Coronavirus hampered Crocs’ results early in the first three months of the year, especially in Asia, but this was partly offset by high store comparable sales in America, where the virus disrupted retail late in the quarter. Revenues for the first quarter declined by 5.0 percent from the year-ago quarter to $281.2 million, or by 3.3 percent on a constant-currency basis. It warned that second-quarter sales could drop further despite signs of recovery in China and South Korea.
The virus has impacted the business globally, including through store closures or reduced operating hours and decreased retail traffic. Many of the 367 company-operated stores, as well as many partner stores and wholesale customers’ stores were shuttered at some point during the first quarter, and many still remain closed.
The gross margin improved by 1.2 percentage points to 47.7 percent. However, the adjusted gross margin, which excludes non-recurring expenditures related to its U.S. and EMEA distribution centers, reached 48.0 percent. This was due to product mix, higher prices on certain products, and lower levels of promotions and discounts in the Americas.
The adjusted operating margin fell by 2.3 percentage points to 9.4 percent, and net income tumbled by 55.1 percent to $11.1 million.
Wholesale revenues decreased by 5.6 to $193.2 million, while retail sales dropped by 15.0 percent due to store closures, with an increase on a comparable store basis of 7.5 percent. However, e-commerce went up by 15.8 percent, and accounted for 30.1 percent of turnover, up from 25.4 percent for the first quarter of 2019. While many brick-and-mortar stores have been closed, Crocs.com and other digital commerce have remained open.
By region, the Americas rose by 15.2 percent to $147.7 million, with store comparable sales jumping by 23 percent before store closures in mid-March. In Asia, revenues tumbled by 25.9 percent in constant currencies to $65.5 million, as growth of 18 percent in e-commerce was offset by a drop of 27 percent in brick-and-mortar retail.
In Europe, the Middle East and Africa, sales were down by 7.6 percent to $70 million in constant currencies. Comparable retail stores sales grew by 7.5 percent. The management said it benefited from growing brand “heat” and strong online sales, which grew by 24 percent. They represented 38.2 percent of revenues compared with 31.8 percent for the same period in 2019. Before the shutdowns, stores were delivering mid-single-digit comparable growth and wholesale boasted double-digit growth.
Crocs closed 4 stores and opened 4 as well during the quarter. The number of stores in the EMEA region was down to 55 from 57.
Given the continued disruption and uncertainty globally related to Covid-19, Crocs withdrew the guidance released on Feb. 27, 2020. It is not providing second quarter or full-year guidance.
But, it expects a larger decline in revenues in the second quarter, as the majority of retail and partner stores may be closed for the whole period. Further afield, it anticipates revenue to continue sufferiing in the retail and wholesale channels as “social distancing” practices remain in effect in many markets.
The group noted that it is beginning to see some recovery in store traffic and sales in China and Korea where almost all stores are now open. Conversely, it is seeing declines in Japan, India, and much of Southeast Asia, areas that have been impacted by a second wave of the virus. Crocs enjoyed ”strong trends” in its e-commerce channel that it expects to continue, as consumers migrate to online shopping.
Crocs is taking several defensive measures: it reduced compensation for senior management and furloughed retail employees, but has retained store managers and assistant store managers, albeit with reduced hours in North America. The company’s owned distribution centers globally are operational. In the U.S., its distribution center qualifies as an “essential business” and is being used to distribute and supply companies with essential products for healthcare workers during the pandemic. Selling, general and administrative expenses for 2020 are now expected to be between $440 and $460 million, which is approximately $30 to $50 million lower than in the prior year and approximately $100 million lower than its original plan for 2020. The savings are primarily comprised of reduced compensation, lower marketing investment, and fewer discretionary expenses.