Crocs, Inc.

Ladies and gentlemen, thank you for standing by and welcome to CROC's second quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Cori Lynn, VP Corporate Finance. Thank you. Please go ahead.

Good morning, everyone, and thank you for joining us today for the Crocs Second 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 laws. These statements include but are not limited to statements regarding potential impacts to our business related to the COVID-19 pandemic. Parks 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 the Form 10-A. Accordingly, actual results could differ materially 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 FDC 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, 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, Karin, and good morning, everyone.

As you saw from our release issue this morning, our business, both from a top and bottom line perspective, performed exceptionally well during the second quarter of 2020. Despite the worldwide challenges presented by the COVID-19 pandemic, our extraordinary performance in the midst of the most difficult business environment Many of us have faced in our lifetimes demonstrate our ability to deliver increased profitability and underscores the work we've done expanding the desirability, relevance, and consideration of our brand and product offering globally. Anna will review our financial results in more detail shortly, but here are a few highlights from the second quarter of 2020. Our global revenue for the second quarter declined by only 6% on a constant currency basis. and revenue grew in four of our top five markets, the US, China, Korea and Germany. Our America's business had a strong second quarter revenue of 172 million as the US business delivered high single-digit revenue growth despite stores being closed for half of the quarter. America's retail comp store sales increased 18% after reopening. While Asia's future revenue declined, Two of our most important markets in the region, China and Korea, each delivered modest revenue growth. Mobile e-commerce revenue increased by 68%, with strong performance across all three regions. E-commerce revenue for the Americas grew triple digits, while Asia and EMEA each grew strong double digits. Adjusted operating margins increased by 800 basis points to 22%. Adjusted diluted earnings per share Thank you. Let's start by reviewing our performance for the quarter and the impact of COVID-19. Our thoughts continue to be those who have been directly impacted. as well as the many heroes on the front line that continue to battle this pandemic. Our top priority throughout continues to be ensuring the well-being of our employees, our consumers, and our partners. As we shared in our last earnings call, we focused on positioning our business for both short and long-term success. Our defensive playbook that we began to implement in early March is complete, and our offensive playbook is beginning to show results. as evidenced by our strong Q2 performance. We have previously outlined that the second quarter will be the most difficult one. While we hope the worst is behind us, we remain prudent and cautious. During Q2, most retail locations across the globe, including our wholesale customers, our own stores, and partner stores will close at some point. In the Americas, our company-operated stores closed in mid-March and began reopening in mid-May. Many of our wholesale customers' brick-and-mortar stores were also closed during these times. Despite these closures, the Americas region grew 1% on a constant currency basis, benefiting from triple-digit e-commerce growth. We're particularly pleased by our continued momentum in the United States, which delivered a high single-digit revenue growth. When our stores reopened, we saw declines in traffic, but increases in both conversion and average transaction value. As a result, we saw 18% comps, with softness in tourist markets such as Hawaii and Orlando, but strength in markets reliant on local consumers. In Asia, the landscape was mixed, and Q2 revenues declined 19% on a constant currency basis. as growth in China and Korea was offset by declines in Japan, India, and much of Southeast Asia. Outside of China and Korea, many stores were closed for the majority of Q2, and we continue to expect a slow recovery in our distributed markets. China and Korea were price bumps, each growing second quarter revenue and delivering positive comps. Korea stores were open throughout the quarter, and we saw significant outperformance in retail. In China, our stores and the approximately 350 partner stores reopened in April and remained open throughout the quarter. We continue to improve brand relevance in China with an all-star live stream event with Yang Mei on Timor, which exceeded our expectations. In June, we were pleased with our brand performance during Mid-Season Festival, and we also opened our first energy store in Shanghai. The energy store features our new store concept, showcases both classic and gibbets, with a large gibbet zone in the front of the store allowing for consumers' in-store personalization. As a result of these activities, our WeChat IPA even increased 50% month-over-month in June. We remain optimistic about our growth acceleration plan in China and the positive momentum we are driving. EMEA performed better than expected in light of retail closure. All of our direct markets experienced revenue growth with strong digital performance, offset by weakness in our distributor markets. Revenue declined roughly 2% on a constant currency basis. While many brick-and-mortar stores were closed, Private Q2, Crocs.com, and our third-party digital commerce platforms remained open. The Americas delivered triple-digit e-commerce growth. while Adrian Amir grouped double digits resulting in 68% global growth. We also saw strong sell-through at our e-tailers which show up in our wholesale revenues. Our digital business which combines e-commerce and e-tail represented 56% of our Q2 sales compared to 33% for the comparable period last year. While these strong growth rates have recently started to temper, It is clear that the pandemic has accelerated the shift to digital, and that digital has been and will remain a high-priority channel going forward. From a product perspective, our results continue to be driven by our focus on our four key product pillars, fogs, sandals, gibbets, and visible comfort technology. Sales of our iconic clog were particularly strong this quarter, increasing 10% year over year to represent 68% of total footwear revenues versus 56% last year. As anticipated, SAML performance was impacted by limited inventory and stores being closed for a good part of the SAML season. In Q2, SAML revenues declined 33% and represented 22% of sales versus 30% of sales last year. We did see encouraging sell-through on our new SAML programs, Brooklyn, Tulum, and the classic slide. We are very optimistic that we'll be able to take full advantage of these programs in 2021. Profitability was very strong, driven by improved gross margin. Our strong brand management resulted in high sell-through rates with significantly reduced discounting and clean inventories. The cross-brand ended this crisis with incredible momentum, and our brand relevance increased even further during the pandemic. We continue to fuel brand heat with collaborations throughout the world. In addition to the event I mentioned with Yang Min, we teamed up with Ruby Rose to create a colorful one-of-a-kind Classic Bay Club to celebrate Pride. During Q2, we executed a number of collaborations in Japan and Korea. We have an exciting collaboration pipeline for the second half of the year, which kicked off with Luke Combs last week showcasing a new Classics line. We believe Brown Momentum was also aided by our Free Care for Healthcare program, which helped to generate more than 29 million new visits to Crocs.com. More importantly, in just 45 days, we donated more than 860,000 pairs of Crocs with a retail value of nearly $40 million to frontline healthcare workers in need. On July 1st, we launched our U.S. partnership with Feeding America, the largest domestic hunger relief organization. This is an important step in our effort to continue to support our communities. I have seen the power of our organization when we come together for good, and I know that together we will continue to make a meaningful impact globally. Brock's vision is everyone comfortable in their own shoes. We are activating our vision through these donation programs, and our Come As You Are campaign now in its fourth year, which celebrates one of a kind and Reflex that we stand together with all different kinds. While it goes without saying that 2020 has been anything but predictable, I'm tremendously proud of how we respond to FTE and the results we have delivered for our employees, our customers, our communities and our shareholders. Now let's turn to the future. We're even more optimistic now about the cross-brand and our long-term growth potential than we were coming into the pandemic. A brand has proven resilient through the crisis, and we're demonstrating that we can deliver best-in-class profitability. While we are confident in the long term, we're managing the business cautiously for the balance of 2020. Global uncertainties remain with both the pandemic and the consumer, as stimulus programs potentially expire as unemployment persists. Specifically relating to crops, we have constrained our inventory levels, will limit our revenue upside in the back half of the year. These inventory constraints are deliberate. In March, we dramatically cut orders for summer deliveries, proactively manage working capital, and preserve full holiday newness. We sold through more than anticipated in Q2, and while we were reacting to shortages in core inventory, we feel it is more important to keep inventory lean and to turn up the majority of our focus to 2021. We're incredibly optimistic about 2021, and we will continue to execute our growth plan, which is clearly working. Our four key product pillars, clogs, standards, gibbets, and comfort technology, and our powerful social and digital marketing are clearly creating consumer engagement. From a channel and regional perspective, our digital first strategy and our growth focus in Asia will lead our future growth. We believe we have a clear path to return to revenue growth in 2021. Before I turn the call over to Anne, I want to express my gratitude to the entire Cross organization for the hard work and commitment to delivering exceptionally strong results in the face of such adversity. A special thanks to those in our distribution centers and retail stores. Without you, it would not have been possible to serve our consumers, and perhaps more importantly, our frontline healthcare community for much of Q2. With that, Anne will now review our financial results in more detail.