Crocs, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the Crocs, Inc. first quarter 2020 earnings call. At this time, all participants are in a listen-only mode, and after the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I'd now like to hand the call over to your speaker today, Corey Lynn, VP of Corporate Finance. Please go ahead.

Good morning, everyone, and thank you for joining us today for the Crocs first quarter 2020 earnings call. Earlier this morning, we announced our latest quarterly results, and a copy of the press release may 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 law. 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 factor section of our annual report on Form 10-K. Accordingly, actual results could differ material from those described on this call. Please refer to CROC's 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 on the call today are Andrew Rees, President and 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'll turn the call over to Andrew.

Thank you, Cori, and good morning, everyone. Let me start by welcoming Cori as our new VP of Corporate Finance and Investor Relations. As you saw from our release issued this morning, our business from both the top and bottom line perspective held up well during the first quarter of 2020, despite the worldwide challenges presented by COVID-19. Our performance in the midst of one of the most difficult situations many of us have faced in our lifetimes underscores the work we've done expanding the desirability, relevance, and consideration of our brand and product offering globally. Anne will review our financial results in more detail shortly, but here are a few highlights from the first quarter of 2020. Our America's Business delivered record first quarter revenue, increasing 14%. Retail comparable sales were up 23% prior to the impact of COVID-19 and subsequent store closures. E-commerce revenue globally increased by 16% on top of 20% constant currency growth last year, with strong performance across all regions. Adjusted gross margins of 48% were up approximately 110 basis points over 2019. We invested an additional approximately $5 million back in the business by our marketing programs to further strengthen our brand equity. And the Crocs brand was ranked the highest it has ever been in Piper Sandler's spring Taking Stock with Teens survey. Let's start by reviewing the impact of COVID-19, which remains top of mind for all of us. Our thoughts are with all of those who have been directly impacted, as well as the many heroes on the front line battling this pandemic. And as we have shared, our top priority throughout this have been ensuring the well-being of our employees, our consumers, and our partners. We are focused on positioning our business for both short- and long-term success. We quickly established both a defensive and offensive playbook that we began to implement in early March. With the actions taken to date and our future plans, we feel Crocs is well-positioned to weather the crisis and emerge a strong, vibrant brand. Despite our optimism for the future, The near-term impact on our business has been profound. Many retail locations across the globe, including our wholesale customers, our own stores, and our partner stores, were closed at some point during Q1, and many remain closed today. In the Americas and Western Europe, our company-operated stores have been closed since mid-March, and in Russia, our stores closed in early April. Many, but not all, of our wholesale customer stores in these regions have also been closed. In Asia, we've seen a second wave of the virus. Japan, India, and much of Southeast Asia have been impacted, with many stores now closed as of early April. In China, our stores and the approximately 350 partner stores that were closed from January through March are now reopened. We are seeing a slow and steady recovery with week-on-week improvements in traffic and sales, but comps are down materially. We are optimistic about our business and career, where stores have not been closed for a sustained period, but the social distancing guidelines have caused traffic to be significantly down through February and March. Encouragingly, we're starting to see week-on-week improvements in traffic and sales. In geographies where stores are closed, stores will remain closed until it is appropriate to open, in line with local guidelines and regulations. Recognizing none of us can predict the future, We've estimated that stores will begin to reopen in stages over the coming months. Importantly, while brick and mortar stores have been closed, Prox.com and our third party digital commerce platforms remain open. We're fortunate to have been able to keep our distribution centers operational with heightened cleaning and socially distancing protocols. We are grateful to our employees who have been working hard to deliver our products worldwide. Our strong digital commerce performance benefited from brand momentum coming into 2020. Our ability to drive brand relevance in an authentic way was evident in our launch of our donation program, a free pair for healthcare. We wanted to provide support to those in need during the crisis, and frontline healthcare workers shared that Crocs was the perfect shoe for them. They provided all-day comfort, easy on and off, and easy to clean. In response to their outreach, We stood up the U.S. donation program in a matter of days, and since March 25th, we have donated over 450,000 pairs of shoes, primarily in the U.S., but also in Asia and Europe. To extend this philanthropic initiative in a financially sustainable way, we recently launched a consumer-supported program in the U.K., one for you, one for a hero. We will monitor the consumer update before hopefully deploying this program globally. In a time with very few bright spots, everyone at Crocs feels proud to meaningfully contribute in a way that is consistent with our brand philosophy. We've also been heartened by the outpouring of support we receive from both the healthcare community and our consumers at large. I encourage you to take a look at some of their responses, which we have included in our first quarter earnings presentation. I hope you're as touched as I was. Now let's turn to the future. As I mentioned, our leadership team laid out both a defensive and offensive playbook that we're executing against. The defensive playbook consists of all the measures you might expect us to take in an environment such as this, including dramatically cutting expenses, reducing inventory, deferring discretionary capital expenditures, and maximizing our liquidity. The following is a recap of the most important steps we have taken over the past few weeks to manage our expenses and maximize our liquidity. Compensation for our board of directors and senior leadership team have been significantly reduced for the foreseeable future. In our retail business, we've temporarily furloughed employees and reduced hours for store management in North America. All these employees continue to receive benefits. In other parts of the world, employers are receiving full or reduced pay in accordance with local regulations. We've kept our distribution centers operational. as they qualify as essential businesses. In addition to the fact they've been used to distribute and supply companies with essential products for healthcare workers during the pandemic. To help ensure the wellbeing of our associates, we've enhanced safety protocols and heightened cleaning of the facility in accordance with state and CDC guidelines. We asked some employees to reduce their work hours. We placed some on temporary unpaid leave and we eliminated some roles as we adjusted our organizational structure for the future. We've supported the impacted employers with separation payments and assistance to transition to their next employment opportunity. Across the company for 2020, we reduced hiring, suspended the annual increases, market adjustments, and promotions that were scheduled to go into effect in 2020. As a result of these activities, we have significantly reduced SG&A for 2020. It is now expected to be between $440 and $460 million, which is approximately $30 to $50 million lower than prior year, and $100 million lower than was planned for 2020. These savings are primarily compromised over reduced salaries and wages, decreased marketing investments, and fewer discretionary expenses. In terms of working capital, We are carefully managing inventories by reducing and canceling future factory orders, rebalancing existing inventory, and consolidating future seasonal collections. We're also working closely with both our customers and vendors to manage receivables and payables. Capital expenditures are now expected to be approximately $30 million as we cut back on deferred investment. This compares to prior guidance of approximately $50 to $60 million for 2020. As previously announced, we increased our revolving credit facility to $500 million, modified our leverage ratios, and suspended share purchases. In addition to these defensive measures, we've started to develop our offensive playbook. We anticipate a slow recovery and are planning for a global recession, where the consumer is focused on value and the retail landscape is highly promotional. For our offensive playbook, We plan to continue to focus on our four key product pillars, clogs, sandals, visible comfort technology, and personalization through gibbets. In addition, we plan to significantly expand our Crocs at Work focus. We will invest in proven winners with high margins, leveraging promotionally orientated products that can deliver strong consumer value and high product margin in a promotional marketplace. We'll continue to leverage gibbets as a way to offer newness and inspiration at a compelling price point. We believe personalization and optimistic storytelling will be even more critical post-COVID-19, and that Jibbitz will provide an important halo for the entire Crocs brand. We will continue to execute upon the successful marketing strategies that have supported our incredible brand momentum during 2018 and 2019. Even as we reduce our marketing spend, we'll execute impactful programs and campaigns to further strengthen consumer affinity for the Crocs brand around the world. I've come as you are campaign now in its fourth year will be amplified and adjusted to be part of the cultural conversation and remain relevant in the new environment. New exciting collaborations such as KFC and Peeps will enhance brand relevance. We are confident that Crofts is well positioned to win even with COVID-19 and a potential recession as a backdrop. Our brand entered this crisis with incredible momentum and that momentum has not abated. Recent evidence is that the Crocs brand was ranked the highest it has ever been in Piper Sandler's Taking Stock with Teens spring survey, which was fielded in the midst of the crisis. Google search interest for Crocs is at the highest we've seen in the past 15 years. Furthermore, in times of change, consumers tend to fall back on brands they trust and believe in. We believe Crocs is one of those brands, delivering iconic products at compelling price points with comfort and style. Despite the challenges presented by COVID-19, we remain very optimistic. No one knows when conditions will return to normal. What we do know is that we are confident that Crocs is well positioned. In the near term, we have no liquidity concerns, and we have the ability to be profitable under a wide range of revenue scenarios. Perhaps even more importantly, for the long term, we are well positioned to restore momentum in 2021 and continue a positive growth trajectory. Before I turn the call over to Anne, I want to express my gratitude to the entire Crocs organization for the hard work and commitment to delivering strong results in the face of such adversity. I also want to especially thank those in our distribution centers. Without you, it would not be possible to serve our consumers, and perhaps more importantly, our frontline healthcare community. These are challenging times for us all, and we look forward to healthier times ahead for everyone. With that, Anne will now review our financial results in more detail.