卡洛馳 (CROX) 2006 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Crocs, Inc. second-quarter fiscal 2006 earnings conference call. At this time all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for your questions. (OPERATOR INSTRUCTIONS). I would like to remind everyone that this conference is being recorded.

Before we begin, I would also like to remind everyone of the Company's Safe Harbor language. Please note that some of the information provided in this call will be forward-looking statements within the meaning of the securities laws. These statements concern Crocs' plans, projections, expectations and estimates, objectives for future operations. The Company cautions you that a number of risks and uncertainties could cause Crocs actual results to differ materially from those described on this call. Crocs has explained some of these risks and uncertainties in the risk factor section of its annual report on Form 10-K and its other documents filed with the SEC, and you are encouraged to read that section and all other disclosures appearing in our filings with the SEC.

Crocs intends that all of its forward-looking statements in this call will be protected by the Safe Harbor Provisions of the Securities Exchange Act of 1934. Crocs is not obligated to update its forward-looking statements to reflect the impact of future events.

I would now like to turn the conference over to the President and Chief Executive Officer, Mr. Ron Snyder. Please go ahead, sir.

Thank you, and thanks everyone for joining us today. We had a pretty good quarter. As you saw from our press release, our second quarter results came in significantly better than expectations as sales increased more than 230% to $85.6 million, which was ahead of our upward revised guidance of 62 to $65 million. And earnings per share increased $0.39 from $0.10 last year.

Sales were fueled by robust demand across the board as we experienced strong sellthrough of our entire footwear line in all channels of distribution both here and abroad. At the same time we successfully improved our gross margins to our target level of the mid 50s while also driving operating expense leverage.

Domestically we continued to improve our penetration to increase shelf space at our current account base along with the addition of new doors. During the quarter we increased our door count by roughly 300 and ended the period selling in approximately 7600 domestic locations. Again, our sales were highlighted by strong consumer demand for all Crocs footwear styles. This included our core Beach and Cayman models, as well as our recent introductions including our flip-flops, slides, rugged outdoor, boat shoes and medical products. This is very important as we plan to further expand and diversify our footwear collection throughout the remainder of the year.

Per our distribution strategy, we continued to launch new products selectively into our channels of distribution. For example, while our Beach and Cayman models are sold in all doors, we introduced the Offroad into the sporting goods retailer channel and the Islander into the department store and outdoor channels.

This fall we also began -- this fall we will also begin delivering a limited edition Disney by Crocs line of footwear as part of our recently announced licensing agreement with the entertainment leader. To be associated with a brand like Disney whose products and characters are loved by people of all ages around the world is a tremendous fit and a great opportunity for Crocs. We are very excited about the many long-term prospects we believe exist within this relationship.

We have also recently signed licensing agreements that allow us to produce collegiate branded Crocs footwear. We currently have over 50 schools on board and expect this number to be north of 70 by year end. This line of products will be sold into sporting goods chains, specialty footwear retailers and on campus bookstores. We believe there is clearly a major opportunity to expand this business in the years ahead. Importantly, these products will ship in early fall and in time for the upcoming football season.

Our medical division is doing better than anticipated, as well. We launched two additional products in the second quarter, and we now have three models being sold in this channel. We now sell to over 200 -- sell through 200 doctors offices in the U.S. and have launched activities in 10 countries. The response from both doctors and consumers in this channel has been quite strong.

Our international business outpaced our expectations and represented approximately 30% of our total sales for the second quarter. Remember that this is the first summer season in most international markets. The Canadian market was quite strong for the quarter as you might expect for a shoe made in Canada. In Japan, our momentum continues to gain speed while our orderbook for Australia is coming in better than expected as they get set for the spring and summer selling seasons. Hong Kong, Singapore and the rest of the Asian markets continued to show solid growth with existing and new products. We have also expanded into additional markets in the region as well as in Dubai, the Maldives, Guam, Tahiti and Fiji, just to name a few.

We witnessed considerable growth in Europe as well, led by the United Kingdom where the brand continues to receive favorable press and celebrity exposure. Sales were also strong in the Benelux region and Scandinavia. We recently showed at three major European tradeshows and the early feedback has been very, very positive. In fact, we have already seen a meaningful pickup in our sales throughout Germany.

We ended the second quarter with about 4000 international doors versus 1500 at the end of the first quarter. As a result of this growth coupled with our current business trends overseas, we now expect international sales to make up approximately 25% to 30% of our total sales for 2006 compared to our prior expectations of 10%.

During the quarter we continued to strengthen a global manufacturing platform in order to better serve our retail partners and ensure we capitalize on the growing demand for the Crocs brand. We invested in additional machines for our Canadian manufacturing facilities while at the same time we made further upgrades to our Company-owned facility in Mexico which we plant to have at 100% capacity by late September. We have also continued to add capacity with our third-party partners in China.

I think it's important to note that our organization has done an excellent job improving the delivery time of Crocs shipments since the beginning of this year. I would like to address the perception that we have delivery issues. With the demand we have experienced and remember sales for the quarter were 85% higher than our projection in February, there are bound to be instances where certain accounts have not received the full amount of product they would like. We perceive this as a demand issue, not a delivery issue. That said, we are continually working to enhance our manufacturing, warehousing and delivery capabilities.

To that end, we have instituted a direct ship program for some of our larger accounts. We implemented a new ERP system at the beginning of the quarter domestically and we will continue our global rollout of that system throughout the remainder of the year. We are very pleased with progress we have made, and we believe we are well positioned for the future.

As we announced during the quarter, we settled three lawsuits regarding our patents. In each case, the companies agreed to stop manufacturing and marketing footwear that infringes on our intellectual property. In addition, we have had very good success defending our intellectual property in international markets.

We are very pleased to announce that we recently received the design patents for the Islander, our boat shoe with a leather upper. We also have numerous patents pending for our other footwear models both domestically and abroad.

The real highlight for the quarter has been the success of our sponsorship of the AVP Pro Beach Volleyball Tour. This tour has made 10 stops since the season kicked off, and every event has provided great exposure for our brand and our products. In each city our footwear has been extremely well received and importantly, we have been able to reach out and connect with a very compelling consumer demographic. In addition, the television ratings on NBC and Fox have been better than we expected, which is important as we have 232 cable spots and 52 network spots scheduled to air this year. The AVP also aired in 100 countries around the world.

We had very high expectations going into this partnership, and I think we have easily surpassed them right out of the gate. We are excited about the future growth potential of the AVP Crocs tour, and we look forward to crowning the first Crocs Cup champions later this season. Additionally, later this fall Crocs will launch a mobile marketing tour that will include two branded Crocs RVs that will attend major events around the country.

Before I turn the call over to Peter to review the financials, I want to reiterate how pleased we are not only with our strong second-quarter performance, but also with the progress we have made creating a stronger, more well balanced Company for the future. This has included diversifying our business in order to evolve Crocs into a true lifestyle brand. Importantly, the positive consumer reaction to all of our new styles bode well as we get set to launch our additional models throughout the remainder of 2006 and next year.

We are actually doing this call from Las Vegas where we are showing our spring 2007 line at the WSA Shoe Show. While it is still early, the feedback we have received from retailers has been very positive. Peter?

Thanks, Ron. Sales for the second quarter were $85.6 million compared to sales of $25.8 million in the second quarter of 2005, an increase of 232.2%. For the quarter, domestic sales rose over 66% to $58.0 million and international sales were up over 180% to $27.6 million. Gross profit for the second quarter of fiscal 2006 was $47.0 million or 54.8% of sales compared with $14 million or 54.2% of sales.

SG&A for the second quarter was $23.3 million or 27.2% of sales compared to $8.6 million or 33.2% of sales in the corresponding period last year. Income from operations for the quarter was $23.9 million or 27.9% of sales versus income from operations of $5.4 million or 21% last year.

Net earnings were $15.7 million including stock-based compensation expense net of tax effect of $1.5 million compared to $3.3 million a year ago, which included stock-based compensation expense net of tax effect of $685,000.

Second-quarter diluted earnings per share including stock-based compensation expense was $0.39 versus $0.10 in the second quarter of 2005. Excluding stock-based compensation expense, diluted earnings per share was $0.43 compared to $0.12 last year.

With regards to our balance sheet, at June 30th we had cash and cash equivalents equal to $67 million. This compares to $4.8 million in cash and cash equivalents as of December 31, 2005. We ended the second quarter of fiscal 2006 with inventories at $40.8 million compared to inventories of $40.7 million at the end of the first quarter.

Now turning to guidance, for the third quarter ended September 30, 2006, we currently project net sales to range from 87 to $90 million and net income per diluted common share including share-based compensation of between $0.38 and $0.40. Excluding share-based compensation, we expect diluted earnings per share to be in the range of $0.41 to $0.43.

I will now turn the call back to Ron for some closing remarks.

Again, we are very pleased with our second quarter results and the continued strong momentum in the business. We continue to increase and broaden our channels of distribution, our aggressive product and our reach around the world. In fact, our international business is growing much faster than we had originally expected. We are building a truly global business with a brand that has become synonymous with fun, comfort, function and of course, fashion.

That said, we still believe we have only scratched the surface in terms of our potential. We remain focused on executing our strategic plan and capitalizing on the many opportunities that still lie ahead.

Operator, I would now like to open the call for questions.

(OPERATOR INSTRUCTIONS) Jeff Klinefelter, Piper Jaffray.

Congratulations guys on a great quarter. A couple of questions. First of all, maybe thinking about Q3 guidance, can you share a little insight regarding new product versus existing, new doors versus existing? Just give some sense for that -- where that is coming from and how we should be thinking about it from an organic growth perspective?

Yes, I would say that we don't expect to add too many doors. We have been careful in not expanding our distribution channel too quickly. The current demand for the product in the existing channels has been quite strong but I wouldn't expect too much door growth domestically. There has been door growth internationally, however, which is somewhat recent, the 2500 of the 4000 doors were added during the quarter so that is kind of new to us. So I wouldn't say much of it is door growth.

On the product side, our kind of bread and butter products, the Beach Cayman models were about 70% of sales during the second quarter. I would look at that decreasing a bit for the third quarter.

A couple other follow-ups here. Ron, can you compare the international profit margins with the U.S. margins and just give us some sense for how to think about the two kind of the economic impact of the two businesses?

They are just slightly higher. They are about the same, maybe slightly higher depending on the markets that we're talking about. In Europe we are selling for -- in euros at the same equivalent of dollars. So it's a little bit higher but costs are a little bit so I should say the margins are a fraction higher.

How are you dealing with the foreign currency exchange at this point given the rapid increase in volume coming into those markets?

We are working with a bank we selected and we will be starting to hedge here shortly.

Okay. Just a couple other follow-ups. Manufacturing capacity. Could you give us an update on where you stand now currently with sort of a monthly volume that you're able to ship and kind of breaking down again now what percent is third party versus owned in terms of that total capacity?

Our core capacity depending on mix now is about 2.6 to 3 million pairs per month. We are presently at about 60%, 65% third party and 40% to 35% in-house production.

Okay and you mentioned Ron that the Mexican facility should be up close to capacity during this quarter. Kind of where were you running through the first couple quarters of the year? Give us a sense for what that ramp would look like.

We've taken that production from say 100,000 a month up to a little over a couple hundred thousand presently, and we will be at 350,000, 400,000 by the end of the third quarter. We've added machines. We've added [bowls]. Remember our strategy is to build product both close to the consumers in North America and Europe, as well as bringing large quantities of products in from China.

Okay. Just the last couple questions and I'll let someone else jump on. Thinking about the core business and thinking about maybe what would be the closest equivalent to an average mature door, maybe it is a Dillard's door or one of your original distribution doors. Can you give a sense for one, what does sort of the volume look like in a mature door year-over-year? Just sort of provide some color for organic growth. And then also, what does it look like in terms of number of SKUs where that traditional department store is evolving for fall year-over-year? Is it an expansion of SKUs, an expansion of floor space or kind of a combination of all of the above?

I would say most of the stores that can fit additional product, we do sell at some small stores that we just carry Beach and Cayman and Athens and flip-flops with that don't have any more space. I would say that any store that has the space has taken any of the new products that we've offered them. So we are increasing skew counts in our larger doors. We are getting more space. We are getting multiple floors. We are getting multiple departments. So I would say that we don't have enough good information yet because it kind of moves around on the shoes per door. But it has definitely increased.

Just lastly, I don't know if you have this information available to you but do you have a breakdown at this point sort of doors -- do you have doors clustered into department store footwear, sporting goods and other? Do you have some way of giving us a sense for how your doors are breaking down or should we follow-up later with that?

Why don't you follow up later? It is along the same lines as what we talked about on the road. So we are probably somewhat equal between sporting goods, outdoor together, department stores and shoe stores.

Thanks a lot, guys.

Jim Duffy, Thomas Weisel Partners.

Congratulations. My first question is on the gross margin you guys made some forward progress from Q1. Do you see further opportunity in the gross margin?

We do. We're actually looking at the third quarter increasing by about 100 basis points, Jim.

Okay, and Peter, you had talked about a key component of improving the gross margins being moving more towards direct ship to key customers. Can you give us a sense of how much of your volume is done through direct ship at this point, and where you see potential for that?

We did upwards of 30, 35% in the Q2, and we think that will grow over 40% or more in Q3.

Okay, and ultimately where do you think that can go?

Over 50% is what we're shooting for.

Okay. The inventory situation, do you wish you had more inventory at this point given the demand that you are seeing? Or you're comfortable with the current levels?

I think some of our retailers would wish we had more inventory possibly, but I think we are good. We're in pretty good shape now. We've got much better planning in place, so we are getting the right inventory to the right distribution centers around the world. So we could use a little bit more now maybe, but we are in pretty good shape, and our turns are up around the 4 --.

Just less than 4, 3.8.

3.8.

That's pretty healthy. Then a question on the product mix. Can you give us a sense for how much children's is contributing to the overall revenue mix?

Yes, kid's is about 20% right now. Trending up just a little bit for Q3, Q4. Then obviously the Disney will start shipping in Q4 will mostly children's and women's.

Licensing seems like a big opportunity for you. Are there other opportunities on the horizon? Maybe not -- maybe you can't speak in specifics, but is that a key initiative for the Company?

There are other opportunities out there, Jim.

Okay. I guess I'll leave it at that.

Elizabeth Montgomery, Cowen.

Congratulations. I think I have just two questions. I guess, Peter, and I apologize if I missed it, did you mention anything about air freight expenses and whether that was also a contributor to the gross margin improvement in the quarter?

I'll actually take that. The airfreight, we still are bringing into airfreight in order to do the volume that was hit to the quarter we had to bring some in airfreight. We expect to have some continued airfreight for Q3 in that we had some new styles that are in pretty high demand. Then we'll probably -- and actually Q3 and Q4 we will be bringing some of the Disney product in that way, as well. So that is partially the improvement in gross profit for Q3.

Okay, and then in terms of the guidance, maybe my math is not right, but I think it is. If I look at Q3 with your upwardly revised revenue guidance and your indication that you are now planning international to be 25% to 30% of the revenue mix for the year up from 10, it seems like you're not really expecting or you haven't really modeled in any upside to the U.S. business, which given the sellthrough, and the fact that the new products are being well-received, I would think that you would have? Is that just being conservative?

You know, what we are still -- we are still a seasonal-- a somewhat seasonal product line. We do have some nice additions for this fall. But I think we are being conservative as we go through the third quarter, and we think it will be about even with the second quarter.

In the U.S.?

Yes.

Thinks. That's helpful.

Joe Besecker, Emerald Asset Management.

I'm sorry. Could you give me a little color on your Internet sales and your website sales how they are progressing and what kind of things you are doing to address the demand that is on that and the systems that you have there?

You probably talked to somebody that has tried to order some shoes?

Well we've been monitoring that, yes.

We have had a tremendous upside in our Internet business. Because of all of the PR we've been getting really all over the world, our website has been brought down a few days actually just this week we totally upgraded the system, put in much larger servers to handle it. So you can try it when you get off the phone and hopefully it will be reacting a little bit better. But that is -- I would say that that has increased, kept up pace with the rest of the increase in the business. So as you might expect.

We moved into new headquarters. We actually ran out of phone lines in our old headquarters. So a lot of calls couldn't be received. We moved on in about a month ago and that has greatly helped us out.

Are you looking to help bolster that channel in general, or are you just looking for the regular retail distribution channel?

We are bolstering that channel. We will have all of our products available on the Web, and bolstering the retail channel as well.

Okay. Thank you.

(OPERATOR INSTRUCTIONS) Rob Rotter, RBR Capital Management.

Just a little housekeeping. Can you tell me what the receivables were last year at this time within the second quarter?

Yes, sure enough. Last year in the quarter we're at 27 million.

And also for the third quarter estimate you indicated that gross margin would be up about 100 basis points. On the same level of sales roughly the same level of sales by your EPS estimate, you are I guess estimating a lower net income. So is anything unusual in terms of the expense side that would account for that?

We continued to grow our SG&A. We would like to invest a little more into the advertising as we did with the AVP, we took it over the events. There are more events in Q3 than there are in Q2.

Okay, so that expense will be more in Q3 than Q2?

That's correct and we continue to grow. We need to add some help, get some more help to keep this growth going.

Sounds fair enough. Thank you.

Christine Kim, Primarius Capital.

It's actually Patrick Lin calling. Congrats on the quarter. I was wondering, you guys are spoiling us with your guidance and then obviously being conservative, but just in terms of the big picture, can you help us understand kind of your addressable market and what you think -- where you think you are with respect to the second inning, third inning? Obviously there are 7 million shares short and a lot of people think that you are at the eighth and ninth inning.

You know, what is interesting, and of course we have gotten this question before, our strongest markets are still the markets that we talked about on the Roadshow. It's Middle America down through the South are much stronger than they were last year and of course the year before. Just starting to get some noticeable penetration on the East Coast through Texas and in California. I think the AVP is helping us get things picking up in California as well. But it is very, very early in all those markets.

And certainly all of the international markets that I spoke of are just seeing shoes for the first time and I think all the press we get in the U.S. and the stars wearing our shoes, the tremendous PR that we've got in the U.S. is translated into the foreign markets where we are getting comparable PR. So I think we are just scratching the surface internationally and on the coast of the U.S.

And at what point do you think a Company like a Nike or Adidas becomes more of a brand versus a shoe company? And where is the Crocs do you think in terms of your vision of where this could become? Obviously Peter has had experience with also retail stores with Ashworth previously?

We certainly feel that we are becoming a very recognized brand when we are selling this many shoes. And by some reports we are selling of our I'd say more popular models that we've been selling a long time I think it is the highest selling shoe model in the country right now. So I think we're becoming a pretty good brand right now. We'll continue to do a number of things to drive that through the rest of this year. And we really have some nice looking products that we are announcing at the show right now in Las Vegas that our retailers are pretty excited about for next year. So they see us becoming an important brand to them and important brand to their consumers.

Congrats on the quarter, and I think our friends over at Zappos would love to get more shoes too.

We just talked about 15 of them yesterday.

Congrats and we'll look forward to seeing you in San Francisco next time.

(OPERATOR INSTRUCTIONS) Jeff Klinefelter.

Just a follow-up on the systems. Ron, you mentioned the ERP system. Could you just explain again your implementation process there and the benefits of that? Also just an update. I think you implemented a new system this spring season. Could you give us an overall update on how things are tracking? And then CapEx, other CapEx requirements that you see going forward? Thank you.

So the system, we went live on schedule on April 1. It had the normal bugs and such that we got through during the first couple of months but we were able to close on time each month during the second quarter. Right now we are launching that system globally through Asia, into Europe, Canada, Mexico. We have a couple other smaller sites that we've got on now in Puerto Rico and in Hawaii. But we are on schedule to get it mostly instituted by the end of this year. There will still be a few modules that we will be bringing up to add more features into the first quarter of next year. But all in all, a very positive launch for such a sophisticated system. And the other question was?

CapEx, we expect to spend upwards of $13 million for the remainder of the year. Some of that being systems, some of it is our new distribution center that we leased back in May. We are kitting that on out and getting some equipment on in there as well as some systems. We have some stores and kiosks and things that we will continue to build, and we're going to continue to build some infrastructure along those lines internationally.

Great. Thanks.

And Mr. Snider, I will turn the conference back over to you for any final and closing remarks.

All right. I think we are very happy with the quarter that we just hand. I think we've got good momentum going into the rest of the year and we are very positive about 2007 as well. I hope to see you all very soon, and thank you very much for attending the call today. Goodbye.

Thank you. That does conclude today's teleconference, and thank you all for your participation. At this time, everyone may disconnect.