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CROX > SEC Filings for CROX > Form 10-Q on 29-Apr-2013All Recent SEC Filings

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Form 10-Q for CROCS, INC.


29-Apr-2013

Quarterly Report


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

Special Note Regarding 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. 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, 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," "strive," "will," "expect," "believe," "anticipate," "intend," "could," "estimate," or "continue," and similar expressions or variations. Further, these statements are based on the beliefs and assumptions of our management based on information currently available. 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, without limitation, 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, 2012 and subsequent filings with the Securities and Exchange Commission. We caution the reader to carefully consider such factors. Moreover, 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 innovative casual lifestyle 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 and 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. 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 company-operated retail stores, outlets, kiosks and webstores,. 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

Our business continues to experience positive results primarily from higher sales volumes and higher average shoe prices. Results for the first quarter of 2013 reflect increases in both consolidated revenues and earnings driven by balanced international growth, operational efficiency, and customer focus. The Asia Pacific segment of our business was a key component of our success during the quarter. While weather did impact consumers in North America and Europe, and Europe also dealt with ongoing macro-economic issues, we did see early signs of recovery in Japan.

The following are the more significant developments in our businesses during the three months ended March 31, 2013:

Revenues increased $39.9 million, or 14.7%, from the same period in 2012 to $311.7 million in 2013. Revenue growth was driven by increased sales volume and focused improvements on average footwear selling prices with new product styles as we continue to transform Crocs brand awareness into an all-season footwear brand. In addition, the Company recorded its highest monthly sales total ever in March 2013, generating over $157.0 million in revenue, which was led by record wholesale numbers.


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Gross profit increased $21.1 million, or 14.5%, from the same period in 2012 to $165.8 million in 2013. Gross margin percentage decreased slightly by 10 basis points compared to the same period last year as we begin to offset higher average selling prices and footwear unit sales with higher product input costs through the expansion of our product line, which utilize more expensive material such as textile fabric and leather. We continue to push the industry standard in gross margins through operational efficiency and continued focus on product design and innovation. Partially offsetting this decrease in gross margin were positive impacts on gross margin through higher average pricing and footwear units sales across the globe, decreased discounting on close-out sales through our wholesale and direct-to-consumer channels and increased supply chain and manufacturing efficiency resulting in decreased expenses related to fulfillment, freight and duties as well as direct labor and overhead costs.

Selling, general, and administrative expenses increased $23.9 million, or 22.9%, from the same period in 2012 to $128.2 million in 2013, which consisted of $68.7 million in indirect expenses and $59.5 million in direct expenses. Selling, general, and administrative expenses continue and will continue to increase as we increase global headcount, retain and reward our current employees, increase our global retail presence and make strategic purchases to improve the operational efficiency of the Company.

Net income increased $0.6 million, or 2.2% from the same period in 2012 to $29.0 million in 2013 driving our basic and diluted earnings per share from $0.32 to $0.33 and $0.31 to $0.33, respectively, due to higher operating results, the repurchase of outstanding shares and to a lesser extent a lower effective tax rate.

We continue to fund the implementation of our customized and fully integrated operations, accounting, and finance enterprise resource planning ("ERP") system, which is expected to launch in the first half of 2014. The introduction of the new ERP to our current environment will allow for seamless, high-quality, and compliant data across the Company. As of March 31, 2013, total costs related to the ERP implementation were $14.9 million, of which $12.9 million was capitalized and $2.0 million was expensed. We currently have $9.3 million in outstanding borrowings related to the ERP under a Master Installment Payment Agreement ("Master IPA") with PNC Equipment Finance, LLC ("PNC"). Our total anticipated expenses to complete the ERP implementation are $25.0 million.

In the first quarter of 2013, we repurchased approximately 0.8 million shares at an average price of $14.99 per share for a total of value of $12.5 million, excluding related commission charges.

Remaining 2013 Outlook

In the remainder of 2013, we expect to expand on the positive trends set in the first quarter of the year as the warm weather months approach. We plan to open approximately 90 more retail stores across the globe by the end of the year as well as open new wholesale doors in order to attract new customers and retain loyalists through visual merchandising and product-driven expansion. We have multiple product launch phases anticipated throughout 2013 which will emphasize the growth of the brand and promote year-round sustainability. We continue to be an industry leader in gross margins and anticipate strong margins for the rest of year as we expand our retail doors and product lines with a focus on comfort, style and color.

In addition, we have implemented several investment strategies to drive revenue growth while improving the operational and technological efficiency of the business. We are entering the testing and development phase of our ERP implementation, which we currently expect to reduce our 2013 earnings per share by $0.08 to $0.10 per diluted share. This implementation represents the beginning of a transformational change intended to improve our operational efficiency as we adapt as a global company. We intend to improve the metrics of our retail stores by focusing on high traffic, outlet locations with an emphasis on increased size and visibility. For our internet channel, we plan to launch new web designs in certain regions complimented by suggestive selling tactics and mobile point of sale systems to better assist customers. We have begun to and plan on continuing our increase in marketing efforts through advertising and promotional sales to attract customers and retain loyalists.


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Results of Operations

Comparison of the Three Months Ended March 31, 2013 and 2012



                                                                              Three Months Ended March 31,                   Change
($ thousands, except per share data and average footwear selling price)        2013                  2012              $                %
Revenues                                                                  $      311,656        $      271,798      $ 39,858             14.7 %
Cost of sales                                                                    145,807               126,999        18,808             14.8

Gross profit                                                                     165,849               144,799        21,050             14.5
Selling, general and administrative expenses                                     128,199               104,290        23,909             22.9
Asset impairments                                                                     -                    713          (713 )         (100.0 )

Income from operations                                                            37,650                39,796        (2,146 )           (5.4 )
Foreign currency transaction losses, net                                           2,600                 4,276        (1,676 )          (39.2 )
Other income, net                                                                   (334 )                (598 )         264            (44.1 )
Interest expense                                                                     209                    47           162            344.7

Income before income taxes                                                        35,175                36,071          (896 )           (2.5 )
Income tax expense                                                                 6,214                 7,725        (1,511 )          (19.6 )

Net income                                                                $       28,961        $       28,346      $    615              2.2 %

Net income per common share:
Basic                                                                     $         0.33        $         0.32      $   0.01              3.1 %

Diluted                                                                   $         0.33        $         0.31      $   0.02              6.5 %

Gross margin                                                                        53.2 %                53.3 %         (10 )bps        (0.2 )%
Operating margin                                                                    12.1 %                14.6 %        (250 )bps       (17.1 )%
Footwear unit sales                                                               15,291                13,646         1,645             12.1 %
Average footwear selling price                                            $        19.89        $        19.22      $   0.67              3.5 %

Revenues. During the three months ended March 31, 2013, revenues increased $39.9 million, or 14.7%, compared to the same period in 2012, primarily due to an increase of 1.6 million, or 12.1%, in global footwear unit sales and an increase of $0.67, or 3.5%, in average footwear selling price. For the three months ended March 31, 2013, revenues from our wholesale channel increased $29.6 million, or 15.5% compared to the same period in 2012, which was primarily driven by increased wholesale sales in Americas, Asia Pacific and Europe partially offset by a decrease in Japan. Revenues from our retail channel increased $10.5 million, or 17.4% compared to the same period in 2012, primarily driven by strong demand in all four reportable segments as well as continued growth of our retail presence by opening 107 retail stores (net of store closures) within the past year. We also continue to close certain kiosks as branded stores allow us to better merchandise the full breadth and depth of our product line. Revenues from our internet channel decreased $0.3 million, or 1.2%, compared to the same period in 2012. Typically, our wholesale business outperforms our consumer-direct business in the first and second quarters of the year as customers accumulate inventory for the spring and summer months. The first quarter on average represents just over 15% of retail sales for the year; therefore, we remain confident that we can achieve modest year-over-year comparable store sales growth similar to 2012 growth rates.

Impact on Revenues due to Foreign Exchange Rate Fluctuations. Changes in average foreign currency exchange rates used to translate revenues and costs of sales from our functional currencies to our reporting currency during the three months ended March 31, 2013 decreased our revenues by $5.4 million compared to the same period in 2012. The majority of this decrease was related to the decrease in value of the Japanese Yen compared to the U.S. Dollar due to the political and macroeconomic environments in Japan.


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The following table summarizes our total revenue by channel for the three months ended March 31, 2013 and 2012:

                                               Three Months Ended March 31,                Change                 Constant Currency  Change(1)
($ thousands)                                    2013                 2012             $             %               $                     %
Channel revenues:
Wholesale:
Americas                                    $       81,604       $       69,056     $ 12,548         18.2 %    $       13,287                 19.2 %
Asia Pacific                                        69,554               51,052       18,502         36.2              17,942                 35.1
Japan                                               22,527               27,843       (5,316 )      (19.1 )            (1,610 )               (5.8 )
Europe                                              46,533               42,616        3,917          9.2               4,080                  9.6
Other businesses                                        65                  125          (60 )      (48.0 )               (61 )              (48.8 )

Total Wholesale                                    220,283              190,692       29,591         15.5              33,638                 17.6
Consumer-direct:
Retail:
Americas                                            35,904               35,546          358          1.0                 555                  1.6
Asia Pacific                                        19,597               15,739        3,858         24.5               3,807                 24.2
Japan                                                5,901                4,842        1,059         21.9               2,002                 41.3
Europe                                               9,689                4,445        5,244        118.0               5,143                115.7

Total Retail                                        71,091               60,572       10,519         17.4              11,507                 19.0
Internet:
Americas                                            11,921               12,705         (784 )       (6.2 )              (744 )               (5.9 )
Asia Pacific                                         1,306                  860          446         51.9                 442                 51.4
Japan                                                1,931                1,688          243         14.4                 561                 33.2
Europe                                               5,124                5,281         (157 )       (3.0 )              (173 )               (3.3 )

Total Internet                                      20,282               20,534         (252 )       (1.2 )                86                  0.4

Total revenues:                             $      311,656       $      271,798     $ 39,858         14.7 %    $       45,231                 16.6 %

(1) Reflects quarter over quarter change as if the current period results were in "constant currency," which is a non-GAAP financial measure. See "Non-GAAP Financial Measures" below for more information.

The table below illustrates the overall growth in the number of our company-operated retail locations as of March 31, 2013 and 2012:

                                      March 31,                                  March 31,       Comparable store
Company-operated retail locations:      2013          Opened       Closed          2012          sales growth (1)
Type:
Kiosk/Store in Store                         116           36          (65 )            145
Retail Stores                                295          116          (19 )            198
Outlet Stores                                136           43           (4 )             97

Total                                        547          195          (88 )            440
Geography:
Americas                                     203           46          (34 )            191                  (10.3 )%
Asia Pacific                                 195           63          (50 )            182                    7.3 %
Japan                                         46           17           -                29                   (5.8 )%
Europe                                       103           69           (4 )             38                   (7.3 )%

Total                                        547          195          (88 )            440                   (5.2 )%

(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.

Gross profit. During the three months ended March 31, 2013, gross profit increased $21.1 million, or 14.5%, compared to the same period in 2012, which was primarily attributable to the 12.1% increase in sales volume and a 3.5% increase in footwear average selling price. Gross margin percentage decreased slightly by 10 basis points compared to the same period last year as we begin to offset higher average selling prices and footwear unit sales with higher product input costs through the expansion of our product line, which utilize more expensive material such as textile fabric and leather. We continue to push the industry standard in gross margins


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through operational efficiency and continued focus on product design and innovation. Partially offsetting this decrease in gross margin were positive impacts on gross margin through higher average pricing and footwear units sales across the globe, decreased discounting on close-out sales through our wholesale and direct-to-consumer channels and increased supply chain and manufacturing efficiency resulting in decreased expenses related to fulfillment, freight and duties as well as direct labor and overhead costs.

Impact on Gross Profit due to Foreign Exchange Rate Fluctuations. Changes in average foreign currency exchange rates used to translate revenues and costs of sales from our functional currencies to our reporting currency during the three months ended March 31, 2013 decreased our gross profit by $2.7 million compared to the same period in 2012.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $23.9 million, or 22.9%, during the three months ended March 31, 2013 compared to the same period in 2012 primarily due to:

(i) an increase of $9.2 million in salaries and related costs including variable and stock compensation, of which $3.3 million is related to our retail channel expansion, as we continued to increase global headcount and reward our current employees, as well as $1.3 million related to our ERP implementation;

(ii) an increase of $7.3 million in rent and building related costs, of which $6.7 million is related to our retail channel expansion as we continue to increase the number of company operated retail stores;

(iii) an increase of $5.7 million in professional service expenses, of which $3.1 million is related to our ERP implementation as we utilize the expertise of outside consultants. The remaining increase is related to various increases in outside services and contract labor related to accounting and finance functions;

(iv) an increase of $2.7 million in marketing expenses including increased spending on advertising and promotional activity as we continue to make investments in our marketing efforts; and

(v) the remaining difference is primarily a result of $1.0 million of net decreases in other selling, general, and administrative expenses including travel, as we continue to be conscious of operating expenses throughout the Company.

As a percentage of revenues, selling, general and administrative expenses increased 7.0%, or 270 basis points, to 41.1% during the three months ended March 31, 2013 compared to the same period in 2012 as we continue to capitalize on our revenue growth by utilizing earnings to increase our global retail presence, utilize state-of-the-art marketing techniques to expand our global brand, and upgrade our current information technology equipment and systems.

Impact on Selling, General, and Administrative Expenses due to Foreign Exchange Rate Fluctuations. Changes in average foreign currency exchange rates used to translate expenses from our functional currencies to our reporting currency during the three months ended March 31, 2013, decreased selling, general and administrative expenses by approximately $2.3 million as compared to the same period in 2012.

Asset Impairments. During the three months ended March 31, 2012, we recorded asset impairments related to certain underperforming domestic stores in the Americas segment that were unlikely to generate sufficient cash flows to fully recover the value of the stores' assets over the remaining economic life of those assets. We did not record any asset impairments in the first quarter of 2013; however, we continue to evaluate all of our retail stores for indicators of impairment.

Foreign Currency Transaction (Gains)/Losses. The line item entitled "Foreign currency transaction (gains)/losses, net" 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. During the three months ended March 31, 2013, losses on foreign currency transactions decreased $1.7 million, or 39.2%, compared to the same period in 2012. This decrease is primarily due to a $4.3 million loss in the first quarter of 2012 as a result of large currency fluctuations and an increase in international business. We have since implemented a foreign currency hedging strategy and as a result, we have been able to reduce the impacts of foreign currency fluctuations on our financial statements.

Income tax (benefit) expense. During the three months ended March 31, 2013, income tax expense decreased $1.5 million resulting in a 3.7% decrease in effective tax rate compared to the same period in 2012, due to differences between accrued taxes and amounts included on statutory tax filings, the utilization of foreign tax credits on previously repatriated earnings, and statute expirations related to previously recognized uncertain tax positions. Our effective tax rate of 17.7% for the three months ended March 31, 2013 differs from the federal U.S. statutory rate primarily because of the above releases as well as differences between income tax rates between U.S. and foreign jurisdictions.


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Presentation of Reportable Segments

During the first quarter of 2013, we adjusted our operating segment structure for internal reports reviewed by the chief operating decision maker ("CODM") by presenting Japan separate from the Asia Pacific segment. This change was made due to recurring amounts of substantial business activity as well as the macroeconomic environment within Japan, which resulted in the need for a regular review of Japan operating results by management and the CODM in order to better evaluate performance and allocate resources for the consolidated business. Segment information for all periods presented has been reclassified to conform to fiscal 2013 presentation.

As a result of the changes discussed above, we have four reportable operating segments based on the geographic nature of our operations: Americas, Asia Pacific, Japan and Europe. 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, Italy and Asia. The composition of our reportable operating segments is consistent with that used by our CODM to evaluate performance and allocate resources.

Each of our reportable operating segments derives its revenues from the sale of footwear, apparel and accessories to external customers as well as intersegment sales. Revenues of the "Other businesses" category are primarily made up of intersegment sales. The remaining revenues for the "Other businesses" represent non-footwear product sales to external customers. Intersegment sales are not . . .

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