Crocs, Inc. Q2 2010 10-Q Summary
Business Context and Reporting Period
This filing covers the quarterly period ended June 30, 2010. Crocs, Inc. designs, manufactures, and markets footwear for men, women, and children globally. The company operates through three reportable segments: Americas, Europe, and Asia. As of July 31, 2010, there were 86,630,707 shares of common stock outstanding.
Key Financial Metrics
| Metric | Q2 2010 | Q2 2009 | YTD 2010 | YTD 2009 |
|---|---|---|---|---|
| Revenues | $228.0 million | $197.7 million | $394.9 million | $332.6 million |
| Gross Profit | $131.9 million | $101.1 million | $218.6 million | $150.8 million |
| Gross Margin | 57.8% | 51.1% | 55.4% | 45.4% |
| Operating Income | $38.7 million | ($24.5 million) | $48.1 million | ($47.1 million) |
| Net Income | $32.3 million | ($30.3 million) | $38.0 million | ($52.7 million) |
| Diluted EPS | $0.37 | ($0.36) | $0.43 | ($0.62) |
| Cash & Equivalents | $96.9 million | $77.3 million (Dec 2009) | N/A | |
| Operating Cash Flow (YTD) | $39.8 million | $26.1 million | N/A | |
| Debt | $3.0 million (Total) | $1.6 million (Dec 2009) | N/A |
Note: Debt consists of capital lease obligations and notes payable. The company has a $30 million revolving credit facility with no outstanding borrowings as of June 30, 2010.
Material Changes vs. Prior Period
- Revenue Growth: Q2 2010 revenue increased 15.3% year-over-year, driven by a 5.1% increase in unit sales and a 12.4% increase in average selling price ($17.76 vs. $15.80). All three geographic segments (Americas, Europe, Asia) reported revenue growth.
- Profitability Turnaround: The company returned to profitability, reporting $32.3 million in net income for Q2 2010 compared to a $30.3 million net loss in Q2 2009. This turnaround is attributed to cost-saving initiatives implemented in 2009 and improved economic conditions.
- Expense Reduction: Selling, general, and administrative (SG&A) expenses decreased slightly in Q2 2010, primarily due to a $14.0 million reduction in stock-based compensation expense compared to the prior year.
- One-Time Items: Q2 2009 results were significantly impacted by $23.7 million in impairment charges and $5.9 million in restructuring charges, neither of which occurred in Q2 2010. Q2 2010 included $1.3 million in restructuring charges related to lease termination estimates.
- Inventory & Receivables: Inventory increased to $113.6 million (from $93.3 million at year-end 2009) due to seasonality. Accounts receivable increased to $94.0 million, with Days Sales Outstanding rising to 37.5 days.
Outlook, Risks, and Management Commentary
- Guidance: The filing does not provide specific numerical guidance for the full year 2010. Management anticipates cash flows from operations will be sufficient to meet needs for the next 12 months.
- Strategic Initiatives: Management continues to expand the retail channel (363 company-operated locations as of June 30, 2010) and increase factory-direct shipments to lower distribution costs. The company is also introducing more winter-oriented styles to mitigate seasonality.
- Legal Proceedings:
- Patent Litigation: A significant ITC investigation regarding patent infringement was remanded to the ITC in July 2010 following a Federal Circuit ruling in Crocs' favor. The matter is pending a determination on enforceability.
- Class Action: A consolidated securities class action lawsuit remains pending with motions to dismiss outstanding; the timing of a ruling is uncertain due to a change in presiding judge.
- Columbia Settlement: Claims regarding trade secrets and breach of fiduciary duty filed by Columbia Sportswear were settled and dismissed.
- Risks: Key risks include foreign currency exchange fluctuations (exposure to Euro and Yen), seasonality of warm-weather footwear, and the outcome of ongoing intellectual property litigation.
Investor Verification Checklist
- Patent Litigation Status: Verify the current status of the ITC remand and the Federal Circuit decision regarding the utility and design patents.
- Seasonality Impact: Assess the company's ability to maintain revenue growth in Q3 and Q4 given the historical seasonality of warm-weather footwear.
- Foreign Currency Exposure: Monitor exchange rates for the Euro and Yen, as a significant portion of revenue and gross profit is generated internationally.
- Inventory Levels: Track inventory turnover and potential write-downs given the $113.6 million inventory balance and the shift to new product styles.
- Class Action Litigation: Monitor the status of the securities class action lawsuit and any potential settlement or dismissal rulings.