卡洛馳 (CROX) 2008 Q2 法說會逐字稿

Please stand by.

Good afternoon, ladies and gentlemen and thank you for standing by.

Welcome to the Crocs Fiscal 2008 Second Quarter Earnings call.

(OPERATOR INSTRUCTIONS).

I would also like to remind everyone, today's call is being recorded.

Before we begin, I'd also like to remind everyone of the company's Safe Harbor language.

Please note that some of the information provided in today's call will be forward-looking statements within the meaning of the securities laws.

These statements concern plans, forecast, guidance, projections, expectations and estimates and adjusted for or adjusted 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 those risks and uncertainties in the risk factor section of the annual report described on this call form 10-K and its other documents filed with the SEC.

And you are encouraged to read that section and all other disclosures appearing on your filings with the SEC.

Crocs intends that all of this forward-looking statements in this call will be protected by the Safe Harbor provision 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 will now like to turn the conference over to President and Chief Executive Officer, Ron Snyder.

Please go ahead.

Good afternoon, and thank you for joining us to discuss our second quarter results.

With me on the call today is Russ Hammer, our Chief Financial Officer.

As you know from our guidance revisions, our second quarter sales came in below our initial projection, primarily due to weaker than expected demand here in the U.S.

for our core products.

At the same time, we did experience some softness in Europe namely the U.K.

which also impacted our top line performance.

Although we have made recent progress reducing costs at our manufacturing and distribution platforms, it was not enough to offset the lower than expected sales volumes during the quarter.

As a result, gross margins were 40.5% versus 58.8% a year ago, and below our forecast of approximately 55%.

In addition, operating expenses were higher than planned due to severance costs, retail expansion and IP litigation.

For the second quarter, sales were $222.8 million compared to $224.3 million a year ago.

Diluted EPS for the quarter was $0.03 which includes a $0.03 charge associated with the shutdown of our Canadian manufacturing facility and assets and impairment charges on tooling.

The first six months of this year have been difficult as we dealt with a challenging retail environment, unfavorable weather, an increase in competition, and a slowdown in sell-through rates of core styles here in the US.

That said, there were also a number of positives.

First, our international business continues to perform well.

We now sell in over 100 countries with sales from outside the US accounting for 58% of total revenues in the second quarter.

Sales in Asia rose 69% from the same period last year driven by ongoing strong demand for our products in Japan, China, Korea and the ASEAN countries.

Australia and Southeast Asian pre-books for Q3 are particularly strong as well.

Elsewhere, we recently commenced direct operations in Russia and South Africa.

And our business continued to gain momentum in Brazil and South America.

In Europe, we saw an 11% increase in sales from the same period last year driven by strong demand in Germany and Spain.

Next, results at our company-owned stores have been very encouraging despite the general slowdown in retail traffic.

Our stores do a great job of displaying a very broad and diverse selection of our merchandise, and provide an ideal platform to introduce consumers to our new product lines.

Sales from our global retail business grew approximately 88% over the same period last year with particularly strong sales coming from Asia where we now have over 96 company-owned locations and more than 40 third-party Crocs locations.

More importantly, consumer reaction to many of our spring 2008 models has been very strong, including the Cyprus, Adara, Malindi, Yukon and the Santa Cruz.

Sales of the spring 2008 collection represented approximately 25% of total sales in the quarter despite the fact that the start to the season was delayed by unusually cold weather.

At the same time, early feedback on our fall 2008 line has also been positive with nearly 40% of our third quarter pre-books coming from new products such as the Nadia, the Nanook and Ambler which are all part of our Fuzz collection as well as the Viking and the Flurry for kids.

This number does not include the Mammoth which has also had strong bookings for the fall and winter season.

While our core styles still make up approximately 50% of our total sales and continue to be our most popular and widely recognized styles, the performance of our new models is very promising.

In fact, we have already booked over 100,000 units of more than 50 different styles.

Plus, an additional 25 styles have booked over 50,000 units so far this year, thereby illustrating the acceptance of our new product portfolio.

The second quarter also marked the launch of several new high profile license products that have helped contribute to this growing segment of our business.

On the entertainment side, we introduced the much anticipated Hannah Montana Mary Jane and we also debuted the Wall-e shoe in conjunction with the premier of the Disney animated feature.

Other new products include popular properties such as High School Musical, Thomas the Tank and Bob the Builder.

Turning to our sports business, this category continues to grow as we expand our portfolio.

We recently signed an agreement which will allow us to license logos from European soccer clubs, specifically Bayern Munich in Germany, PSV in Holland and Arsenal and Liverpool in the U.K.

As I am sure many of you saw, we recently announced that the center for Medicare and Medicaid services has accepted our Custom Cloud into the diabetic shoe program.

This was a very lengthy and difficult process and required extensive clinical data and medical endorsements.

We are obviously extremely pleased by this decision, as it will now provide millions of individuals who suffer from diabetes and other foot ailments, greater acceptability to our product.

At the same time this distinction underscores the unique and positive attributes of our proprietary Croslite material and helps further differentiate our brand and products from the competition in the marketplace.

Finally, I think it's worth noting some recent third-party data related to our brand.

According to NPD, for the 12 months ending June 30, 2008 Crocs has been number one children's casual shoe in terms of unit sales and dollars in the US market.

And we have the number one adult casual and overall casual shoe in terms of unit sales for the same time period.

Russ will now walk through the numbers and I'll return and outline our strategy for the remainder of 2008 and beyond.

Thanks, Ron.

Sales for the second quarter were $222.8 million compared to the sales of $224.3 million in the second quarter of 2007.

For the quarter, international sales increased 20% to $130.1 million from $108.9 million a year ago.

Revenue for Asia was $63 million, Europe was $55.6 million, Canada, Mexico were $10.2 million and the balance of $1.4 million was from other international locations.

Domestic sales were $92.6 million representing approximately 40% of our global business.

Footwear sales accounted for approximately 91% of revenue and represented 10.9 million units for an average selling price of $18.39.

Sales of our classics represented 29% of footwear sales.

Gross profit for the second quarter of fiscal 2008 was $90.3 million including restructuring charges or 40.5% of sales compared to $131.9 million or 58.8% of sales in the second quarter of 2007.

This decrease in margin was primarily attributable to lower sales volume than planned and higher costs associated with underutilized capacity in our company-owned manufacturing facilities and distribution centers.

SG&A for the second quarter was $89.9 million compared to $63.5 million in the corresponding period last year.

This increase was primarily a result of increased legal, marketing, as well as increased retail expenditures.

As a percentage of revenues, selling, general administrative expenses increased to 40.4% in the three months ended June 30, 2008 from 28.3% in the three months ended June 30, 2007.

We reported a pre-tax operating loss of $2.9 million in the second quarter compared to pre-tax operating income of $68.5 million a year ago.

Net income was $2.1 million or $0.03 per diluted share compared to net income of $48.6 million or $0.58 per diluted share in the second quarter of 2007.

Included in net income are charges totaling $0.03 associated with the shutdown of our Canadian facility and other asset impairments on tooling for certain styles.

Now turning to the balance sheet.

As of June 30, 2008 we had $51.2 million in cash and cash equivalents compared to $29.6 million as of March 31, 2008.

This increase quarter over quarter is attributed to working capital improvements primarily from the reduction of inventory and accounts receivable.

As a result of aggressive inventory and accounts receivable management initiatives, we generated approximately $21.6 million of cash in the quarter.

Our net accounts receivable balance as of June 30, 2008 was $128.1 million, a decrease of $26.5 million or 16% since last quarter.

Our DSO improved to 52 days from 71 days as of March 31, 2008.

Our inventories decreased 17% to $220.2 million at June 30, 2008 from $265.5 million as of March 31, 2008.

Approximately $7.2 million of the decrease attributable to reserve on certain slower moving styles.

Since July 1, our inventory is already down approximately an additional $9 million and we expect our inventory levels will continue to decrease over the remaining quarters of this year.

Our Q2 capital expenditures were approximately $17 million, a reduction from our Q1 capital spend.

Our net fixed assets increased to $96.9 million on June 30, 2008, up from $90.9 million reported March 31, 2008, primarily driven by increased retail expansion.

We ended the quarter with $37 million in outstanding borrowings on our $60 million line of credit which represented a 14% decrease from the $43 million outstanding as of March 31, 2008.

By the end of this week, we'll have paid down an additional $17 million on our line of credit resulting in an outstanding balance of about $20 million.

Now for the outlook for the remainder of the year.

As we stated on the July 25 conference call, we expect third quarter sales to be in the range of $195 million to $205 million, and diluted earnings per share of approximately $0.01 to $0.05.

This guidance assumes gross margin of approximately 44% to 46% and SG&A as a percentage of sales between 41% and 43%.

For the full year we continue to expect sales to be down modestly compared to 2007 levels with diluted earnings per share of approximately breakeven, including the total pre-tax charge of approximately $20 million or $0.16 per diluted share associated with the shutdown of our Canadian manufacturing operations.

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

Thanks, Russ.

Over the next two quarters we'll be focused on right sizing our operation to better align with our projected volumes.

This will include reductions in our worldwide headcount, the shutdown of our Canadian facility which should be completed by the end of the third quarter, right sizing our distribution and infrastructure facilities and delaying certain capital expenditures.

We are also enacting a 25% cut in executive management salaries through the end of the year and foregoing executive bonuses for 2008.

At the same time we'll be implementing new initiatives aimed at broadening consumer awareness of our new products and strategically increasing our presence in the marketplace including new point of sale materials and more effective in-store marketing.

Our plan is to focus on our key accounts that have the resources and the real estate to merchandise a larger assortment of Crocs footwear beyond just a handful of styles.

Therefore we do expect that our U.S.

store count will come down by year end.

We are also accelerating our retail store roll out.

In the quarter we opened an additional 54 retail locations including outlets, retail stores, third-party stores, and kiosks, primarily in Asia and Europe.

Here in the US we currently have five full-price stores, 12 outlets, 128 kiosks, and expect to end the year with 14 additional outlet stores and three additional full-price retail stores, as we open new stores in Portland, Panama City, Florida and Chicago.

Our recent store opening in Waikiki has proven to be quite successful with initial results averaging over 500 pairs per day in the first couple of weeks of operation.

At the same time, we'll be closing some of our under performing kiosks, as we concentrate our resources on our stores which can obviously display a much broader selection of merchandise.

In Asia our plans call for additional stores this year as we try and capitalize on the recent momentum in this market.

In fact, in June, ten of our Asian stores sold over 5,000 pairs of shoes each and this trend has continued into the third quarter.

Our brand is clearly gaining momentum in Asia.

In Europe we recently opened additional stores in Germany and the UK and on August 1, opened our first full priced brand store in Russia.

Looking out beyond this year, we are currently in the process of developing strategies that we believe will help stabilize our business and result in consistent long-term growth.

An important change we are making revolves around product segmentation, designing specific footwear styles for a much more targeted audience to compliment our core business and its broad appeal.

This will also include a more streamlined distribution strategy for our future collections and a greater percentage of pre-booked orders.

We are developing strategies to grow our business where we are presently under penetrated and we are implementing new merchandising strategies that will allow us to capitalize on key seasonal windows.

We will also be implementing additional internal processes to manage product life cycle and inventory levels.

By using our brand portfolios in Jibbitz, Crocs, Ocean Minded and the licensed properties, we can strategically reach different consumers and additional distribution channels.

Our marketing resources will also be realigned to fit closely with our key retail partners and the consumer.

As we've previously stated, we believe that if we are able to successfully execute these initiatives, even modest sales growth could generate gross margins in the range of 46% to 48% and operating margins between 13% and 15% by mid-2009.

Thank you, and the operator will now open it up for questions.

Thank you and the question-and-answer session will be conducted electronically.

(OPERATOR INSTRUCTIONS) And we'll pause for just a moment.

And our first question will come from Reed Anderson with D.A.

Davidson.

Good afternoon.

First question for Russ.

Russ, on -- as we think about inventory and you are doing a good job getting that going in the right direction and also receivables, but based on what you know today, what kind of inventory level, even on a dollar basis or on a percentage, make, kind of makes sense as we look at towards the end of this year.

Reed, thanks for the question.

So our inventory as you said, we've made very strong progress here in the second quarter and we're already off to a good start in the third quarter.

We expect third quarter will continue to improve and probably be in the $200 million to $210 million range and then we continue to make that type of improvement into the fourth quarter as well.

Okay.

So fourth quarter, the trend would continue from what you see out of 3Q, but $200 million to $210 million makes sense for 3Q.

And then on the receivables side have you made a lot of the progress there, or is there more you can squeeze out of that as well?

We'll continue to make improvement on our receivables as well.

So, we've been tightening up with all of our customer accounts and just managing our terms with them.

So, we'll continue to make progress there.

And then, Ron, you were talking about -- I was curious about the -- when you were talking about working with the key vendors, key accounts, excuse me, new POS, new in-store, as you think about what you term key accounts, what percentage of your business at least in the U.S.

might that, people like a Dick's or a TSA or a major department store?

What might they account for, the key accounts?

It's over 50% of our doors today.

And I think what we're doing now is we've seen tremendous results from the accounts, either our own retail or retail partners in those that have enough of our collection.

So that's where we're focused now.

We're going to get better fixturing, we're going get more presence in stores; consumers will be able to find our products where many can't now.

So that's where we're focusing.

We're still going to have a lot of the smaller retailers and we'll have specific collections for those.

But we're really focusing on that maybe 50% to 60% of the doors here in the US that have the space and the wherewithal to display our products.

And what would be the timing of implementing the changes you're thinking about over the next couple of quarters?

Will we see it all by the end of September, or is it going to drift into the fourth quarter too?

Oh no, we're continuing to work with the retailers and built-out through this quarter, through next quarter and even into next spring with, we have a pretty exciting lineup of products that we just introduced at the recent shoe show that are very segmented, we have sports products, we have style products, we have lifestyle products and they go to different retail partners.

And then, Russ, on the tax rate, it was kind of funky in the quarter, how should we think about that, either for the balance of the year or for the full year?

So obviously we have a loss benefit that we're taking.

We're still profitable in the Europe and Asia markets right now, but with our global tax rate, our global tax strategy, it's low on these profits so we actually recognize the benefit of US loses with that large tax break.

And as we forecasted for the year of approximate, the breakeven on the EPS we will continue to see that benefit.

So, what might the full year tax rate look like?

It'll be pretty comparable to what we have right now.

On a year-to-date basis?

Right.

Okay, thanks.

That's it for me.

Thanks, Reed.

And next we'll hear from Jim Duffy with Thomas Weisel Partners.

Thanks, hello.

Hello, Jim.

So, in hearing what you're saying about operating margin targets by mid '09, what type of revenue and SG&A run-rate does that assume, kind of on an annual basis?

We haven't projected fully our, we don't have projections yet out for 2009, but that would project fairly flat.

We're assuming in cost reductions and activities that we have underway right now that we'd have flat sales or maybe even down sales from where they are today.

So, we're taking out costs, we're sizing the business back to where it was at that level.

Okay.

So I guess what I'm hearing from you, Ron, is that the strategy is to plan the business for a smaller revenue run-rate and try to take costs out to right size it to get to an appropriate margin structure?

I hear that from you but I'm also hearing some growth initiatives, like opening more retail and things like that and I'm just struggling to kind of piece the two together.

Like for instance, why does it make sense to open more retail now?

Jim, because the results in our retail operations and this is a global picture are much better than in our wholesale channel.

Our retail margins and operating profits in Asia are quite high.

We're doing very, very well in the stores we've opened, and the outlet stores in the US.

In Europe, we're actually working with a lot of partners, third party partners where we're selling to them just as a normal account, but they are full-fledged Croc stores where we do the design of them and everything.

So we have a strategy where it makes sense for us to open up our own store where the margins are going to be quite high.

We'll do that or in a city that we want to promote our brands, we'll open them ourselves.

In smaller cities, we'll work with third party partners, or smaller countries.

So that's the strategy there.

Okay, so it sounds like some realigning of the account base in the U.S.

So maybe US revenues go back where it's offset some by growth in international markets, is that an appropriate characterization?

Yes.

Okay, thanks and good luck.

Thanks, Jim.

(OPERATOR INSTRUCTIONS).

We'll now hear from Jeff Klinefelter with Piper Jaffray.

Hello, guys.

It's Steph for Jeff Klinefelter.

I just have a couple of questions.

First I wanted to follow-up on Reed's question regarding the percentage of doors that qualify for that segmentation strategy that you introduced.

What percentage of your sales is accounted for by those 50%, 60% of doors?

Probably, 80% to 90%.

So you could say to yourself on that, that we have a lot of small doors and the other we started with, and those that can't move with us and display enough of our collection or at least hit some minimums, we'll be, we'll probably be eliminating.

And is a similar strategy going to be employed in Europe as well for your current door base?

Yes it is.

In Europe this year, what's happened is many of the doors were new so they were taking just our classics or our classic and core products.

And they didn't get enough, we didn't enough product out there in Europe this year.

And it wasn't because our guys weren't working on it.

It's because the stores wanted to go with what they heard sold well.

Now, we're working with those stores in better merchandizing, more merchandizing and taking more of our products.

So the same type thing will happen where we'll probably shed some doors but probably not too many in Europe.

Okay.

That's helpful.

And just a couple more.

How do you, as you're looking at that segmentation strategy, how do you prioritize?

It is by access to product?

Or by price, by style is it a matrix approach?

Can you just give a little insight into how we'll see the product differentiated at the stores?

I think what we'll see is, you'll see better presentations.

I think one of the problems we've had is some of our retailers that have some of the older fixtures or older point of purchase advertising, it's just old and stale so it doesn't look like there's new products.

So we're focused.

We have a whole group now focused on better presentations in stores, better presentations for some of our newer products, making sure consumers know that we have these great new products that are selling well where they are well displayed.

We just want them to be well displayed in more shops.

Okay.

Last one for us.

Just a question on Europe and Asia.

Can you just talk about your differences in strategy in those two markets now having gone through this rationalization period in the U.S.?

Thanks.

Yes, in Asia we already have much more of our products presented at retail and I think that's why we're seeing such rapid growth in the Asian market.

About our retail Internet business in Asia going into this quarter is about one-third of the business.

So it's really grown rapidly.

And that's 150 doors of our own retail and some Internet versus 6,000 doors in the wholesale side of our business there.

So one-third of the business is represented by 150 doors.

So it's, that's a pretty dramatic number and you can see when our product is well displayed, we sell a lot of it.

So we're going to continue to rollout stores with both partners and ourselves in Asia.

In Europe, as I said, we're opening a lot more partner stores there.

Not really having too many company owned stores.

So that's where we're going to continue to employ there.

And we'll continue to grow our door count in some of the market of Eastern Europe where we haven't penetrated much and Russia, and the Baltics, we're going to get more aggressive in some of the Northern European countries next year.

But right now, we're doing quite well in Germany.

It's one of our best stories of this year.

And as we said, Spain continues to do well.

France and Italy is not underperforming where we thought they would be.

Okay, just one housekeeping.

Can you just give us the door count at quarter-end, both US and international?

Thanks, guys.

Yes, it's flat off prior quarter.

We haven't really added doors, we've been focused on our existing doors.

Thanks, and good luck.

Thanks, Steph.

(OPERATOR INSTRUCTIONS).

And we'll hear from [Keith Fern] with Wachovia.

I was just wondering for current shareholders, and who's been in this stock for so long, and watching sales, where is the buy-back for (inaudible) sales?

Show some loyalty to the people who have suffered in the last few months in this company?

Keith, thanks for the question.

So as I mentioned earlier on the call that we're looking at our cash very closely, we've been focusing on our working capital.

Our first priority is to pay down our debt, which we are aggressively doing, and we are, as we stated on the pre-guidance call, looking at our share buy-back strategy here in the next few months.

And you'll hear more about that shortly.

What about individual people who've sold over the last two years who have not stepped up to the plate.

We saw one person buy stock.

We're trading at pretty bleak levels and people have sold stock at a lot higher prices and I think it would be a good signal to shareholders.

I'm looking at Ron right here.

Okay, and I'm sure individuals in the company will look at it very closely.

And there appear to be no further questions at this time.

I'll turn things back to management for any closing remarks.

Okay, thank you very much.

That does conclude today's conference call.

Thank you for your participation.

Have a great day.