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Crocs, Inc. (CROX)

Shareholder Analyst Call

May 23, 2012 2:20 p.m. ET


John McCarvel - President and Chief Executive Officer

Jeff Lasher - Chief Financial Officer

Dale Bathum - Senior Vice President of Products

Kevin Kim - Investor Relations

Hank Haney - Professional Golf Expert/Instructor


John McCarvel

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» Crocs' CEO Discusses Q1 2012 Results - Earnings Call Transcript
» Crocs' CEO Discusses Q4 2011 Results - Earnings Call Transcript
» Crocs's CEO Discusses Q3 2011 Results - Earnings Call Transcript

We are going to post the presentation to the website sometime later today so everything that we are going to cover with you today will be on the website later. So welcome. So, of course, forward looking statements, our safe harbor. I’d like to just frame today and talk about what we think our business looks like over the next three years and answer any questions that you guys have as we go through long-term.

Now we are going to some specific drill downs as we go through the presentation today. Things that I think are concerning in the general market. Things like Europe, what does that mean to Crocs. FX, what is the foreign exchange impact to our business. And so we are going to do some specific drill downs but I would like you guys just to ask questions as things come today. Make this an interactive session as much as possible.

When we think about our business in Crocs, I know we have said this many before and I think it is worth repeating, we think about ourselves as moving from this clog company, which we have been, in which we still have high-40% revenue tied up in clogs, different types of clog products we sell, kids, adults. And how we move ourselves gradually but progressively towards being much more of a casual, lifestyle play. And I think what you are going to see in the products around you, we have our Americas sales and marketing meeting going on right now for spring-summer ’13. So what's going to happen is when it’s an appropriate breaking-point then, probably after Dale presents, we are going to take you into the room. It’s kind of cordoned off there, closed off. And we are going to show you what the line looks like, we are going to show you how it’s going to market. So you are going to get kind of a preview that we wouldn’t normally show until we get into trade shows, but you are going to get a much better perspective here.

So there is about 140 people also on campus this week. Our U.S. sales force, our Canadian group, our distributors from Latin-South America too. But this is something that we are working at hard. We think that it drives us to a far better place in the next three to five years. And we don’t think we really have a lot of natural competitors in this $30 to $60 price point that we really position the brand around today. Balanced international growth. I have spent, of the last three weeks I spent six weeks abroad. Mainly because 65% of our revenue comes from abroad and I really need to be out there and working with on understanding what's happening with the business. And I’ve come back, I will talk through today.

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I am really excited about what's happening in Asia of course. But you know actually I left Europe on both occasions very bullish about what's happening relative to our business. Like if they were going to talk about the -- it’s the smallest piece of our business, only 17% of our revenue comes from the European market place. If we think back years ago, Europe was larger than Asia at that time. And we kind of lost our way, we stayed with the clogs too long, we didn’t distribute, we didn’t build out, as you are going to see today in numeric terms, platforms either in retail or in ecommerce that drives our Asian and American business.

We made a mistake on the Q, before our earnings call that we -- the Q1 earnings call, that we didn’t book in this right up front and stay right out of the shoot. We are really happy with where we are at. Not only for the quarter, for the year. This top line growth that we are going to talk about today on a constant currency normalized basis, is driving what we said 15% to 20% top line growth. And we are going to break it out in more granularity than we ever have for you. So hopefully that kinds of gives you a better feeling.

And we are committed to running a good business. We are committed to the consistency that you have seen from us, how we manage SG&A. We are going to going to give you more details today on retail and all that and how that ties to how we financially manage a strong balance sheet here at Crocs. And I think that there is a little bit concern sometimes too about inventory levels. I have said this from the day I became CEO, we will never have an inventory problem as long as I am here. And I am committed to this internally, to the board and to the Street. And we don’t have an inventory buildup issue here. We are going to talk through that in more detail with you today. So we manage maybe at times, too tightly. Maybe we are sacrificing a little bit of top line growth but we are not going to go out and chase business from an inventory standpoint.

When we have our conversations and I did this yesterday with the Americas sales group, we break it down in just simple of a way with them. That 5% of our growth has to come from geographic expansion. So I look at what we are doing in China today, or what we are doing in India, what we are doing in the Middle East which we will talk about during the day today. What we do in Eastern bloc countries. So we are just going into Josie’s favorite homeland. We are just going into Poland now and there is that huge amount, is that fair. Only one person asked me if the website is in Polish. Right, off all of our investors here. Nothing in Polish.

But I think, all kidding aside, I think Central and South America offers us huge growth. All we are asking our sales people, in any region that we talk to, it’s 5% growth. It’s all we ask them. 5% growth in new geography. All we ask them is for 5% growth in ASP. We are not trying to go from a $30 clog to an $80 nice dress shoe. We are inching up the brand, and you see some of things in front of you. The [be bold] or Huarache collection, we are going to talk with you guys about it. Today you are going to see it in the other room.

A whole new place where we can continue to expand our flats, our sandals, our women’s wedge business, into a whole, new more innovative space building on our heritage of molded, cool, innovative products. 5% wholesale expansion. A few more doors and more placements of products in the doors that we have today. We are going to talk with you about our sales philosophy when it comes to adding new accounts versus kind of building and defending the space that we have today.

Once you get space at wholesale, unless you really have a difficult time selling through products, which we have not had the last three, four years, then wholesalers are conservative. They are not going to give up your space to someone else if you continue to do the right thing. 5% is all we ask, whole sale expansion. And lastly, in retail. We are expanding retail doors this year somewhere between 80 and 100 net doors for the year. We continue on this. That’s 25% growth on door count.

If you think about again, our business, just 438-439 retail doors that we have today, generate a significant amount of revenue for our business. And you are going to kind of continue to see that investment in retail as we don’t grow wholesale at a rapid rate, you are going to see a little bit more of a shift to the end direct consumer. So we get the product placements that we want to have in the next two-three years, and we are going to talk in more detail about that today.

So with that I am going to turn it over to Jeff so that he can do the retail review for 2012, and then I am going to come back and talk about channels and regions.

Jeff Lasher

Thanks, John. Welcome everybody. Hope everybody had a good trip down here. Thanks to everybody here, thank you for coming. Just wanted to kind of recap Q1. Set off the tone for the day and then as John mentioned, we have got a busy presentation over the next couple of hours for you, walking through a number of different topics. We will talk about each one of these individually as we go through the next couple of hours, specifically revenue. John will talk about revenue and the wholesale, retail internet as well as our international expansion.

In the first quarter, as John mentioned, we were up 20% on a year-over-year basis. Gross margin, we will talk about that later in the presentation. SG&A as a percentage of sale, we will talk about that, give you a little bit more information on the SG&A aspect of our business. And then overall operating margins for first quarter, 14.6%, improvement of 160 basis points in Q1 versus Q1 2011. You can see that in the bottom line. EPS was $0.31 versus the $0.24 last year.

Guidance for 2012 second quarter, $335 million to $340 million. Tax rate at that time 22%. We will talk a little bit more about taxes later in this presentation as well. And then diluted EPS, the guidance was $0.61 to $0.63. At that time we estimated that euro to U.S. dollars would be $1.131 and that Japanese yen would be about 82.5.

I think the key message today, and you will hear this from all three of us, is that our -- consistent with prior meetings, we believe our long-term sustainable growth story continues as we penetrate international markets. We look at our international footprint, driving a wholesale expansion, increased product portfolio driving ASP, and then finally our retail and internet investments around the globe. Driving overall revenue up about 15% to 20% on a constant currency basis.

We haven’t deviated from that message and we continue to maintain our objective of driving that long-term sustainable growth rate. Let me turn it back over to John to talk about both the international expansion as well as the channel expansions.

John McCarvel

Just real quick, and you know as we sit here today different facility maybe worth noting. You know we were in a building in the Crocs parking lot. Last time you were there, people who came, this building here now is completely ours. We are renovating the back half where product development was, where we met last year. And that will be where marketing and our product development groups are at. And then as you do tour through here today, you are going to see (inaudible) our supply chain management, ecommerce, all in this building.

It’s really quite nice. We are all interconnected today and this is all of our corporate organization here. Crocs parking lot, there is one building that you will see kind of mustard cone colored building in Crocs parking lot. That’s our Americas business over there. That parking lot is not big enough sometimes and at other times it’s too big. But we do try to kind of separate church and state. You know what goes on in the regions is there’s to do. What we do at corporate is much more strategic, much more directed towards strategies, systems, overall consolidation of product development. So there is kind of that separation of the building.

Nice part about this is, this is about 60% this space here that we moved into -- after renovation moving into this, about 60% of the price we paid for the building that we were in. So it’s a nicer space for us. It’s much more conducive as you are going to see. We have a little cafeteria here. 450 people basically on the campus between our corporate and the Americas group today.

You know, Jeff goes through this charade and I think that this is a really good representation of the management of this business. And I know it doesn’t look at the balance sheet side of this but we would also look equally as yet. But when we put this up and we look at this internally, I can't determine what investors think about what this business is doing. But what I can do, and what we as a management can do is control what's within our space and see that kind of revenue growth. And we are going to talk about what that looks like within the channel. To see us have the ability to transform our business from just molded products into other products, holding us margins, driving operating margins up as we go and to control SG&A. Which -- you know we had a little bit of history of issues early on with the SG&A that we have overcome.

I think this is a really nice place to start with. Where this business is at and where it’s going. And I think it’s a testament to the management team that is here, that is focused on this and has delivered these results and are the same group that are committed to continuing to growth this business.

Let's talk about channels first and then we will go into regions after that. And again, as I get into this you may have specific questions and things that you may want to ask, Jeff might jump up and help me with specific things if need be. But if you look at our overall business, if you look at ’11, ’12 and as we go into ’13, yes, there is a gentle shift here as we are putting more retail stores online in Europe. We are seeing an opportunity in specific key locations in the U.S. to add and also in our Asian business where you are going to see we have a high mix of both Crocs stores as well partner stores. And I think the numbers might surprise you a little bit.

We have talked about this before but I think you are going to see it upon the screen today. It kind of goes to show what derives, what is the underlying things that drive our business in Asia. What are the underlying things that drive our business in Europe and U.S., America’s marketplace. So a little bit of shift we see in the next couple of years. A little bit more directed towards retail. But as we continue to try to sell-in and we will talk about our wholesale strategy. If we gain additional doors in wholesale, we don’t over distribute, dilute the brands, which we are very cognizant of what the trade-offs are there. Then we will see what that balance comes back to be. But it’s our preference that we stay in that 60, kind of 40 split, but we are moving a little bit more towards the direct.

If we look about growth, if we just take Q1 as an example of kind of how that growth looks, remember that retail has a 10% comp growth on that year-over-year. In our comp base today, you guys have asked this question before, we have about 72% of all retail doors fall in the comp base. And it’s a question of time how many stores you can set there, is it 80, is it 50. You guys are changing format. You stand them all but you move from a kiosk to a store. You are changing a store size inside a mall. 72% of our retail falls in a comp base and we comped up 10%.

Now, I think we all know and I think this is pretty consistent with what you here. I am in the marketplace today. We do see some pull-forward from April for holiday reasons and just for the weather reasons between April and March. And we talked about this even when we did the Q1 earnings call. That’s why when we talk about the first half of the year, we are very bullish that we are about plan of where we are going to be at the bottom line, and we think that it’s going to equal out a little bit between Q1 and Q2 on the top line revenue.

So a good strong start to the year from a growth standpoint, wholesale, retail and internet business. Kind of showing that there is a good appetite for the brand in the marketplace today. We think about channel sales, we have continued to build doors and I will show certain things that we are doing with some retailers. I did not pull some of the same slides from Europe or Asia. I think sometimes we can relate, investors can relate a little bit more with what's happening with the brand. With U.S. wholesale customers, I am going to show you some specific things that we are doing with key customers today. And how when we talk about building kind of wholesale partnerships, what do I mean. What are we actually doing here to gain more space both in real estate and number of skews that we are distributing in those particular retailers.

And also we are working really hard, and Dale’s going to talk about this again, to continue to build a Q4 business. It’s not going to happen overnight. We never said it would happen overnight. But for us to be relevant we have to continue to design cool, innovative products. You see some products up here, our Mammoth collection comes back this year. You know Dale comes from Nike and Doug Hayes runs or Americas business, comes from Adidas. He was President of Adidas in Canada.

When we look at models and we ask them, how many models in your history in those really key brands did sell 10 million pairs of shoes. Our Mammoth collection of products, we sold over 10 million pair of shoes out. This is a franchise for us not to go past or forget about what to build on in. We took the Mammoth out of the line last year in our U.S. marketplace. It got a little bit distributed broken, it didn’t really have the right, maybe distribution and pricing around it. So by taking it out, coming with a new series of products this year. Little bit upgraded, a little bit different design. And we believe we are kind of building on a franchise that hopefully we will do better.

Cobbler collection in our boot line. We are committed to inching those forward each season. And Dale’s going to give you some specific numbers today so you can see. So what does that mean in terms of flat and boots and how is this kind of coming together for Crocs as a brand. Big debate inside, somebody brought a Mac, other don’t Mac. I am not capable yet of running a Mac so. Any questions at this point? Yeah?

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