Location closures in excess of three months are excluded until the thirteenth month post re-opening. Comparable store sales growth is calculated on a currency neutral basis using historical annual average currency rates.

                                              September 30,       September 30,
Company-operated retail locations by type:        2012                2011            Change
Retail stores                                            245                 167           78
Outlet stores                                            121                  84           37
Store in Store                                            99                  92            7
Kiosk                                                     34                  67          (33 )

Total company-operated retail locations                  499                 410           89

Impact on Revenues due to Foreign Exchange Rate Fluctuations. Changes in average foreign currency exchange rates used to translate revenues from our functional currencies to our reporting currency, the U.S. dollar, during the three months ended September 30, 2012 decreased revenues by $8.2 million as compared to the same period in 2011.

Gross profit. During the three months ended September 30, 2012, gross profit increased $13.6 million, or 9.2%, compared to the same period in 2011 and gross margin increased to 54.4%. These increases are primarily attributable to an increase of 2.7% in our global average footwear selling price and increased volume, which was partially offset by higher cost of sales driven by product mix.

Impact on Gross Profit due to Foreign Exchange Rate Fluctuations. Changes in average foreign currency exchange rates used to translate revenues and cost of sales from our functional currencies to our reporting currency during the three months ended September 30, 2012 decreased our gross profit by $3.2 million compared to the same period in 2011.

Selling, general and administrative expenses. Selling, general and administrative expense ("SG&A") increased $9.1 million, or 8.1%, during the three months ended September 30, 2012 compared to the same period in 2011. This increase was primarily due to increases of $6.0 million in rent and building costs resulting from continued growth in the number of company-operated retail stores, $2.7 million in other expenses including increases in depreciation and amortization expenses, and $1.7 million in salaries and related costs resulting from higher global headcount. As a percentage of revenues, SG&A increased to 40.8% from 40.6% during the three months ended September 30, 2012 compared to the same period 2011.

Impact on SG&A due to Foreign Exchange Rate Fluctuations. Changes in average foreign currency exchange rates used to translate SG&A from our functional currencies to our reporting currency during the three months ended September 30, 2012 decreased SG&A by approximately $2.3 million as compared to the same period in 2011.


Table of Contents

Foreign currency transaction (gains)losses. The line item entitled Foreign currency transaction (gains) losses is comprised of foreign currency gains and losses from the re-measurement and settlement of monetary assets and liabilities denominated in non-functional currencies and the impact of certain foreign currency derivative instruments. There was an insignificant loss on foreign currency during the three months ended September 30, 2012 compared to $2.4 million of gains during the same period in 2011.

Income tax benefit. During the three months ended September 30, 2012, income tax decreased $12.0 million compared to the same period in 2011, which was primarily due to a reversal of certain tax provisions and the release of certain valuation allowances associated with deferred tax assets. Our effective tax rate for the three months ended September 30, 2012 differs from the federal U.S. statutory rate primarily because of differences between income tax rates between U.S. and foreign jurisdictions. Our effective tax rate for the three months ended September 30, 2012 was 31.6% lower than the rate for the quarter ended September 30, 2011 primarily due to a reversal of certain tax provisions and the release of certain valuation allowances associated with deferred tax assets.


Table of Contents

Comparison of the Nine Months Ended September 30, 2012 and 2011




                                                          Nine Months Ended
                                                            September 30,                          Change
($ thousands, except per share data)                   2012              2011                $                 %
Revenues                                            $   898,309       $   797,189       $   101,120              12.7 %
Cost of sales                                           396,682           360,591            36,091              10.0

Gross profit                                            501,627           436,598            65,029              14.9
Selling, general and administrative expenses            349,737           309,769            39,968              12.9
Asset impairment                                            819               527               292              55.4

Income from operations                                  151,071           126,302            24,769              19.6
Foreign currency transaction (gains) losses, net          2,670            (4,560 )           7,230            (158.6 )
Other (income) expense, net                              (1,747 )             636            (2,383 )          (374.7 )
Interest expense                                            556               632               (76 )           (12.0 )

Income before income taxes                              149,592           129,594            19,998              15.4
Income tax expense                                       14,642            22,377            (7,735 )           (34.6 )

Net income                                          $   134,950       $   107,217       $    27,733              25.9 %

Net income per common share:
Basic                                               $      1.50       $      1.21       $      0.29              23.8 %

Diluted                                             $      1.48       $      1.18       $      0.30              25.5 %

Gross Margin                                               55.8 %            54.8 %             1.0 %             1.8 %
Operating Margin                                           16.8 %            15.8 %             1.0 %             6.3 %
Footwear unit sales                                      40,126            38,494             1,632               4.2 %
Average footwear selling price                      $     21.45       $     19.79       $      1.66               8.4 %

Total Revenues by Channel




                             Nine Months Ended
                               September 30,                           Change
  ($ thousands)           2012              2011                $                  %
  Channel revenues:
  Wholesale:
  Americas            $     187,870     $     172,853     $      15,017                8.7 %
  Asia                      249,491           211,734            37,757               17.8
  Europe                     97,773           109,606           (11,833 )            (10.8 )
  Other businesses              333               103               230              223.3

  Total Wholesale           535,467           494,296            41,171                8.3
  Consumer-direct:
  Retail
  Americas                  149,296           131,404            17,892               13.6
  Asia                      110,766            85,301            25,465               29.9
  Europe                     25,158            15,832             9,326               58.9

  Total Retail              285,220           232,537            52,683               22.7
  Internet
  Americas                   46,700            40,196             6,504               16.2
  Asia                       12,319             8,672             3,647               42.1
  Europe                     18,603            21,488            (2,885 )            (13.4 )

  Total Internet             77,622            70,356             7,266               10.3

  Total Revenues      $     898,309     $     797,189     $     101,120               12.7 %

Revenues. During the nine months ended September 30, 2012, revenues increased $101.1 million, or 12.7%, compared to the same period in 2011, due to an increase of 8.4% in average footwear selling price and an increase of 1.6 million, or 4.2%, in footwear unit sales.


Table of Contents

During the nine months ended September 30, 2012, revenues from our wholesale channel grew by $41.2 million, or 8.3%, compared to the same period in 2011, which was primarily driven by continued strong demand in both the Americas and Asia operating segments. Revenues from our retail channel grew by $52.7 million, or 22.7%, compared to the same period in 2011, due to a net increase of 89 global retail locations and growth in comparable store revenues of 3.1%. We continue to close certain kiosks and open more branded stores where we can better merchandise the full breadth and depth of our product line. Revenues from our internet channel grew by $7.3 million, or 10.3%, compared to the same period in 2011, as a result of increased brand awareness in the Americas.

The table below sets forth information about the number of company-operated retail locations as of September 30, 2012 and 2011 and comparable store sales growth for the nine months ended September 30, 2012 compared to the same period in 2011.

                                                                                                                                    Comparable
                                                                September 30,            September 30,                              store sales
Company-operated retail locations by operating segment:             2012                     2011                Change               growth
Americas                                                                   189                      195               (6 )                   3.7 %
Asia                                                                       233                      182               51                     1.2
Europe                                                                      77                       33               44                     7.5

Total company-operated retail locations                                    499                      410               89                     3.1 %

Impact on Revenues due to Foreign Exchange Rate Fluctuations. Changes in average foreign currency exchange rates used to translate revenues from our functional currencies to our reporting currency, the U.S. dollar, during the nine months ended September 30, 2012 decreased revenues $21.9 million as compared to the same period in 2011.

Gross profit. During the nine months ended September 30, 2012, gross profit increased $65.0 million, or 14.9%, compared to the same period in 2011 and gross margin increased to 55.8%. These increases are primarily attributable to an increase of 8.4% in our global average footwear selling price and an increase of 4.2% in global footwear unit sales which were partially offset by higher cost of sales driven by product mix and increased volume.

Impact on Gross Profit due to Foreign Exchange Rate Fluctuations. Changes in average foreign currency exchange rates used to translate revenues and cost of sales from our functional currencies to our reporting currency during the nine months ended September 30, 2012 decreased our gross profit by $7.7 million compared to the same period in 2011.

Selling, general and administrative expenses. Selling, general and administrative expense increased $40.0 million, or 12.9%, during the nine months ended September 30, 2012 compared to the same period in 2011. This increase was primarily due to increases of $16.2 million in rent and building costs resulting from continued growth in the number of company-operated retail stores, $12.4 million in salaries and related costs resulting from higher global headcount, and $8.3 million in other expenses including increases in depreciation and amortization expenses. As a percentage of revenues, SG&A was 38.9% the same for the nine months ended September 30, 2012 and 2011.

Impact on SG&A due to Foreign Exchange Rate Fluctuations. Changes in average foreign currency exchange rates used to translate SG&A from our functional currencies to our reporting currency during the nine months ended September 30, 2012 decreased SG&A by approximately $5.5 million as compared to the same period in 2011.

Foreign currency transaction (gains)losses. The line item entitled Foreign currency transaction (gains) losses is comprised of foreign currency gains and losses from the re-measurement and settlement of monetary assets and liabilities denominated in non-functional currencies and the impact of certain foreign currency derivative instruments. Foreign currency transactions were in a loss position of $2.7 million during the nine months ended September 30, 2012 compared to $4.6 million of gains for the same period in 2011, primarily due to the re-measurement of monetary assets and liabilities in certain non-functional currencies, net of related undesignated forward instruments, as the U.S. dollar strengthened against those currencies.

Income tax expense. During the nine months ended September 30, 2012, income tax expense decreased $7.8 million compared to the same period in 2011, which was primarily due to a reversal of certain tax provisions and the release of certain valuation allowances associated with deferred tax assets. Our effective tax rate for the nine months ended September 30, 2012 differs from the federal U.S. statutory rate primarily because of differences between income tax rates between U.S. and foreign jurisdictions. Our effective tax rate for the nine months ended September 30, 2012 was 7.5% lower than the rate for the quarter ended September 30, 2011 primarily due to a reversal of certain tax provisions and the release of certain valuation allowances associated with deferred tax assets.

Presentation of Reportable Operating Segments

We have three reportable operating segments: Americas, Europe and Asia. We also have an Other businesses category which aggregates insignificant operating segments that do not meet the reportable threshold and represent manufacturing operations located in Mexico and Italy. The composition of our reportable operating segments is consistent with that used by our chief operating decision maker ("CODM") to evaluate performance and allocate resources. Each of our reportable operating segments derives its revenues


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