Earnings Call Transcript - CROX Q2 2021

Operator, Operator

Good day and thank you for standing by. Welcome to the Crocs, Inc. Second Quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Cori Lin, please go ahead.

Corinne Lin, Moderator

Good morning everyone and thank you for joining us today for the Crocs second quarter 2021 earnings call. Earlier this morning, we announced our latest quarterly results and a copy of the press release can be found on our website at crocs.com. We would like to remind you that some of the information provided on this call is forward-looking and accordingly is subject to the Safe Harbor provisions of the federal securities laws. These statements include, but are not limited to statements regarding potential impacts to our business related to the COVID-19 pandemic. Crocs is not obligated to update these forward-looking statements to reflect the impact of future events. We caution you that all forward-looking statements are subject to risks and uncertainties described in the Risk Factors section of our Annual Report on Form 10-K. Accordingly, actual results could differ materially from those described on this call. Please refer to Crocs' Annual Report on Form 10-K as well as other documents filed with the SEC for more information relating to these risk factors. Adjusted gross margin, income from operations, operating margin and earnings per diluted common share are non-GAAP measures. A reconciliation of these amounts to their GAAP counterparts is contained in the press release we issued earlier this morning. Joining us today on the call are Andrew Rees, Chief Executive Officer and Anne Mehlman, Executive Vice President and Chief Financial Officer. Following their prepared remarks, we will open the call for your questions. At this time, I will turn the call over to Andrew.

Andrew Rees, CEO

Thank you, Corinne, and good morning everyone. Our Q2 results were exceptional as we continue to see strong demand for the Crocs brand globally. Our confidence in the strength of our brand is also reflected in our raised 2021 guidance. Looking beyond this year, we're announcing that the Crocs brand will have net zero emissions by 2030. We will raise our already low emission footprint per shoe, enabling us to provide comfort without carbon to our fans worldwide. I'm excited for our future and I'm confident we can deliver sustained highly profitable growth while having a positive impact on our planet and our communities. Turning to the highlights from the second quarter of 2021, revenues nearly doubled versus prior year to $641 million and increased 79% from 2019. Revenue growth was strong across all regions with the Americas up 136% and on a constant currency basis, EMEA up 53% and Asia up 27%. Digital sales grew by 25% versus prior year and an impressive 99% versus 2019 to represent 36% of revenues. Adjusted operating income more than doubled to $196 million and adjusted operating margins expanded to a record of 31%. Adjusted diluted earnings per share increased by $1.22 to $2.23. Underlying these incredible results is the iconic brand we have built. To continue to build brand relevance and consideration globally, we leveraged digital and social marketing, influencer campaigns and collaborations. We're proud of the brand we have built, and especially pleased with initiatives such as the free pair for healthcare that enable the Crocs brand and business to have a positive impact in our communities. This week, we announced our next step in having a positive impact on our planet; our commitment to becoming net zero emissions by 2030. Our inherently simple approach to design, the materials we use, and how our shoes are manufactured means that our classic clog already has a low carbon footprint of only 3.94 kilograms of carbon per pair. We anticipate our consumers will be as excited as we are about our commitment to having a positive impact. Our comfort journey will increasingly include uplifting our communities and creating a welcoming environment for everyone. Now let's turn to second quarter operating highlights. We're very excited by the growth we're seeing in all key product pillars, clogs, sandals, and Jibbitz. Clog sales were outstanding, increasing 101% year-over-year to represent 74% of total footwear revenues versus 68% last year. Sandal sales were a standout, increasing 57% for Q2 and 38% for the first half, driven by our classic fly and classic sandal. Jibbitz sales were exceptional, more than tripling for the quarter versus last year. Global DTC revenues grew by 79%. Our wholesale channel grew revenues by 112% versus prior year. Finally, profitability was exceptional as we achieved record quarterly adjusted operating margins. While we remain incredibly optimistic about our business and have substantially raised full year 2021 guidance as we emerge from the pandemic, global logistics remain challenging and volatile. I also want to thank the entire Crocs organization. These results are a reflection of the hard work and dedication to the Crocs brand. With that, Anne will now review our financial results in more detail.

Anne Mehlman, CFO

Thank you, Andrew. And good morning everyone. We'll begin with a short recap of our second quarter results. Our second-quarter results are exceptional. We delivered record quarterly revenues on broad-based growth across all regions, channels, and product categories. Second quarter revenues came in at $640.8 million, compared to $331.5 million in the second quarter of 2020, marking a 93.3% increase. Year-to-date revenues exceeded $1.1 billion, an increase of 68.1% versus the first half of 2019. We sold 29.1 million pairs of shoes, an increase of 78.8% over last year. The Q1 price realignments we took on certain products in select markets globally have been successfully adopted. In the Americas, revenues were $405.7 million, up 136.4%. In Asia, Q2 revenues were $126.8 million up 35.5%. EMEA revenues increased 63.1% to $108.3 million with growing brand heat offsetting any global logistics disruptions. Our second quarter adjusted gross margins were 61.8% up 660 basis points from last year, driven by price increases, fewer promotions, and increased sales of Jibbitz. We expect to generate significant operating cash flow and to maintain a strong balance sheet. In Q2, we executed a $300 million ASR which resulted in the repurchase of $2.9 million shares at an average price of $103.79 per share. Our liquidity position remains strong with $197.9 million in cash and cash equivalents and $386.4 million in borrowings. Turning to our outlook for the third quarter and full year 2021, we expect revenue to grow approximately 60% to 70% and adjusted operating margin to expand to be between 24% and 26%. Given our extraordinary first half performance, we are raising our full-year 2021 guidance.

Andrew Rees, CEO

Before we open the line for Q&A, I want to acknowledge that Dorian Wright is retiring from our board of directors after a decade of service. The Crocs brand remains incredibly strong, as evidenced by our second quarter results, and our increased guidance for 2021. We're excited for the future which now includes achieving net zero emissions by 2030 and having a positive impact on our planet.

Operator, Operator

Your first question is from Jonathan Komp with R.W. Baird. Your line is open.

Jonathan Komp, Analyst

Yes thank you very much. I wanted to start off when you think about the second half guidance, given the raise to the full year revenue. Could you just maybe share more detail on what you're seeing across channels and geographies to support your confidence in that two year acceleration from here?

Andrew Rees, CEO

Thanks John. I'll give you a bit of color and then pass it over to Anne for specifics. We remain incredibly confident in the trajectory of the brand. As we look across all of our channels, we see strength everywhere. Our stores have reopened this year. We've seen significant increases in traffic and conversion, particularly in Korea. Digital is performing well and our wholesale channels are also performing great, leading to a very bullish outlook overall.

Anne Mehlman, CFO

Yes, we saw EMEA growth of almost 53% constant currency in the quarter, so good to see some international growth coming on strong. Asia also returned to growth on a two-year basis, so we expect all of our regions to contribute to those growth factors in Q3 and Q4.

Jonathan Komp, Analyst

When you think about the supply chain ability to keep up with that growth, could you just share more about the current state of the environment there and the key factors impacting it?

Andrew Rees, CEO

As you look at global supply and logistics, it's been extremely challenging for the last 12 months. We anticipate seeing some temporary factory closures in Vietnam as they battle COVID. However, we are confident in our inventory on hand and currently in transit, thus embedding that into our guidance. We feel comfortable with where we are given these uncertainties.

Erinn Murphy, Analyst

Can you remind us how big Vietnam is as a percent of your overall sourcing and how quickly you can move into other regions if these rolling lockdowns continue?

Anne Mehlman, CFO

We manufacture a significant portion of our products in Vietnam, but we don't release the exact percentage. We are supplementing production with other regions as well, but Vietnam remains crucial for us.

Andrew Rees, CEO

Our performance in Asia was very pleased. We executed well against our repositioning plan, particularly in China. We feel really good about performance and are confident about accelerated growth in '22.

Erinn Murphy, Analyst

Regarding your goal to get to net zero by 2030, what percent reduction are you committing to versus using offsets to net out the rest?

Andrew Rees, CEO

We have been working on this for some time from various dimensions, including sustainable ingredients and packaging. We're committed to making substantial reductions in our carbon footprint, with more details to be shared at our September Investor Day.

Anne Mehlman, CFO

We've actually revised our CapEx guidance for the year from $130 million to $80 to $100 million, simply due to timing of our costs and investments.

Mitchel Kummetz, Analyst

Can you help me understand how meaningful it is that sandal consideration is now comparable to clogs?

Andrew Rees, CEO

We think it’s very important that sandal consideration has risen significantly. This gives us confidence in our growth strategy, although we don't expect sandal sales to equal clogs sales next year.

Sam Poser, Analyst

Can you follow up on the fourth quarter and how much of your inventory is in transit right now?

Anne Mehlman, CFO

We don’t break out the in transit versus on-hand inventory but it's significant and has been consistent as we've navigated through logistics challenges.

Susan Anderson, Analyst

How are you thinking about promotions impacting gross margin levels looking forward?

Andrew Rees, CEO

We've been very proactive in pulling back on promotions. While there's some room in certain Asian markets, we've mostly had a non-promotional stance across our stores in the U.S.

Jay Sole, Analyst

Can you talk about the allocation model and what benefits it has brought to the brand and operations overall?

Andrew Rees, CEO

The benefits are significant. The allocation model helps manage our inventory effectively at wholesale and provides differentiation between our wholesale partners. We're using best-in-class brand management practices.

Operator, Operator

This concludes today’s conference call. Thank you for participating. You may now disconnect.