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| CROX > SEC Filings for CROX > Form 10-Q on 5-Nov-2009 | All Recent SEC Filings |
5-Nov-2009
Quarterly Report
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 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. This Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations" contains 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, 2008 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.
Overview
We are a designer, manufacturer, distributor, worldwide marketer and brand manager of footwear and accessories for men, women, and children. We aspire to be the global leader in molded footwear design and development. We manufacture a product offering that provides new, innovative and exciting molded footwear products that combine comfort, affordability, functionality and fun. We design and sell a broad offering of footwear that utilizes our proprietary closed cell-resin, called Croslite. Croslite is a unique material that enables us to produce an innovative, soft, lightweight, non-marking, slip and odor-resistant shoe. Shoes made with Croslite have been certified by US Ergonomics to reduce peak pressure on the foot, reduce muscular fatigue while standing and walking and to relieve the musculoskeletal system.
Since the initial introduction and popularity of our Beach and Cayman models, we have expanded our Croslite products to include a variety of new styles and products and have extended our product reach through the acquisitions of brand platforms such as Jibbitz, LLC ("Jibbitz") and Ocean Minded, LLC ("Ocean Minded"). We intend to continue branching out into other styles of injection-molded footwear, bringing a unique and original perspective to the consumer in styles that may be unexpected from Crocs, including winter styles. In part, we believe this will help us to continue to build a less seasonal, more year-round business as we look to offer more winter-oriented styles.
Our marketing approach is currently focused on a defined target consumer and our retail partners, ensuring that our product presentation and story are world class and drive purchasing at point of sale. Going forward, we intend to augment this approach with a broader and more integrated marketing plan.
We currently sell our Crocs-branded and Ocean Minded branded products throughout the U.S. and in more than 125 countries. We sell our products through domestic and international retailers and distributors and directly to end-user 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 our wholesale, retail and internet channels.
General
Revenues are recorded when products are shipped and the customer takes title and assumes risk of loss, collection of related receivables are probable, persuasive evidence of an arrangement exists, and the sales price is fixed or determinable. Title passes on shipment or on receipt by the customer depending on the country of the sale and the agreement with the customer. Allowances for estimated returns and discounts are recognized when related revenue is recorded. Because we use both internal manufacturing and contract with third parties to manufacture our products, our cost of sales represents our costs to manufacture products in our Company-operated facilities, including raw materials costs and all overhead expenses related to production, as well as the cost to purchase finished products from our third-party manufacturers. Cost of sales also includes the cost to transport these products to our facilities and all warehouse and outbound freight expenses. Our selling, general and administrative expense consists primarily of wages and related payroll and employee benefit costs for selling, marketing and administrative employees, travel and insurance expenses, depreciation, amortization, unrealized gains or losses on foreign currency exchange, all related retail expenses, including rent and depreciation, professional fees, facility expenses, bank charges and non-cash charges for share-based compensation.
Recent Events
From our inception through the year ended December 31, 2007, we experienced rapid revenue growth and had difficulty meeting demand for our footwear products. During this period, we significantly increased our production capacity, warehouse space and inventory in an effort to meet demand. This pattern changed in 2008. Our revenue growth moderated and then began to decline during 2008 when compared to 2007. Accordingly, we evaluated our production capacity and operations structure and, in 2008, we discontinued our Canadian manufacturing operations and consolidated our Canadian distribution activities with other existing North American distribution operations; we abandoned certain equipment and molds that represented excess capacity; we wrote down the value of certain units in inventory that we felt we may not be able to sell for a price above cost; and we discontinued manufacturing operations at our Brazilian manufacturing facility. From January 1, 2008 through September 30, 2009, we decreased our fixed costs by consolidating our global distribution centers and reducing our warehouse space; we took additional impairments on molds, tooling, equipment and other assets related to manufacturing, distribution and sales; and we reduced our global headcount by approximately 36.0%. We believe these actions were necessary in order to align our production and distribution capacities with our revised demand projections. Furthermore, we have taken actions to reduce our selling, general and administrative costs by reducing personnel, reducing our space costs by consolidating certain offices and reducing other discretionary spending. As a result of these and other actions taken by management as part of our turnaround strategy, we achieved higher year-over-year revenue in the third quarter of 2009 as well as improved gross margins, operating margins and net income, despite current economic conditions. However, we may continue to experience declines in revenue during the 2009 fourth quarter, particularly given the current economic downturn and the historical seasonality of our business, and accordingly, we may take further actions to align our cost structure with general demand for our products.
Throughout the 2009 third quarter, we continued to execute against our plan for the disposal of our discontinued and impaired product inventories. This plan includes structured sales to established discount retailers, sales through our Company-operated outlet stores, warehouse sales and other disposition activities as well as donations to our Crocs Cares! charitable organization. These actions were designed to minimize adverse impacts to our resellers, distributors, and Company-operated retail channels.
Additionally, during the second quarter of 2009, we offered to purchase stock options with exercise prices equal to or greater than $10.50 per share for cash from certain eligible employees (the "Tender
Offer") in order to restore the incentive value of the Company's long-term performance award programs and in response to the fact that the exercise prices of a substantial number of outstanding stock options held by our employees far exceeded the market price of our common stock. As part of the Tender Offer, we repurchased 2,315,951 stock options from our employees and non-employee directors. Accordingly, we recorded a charge of $16.3 million in the quarter ending June 30, 2009 related to previously unrecognized share-based compensation expense for these tendered and cancelled options. Of this $16.3 million charge, $13.3 million was recorded to selling, general and administrative expenses and $3.0 million was recorded to cost of sales.
During the nine months ended September 30, 2009, we experienced a decline in revenue of 14.4% when compared with the same period in the previous year, due to declines in consumer demand for our products as a result of the economic downturn, the maturity of our products within certain markets, increased competition and challenges we have experienced merchandising our expanded product lines in existing wholesale channels. Due to these factors as well as the challenges we face with respect to better aligning our cost structure with lower revenues, we reported a net loss of $30.6 million in the nine month period ended September 30, 2009. However, during the quarter ended September 30, 2009, we reported net income of $22.1 million, or $0.25 per diluted share. While our third quarter 2009 results were affected by a material one-time tax benefit as well as increased gross margin from the sale of previously impaired unit sales, we believe that third quarter 2009 results reflect some positive trends resulting from the cost savings initiatives it has been executing against during the last 12 months.
Results of Operations
Revenues. Revenues increased 1.7%, or $2.9 million, to $177.1 million in the three months ended September 30, 2009, from $174.2 million in the three months ended September 30, 2008. Unit sales of footwear products increased 17.3%, or 1.4 million pairs, to 9.5 million pairs in the three months ended September 30, 2009, from 8.1 million pairs in the three months ended September 30, 2008. The increase in revenue and unit sales was partially the result of the continued execution against our plan to sell inventories of discontinued and impaired product. This product is generally being sold at lower prices, therefore the increase in unit sales was higher than the increase in the dollar value of sales. Sales of impaired product during the three months ended September 30, 2009 were $11.5 million. In addition, sales of our Jibbitz products decreased 33.1% to $7.9 million in the three months ended September 30, 2009, from $11.8 million in the three months ended September 30, 2008.
For the nine months ended September 30, 2009, revenues declined 14.4%, or $85.7 million, when compared to the same period in 2008. Unit sales of footwear products during the nine months ended September 30, 2009 increased 1.4%, or 0.4 million pairs, to 29.6 million pairs in the three months ended September 30, 2009. The decrease in revenue and corresponding increase in unit sales was the result of the continuation of our plan to sell inventories of discontinued and impaired product, as stated above. Sales of our discontinued and impaired product were at a lower selling price and, as a percentage of total units sold during the 2009 nine-month period, were significant, thereby causing a decline in revenue despite the increase in units sold.
Our wholesale channel revenues decreased 14.7%, or $18.4 million, to $107.1 million, for the three months ended September 30, 2009, from $125.5 million for the three months ended September 30, 2008. For the nine months ended September 30, 2009, wholesale revenues decreased 30.7%, or $145.2 million, from the nine month period ended September 30, 2008. We believe that a portion of these decreases is due to the global economic downturn, which has lessened consumer demand and caused some retailers to choose to operate at leaner inventory levels. In addition, we have recently implemented a more disciplined wholesale approach and, accordingly, have taken measures to reduce the number of wholesalers selling our product in order to better position the brand in the marketplace. These measures have resulted in fewer wholesale customers. Further, we believe sales of our footwear
at wholesale also declined due to the challenges we face in merchandising our expanded product lines in existing wholesale channels as well as lessening consumer demand for our products as such products reach a more mature stage in their product life. We have also been affected by competitors entering the market with imitation products that are sold at substantially lower prices.
We operated 310 retail locations, including retail stores, kiosks and outlets, at September 30, 2009, which is up from 262 at September 30, 2008. Total revenue from Company-operated retail locations increased 39.6%, or $15.3 million, to $53.9 million in the three months ended September 30, 2009, from $38.6 million for the three months ended September 30, 2008. Through the first nine months of 2009, revenue from Company-operated retail locations increased 51%, or $46.3 million, to $137.1 million from $90.8 million through the nine months ended September 30, 2008. We believe that increased revenue in our retail channel was driven by the fact that we are able to merchandise the full breadth and depth of our product line and through an increase in Company-operated retail locations. As a percentage of total revenue, revenue from our retail channel was 30.4% and 26.9% for the three and nine months ended September 30, 2009, and 22.2% and 15.2% for the three and nine months ended September 30, 2008. As our retail business becomes a larger portion of our business, we expect to see some improvements in total revenue and gross margin as we have traditionally been able to achieve a higher average selling price in this channel. We expect to continue to selectively open retail stores in markets where we see sufficient demand and growth opportunities. We plan to close certain kiosks and selectively open more branded stores. Our plans for expanding retail locations in future periods may be adjusted or suspended should economic conditions worsen or should management determine that a different course of action for our future retail strategy is necessary.
Revenues from our internet channel increased $6.1 million, or 61%, to $16.1 million in the three months ended September 30, 2009 from $10.0 million in the three months ended September 30, 2008. For the nine months ended September 30, 2009, internet revenue increased $13.3 million, or 41.7%, to $45.2 million from $31.9 million in the same period of 2008. The increase in revenues in the 2009 periods is due primarily to increased web-based and other marketing efforts aimed at driving consumer awareness of our webstores as well as the launches of several new sites serving international markets. We expect to continue investing in webstores and web-based marketing efforts as this channel enables us to showcase our entire product offering directly to the consumer, which we believe to be advantageous to the Company in terms of sales volume and brand awareness. As a percentage of total revenue, revenue from our internet channel was 9.1% and 8.9% for the three and nine months ended September 30, 2009, respectively, and 5.7% and 5.4% for the three and nine months ended September 30, 2008, respectively. While still a small percentage of our business overall, as our internet business becomes a larger portion of our business, we expect to see some improvements in total revenue and gross margin as we have traditionally been able to achieve a higher average selling price in this channel. Our plans for future expansion may be adjusted or suspended should economic conditions worsen or should management determine that a different course of action for our future internet strategy is necessary.
The majority of our revenues during the three months ended September 30, 2009 were attributable to our non-classic footwear models. Sales of our classic models, Beach and Cayman, represented 15.7% and 17% of total unit sales for the quarter and nine months ended September 30, 2009, respectively, compared to 22% and 26.6% for the three and nine months ended September 30, 2008, respectively. We intend to continue to diversify our product offerings in order to expand our brand and expect that sales of our classic models will represent a smaller portion of our overall revenues in the future. We also intend to segment our product offerings into our various sales channels and to enhance our visual and fixture merchandising platforms in Company-operated and wholesale customers' stores to more effectively display our expanded product portfolio.
Changes in foreign currency exchange rates in the three and nine months ended September 30, 2009 compared to the three and nine months ended September 30, 2008 contributed to a reduction of
$0.9 million and $18.0 million, respectively, in revenues for such periods. We expect that sales in international markets in foreign currencies will continue to represent a substantial portion of our overall revenues. Accordingly, changes in foreign currency exchange rates could materially affect our overall revenues or the comparability of those revenues from period to period as a result of translating our financial statements into our reporting currency, the U.S. dollar.
Americas Market. Our revenues from the Americas decreased 2.8%, or $2.3 million, to $79.3 million in the three months ended September 30, 2009 compared to $81.6 million for the three months ended September 30, 2008. For the nine months ended September 30, 2009, revenues from the Americas declined 21.1%, or $62.2 million, to $232.4 million from $294.6 million in the nine months ended September 30, 2008. We believe the three and nine month declines are reflective of economic conditions in the United States coupled with the challenges we face in merchandising our expanded product lines as well as the maturity of our core products in the consumer market and lessening demand for such products, as discussed in "Revenues" above. We have begun executing against plans to re-invigorate revenue in the U.S. wholesale channel, which has recently experienced revenue declines.
The number of Company-operated retail locations in the Americas, including retail stores, kiosks and outlets, increased to 162 locations at September 30, 2009 from 153 locations at September 30, 2008. Revenue from Company-operated retail locations increased 57.8%, or $11.5 million, to $31.4 million in the three months ended September 30, 2009, from $19.9 million for the three months ended September 30, 2008. For the nine months ended September 30, 2009, revenue from Company-operated retail locations in the Americas region increased 60.9%, or $29.4 million, to $77.7 million from $48.3 million in the nine months ended September 30, 2008. Our Company-operated retail locations allow us to showcase our entire product offering, which we believe results in higher sales of new product offerings and increased brand awareness. This, in conjunction with the increase in the number of Company-operated retail locations, drove the increase in revenue in this channel during the three and nine month periods ended September 30, 2009.
Asian Market. Our revenues in Asia increased 7.4%, or $4.7 million, to $68.0 million in the three months ended September 30, 2009 from $63.3 million for the three months ended September 30, 2008. Revenues in Asia increased 16.0%, or $25.8 million, to $187.0 million in the nine months ended September 30, 2009 compared to $161.2 million for the nine months ended September 30, 2008. Revenue in the region increased as a result of strong demand in all channels, particularly in wholesale and retail.
We increased the number of Company-operated retail venues in Asia to 131 locations at September 30, 2009, from 96 locations at September 30, 2008. Revenue from Company-operated retail locations increased 14%, or $2.3 million, to $18.7 million in the three months ended September 30, 2009, from $16.4 million for the three months ended September 30, 2008. For the nine months ended September 30, 2009, revenue from Company-operated retail locations in Asia increased 35.0%, or $13.1 million, to $50.5 million compared to $37.4 million for the same period in 2008.
European Market. Our revenues in Europe increased 1.7%, or $0.5 million, to $29.9 million in the three months ended September 30, 2009 from $29.4 million for the same period in 2008, driven by year-over-year revenue increases in the retail and internet channels. For the nine months ended September 30, 2009, revenues in Europe declined 35.3%, or $49.4 million, to $90.4 million compared to $139.8 million for the nine months ending September 30, 2008. This decline was led by a decline at wholesale, where we saw a drop in demand due in part to economic conditions and an increased number of imitation products in the region. Partially offsetting this decline were increases in revenue from our Company-owned retail locations, due to an increased number of locations, and an increase in internet revenue.
As of September 30, 2009, we operated 17 retail locations in Europe versus 13 in the same period of 2008. Revenue from Company-operated retail locations was $3.9 million and $8.8 million in the three and nine months ended September 30, 2009, respectively, versus $2.4 million and $5.3 million for the three and nine months ended September 30, 2008, respectively.
Gross profit. Gross profit increased $87.5 million to $89.9 million in the three months ended September 30, 2009. Gross margin also increased from 1.4% in the quarter ended September 30, 2008 to 50.7% in the quarter ended September 2009. These increases were largely driven by charges taken in the third quarter of 2008 which decreased our gross profit in the 2008 quarter: $65.8 million in inventory write-down charges and $4.2 million in charges related to losses on future purchase commitments. In addition, during the third quarter of 2009, we were able to sell 1.0 million units of impaired product (see "Recent Events," above). Much of this product had been written down to a level that we considered realizable; however, we were able to sell this product at prices substantially higher than what we had previously estimated. The gross profit amount related to these units was accretive to our gross profit percentage during the quarter ended September 30, 2009. The net effect of these sales on our gross profit during the third quarter of 2009 was $9.6 million. We have also experienced an increase in retail and internet sales as a percentage of our total revenue, as discussed previously. This trend has contributed to higher gross margins as we have traditionally been able to achieve a higher average selling price in these channels while many of the fixed costs associated with operating our company-owned retail stores are included in selling, general and administrative expenses. Partially offsetting these increases in gross profit were restructuring charges of $0.5 million for severance costs associated with the consolidation of our warehouse and distribution space and cancellation of our warehousing agreement. See Restructuring below for further discussion. In addition, we now sell a wide range of products which require additional materials, such as canvas, cloth lining and suede, and additional processes, such as stitching, to manufacture, thereby increasing our direct costs and lowering our gross margins on those products. As we continue to expand our portfolio and non-classic models become a larger portion of our business, we expect that our profit margins will be adversely affected.
For the nine months ended September 30, 2009, gross profit increased $62.7 million to $240.6 million from $177.9 million in the nine months ended September 30, 2008. Gross margin increased from 29.9% in the nine months ended September 30, 2008 to 47.2% in the nine months ended September 30, 2009. The increase in gross margin was the result of the same items as those that affected the three month period, discussed previously. Partially offsetting these increases in gross profit were increases in stock-based compensation expense resulting from the Tender Offer, as discussed previously in "Recent Events."
Changes in foreign currency exchange rates in the three months ended September 30, 2009 compared to the three months ended September 30, 2008 increased our gross margin by $0.2 million. Changes in foreign currency exchange rates in the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008 reduced our gross margin by $8.1 million. We expect that sales at subsidiary companies with functional currencies other than the U.S. dollar will continue to generate a substantial portion of our overall gross profit. Accordingly, changes in foreign currency exchange rates could materially affect our overall gross profit or the comparability of our gross profit from period to period as a result of translating our financial statements into our reporting currency, the U.S. dollar.
Selling, general and administrative expenses. Selling, general and administrative expenses decreased 26.2% to $77.0 million in the three months ended September 30, 2009, from $104.4 million for the three months ended September 30, 2008. As a percentage of net revenues, selling, general and administrative expenses decreased to 43.4% in the quarter ended September 30, 2009 from 59.9% for the quarter ended September 30, 2008. This decline in selling, general and administrative expense was primarily driven by changes in foreign currency exchange rates, wherein during the 2009 quarter, we recognized a net gain on changes in currency exchange rates for transactions denominated, and settled
or to be settled, in a currency other than the functional currency of the consolidated entity of $1.0 million compared to a comparative net loss of $14.6 million during the 2008 third quarter. Included in third quarter 2009 selling, general and administrative expenses was $1.1 million in stock-based compensation expense, down from $2.9 million in the third quarter of 2008. We also experienced a decline of $6.9 million in legal expenses and $9.4 million in marketing and corporate sponsorship expenses. These declines were partially offset by an increase of $3.6 million in salary and related expenses. As our retail channel becomes a larger portion of our total business, we expect that selling, general and administrative expenses will increase as a percentage of total revenue as certain fixed costs associated with the retail channel are recognized in selling general and administrative expenses.
For the nine months ended September 30, 2009, selling, general and administrative expenses decreased 11.7% to $239.4 million from $271.2 million in the same period in 2008. As a percentage of net revenues, selling, general and . . .
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