ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Business Overview
Crocs, Inc. and its consolidated subsidiaries (collectively, the “Company,” “Crocs,” “we,” “our,” or “us”) are engaged in the design, development, manufacturing, worldwide marketing, distribution and sale of casual lifestyle footwear and accessories for men, women, and children. The broad appeal of our footwear has allowed us to market our products through a wide range of distribution channels, our own Crocs single-branded stores including both full-price and outlet stores, our own e-commerce sites, traditional multi-branded stores including family footwear stores, sporting goods stores and a variety of specialty and independent retail channels, and third-party e-commerce sites. In select markets we also sell to distributors that are typically granted the rights to distribute our products in a given geographical area.
Known or Anticipated Trends
Based on our recent operating results and current perspectives on our operating environment, we anticipate certain trends to impact our operating results:
|
|
•
|
Continued softening in select global regional economies and a cautious retail environment may negatively affect customer purchasing trends.
|
|
|
•
|
Foreign exchange rate volatility may continue to impact our reported U.S. dollar results from our foreign operations for the foreseeable future.
|
|
|
•
|
Consumer spending preferences continue to shift toward
e-commerce
and away from brick and mortar stores. This has resulted in continued sales growth in our e-commerce channel, as well as on various e-tail sites operated by wholesalers, and contributed to declining foot traffic in our retail locations.
|
|
|
•
|
We anticipate lower retail revenues and selling, general and administrative expenses (“
SG&A
”) as we close less productive stores as leases expire and transfer select company-operated stores to distributors. Distributor revenues are reported within our wholesale channel.
|
|
|
•
|
We anticipate that our annual gross margin for 2017 will trend to approximately 50%, as our seasonal sale volumes are lower in our third and fourth quarters.
|
|
|
•
|
We have identified reductions in SG&A in the amount of $75 to $85 million. These actions are projected to generate an annual $30 to $35 million improvement in earnings before interest and taxes by 2019. We expect to achieve approximately $30 million of these SG&A reductions in 2017. We expect to incur charges of approximately $10 to $15 million over the next two years to achieve these SG&A reductions, with approximately $7 to $10 million of that being incurred in 2017. We anticipate closing or transferring approximately 90 and 70 company-operated retail stores in 2017 and 2018, respectively, thereby reducing our total store count to approximately 400 from 558 at the end of 2016. The majority of company-operated store closures will occur as store leases expire.
|
Use of Non-GAAP Financial Measures
In addition to financial measures presented on the basis of
accounting principles generally accepted in the United States of America
(“
U.S. GAAP
”), we present certain information related to our current period results of operations through “constant currency”, which is a non-GAAP financial measure and should be viewed as a supplement to our results of operations and presentation of reportable segments under
U.S. GAAP
. Constant currency represents current period results that have been retranslated using prior year average foreign exchange rates for the comparative period to enhance the visibility of the underlying business trends excluding the impact of foreign currency exchange rate fluctuations.
Management uses constant currency to assist in comparing business trends from period to period on a consistent basis in communications with the Board of Directors (the “Board”), stockholders, analysts, and investors concerning our financial performance. We believe constant currency is useful to investors and other users of our consolidated financial statements as an additional tool to evaluate operating performance. We believe it also provides a useful baseline for analyzing trends in our operations. Investors should not consider constant currency in isolation from, or as a substitute for, financial information prepared in accordance with
U.S. GAAP
.
Financial Highlights
The following are significant developments in our businesses during the
three months ended June 30, 2017
:
|
|
•
|
Revenues for the
three months ended June 30, 2017
were
$313.2 million
, a
decrease
of
$10.6 million
, or
3.3%
, compared to the same period in 2016.
|
|
|
•
|
Cost of sales for the
three months ended June 30, 2017
was
$143.4 million
, a
decrease
of
$10.8 million
, or
7.0%
, compared to the same period in 2016.
|
|
|
•
|
Gross profit for the
three months ended June 30, 2017
was
$169.8 million
, an
increase
of
$0.2 million
, or
0.1%
. Gross margin increased
180
basis points to
54.2%
, compared to the same period in 2016.
|
|
|
•
|
Selling, general and administrative expenses
decreased
$8.7 million
, or
5.8%
, including
$1.8 million
in strategic consulting and reorganization costs, for the
three months ended June 30, 2017
compared to the same period in 2016.
|
|
|
•
|
Net income attributable to common stockholders
increased
$6.3 million
to
$18.1 million
compared to
$11.7 million
for the same period in
2016
. Basic and diluted net
earnings per common share
(“
EPS
”) were
$0.21
and
$0.20
respectively, for the
three months ended June 30, 2017
, compared to basic and diluted EPS of
$0.13
for the
three months ended June 30, 2016
.
|
Future Outlook
We intend to continue our strategic plans for long-term improvement and growth of the business, which comprise these key initiatives:
(1) focusing on driving clogs and sandals growth (sandals includes flips, and slides),
(2) enhancing brand relevance and esteem through our “Come as You Are” campaign, using effective digital marketing,
(3) focusing on driving consistent growth in e-commerce and wholesale, and optimizing distributor and outlet productivity and performance,
(4) focusing time and investment on driving growth in core markets in Asia and the Americas,
(5) driving improved profitability through greater cost and working capital efficiency, and
(6) elevating internal communication and employee engagement.
We believe these initiatives will better position Crocs to adapt to changing customer demands and global economic developments. We are focusing on our core molded footwear heritage by narrowing our product line with an emphasis on higher margin units, as well as developing innovative new casual lifestyle footwear platforms. By streamlining the product portfolio and reducing non-core product development, we believe we will create a more powerful consumer connection to the brand.
We are refining our business model around the world, prioritizing direct investment in larger-scale geographies to focus our resources on the demographics with the largest growth prospects, moving away from direct investment in the retail and wholesale businesses in smaller markets, and transferring significant commercial responsibilities to distributors and third-party agents. Further, we intend to expand our engagement with leading wholesale accounts in select markets to drive sales growth, optimize product placement and enhance brand reputation.
Comparison of
Three Months Ended June 30, 2017
to
Three Months Ended June 30, 2016
Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Change
|
|
2017
|
|
2016
|
|
$
|
|
%
|
|
(in thousands, except per share, margin, unit sales and average selling price data)
|
Revenues
|
$
|
313,221
|
|
|
$
|
323,828
|
|
|
$
|
(10,607
|
)
|
|
(3.3
|
)%
|
Cost of sales
|
143,414
|
|
|
154,188
|
|
|
(10,774
|
)
|
|
(7.0
|
)%
|
Gross profit
|
169,807
|
|
|
169,640
|
|
|
167
|
|
|
0.1
|
%
|
Selling, general and administrative expenses
|
140,361
|
|
|
149,035
|
|
|
(8,674
|
)
|
|
(5.8
|
)%
|
Income from operations
|
29,446
|
|
|
20,605
|
|
|
8,841
|
|
|
42.9
|
%
|
Foreign currency gain (loss), net
|
162
|
|
|
(1,700
|
)
|
|
1,862
|
|
|
109.5
|
%
|
Interest income
|
157
|
|
|
164
|
|
|
(7
|
)
|
|
(4.3
|
)%
|
Interest expense
|
(188
|
)
|
|
(234
|
)
|
|
46
|
|
|
(19.7
|
)%
|
Other income, net
|
9
|
|
|
(189
|
)
|
|
198
|
|
|
(104.8
|
)%
|
Income before income taxes
|
29,586
|
|
|
18,646
|
|
|
10,940
|
|
|
58.7
|
%
|
Income tax expense
|
7,627
|
|
|
3,109
|
|
|
4,518
|
|
|
145.3
|
%
|
Net income
|
21,959
|
|
|
15,537
|
|
|
6,422
|
|
|
41.3
|
%
|
Dividends on Series A convertible preferred stock
|
(3,000
|
)
|
|
(3,000
|
)
|
|
—
|
|
|
—
|
%
|
Dividend equivalents on Series A convertible preferred shares related to redemption value accretion and beneficial conversion feature
|
(873
|
)
|
|
(802
|
)
|
|
(71
|
)
|
|
8.9
|
%
|
Net income attributable to common stockholders
|
$
|
18,086
|
|
|
$
|
11,735
|
|
|
$
|
6,351
|
|
|
54.1
|
%
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
Basic
|
$
|
0.21
|
|
|
$
|
0.13
|
|
|
$
|
0.08
|
|
|
61.5
|
%
|
Diluted
|
$
|
0.20
|
|
|
$
|
0.13
|
|
|
$
|
0.07
|
|
|
53.8
|
%
|
|
|
|
|
|
|
|
|
Gross margin
|
54.2
|
%
|
|
52.4
|
%
|
|
180
|
|
|
3.5
|
%
|
Operating margin
|
9.4
|
%
|
|
6.4
|
%
|
|
300
|
|
|
46.9
|
%
|
Footwear unit sales
|
17,422
|
|
|
17,734
|
|
|
(312
|
)
|
|
(1.8
|
)%
|
Average footwear selling price
|
$
|
17.66
|
|
|
$
|
18.05
|
|
|
$
|
(0.39
|
)
|
|
(2.2
|
)%
|
Revenues.
Revenues
decreased
$10.6 million
, or
3.3%
, in the
three months ended June 30, 2017
, compared to the same period in 2016. The revenue
decrease
was primarily due to the sale of our Taiwan business in December 2016, targeted reductions in the number of our company-operated retail stores, and additional actions taken to optimize our wholesale, retail and e-commerce channels. Approximately
$5.7 million
, or
1.8%
, of the
decrease
was due to lower sales volumes,
$2.9 million
, or
0.9%
, was due to lower average selling prices as our product, store and channel mix continued to change, and the remaining
decrease
of
$2.0 million
, or
0.6%
, resulted from foreign currency translation.
Cost of sales.
During the
three months ended June 30, 2017
, cost of sales
decreased
$10.8 million
, or
7.0%
, compared to the same period in 2016. Lower average costs per unit were primarily the result of product mix, including sandals and clog silhouettes which cost less to produce, and continued supply chain cost reductions, including relocation of third-party manufacturing production within the Asia Pacific region. Approximately
$2.7 million
, or
1.8%
, of the
decrease
was due to lower unit sales volumes,
$7.5 million
, or
4.8%
, was related to lower average costs per unit, and
$0.6 million
, or
0.4%
, from foreign currency translation.
Gross profit.
During the
three months ended June 30, 2017
, gross profit
increased
$0.2 million
, or
0.1%
, and gross margin
increased
180
basis points to
54.2%
, compared to the same period in
2016
. The increase in gross profit was primarily due to our continued focus on sales of higher margin core molded products, and reduced sales through discount channels. Approximately
$4.5 million
, or
2.7%
, of the
increase
was due to the combined impact of decreases in average costs per unit which exceeded decreases in average selling prices, partially offset by decreases of
$3.0 million
, or
1.8%
, resulting from lower sales unit volumes, and
$1.3 million
, or
0.8%
, from foreign currency translation.
Selling, general and administrative expenses.
SG&A
decreased
$8.7 million
, or
5.8%
, during the
three months ended June 30, 2017
, compared to the same period in
2016
. The
decrease
was primarily due to the combined impacts of a timing related deferral of $1.7 million in marketing expense related to our advertising and promotional activities, a decrease in facilities expenses of $2.6 million, reflecting fewer company-operated retail stores and the sale of our Taiwan business, a decrease in net bad debts expense of $1.2 million due to recoveries of previously reserved accounts receivable in China, and decreases of $3.2 million related to our SG&A reduction efforts, none of which were individually significant.
Bad debt expense related to our China operations was not significant during
2017
or
2016
, due to the implementation of a more restrictive credit policy in 2015 and our continued focus on the creditworthiness of our distribution partners.
Foreign currency gain (loss), net.
Foreign currency gain (loss), net consists of foreign currency gains and losses from the re-measurement and settlement of monetary assets and liabilities denominated in non-functional currencies, and realized and unrealized gains and losses on foreign currency derivative instruments. During the
three months ended June 30, 2017
, we recognized realized and unrealized net foreign currency
gains
of
$0.2 million
compared to net
losses
of
$1.7 million
during the
three months ended June 30, 2016
.
Income tax expense.
During the
three months ended June 30, 2017
, income tax expense
increased
$4.5 million
compared to the same period in
2016
. The effective tax rate for the
three months ended June 30, 2017
was
25.8
% compared to an effective tax rate of
16.7
% for the same period in
2016
, a
9.1
%
increase
. The increase in the effective rate was driven primarily by operating losses in certain jurisdictions where we are unable to record tax benefits because we have determined that it is not more likely than not that such tax benefits will be realized, as well as an increase in profitability in certain jurisdictions for which tax expense is recorded. Our effective tax rate of
25.8
% for the
three months ended June 30, 2017
differs from the federal U.S. statutory rate primarily due to differences in income tax rates between U.S. and foreign jurisdictions as well as book losses in certain jurisdictions for which tax benefits cannot be recognized.
Revenues By Channel
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Change
|
|
Constant Currency
Change (1)
|
|
2017
|
|
2016
|
|
$
|
|
%
|
|
$
|
|
%
|
|
(in thousands)
|
Wholesale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
$
|
57,307
|
|
|
$
|
54,620
|
|
|
$
|
2,687
|
|
|
4.9
|
%
|
|
$
|
2,516
|
|
|
4.6
|
%
|
Asia Pacific
|
65,146
|
|
|
74,640
|
|
|
(9,494
|
)
|
|
(12.7
|
)%
|
|
(8,541
|
)
|
|
(11.4
|
)%
|
Europe
|
30,947
|
|
|
36,192
|
|
|
(5,245
|
)
|
|
(14.5
|
)%
|
|
(5,234
|
)
|
|
(14.5
|
)%
|
Other businesses
|
103
|
|
|
225
|
|
|
(122
|
)
|
|
(54.2
|
)%
|
|
(121
|
)
|
|
(53.8
|
)%
|
Total wholesale
|
153,503
|
|
|
165,677
|
|
|
(12,174
|
)
|
|
(7.3
|
)%
|
|
(11,380
|
)
|
|
(6.9
|
)%
|
Retail:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
55,576
|
|
|
57,786
|
|
|
(2,210
|
)
|
|
(3.8
|
)%
|
|
(2,108
|
)
|
|
(3.6
|
)%
|
Asia Pacific
|
39,429
|
|
|
41,319
|
|
|
(1,890
|
)
|
|
(4.6
|
)%
|
|
(1,566
|
)
|
|
(3.8
|
)%
|
Europe
|
13,071
|
|
|
13,950
|
|
|
(879
|
)
|
|
(6.3
|
)%
|
|
(1,138
|
)
|
|
(8.2
|
)%
|
Total retail
|
108,076
|
|
|
113,055
|
|
|
(4,979
|
)
|
|
(4.4
|
)%
|
|
(4,812
|
)
|
|
(4.3
|
)%
|
E-commerce:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
23,271
|
|
|
22,691
|
|
|
580
|
|
|
2.6
|
%
|
|
659
|
|
|
2.9
|
%
|
Asia Pacific
|
20,069
|
|
|
14,887
|
|
|
5,182
|
|
|
34.8
|
%
|
|
6,008
|
|
|
40.4
|
%
|
Europe
|
8,302
|
|
|
7,518
|
|
|
784
|
|
|
10.4
|
%
|
|
902
|
|
|
12.0
|
%
|
Total e-commerce
|
51,642
|
|
|
45,096
|
|
|
6,546
|
|
|
14.5
|
%
|
|
7,569
|
|
|
16.8
|
%
|
Total revenues
|
$
|
313,221
|
|
|
$
|
323,828
|
|
|
$
|
(10,607
|
)
|
|
(3.3
|
)%
|
|
$
|
(8,623
|
)
|
|
(2.7
|
)%
|
Wholesale channel revenues.
During the
three months ended June 30, 2017
, revenues from our wholesale channel
decreased
$12.2 million
, or
7.3%
, compared to the same period in
2016
. The decrease resulted from an intentional reduction of sales through discount channels and reduced sales to select, overstocked distributors in Asia, which we began in the third quarter of 2016 to improve the quality of our earnings. Approximately
$8.2 million
, or
4.9%
, of the
decrease
resulted from lower sales volumes,
$3.2 million
, or
1.9%
, is attributable to lower average selling prices, and
$0.8 million
, or
0.5%
, resulted from foreign currency translation.
Retail channel revenues.
During the
three months ended June 30, 2017
, revenues from our retail channel
decreased
$5.0 million
or
4.4%
, compared to the same period in
2016
. The decrease in retail channel revenues compared to the same period in
2016
was due primarily to lower average sales prices as we shift to lower-priced molded product, combined with a net decrease of 55 company-operated retail store locations, as we work to optimize our store fleet. Approximately
$5.7 million
, or
5.1%
, of the
decrease
was attributable to lower average selling prices, a
decrease
of
$0.2 million
, or
0.1%
, resulted from foreign currency translation, which were partially offset by an
increase
of
$0.9 million
, or
0.8%
, from higher sales volumes.
E-commerce channel revenues.
During the
three months ended June 30, 2017
, revenues from our e-commerce channel
increased
$6.6 million, or
14.5%
, compared to the same period in
2016
, as this channel continues to grow in importance to our overall business. Revenues associated with an
increase
of
$15.4 million
, or
34.0%
, in sales volumes, particularly in the Asia Pacific segment, were offset in part by a
decrease
of
$7.8 million
, or
17.3%
, in lower average selling prices, and a
decrease
of
$1.0 million
, or
2.2%
, from foreign currency translation.
Future changes in average selling prices will be impacted by: (i) the mix of products sold, (ii) the sales channel under which the sales are made (as we generally realize higher sales prices from our retail and e-commerce channels as compared to our wholesale channel), and (iii) the level of sales discounts and incentives we offer our customers.
Comparison of the
Three Months Ended June 30, 2017
and
2016
by Reportable Operating Segment
The following table sets forth information related to our reportable operating segments, including a comparison of revenues and operating income by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Change
|
|
Constant Currency
Change (1)
|
|
2017
|
|
2016
|
|
$
|
|
%
|
|
$
|
|
%
|
|
(in thousands)
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
$
|
136,154
|
|
|
$
|
135,097
|
|
|
$
|
1,057
|
|
|
0.8
|
%
|
|
$
|
1,067
|
|
|
0.8
|
%
|
Asia Pacific
|
124,644
|
|
|
130,846
|
|
|
(6,202
|
)
|
|
(4.7
|
)%
|
|
(4,099
|
)
|
|
(3.1
|
)%
|
Europe
|
52,320
|
|
|
57,660
|
|
|
(5,340
|
)
|
|
(9.3
|
)%
|
|
(5,470
|
)
|
|
(9.5
|
)%
|
Total segment revenues
|
313,118
|
|
|
323,603
|
|
|
(10,485
|
)
|
|
(3.2
|
)%
|
|
(8,502
|
)
|
|
(2.6
|
)%
|
Other businesses
|
103
|
|
|
225
|
|
|
(122
|
)
|
|
(54.2
|
)%
|
|
(121
|
)
|
|
(53.8
|
)%
|
Total revenues
|
$
|
313,221
|
|
|
$
|
323,828
|
|
|
$
|
(10,607
|
)
|
|
(3.3
|
)%
|
|
$
|
(8,623
|
)
|
|
(2.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
$
|
25,205
|
|
|
$
|
18,015
|
|
|
$
|
7,190
|
|
|
39.9
|
%
|
|
$
|
7,294
|
|
|
40.5
|
%
|
Asia Pacific
|
33,305
|
|
|
34,533
|
|
|
(1,228
|
)
|
|
(3.6
|
)%
|
|
(654
|
)
|
|
(1.9
|
)%
|
Europe
|
10,031
|
|
|
8,437
|
|
|
1,594
|
|
|
18.9
|
%
|
|
1,284
|
|
|
15.2
|
%
|
Total segment operating income
|
68,541
|
|
|
60,985
|
|
|
7,556
|
|
|
12.4
|
%
|
|
7,924
|
|
|
13.0
|
%
|
Other businesses (2)
|
(5,035
|
)
|
|
(6,038
|
)
|
|
1,003
|
|
|
(16.6
|
)%
|
|
1,008
|
|
|
(16.7
|
)%
|
Unallocated corporate and other (3)
|
(34,060
|
)
|
|
(34,342
|
)
|
|
282
|
|
|
(0.8
|
)%
|
|
(41
|
)
|
|
0.1
|
%
|
Total operating income
|
$
|
29,446
|
|
|
$
|
20,605
|
|
|
$
|
8,841
|
|
|
42.9
|
%
|
|
$
|
8,891
|
|
|
43.1
|
%
|
_________________________________________________________________
(1) Reflects year over year change as if the current period results were in “constant currency”, which is a non-GAAP financial measure. “Constant currency” represents current period results that have been retranslated using exchange rates in effect in the prior comparative period.
(2) Other businesses consists primarily of our owned and leased manufacturing facilities, which manufacture products for sale by our operating segments.
(3) Unallocated corporate and other includes a corporate component consisting primarily of corporate support and administrative functions, costs associated with share-based compensation, research and development, brand marketing, legal, and depreciation and amortization of corporate and other assets not allocated to operating segments.
Americas Operating Segment
Revenues.
During the
three months ended June 30, 2017
, revenues for our Americas segment
increased
$1.1 million
, or
0.8%
, compared to the same period in
2016
. Higher wholesale revenues, as a result of increased customer acceptance of our products in key family footwear accounts, and a modest increase in e-commerce revenues, were partially offset by lower retail revenues resulting from fewer company-operated retail stores. Higher sales volumes resulted in an
increase
of approximately
$3.0 million
, or
2.2%
, which was partially offset by a
decrease
in average selling prices of
$1.9 million
, or
1.4%
.
Income from Operations.
During the
three months ended June 30, 2017
, gross profit for the Americas segment
increased
$3.3 million
, or
4.8%
, and gross margin
increased
206
basis points to
53.3%
, compared to the same period in
2016
. The
increase
in the Americas segment gross profit is due to the net impact of an
increase
of
$1.5 million
, or
2.2%
, due to higher sales volumes, an
increase
of
$1.9 million
, or
2.8%
, due to a decline in average costs per unit which exceeded the decline in average selling prices, and a
decrease
of
$0.1 million
, or
0.2%
, due to foreign currency translation.
During the
three months ended June 30, 2017
,
SG&A
for our Americas segment
decreased
$3.9 million
, or
7.5%
, compared to the same period in
2016
. The
decrease
in
SG&A
was primarily due to the net impact of a decrease of $0.9 million in salaries and wages, a decrease of $0.7 million in facilities expenses due primarily to reduced retail store locations, decreases of $1.0 million in marketing, information technology and bad debts expenses, and decreases of $1.3 million in services and other expenses, none of which were individually significant.
Asia Pacific Operating Segment
Revenues.
During the
three months ended June 30, 2017
, revenues for our Asia Pacific segment
decreased
$6.2 million
, or
4.7%
, compared to the same period in 2016. Wholesale revenues decreased due to the sale of our Taiwan business in December 2016, and reduced sales to select, overstocked distributors. Retail revenues decreased due to a lower number of company-operated retail stores. E-commerce revenues increased, with particularly strong results in China. Approximately
$13.8 million
, or
10.5%
, of the
decrease
was due to lower average selling prices, accompanied by a
decrease
of
$2.1 million
, or
1.6%
, from foreign currency translation, which were offset in part by an
increase
of
$9.7 million
, or
7.4%
, due to higher sales volumes.
Income from Operations.
During the
three months ended June 30, 2017
, gross profit for the Asia Pacific segment
decreased
$4.7 million
, or
5.9%
, and gross margin
decreased
72
basis points to
59.9%
compared to the same period in
2016
. The
decrease
in the Asia Pacific segment gross profit is due to the net impact of an
increase
of
$5.9 million
, or
7.4%
, due to higher unit sales volumes, a
decrease
of
$9.2 million
, or
11.6%
, due to a decline in average selling prices that exceeded the decline in average costs per unit, and a
$1.4 million
, or
1.7%
,
decrease
from foreign currency translation.
During the
three months ended June 30, 2017
,
SG&A
for our Asia Pacific segment
decreased
$3.4 million
or
7.7%
, compared to the same period in
2016
. The
decrease
in
SG&A
was primarily due to the net impact of a reduction in net bad debts expense of $0.9 million due to due to recoveries of previously reserved accounts receivable in China, a decrease of $2.4 million in salaries, wages and facilities expenses as a result of the reduction in the number of company-operated retail stores and our SG&A reduction efforts, and a decrease of $0.1 million in services and other costs.
Europe Operating Segment
Revenues.
During the
three months ended June 30, 2017
, revenues for our Europe segment
decreased
$5.3 million
, or
9.3%
, compared to the same period in
2016
, as we continued reducing discount channel sales and our company-operated stores, while growing our e-commerce business. Approximately
$13.1 million
, or
22.7%
, of the
decrease
was due to lower sales volumes, which was offset in part by an
increase
of
$7.6 million
, or
13.2%
, attributable to higher average selling prices and an
increase
of
$0.2 million
, or
0.2%
, from foreign currency translation.
Income from Operations.
During the
three months ended June 30, 2017
, gross profit for the Europe segment
decreased
$0.9 million
, or
3.3%
, and gross margin increased
332
basis points to
53.4%
compared to the same period in
2016
. The
decrease
in the Europe segment gross profit was due to the net impact of a
decrease
of
$6.5 million
, or
22.7%
, from lower unit sales volumes, an
increase
of
$5.5 million
, or
19.1%
, from higher average selling prices that exceeded an increase in cost per unit, and a
$0.1 million
, or
0.3%
,
increase
from foreign currency translation.
During the
three months ended June 30, 2017
,
SG&A
for our Europe segment
decreased
$2.5 million
, or
12.4%
, compared to the same period in
2016
. The
decrease
in
SG&A
was primarily due to the net impact of a decrease of $1.4 million in salaries, wages and facilities expenses, resulting from reductions in the number of company-operated retail stores and our SG&A reduction efforts, a $0.7 million decrease in marketing expenses due to a timing deferral, and a decrease in services and other costs of $0.4 million.
Unallocated Corporate and Other
During the
three months ended June 30, 2017
, total net costs within Unallocated Corporate and Other
decreased
by
$0.3 million
or
0.8%
, compared to the same period in 2016. The decrease was primarily due to decreases in services and other corporate expenses.
Store Locations and Comparable Store Sales
The table below illustrates the overall change in the number of our company-operated retail locations by type of store and reportable operating segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
Opened
|
|
Closed (1)
|
|
June 30, 2017
|
Company-operated retail locations:
|
|
|
|
|
|
|
|
Type:
|
|
|
|
|
|
|
|
Kiosk/store-in-store
|
90
|
|
|
—
|
|
|
6
|
|
|
84
|
|
Retail stores
|
219
|
|
|
1
|
|
|
29
|
|
|
191
|
|
Outlet stores
|
233
|
|
|
3
|
|
|
8
|
|
|
228
|
|
Total
|
542
|
|
|
4
|
|
|
43
|
|
|
503
|
|
Operating segment:
|
|
|
|
|
|
|
|
Americas
|
186
|
|
|
—
|
|
|
2
|
|
|
184
|
|
Asia Pacific
|
260
|
|
|
3
|
|
|
35
|
|
|
228
|
|
Europe
|
96
|
|
|
1
|
|
|
6
|
|
|
91
|
|
Total
|
542
|
|
|
4
|
|
|
43
|
|
|
503
|
|
_________________________________________________________________
(1) We completed the transfer of twenty-five company-operated stores in the Middle-East and China to distributors during the period.
Comparable retail store sales and direct to consumer store sales by operating segment are as follows:
|
|
|
|
|
|
|
|
Constant Currency (1)
|
|
Three Months Ended June 30,
|
|
2017
|
|
2016
|
Comparable store sales (retail only): (2)
|
|
|
|
Americas
|
0.4
|
%
|
|
(2.5
|
)%
|
Asia Pacific
|
(0.9
|
)%
|
|
(6.8
|
)%
|
Europe
|
0.7
|
%
|
|
1.8
|
%
|
Global
|
0.0
|
%
|
|
(3.4
|
)%
|
|
|
|
|
|
|
|
|
Constant Currency (1)
|
|
Three Months Ended June 30,
|
|
2017
|
|
2016
|
Direct to consumer comparable store sales (includes retail and e-commerce): (2)
|
|
|
|
Americas
|
1.1
|
%
|
|
2.4
|
%
|
Asia Pacific
|
13.3
|
%
|
|
4.3
|
%
|
Europe
|
5.1
|
%
|
|
1.6
|
%
|
Global
|
5.7
|
%
|
|
2.9
|
%
|
_________________________________________________________________
(1) Reflects period over period change on a “constant currency” basis, which is a non-GAAP financial measure. “Constant currency” represents current period results that have been retranslated using exchange rates used in the prior comparative period.
(2) Comparable store status is determined on a monthly basis. Comparable store sales includes the revenues of stores that have been in operation for more than twelve months. Stores in which selling square footage has changed more than 15% as a result of a remodel, expansion or reduction are excluded until the thirteenth month in which they have comparable prior year sales. Temporarily closed stores are excluded from the comparable store sales calculation during the month of closure. Location closures in excess of three months are excluded until the thirteenth month post re-opening.
E-commerce
revenues are based on same site sales period over period.
Comparison of the
Six Months Ended June 30, 2017
to the
Six Months Ended June 30, 2016
Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
Change
|
|
2017
|
|
2016
|
|
$
|
|
%
|
|
(in thousands, except per share, margin, unit sales and average selling price data)
|
Revenues
|
$
|
581,128
|
|
|
$
|
602,968
|
|
|
$
|
(21,840
|
)
|
|
(3.6
|
)%
|
Cost of sales
|
277,737
|
|
|
303,962
|
|
|
(26,225
|
)
|
|
(8.6
|
)%
|
Gross profit
|
303,391
|
|
|
299,006
|
|
|
4,385
|
|
|
1.5
|
%
|
Selling, general and administrative expenses
|
258,363
|
|
|
264,158
|
|
|
(5,795
|
)
|
|
(2.2
|
)%
|
Income from operations
|
45,028
|
|
|
34,848
|
|
|
10,180
|
|
|
29.2
|
%
|
Foreign currency transaction gain (loss), net
|
438
|
|
|
(2,947
|
)
|
|
3,385
|
|
|
(114.9
|
)%
|
Interest income
|
307
|
|
|
380
|
|
|
(73
|
)
|
|
(19.2
|
)%
|
Interest expense
|
(372
|
)
|
|
(477
|
)
|
|
105
|
|
|
(22.0
|
)%
|
Other expense, net
|
133
|
|
|
(107
|
)
|
|
240
|
|
|
(224.3
|
)%
|
Income before income taxes
|
45,534
|
|
|
31,697
|
|
|
13,837
|
|
|
43.7
|
%
|
Income tax expense
|
12,564
|
|
|
6,014
|
|
|
6,550
|
|
|
108.9
|
%
|
Net income
|
32,970
|
|
|
25,683
|
|
|
7,287
|
|
|
28.4
|
%
|
Dividends on Series A convertible preferred stock
|
(6,000
|
)
|
|
(6,000
|
)
|
|
—
|
|
|
—
|
%
|
Dividend equivalents on Series A convertible preferred shares related to redemption value accretion and beneficial conversion feature
|
(1,729
|
)
|
|
(1,587
|
)
|
|
(142
|
)
|
|
8.9
|
%
|
Net income attributable to common stockholders
|
$
|
25,241
|
|
|
$
|
18,096
|
|
|
$
|
7,145
|
|
|
39.5
|
%
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.29
|
|
|
$
|
0.21
|
|
|
$
|
0.08
|
|
|
38.1
|
%
|
Diluted
|
$
|
0.29
|
|
|
$
|
0.20
|
|
|
$
|
0.09
|
|
|
45.0
|
%
|
|
|
|
|
|
|
|
|
Gross margin
|
52.2
|
%
|
|
49.6
|
%
|
|
260
|
|
|
5.3
|
%
|
Operating margin
|
7.7
|
%
|
|
5.8
|
%
|
|
197
|
|
|
34.1
|
%
|
Footwear unit sales
|
33,817
|
|
|
34,001
|
|
|
(184
|
)
|
|
(0.5
|
)%
|
Average footwear selling price
|
$
|
16.91
|
|
|
$
|
17.48
|
|
|
$
|
(0.57
|
)
|
|
(3.3
|
)%
|
Revenues.
Revenues
decreased
$21.8 million
, or
3.6%
, in the
six months ended June 30, 2017
, compared to the same period in 2016. The decrease in revenues was primarily due to the sale of our Taiwan business in December 2016, targeted reductions in the number of company-operated retail stores, and additional actions taken to optimize our wholesale, retail and e-commerce channels. Approximately
$3.2 million
, or
0.5%
, of the
decrease
was due to lower sales volumes,
$17.6 million
, or
2.9%
, was due to lower average selling prices as our product, store, and channel mix continued to change, and
$1.0 million
, or
0.2%
, resulted from foreign currency translation.
Cost of sales.
During the
six months ended June 30, 2017
, cost of sales
decreased
$26.2 million
, or
8.6%
, compared to the same period in 2016. Lower average costs per unit were primarily the result of product mix, including sandals and clog silhouettes which cost less to produce, and continued supply chain cost reductions, including relocation of third-party manufacturing production within the Asia Pacific region. Approximately
$24.7 million
, or
8.1%
, of the
decrease
was due to lower average costs per unit, and
$1.6 million
, or
0.5%
, due to lower unit sales volumes, which was partially offset by an
increase
of
$0.1 million
, or less than 1%, from foreign currency translation.
Gross profit.
During the
six months ended June 30, 2017
, gross profit
increased
$4.4 million
, or
1.5%
, and gross margin
increased
approximately
260
basis points to
52.2%
compared to the same period in 2016. The increase in gross profit was primarily due to our continued focus on sales of higher margin core molded products, and reduced sales through discount channels. Approximately
$7.1 million
, or
2.4%
, of the
increase
was due to decreases in average costs per unit which exceeded decreases in average selling prices, which was partially offset by decreases of
$1.6 million
, or
0.5%
, from lower sales unit volumes, and
$1.1 million
, or
0.4%
, from foreign currency translation.
Selling, general and administrative expenses.
SG&A
decreased
$5.8 million
, or
2.2%
, during the
six months ended June 30, 2017
, compared to the same period in
2016
. The
decrease
was primarily due to the combined net impacts of a decrease of $6.1 million in facilities expenses reflecting fewer company-owned retail stores, including impairment in 2016 of $0.8 million, lower net bad debts expense of $2.2 million due to recoveries of previously reserved accounts receivable in China, partially offset by higher marketing expenses of $2.1 million and an increase in other expenses of $0.4 million.
Bad debt expense related to our China operations was not significant during
2017
or
2016
, due to the implementation of a more restrictive credit policy in 2015 and continued focus on the creditworthiness of our distribution partners.
Foreign currency gain (loss), net.
Foreign currency gain (loss), net consists of foreign currency gains and losses from the re-measurement and settlement of monetary assets and liabilities denominated in non-functional currencies, and realized and unrealized gains and losses on foreign currency derivative instruments. During the
six months ended June 30, 2017
, we recognized realized and unrealized foreign currency net
gains
of
$0.4 million
compared to net
losses
of
$2.9 million
during the
six months ended June 30, 2016
Income tax expense.
During the
six months ended June 30, 2017
, income tax expense
increased
$6.6 million
compared to the same period in
2016
. The effective tax rate for the
six months ended June 30, 2017
was
27.6%
compared to an effective tax rate of
19.0%
for the same period in
2016
, an
8.6
%
increase
. The increase in the effective rate was driven primarily by operating losses in certain jurisdictions where we are unable to record tax benefits because we have determined that it is not more likely than not that such tax benefits will be realized, as well as an increase in profitability in certain jurisdictions for which tax expense is recorded. Our effective tax rate of
27.6%
for the
six months ended June 30, 2017
differs from the federal U.S. statutory rate primarily due to differences in income tax rates between U.S. and foreign jurisdictions as well as book losses in certain jurisdictions for which tax benefits cannot be recognized.
Revenues By Channel
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
Change
|
|
Constant Currency
Change (1)
|
|
2017
|
|
2016
|
|
$
|
|
%
|
|
$
|
|
%
|
|
(in thousands)
|
Wholesale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
$
|
128,333
|
|
|
$
|
128,775
|
|
|
$
|
(442
|
)
|
|
(0.3
|
)%
|
|
$
|
(1,762
|
)
|
|
(1.4
|
)%
|
Asia Pacific
|
136,081
|
|
|
151,793
|
|
|
(15,712
|
)
|
|
(10.4
|
)%
|
|
(14,760
|
)
|
|
(9.7
|
)%
|
Europe
|
71,530
|
|
|
75,254
|
|
|
(3,724
|
)
|
|
(4.9
|
)%
|
|
(3,096
|
)
|
|
(4.1
|
)%
|
Other businesses
|
291
|
|
|
397
|
|
|
(106
|
)
|
|
(26.7
|
)%
|
|
(100
|
)
|
|
(25.2
|
)%
|
Total wholesale
|
336,235
|
|
|
356,219
|
|
|
(19,984
|
)
|
|
(5.6
|
)%
|
|
(19,718
|
)
|
|
(5.5
|
)%
|
Retail:
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
88,405
|
|
|
93,535
|
|
|
(5,130
|
)
|
|
(5.5
|
)%
|
|
(5,066
|
)
|
|
(5.4
|
)%
|
Asia Pacific
|
60,961
|
|
|
63,838
|
|
|
(2,877
|
)
|
|
(4.5
|
)%
|
|
(2,730
|
)
|
|
(4.3
|
)%
|
Europe
|
20,490
|
|
|
21,505
|
|
|
(1,015
|
)
|
|
(4.7
|
)%
|
|
(1,549
|
)
|
|
(7.2
|
)%
|
Total retail
|
169,856
|
|
|
178,878
|
|
|
(9,022
|
)
|
|
(5.0
|
)%
|
|
(9,345
|
)
|
|
(5.2
|
)%
|
E-commerce:
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
37,139
|
|
|
36,917
|
|
|
222
|
|
|
0.6
|
%
|
|
267
|
|
|
0.7
|
%
|
Asia Pacific
|
25,946
|
|
|
19,716
|
|
|
6,230
|
|
|
31.6
|
%
|
|
7,111
|
|
|
36.1
|
%
|
Europe
|
11,952
|
|
|
11,238
|
|
|
714
|
|
|
6.4
|
%
|
|
869
|
|
|
7.7
|
%
|
Total e-commerce
|
75,037
|
|
|
67,871
|
|
|
7,166
|
|
|
10.6
|
%
|
|
8,247
|
|
|
12.2
|
%
|
Total revenues
|
$
|
581,128
|
|
|
$
|
602,968
|
|
|
$
|
(21,840
|
)
|
|
(3.6
|
)%
|
|
$
|
(20,816
|
)
|
|
(3.5
|
)%
|
Wholesale channel revenues.
During the
six months ended June 30, 2017
, revenues from our wholesale channel
decreased
$20.0 million
, or
5.6%
, compared to the same period in 2016. The decrease was due to lower average sales prices as we shift to lower-priced molded product, an intentional reduction of sales through discount channels, and reduced sales to select, overstocked distributors in Asia, which we began in the third quarter of 2016 to improve the quality of our earnings. Approximately
$3.8 million
, or
1.1%
, of the
decrease
resulted from lower sales volumes,
$15.9 million
, or
4.5%
, was due to lower average selling prices, and
$0.3 million
, or less than 1%, resulted from foreign currency translation.
Retail channel revenues.
During the
six months ended June 30, 2017
, revenues from our retail channel
decreased
$9.0 million
, or
5.0%
compared to the same period in
2016
. The decrease in retail channel revenues was due primarily to lower average sales prices as we shift to lower-priced molded product, and a net decrease of 55 company-operated retail store locations, as we work to optimize our store base. Approximately
$7.0 million
, or
3.9%
, of the
decrease
was due to lower average selling prices, along with a
decrease
of
$2.4 million
, or
1.3%
, in sales volumes, partially offset by an
increase
of
$0.2 million
, or
0.2%
, from foreign currency translation.
E-commerce channel revenues.
During the
six months ended June 30, 2017
, revenues from our e-commerce channel
increased
$7.2 million
, or
10.6%
, compared to the same period in
2016
., as this channel continued to grow in importance to our business. Approximately
$17.7 million
, or
26.1%
, of the
increase
resulted from higher sales volumes, primarily in the Asia Pacific segment, which was partially offset by decreases of
$9.5 million
, or
14.0%
, due to lower average selling prices, and
$1.0 million
, or
1.5%
, from foreign currency translation.
Future changes in average selling prices will be impacted by: (i) the mix of products sold, (ii) the sales channel under which the sales are made (as we generally realize higher sales prices from our retail and e-commerce channels as compared to our wholesale channel), and (iii) the level of sales discounts and incentives we offer our customers.
Comparison of the
Six Months Ended June 30, 2017
and
2016
by Reportable Operating Segment
The following table sets forth information related to our reportable operating segments, including a comparison of revenues and operating income by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
Change
|
|
|
|
2017
|
|
2016
|
|
$
|
|
%
|
|
$
|
|
%
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
$
|
253,877
|
|
|
$
|
259,227
|
|
|
$
|
(5,350
|
)
|
|
(2.1
|
)%
|
|
$
|
(6,561
|
)
|
|
(2.5
|
)%
|
Asia Pacific
|
222,989
|
|
|
235,347
|
|
|
(12,358
|
)
|
|
(5.3
|
)%
|
|
(10,379
|
)
|
|
(4.4
|
)%
|
Europe
|
103,971
|
|
|
107,997
|
|
|
(4,026
|
)
|
|
(3.7
|
)%
|
|
(3,776
|
)
|
|
(3.5
|
)%
|
Total segment revenues
|
580,837
|
|
|
602,571
|
|
|
(21,734
|
)
|
|
(3.6
|
)%
|
|
(20,716
|
)
|
|
(3.4
|
)%
|
Other businesses
|
291
|
|
|
397
|
|
|
(106
|
)
|
|
(26.7
|
)%
|
|
(100
|
)
|
|
(25.2
|
)%
|
Total revenues
|
$
|
581,128
|
|
|
$
|
602,968
|
|
|
$
|
(21,840
|
)
|
|
(3.6
|
)%
|
|
$
|
(20,816
|
)
|
|
(3.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
$
|
47,207
|
|
|
$
|
34,592
|
|
|
$
|
12,615
|
|
|
36.5
|
%
|
|
$
|
12,599
|
|
|
36.4
|
%
|
Asia Pacific
|
60,030
|
|
|
60,383
|
|
|
(353
|
)
|
|
(0.6
|
)%
|
|
165
|
|
|
0.3
|
%
|
Europe
|
22,305
|
|
|
14,960
|
|
|
7,345
|
|
|
49.1
|
%
|
|
7,118
|
|
|
47.6
|
%
|
Total segment operating income
|
129,542
|
|
|
109,935
|
|
|
19,607
|
|
|
17.8
|
%
|
|
19,882
|
|
|
18.1
|
%
|
Other businesses (2)
|
$
|
(10,650
|
)
|
|
(12,111
|
)
|
|
1,461
|
|
|
(12.1
|
)%
|
|
1,430
|
|
|
(11.8
|
)%
|
Unallocated corporate and other (3)
|
(73,864
|
)
|
|
(62,976
|
)
|
|
(10,889
|
)
|
|
17.3
|
%
|
|
28,593
|
|
|
(45.4
|
)%
|
Total operating income
|
$
|
45,028
|
|
|
$
|
34,848
|
|
|
$
|
10,179
|
|
|
29.2
|
%
|
|
$
|
49,905
|
|
|
143.2
|
%
|
_________________________________________________________________
(1) Reflects year over year change as if the current period results were in “constant currency”, which is a non-GAAP financial measure. “Constant currency” represents current period results that have been retranslated using exchange rates used in the prior comparative period.
(2) Other businesses consists primarily of our owned and leased manufacturing facilities, which manufacture products for sale by our operating segments.
(3) Unallocated corporate and other includes a corporate component consisting primarily of corporate support and administrative functions, costs associated with share-based compensation, research and development, brand marketing, legal, depreciation and amortization of corporate and other assets not allocated to operating segments.
Americas Operating Segment
Revenues.
During the
six months ended June 30, 2017
, revenues for our Americas segment
decreased
$5.4 million
, or
2.1%
, compared to the same period in
2016
. The decrease in revenues resulted primarily from lower retail revenues as a result of fewer company-operated retail stores. Approximately
$4.0 million
, or
1.5%
, of the
decrease
related to a decrease in average selling prices,
$2.6 million
, or
1.0%
, resulted from lower unit sales volumes, which were partially offset by an
increase
of
$1.2 million
, or
0.4%
, from foreign currency translation.
Income from Operations.
During the
six months ended June 30, 2017
, gross profit for the Americas segment
increased
$8.9 million
, or
7.2%
, and gross margin
increased
451
basis points to
52.2%
, compared to the same period in
2016
. The
increase
in the Americas segment gross profit is due to the net impact of a
decrease
of
$1.2 million
, or
1.0%
, due to lower unit sales volumes, an
increase
of
$9.9 million
, or
8.0%
, due to a decline in average costs per unit which exceeded the decline in average selling prices, and an
increase
of
$0.2 million
, or
0.2%
, due to foreign currency translation.
During the
six months ended June 30, 2017
,
SG&A
for our Americas segment
decreased
$3.7 million
, or
4.2%
, compared to the same period in
2016
. The
decrease
in
SG&A
was primarily due to the net impact of a decrease of $1.3 million in facilities expenses as a result of reductions in the number of company-operated retail stores, a decrease of $0.7 million in impairment expense recorded in 2016, and a decrease of $1.7 million in services, information technology, and other expenses, none of which were individually significant.
Asia Pacific Operating Segment
Revenues.
During the
six months ended June 30, 2017
, revenues for our Asia Pacific segment
decreased
$12.4 million
, or
5.3%
, compared to the same period in 2016. Wholesale revenues decreased due to the combined effects of the sale of our Taiwan business in December 2016, and reduced sales to select, overstocked distributors. Retail revenues decreased as a result of a lower number of company-operated retail stores. E-commerce revenues increased, with particularly strong performance in China. Approximately
$33.5 million
, or
14.2%
, of the
decrease
resulted from lower average selling prices, along with a
decrease
of
$2.0 million
, or
0.9%
, from foreign currency translation, partially offset by an
increase
of
$23.1 million
, or
9.8%
, due to higher sales volumes.
Income from Operations.
During the
six months ended June 30, 2017
, gross profit for the Asia Pacific segment
decreased
$8.5 million
, or
6.2%
, and gross margin
decreased
60
basis points to
57.6%
compared to the same period in
2016
. The
decrease
in the Asia Pacific segment gross profit is due to the net impact of a
decrease
of
$20.7 million
, or
15.1%
, due to a decline in average selling prices that exceeded the decline in average costs per unit, a
decrease
of
$1.3 million
, or
0.9%
, from foreign currency translation, partially offset by an
increase
of
$13.5 million
, or
9.8%
, resulting from higher sales volumes,.
During the
six months ended June 30, 2017
,
SG&A
for our Asia Pacific segment
decreased
$8.2 million
, or
10.7%
, compared to the same period in
2016
. The
decrease
in
SG&A
was primarily due to the net impact of decreases of $2.5 million in salaries and wages, and $2.5 million in facilities expenses, as a result of the reduction in the number of company-operated retail stores, lower net bad debts expense of $1.9 million due to recoveries of previously reserved accounts receivable in China, a decrease of $0.4 million in marketing expenses due to a timing deferral, and a decrease of $0.9 million services and other costs.
Europe Operating Segment
Revenues.
During the
six months ended June 30, 2017
, revenues for our Europe segment
decreased
$4.0 million
, or
3.7%
, compared to the same period in
2016
, as we continued to reduce discount channel sales and company-operated stores, while growing our e-commerce business. Approximately
$15.8 million
, or
14.6%
, of the
decrease
was due to lower unit sales volumes, along with a
decrease
of
$0.2 million
, or
0.2%
, from foreign currency translation, partially offset by an
increase
of
$12.0 million
, or
11.1%
, from a higher average selling prices.
Income from Operation.
During the
six months ended June 30, 2017
, gross profit for the Europe segment
increased
$2.1 million
, or
4.1%
, and gross margin
increased
by
387
basis points to
51.5%
compared to the same period in
2016
. The
increase
in the Europe segment gross profit is due to the net impact of a
decrease
of
$7.5 million
, or
14.6%
, due to lower unit sales volumes, an
increase
of
$9.7 million
, or
18.9%
, due to a higher average selling prices, and a
decrease
of
$0.1 million
, or
0.2%
, from foreign currency translation.
During the
six months ended June 30, 2017
,
SG&A
for our Europe segment
decreased
$5.2 million
, or
14.4%
, compared to the same period in
2016
. The
decrease
in
SG&A
was primarily due to decreases in salaries and wages of $1.6 million, and facilities expenses of $1.2 million, as a result of the reduction in company-operated retail stores, a decrease of $1.7 million in marketing expenses due to a timing deferral, and a decrease in services and other costs of $0.7 million.
Unallocated Corporate and Other
During the
six months ended June 30, 2017
, total net costs within Unallocated Corporate and Other
increased
by
$10.9 million
, or
17.3%
, compared to the same period in 2016. The increase was primarily due to an increase of $2.6 million in salaries and wages, including $1.2 million in severance costs, an increase of $4.7 million in marketing expenses, primarily related to our advertising and promotional activities, increases in strategic consulting fees of $1.6 million, reorganization costs of $1.6 million, and an increase of $0.4 million in other corporate costs.
Store Locations and Comparable Store Sales
The table below illustrates the overall change in the number of our company-operated retail locations by type of store and reportable operating segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Opened
|
|
Closed (1)
|
|
June 30, 2017
|
Company-operated retail locations:
|
|
|
|
|
|
|
|
Type:
|
|
|
|
|
|
|
|
Kiosk/store-in-store
|
98
|
|
|
—
|
|
|
14
|
|
|
84
|
|
Retail stores
|
228
|
|
|
4
|
|
|
41
|
|
|
191
|
|
Outlet stores
|
232
|
|
|
10
|
|
|
14
|
|
|
228
|
|
Total
|
558
|
|
|
14
|
|
|
69
|
|
|
503
|
|
Operating segment:
|
|
|
|
|
|
|
|
Americas
|
190
|
|
|
1
|
|
|
7
|
|
|
184
|
|
Asia Pacific
|
270
|
|
|
12
|
|
|
54
|
|
|
228
|
|
Europe
|
98
|
|
|
1
|
|
|
8
|
|
|
91
|
|
Total
|
558
|
|
|
14
|
|
|
69
|
|
|
503
|
|
_________________________________________________________________
(1) We completed the transfer of thirty company-operated stores in the Middle-East and China to distributors during the period.
Comparable retail store sales and direct to consumer store sales by operating segment are as follows:
|
|
|
|
|
|
|
|
Constant Currency (1)
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
Comparable store sales (retail only): (2)
|
|
|
|
Americas
|
(2.1
|
)%
|
|
(0.5
|
)%
|
Asia Pacific
|
(1.1
|
)%
|
|
(3.7
|
)%
|
Europe
|
(2.5
|
)%
|
|
3.9
|
%
|
Global
|
(1.8
|
)%
|
|
(1.0
|
)%
|
|
|
|
|
|
|
|
|
Constant Currency (1)
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
Direct to consumer comparable store sales (includes retail and e-commerce): (2)
|
|
|
|
Americas
|
1.2
|
%
|
|
5.9
|
%
|
Asia Pacific
|
10.9
|
%
|
|
4.8
|
%
|
Europe
|
1.4
|
%
|
|
4.4
|
%
|
Global
|
2.9
|
%
|
|
5.4
|
%
|
_________________________________________________________________
(1) Reflects period over period change on a “constant currency” basis, which is a non-GAAP financial measure. “Constant currency” represents current period results that have been retranslated using exchange rates used in the prior comparative period.
(2) Comparable store status is determined on a monthly basis. Comparable store sales includes the revenues of stores that have been in operation for more than twelve months. Stores in which selling square footage has changed more than 15% as a result of a remodel, expansion or reduction are excluded until the thirteenth month in which they have comparable prior year sales. Temporarily closed stores are excluded from the comparable store sales calculation during the month of closure. Location closures in excess of three months are excluded until the thirteenth month post re-opening.
E-commerce
revenues are based on same site sales period over period.
Liquidity and Capital Resources
We anticipate our cash flows from operations and available borrowings under our revolving credit facility (as described below) will be sufficient to meet the ongoing liquidity needs of our business for the next twelve months. As of
June 30, 2017
, we had
$157.0 million
in cash and cash equivalents and up to
$78.7 million
in available borrowings under our revolving credit facility. At
June 30, 2017
,
$131.8 million
of our
$157.0 million
in cash and cash equivalents was held in international locations. See “Repatriation of Cash” below for more information. Additional future financing may be necessary to fund our operations and there can be no assurance that, if needed, we will be able to secure additional debt or equity financing on terms acceptable to us or at all.
Condensed Consolidated Statements of Cash Flows
Our condensed consolidated statements of cash flows are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
Change
|
|
(in thousands)
|
Cash provided by operating activities
|
$
|
39,380
|
|
|
$
|
19,818
|
|
|
$
|
19,562
|
|
Cash used in investing activities
|
(10,695
|
)
|
|
(11,258
|
)
|
|
563
|
|
Cash used in financing activities
|
(18,305
|
)
|
|
(7,443
|
)
|
|
(10,862
|
)
|
Effect of exchange rate changes on cash
|
(983
|
)
|
|
2,204
|
|
|
(3,187
|
)
|
Net change in cash and cash equivalents
|
$
|
9,397
|
|
|
$
|
3,321
|
|
|
$
|
6,076
|
|
Operating Activities.
Cash provided by operating activities
increased
$19.6 million
for the
six months ended June 30, 2017
compared to the
six months ended June 30, 2016
. The
increase
in cash provided by operating activities resulted from a
favorable
change in net income as adjusted for non-cash items of
$3.7 million
, and a
favorable
change in our operating assets and liabilities of
$15.9 million
. Net income as adjusted for non-cash items
increased
due to: (i) an
increase
of
$3.1 million
from net unrealized foreign currency forward contracts gains and losses; (ii) an
increase
of
$7.3 million
from
higher
net income; (iii) a decrease of share-based compensation expense of
$2.0 million
; and (iv) a
decrease
of $4.5 million in other non-cash items including a
decrease
of
$2.2 million
in bad debts.
Investing Activities.
The $0.6 million
decrease
in cash used in investing activities for the
six months ended June 30, 2017
compared to the
six months ended June 30, 2016
is primarily due to the net impact of: (i) a $0.9 million decrease in long-term restricted cash; and (ii) a $0.6 million increase in capital expenditures for property, equipment and intangible assets; partially offset by (iii) a decrease in proceeds from asset disposals of $0.9 million. Our capital expenditures in the
six months ended June 30, 2017
did not change significantly compared to the same period in 2016.
Financing Activities.
The $10.9 million
increase
in cash used in financing activities for the
six months ended June 30, 2017
compared to the
six months ended June 30, 2016
resulted from repurchases of 1.4 million shares of our common stock for approximately
$10.0 million
, and net repayments on borrowings of $0.9 million during the
six months ended June 30, 2017
compared to the same period in 2016. Our net borrowings decreased because we financed more of our short-term cash requirements from internal cash generated from operations.
Working Capital.
Changes in cash from working capital during the
six months ended June 30, 2017
were due primarily to the following: (i) an
increase
of
$57.6 million
from higher accounts receivable, primarily due to our seasonal revenues which are higher in our second quarter; (ii) an
increase
of
$8.7 million
from higher inventory levels, due to a seasonal increase related to our summer selling season; (iii) a
decrease
of
$5.0 million
in prepaids expenses and other assets driven primarily by decreases in prepaid advertising, endorsement and other prepaids; and (iv) an
increase
of
$27.7 million
from higher accounts payable and accrued expenses, primarily related to increased inventory levels in advance of our summer selling season. Cash and cash equivalents increased by
$9.4 million
to
$157.0 million
as of
June 30, 2017
.
Bad debt expense related to our China operations was not significant during 2017 or 2016, due to the implementation of a more restrictive credit policy in 2015 and continued focus on the creditworthiness of our distribution partners.
Senior Revolving Credit Facility
In order to provide additional liquidity in the future and to help support our strategic goals, our Senior Revolving Credit Facility (the "Facility"), as amended, provides for borrowings of up to
$80.0 million
through
February 2021
. The Facility contains financial covenants that restrict certain actions by us, including limitations on: (i) stock repurchases to
$50.0 million
per year, subject to certain restrictions; and (ii) capital expenditures and commitments to
$50.0 million
per year. The Facility also requires us to meet certain financial covenant ratios that become effective when total borrowings, including letters of credit, exceed $20.0 million during certain periods or when the outstanding borrowings exceed the borrowing base. If the financial covenants are in effect, we must maintain a minimum fixed charge coverage ratio of
1.10
to 1.00, and a maximum leverage ratio of
2.00
to 1.00. The weighted average interest rate on borrowings during the three months ended
June 30, 2017
was
2.49%
. As of
June 30, 2017
, we were in compliance with all covenants.As of
June 30, 2017
, we had no outstanding borrowings on the Facility and
$1.3 million
of outstanding letters of credit, resulting in
$78.7 million
of available credit for future financing needs.
Short-term Bank Borrowings
As of
June 30, 2017
and
December 31, 2016
, we had
$1.7 million
and
$2.3 million
, respectively, of current debt outstanding under notes payable. As of
June 30, 2017
, the notes bear interest rates ranging from
1.95%
to
2.83%
.
Stock Repurchase Plan Authorizations
On December 26, 2013, the
Board
approved the repurchase of up to
$350.0 million
of our common stock. The number, price, structure, and timing of the repurchases will be at our sole discretion and may be made in the open market or in privately negotiated transactions. The repurchase authorization does not have an expiration date and does not oblige us to acquire any particular amount of our common stock. The
Board
may suspend, modify, or terminate the repurchase program at any time without prior notice.
During June 2017, we repurchased 1.4 million shares of our common stock for approximately $10.0 million. As of
June 30, 2017
, we had
$108.7 million
of remaining common stock repurchase authorizations under our 2013 stock repurchase plan. During the
six months ended June 30, 2016
, we had no repurchases.
Capital Assets Expenditures and Commitments
During the
six months ended June 30, 2017
, net capital assets acquired, inclusive of intangible assets, were
$12.2 million
compared to
$12.8 million
during the
six months ended June 30, 2016
. As of
June 30, 2017
, we have committed to additional purchases of capital assets of approximately
$5.4 million
. Capital spend during the
six months ended June 30, 2017
related primarily to information technology investments, opening new retail stores and renovating existing stores. In addition, we renewed an agreement with our information technology service provider for
three
years at
$5.0 million
per year.
Repatriation of Cash
We have cash balances located in various countries and denominations associated with our international operations. Fluctuations in foreign currency exchange rates impact the results of our operations and cash positions. Future fluctuations in foreign currencies may have a material impact on our cash flows and capital resources. Cash balances held in foreign countries may have additional restrictions and covenants that could adversely impact our liquidity and our ability to timely access and transfer cash balances between entities.
We generally consider unremitted earnings of subsidiaries operating outside of the U.S. to be indefinitely reinvested; however, our Board has approved a foreign cash repatriation strategy. As part of this strategy, we repatriated approximately $
28.1 million
of current earnings during the
six months ended June 30, 2017
without a tax impact. Further cash repatriation will depend on future cash requirements in the U.S. As of
June 30, 2017
, we maintain approximately $
178.0 million
of foreign earnings for which tax has previously been provided that has not yet been repatriated.
Most of the cash balances held outside of the U.S. could be repatriated to the U.S., but under current law, would be subject to U.S. federal and state income taxes less applicable foreign tax credits. In some countries, repatriation of certain foreign balances is restricted by local laws and could have adverse tax consequences if we were to move the cash to another country. Certain countries have monetary laws, which may limit our ability to utilize cash resources in those countries for operations in other countries. These limitations may affect our ability to fully utilize our cash resources for needs in the U.S. or other countries and could adversely affect our liquidity. As of
June 30, 2017
, we held
$131.8 million
of our total
$157.0 million
cash balance in international locations. This cash is primarily used for the ongoing operations of the business in the locations in which the cash is held. Of the
$131.8 million
, $
0.5 million
could potentially be restricted, as described above. If the remaining $
131.3 million
were immediately repatriated to the U.S., no additional tax expense would be incurred as $
178.0 million
has previously been provided for in prior periods.
Off-Balance Sheet Arrangements
We had no material off-balance sheet arrangements as of June 30, 2017, other than certain operating lease and purchase commitments, which are described in Note 13 — Commitments and Contingencies.
Critical Accounting Policies and Estimates
The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, sales and expenses, and related disclosure of contingent assets and liabilities. We evaluate our assumptions and estimates on an on-going basis. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. For a complete discussion of our critical accounting policies, please refer to our Annual Report on Form 10-K for the year ended
December 31, 2016
. There have been no significant changes in our critical accounting policies or their application since
December 31, 2016
.
Recent Accounting Pronouncements
See Note 2 — Recent Accounting Pronouncements in the accompanying notes to the condensed consolidated financial statements for a description of recently adopted accounting pronouncements, and issued accounting pronouncements that we believe may have an impact on our consolidated financial statements when adopted.