In a Nutshell: The popular clog brand once again was a winner in early trading as investors, impressed with Crocs’ wholesale operation and growing margins, sent its stock up nearly 10 percent, settling on a price of $25 per share at the time of writing.
Crocs recently invested in a distribution center in Ohio to replace its operations in California, resulting in a $15.5 million increase in capital expenditures during the quarter. The brand expects to spend $35 million in capital throughout FY19 on the new facility.
Sales: The brand’s supply chain concerns from the previous quarter did not appear to affect Q2, as Crocs took in $358.9 million in revenue, up 9.4 percent over the comparable period a year ago and just missing analyst expectations by $1.56 million. Wholesale revenue grew by 9.4 percent while e-commerce sales grew by 18 percent. Not to be left behind, retail comparable sales also grew substantially in the second quarter, up 11.8 percent over the same period last year.
Crocs reported that its income from operations rose by 29 percent as well, up to $47.8 million from $37.1 million in the comparable period. As a result, Crocs said that it would be raising its full-year revenue guidance to a growth rate of 9 percent to 11 percent over the prior range of 5 percent to 7 percent.
The footwear brand’s adjusted gross margin widened 170 basis points during the quarter, compared to the previous year. At 53.6 percent, the margin was also “well above” the previous guidance of 52.2 percent set earlier in the year. The company attributed the result to reduced purchasing power associated with the “strength of the U.S. dollar” and an unforeseen reduction in freight costs.
However, Crocs held fast to its year-end adjusted gross margin guidance of 50.5 percent, expecting headwinds in the form of higher freight and distribution costs along with the impact of an increased emphasis on low-margin, wholesale products. Nonetheless, the brand expects much of that to be offset by increased pricing, improved efficiency from its infrastructure investments and a reduction in promotion.
Stores closures in the quarter trimmed revenues by $6 million versus the prior-year period, Crocs said.
Earnings: Crocs increased its earnings per share by more than 50 percent in the second quarter of 2019, highlighting the brand’s continued growth and unexpected rise to prominence. It registered a non-GAAP EPS of 59 cents in doing so, beating projections of 46 cents set by analysts. Net income attributable to stockholders also grew to $39.2 million from $30.4 million in the year-ago period, an increase of 22 percent.
CEO’s Take: Crocs CEO and president Andrew Rees credited increased consumer demand for Crocs products as a big reason behind the company’s Q2 success. However, as the brand’s raised revenue guidance demonstrates, he believes there is still more room to grow.
“We had a terrific quarter, as demand for our product and brand heat continued to climb,” Rees explained. “With strong revenue growth and better-than-expected gross margins, we expanded our operating margin 200 basis points to approximately 13 percent of sales and grew our diluted earnings per share 57 percent compared to last year’s second quarter. We expect our revenue growth in the back half of the year to significantly outpace the first half; accordingly, we are increasing our full-year outlook.”