Business Overview
Crocs, Inc. and our consolidated subsidiaries (collectively the "Company," "Crocs," "we," "us," or "our") are engaged in the design, development, worldwide marketing, distribution, and sale of casual lifestyle footwear and accessories for men, women, and children. We strive to be the world leader in innovative casual footwear for women, men, and children, combining comfort and style with a value that consumers want. The vast majority of shoes within our collection contain Croslite™ material, a proprietary, molded footwear technology, delivering extraordinary comfort with each step.
Known or Anticipated Trends
Based on our recent operating results and current perspectives on our operating environment, we anticipate certain trends will continue to impact our operating results: •The COVID-19 pandemic has impacted our business globally in 2020. Despite this, the vast majority of our 351 company-operated stores were open during the third quarter, albeit at reduced hours. Wholesale brick-and-mortar stores also largely reopened prior to or during the quarter, which along with strong consumer demand at e-tailers, drove higher than anticipated growth in our wholesale channel. Further, the increase in digital sales, which includes sales through our company-owned websites, third party marketplaces, and e-tailers, began to temper compared to second quarter growth, but still showed significant growth over prior year. •In Asia, ourSouth Korea andChina markets performed well, but ourSoutheast Asia distributors continued to struggle as a result of reduced travel in these highly tourism-dependent markets. •While we began to reinvest in the business in the third quarter, we have still realized overall savings to date related to our 2020 COVID-19 cost reduction initiatives. •To ensure the well-being of our employees and customers, our corporate offices, retail stores, and distribution centers have implemented various elevated safety protocols, in accordance with local guidelines and regulations, including temperature checks, mandatory mask policies, social distancing, access to hand sanitizer, plexiglass partitions, and enhanced cleaning of the facilities. Our corporate offices have also actively managed attendance levels in accordance with local guidelines and regulations, and many of our corporate employees have continued to successfully conduct business virtually. •We expect to be cash flow positive for all of 2020, barring any material, unforeseen changes in the pandemic or economic environment. As ofSeptember 30, 2020 , we have largely returned to standard payment terms with our customers and vendors after more strictly managing accounts payable in the first part of the year. AtSeptember 30, 2020 , there were$135.0 million of borrowings outstanding on our credit facility after repayments of$140.0 million during the third quarter. Our borrowings may continue to fluctuate as we manage our liquidity needs. Finally, our share repurchases have remained temporarily suspended to preserve maximum liquidity and flexibility, but we may opportunistically resume share repurchases in the future.
Use of Non-GAAP Financial Measures
In addition to financial measures presented on the basis of accounting principles generally accepted inthe United States of America ("U.S. GAAP"), we present certain information related to our 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 underU.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 rates on reported amounts. 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, stockholders, analysts, and investors concerning our financial performance. We believe constant currency is useful to investors and other users of our condensed consolidated financial statements as an additional tool to evaluate operating performance and trends. Investors should not consider constant currency in isolation from, or as a substitute for, financial information prepared in accordance withU.S. GAAP. 20 -------------------------------------------------------------------------------- Table of Contents Third Quarter 2020 Financial and Operational Highlights Revenues were$361.7 million for the third quarter of 2020, a 15.7% increase compared to the third quarter of 2019. The increase was due to the net effects of: (i) higher unit sales volumes, which increased revenues by$11.1 million , or 3.6%, driven by rapid e-commerce and e-tail growth, combined with positive wholesale brick-and-mortar performance, as multi-brand wholesale stores reopened during the COVID-19 pandemic; (ii) higher average selling prices, driven by reduced promotions, higher pricing, and increased sales of charms per shoe, which increased revenues by$38.5 million , or 12.3%; and (iii) unfavorable changes in exchange rates, which decreased revenues by$0.6 million , or 0.2%.
The following were significant developments affecting our businesses and capital
structure during the three months ended
•We sold 16.9 million pairs of shoes worldwide, an increase from 15.9 million pairs in the third quarter of 2019. •Digital sales represented 37.7% of revenue, compared to 32.2% in last year's third quarter. •Gross margin was 57.2%, an increase of 480 basis points from last year's third quarter, as a result of changes in product mix, price increases on certain products, and lower levels of promotions and discounts. •SG&A was$134.7 million compared to$123.9 million in the third quarter of 2019. As a percent of revenues, SG&A decreased 240 basis points to 37.2% of revenues compared to 39.6% of revenues in the third quarter of 2019. •Income from operations increased 80.7% to$72.1 million from$39.9 million in last year's third quarter. Net income was$61.9 million , or$0.91 per diluted share, compared to$35.7 million , or$0.51 per diluted share, in last year's third quarter. 21 --------------------------------------------------------------------------------
Table of Contents Results of Operations % Change Three Months EndedSeptember 30 , Nine Months EndedSeptember 30 , Favorable (Unfavorable) 2020 2019 2020 2019 Q3 2020-2019 YTD 2020-2019 (in thousands, except per share, margin, and average selling price data) Revenues$ 361,736 $ 312,766 $ 974,445 $ 967,614 15.7 % 0.7 % Cost of sales 154,967 148,942 453,581 476,796 (4.0) % 4.9 % Gross profit 206,769 163,824 520,864 490,818 26.2 % 6.1 % Selling, general and administrative expenses 134,683 123,940 371,371 370,525 (8.7) % (0.2) % Income from operations 72,086 39,884 149,493 120,293 80.7 % 24.3 % Foreign currency gains (losses), net (516) 585 (1,434) (893) (188.2) % (60.6) % Interest income 43 167 189 493 (74.3) % (61.7) % Interest expense (1,502) (2,505) (5,593) (6,743) 40.0 % 17.1 % Other income (expense), net (27) (34) 901 (48) 20.6 % 1,977.1 % Income before income taxes 70,084 38,097 143,556 113,102 84.0 % 26.9 % Income tax expense 8,195 2,421 14,025 13,518 (238.5) % (3.8) % Net income$ 61,889 $ 35,676 $ 129,531 $ 99,584 73.5 % 30.1 % Net income per common share: Basic $ 0.92$ 0.52 $ 1.92 $ 1.40 76.9 % 37.1 % Diluted $ 0.91$ 0.51 $ 1.89 $ 1.38 78.4 % 37.0 % Gross margin (1) 57.2 % 52.4 % 53.5 % 50.7 % 480 bp 280 bp Operating margin (1) 19.9 % 12.8 % 15.3 % 12.4 % 710 bp 290 bp Footwear unit sales 16,867 15,883 50,234 53,361 6.2 % (5.9) % Average footwear selling price - nominal basis (2) $ 21.36$ 19.63 $ 19.33 $ 18.10 8.8 % 6.8 % (1) Changes for gross margin and operating margin are shown in basis points ("bp"). (2) Average footwear selling price is calculated as footwear and charms revenues divided by footwear units. 22 --------------------------------------------------------------------------------
Table of Contents Revenues By Channel Constant Currency % Change % Change (1) Three Months EndedSeptember 30 , Nine Months EndedSeptember 30 , Favorable
(Unfavorable)
2020 2019 2020 2019 Q3 2020-2019 YTD 2020-2019 Q3 2020-2019 YTD 2020-2019 (in thousands) Wholesale:Americas $ 98,025 $ 75,660 $ 256,258 $ 216,846 29.6 % 18.2 % 31.8 % 19.8 %Asia Pacific 28,842 36,655 109,705 169,468 (21.3) % (35.3) % (21.1) % (33.9) % EMEA 37,630 34,058 136,507 144,685 10.5 % (5.7) % 8.3 % (3.9) % Other businesses 14 49 106 175 (71.4) % (39.4) % (71.4) % (39.4) % Total wholesale 164,511 146,422 502,576 531,174 12.4 % (5.4) % 13.1 % (3.8) % Retail:Americas 89,748 78,141 158,587 182,116 14.9 % (12.9) % 14.9 % (12.9) %Asia Pacific 19,652 20,133 51,643 60,901 (2.4) % (15.2) % (2.7) % (13.3) % EMEA 7,789 9,347 15,970 25,453 (16.7) % (37.3) % (15.1) % (35.9) % Total retail 117,189 107,621 226,200 268,470 8.9 % (15.7) % 9.0 % (15.1) % E-commerce:Americas 46,274 31,391 138,510 85,796 47.4 % 61.4 % 47.5 % 61.6 %Asia Pacific 19,210 17,463 65,388 53,353 10.0 % 22.6 % 9.2 % 24.4 % EMEA 14,552 9,869 41,771 28,821 47.5 % 44.9 % 43.3 % 46.4 % Total e-commerce 80,036 58,723 245,669 167,970 36.3 % 46.3 % 35.4 % 47.3 % Total revenues$ 361,736 $ 312,766 $ 974,445 $ 967,614 15.7 % 0.7 % 15.9 % 1.9 %
(1) Reflects year over year change as if the current period results were in constant currency, which is a non-GAAP financial measure. See "Use of Non-GAAP Financial Measures" for more information.
The primary drivers of changes in revenue were:
Three Months Ended September 30, 2020 vs. 2019 Volume Price (1) Foreign Exchange Total $ Change % Change $ Change % Change $ Change % Change $ Change % Change (in thousands) Total revenues$ 11,087 3.6 %$ 38,491 12.3 %$ (608) (0.2) %$ 48,970 15.7 %
(1) The change due to price is based on the change in average selling price on a constant currency basis ("ASP").
Nine Months Ended September 30, 2020 vs. 2019 Volume Price (1) Foreign Exchange Total $ Change % Change $ Change % Change $ Change % Change $ Change % Change (in thousands) Total revenues$ (65,364) (6.8) %$ 83,876 8.7 %$ (11,681) (1.2) %$ 6,831 0.7 %
(1) The change due to price is based on the change in ASP.
Revenues. In three months endedSeptember 30, 2020 , revenues increased compared to the same period in 2019. Despite the continued presence of the COVID-19 pandemic, brick-and-mortar stores in our wholesale channel reopened and remained open for most of the quarter and e-commerce revenues continued to grow. Volume was up, particularly in ourAmericas and EMEA wholesale revenues, as a result of higher consumer demand in our e-tail and brick-and-mortar accounts as markets reopened. This was offset in part by lower volumes in ourAsia Pacific revenues, due to ongoing negative impacts from COVID-19, including pervasive closures and the lack of tourism in the region. Higher ASP drove growth in all segments and substantially all channels, especially in theAmericas , as a result of fewer promotions and discounts, higher pricing on certain products, and increased sales of charms per shoe. Fluctuations in foreign currencies slightly reduced revenues, primarily from unfavorable changes in the Brazilian Real that were mostly offset by favorable changes in the Euro. 23
--------------------------------------------------------------------------------
Table of Contents
Revenues also increased in the nine months endedSeptember 30, 2020 , primarily as a result of increases in ASP in all segments, due to fewer promotions and discounts, price increases, and increased sales of charms per shoe. These increases were partially offset by lower volume in the first half of the year, attributable to COVID-19 store closures, and negative currency changes, primarily in the Russian Ruble, Brazilian Real, Korean Won, and Chinese Yuan. Cost of sales. In the three months endedSeptember 30, 2020 , compared to the same period in 2019, cost of sales increased due to higher volume of$9.0 million , or 6.0%, primarily in ourAmericas and EMEA segments, offset in part by lower average cost per unit on a constant currency basis ("AUC"), as a result of product mix, which decreased cost of sales by$2.7 million , or 1.8%, and foreign currency fluctuations, which decreased cost of sales by$0.3 million , or 0.2%. In the nine months endedSeptember 30, 2020 , compared to the same period in 2019, cost of sales decreased primarily due to lower volume of$23.8 million , or 5.0%. Foreign currency fluctuations further decreased cost of sales by$5.7 million , or 1.2%. These decreases were partially offset by higher AUC of$6.3 million , or 1.3%, primarily due to higher costs as a result of changes in channel mix, purchasing power related to currency changes in our EMEA segment, and an inventory write-off in ourAsia Pacific segment in response to COVID-19. Gross profit. Gross margin increased in the three months endedSeptember 30, 2020 to 57.2%, compared to 52.4% in the same period in 2019, as a result of changes in product mix, price increases, and fewer promotions and discounts. Gross profit increased$42.9 million , or 26.2%. This was primarily as a result of higher ASP, supplemented by moderately lower AUC, of$41.2 million , or 25.1%, and higher volume of$2.0 million , or 1.3%. Negative currency changes of$0.3 million , or 0.2% had a minimal impact on gross profit. Gross margin in the nine months endedSeptember 30, 2020 was 53.5% compared to 50.7% in 2019, due to product mix, price increases, and fewer promotions and discounts. Gross profit increased$30.0 million , or 6.1%, as a result of net higher ASP and AUC of$77.6 million , or 15.8%, partially offset by lower volume of$41.6 million , or 8.5%, and negative currency changes of$6.0 million , or 1.2%. Selling, general and administrative expenses. SG&A increased$10.7 million , or 8.7%, in the three months endedSeptember 30, 2020 compared to the same period in 2019. This was driven primarily by an increase in compensation expense of$11.2 million , primarily in variable compensation, as a result of the timing of positive business performance compared to 2019. Additionally, marketing costs increased by$2.2 million , primarily as a result of variable costs associated with increased revenue and a higher share of e-commerce sales. These increases were partially offset by a decrease in professional services costs of$2.3 million , primarily due to cost saving measures related to COVID-19, and lower other net costs of$0.4 million . SG&A increased$0.8 million , or 0.2%, during the nine months endedSeptember 30, 2020 , compared to the same period in 2019. Increases due to inventory donations of$10.0 million , bad debt expense of$3.6 million , and information technology, marketing, and other net costs of$3.5 million were partially offset by various reductions, mostly as a result of cost saving measures taken in response to COVID-19. These reductions included net lower compensation expense of$8.5 million , primarily due to the temporary and permanent elimination of certain roles, decreased travel and related costs of$5.2 million , and decreased facilities costs of$2.6 million , due to savings in our company-owned retail stores, primarily in variable rent costs. Foreign currency gains (losses), net. Foreign currency gains (losses), net, consist of realized and unrealized foreign currency gains and losses from the remeasurement and settlement of monetary assets and liabilities denominated in non-functional currencies as well as realized and unrealized gains and losses on foreign currency derivative instruments. During the three months endedSeptember 30, 2020 , we recognized realized and unrealized net foreign currency losses of$0.5 million , compared to gains of$0.6 million during the three months endedSeptember 30, 2019 . During the nine months endedSeptember 30, 2020 , we recognized realized and unrealized net foreign currency losses of$1.4 million , compared to losses of$0.9 million during the nine months endedSeptember 30, 2019 . Income tax expense. During the three months endedSeptember 30, 2020 , income tax expense increased$5.8 million compared to the same period in 2019. The effective tax rate for the three months endedSeptember 30, 2020 was 11.7% compared to an effective tax rate of 6.4% for the same period in 2019, a 5.3% increase. The increase in the effective rate was driven by tax expense recorded in profitable jurisdictions, partially offset by the utilization of deferred tax assets which were subject to a valuation allowance, and by operating losses in certain jurisdictions where we had determined that it is not more likely than not to realize the associated tax benefits. Our effective income tax rate, for each period presented, also differs from the federalU.S statutory rate primarily due to differences in income tax rates betweenU.S. and foreign jurisdictions, as well as utilization of deferred tax assets which were subject to a valuation allowance. 24
--------------------------------------------------------------------------------
Table of Contents
During the nine months endedSeptember 30, 2020 , income tax expense increased$0.5 million compared to the same period in 2019. The effective tax rate for the nine months endedSeptember 30, 2020 was 9.8% compared to an effective tax rate of 12.0% for the same period in 2019, a 2.2% decrease. This decrease in the effective rate was driven primarily by the utilization of deferred tax assets which were subject to a valuation allowance, tax expense recorded in profitable jurisdictions, and by operating losses in certain jurisdictions where we had determined that it is not more likely than not to realize the associated tax benefits. Our effective income tax rate, for each period presented, also differs from the federalU.S. statutory rate primarily due to differences in income tax rates betweenU.S. and foreign jurisdictions, as well as utilization of deferred tax assets which were subject to a valuation allowance. 25 -------------------------------------------------------------------------------- Table of Contents Reportable Operating Segments The following table sets forth information related to our reportable operating segments, including a comparison of revenues and operating income by segment: Constant Currency % Change % Change (1) Three Months EndedSeptember 30 , Nine Months EndedSeptember 30 , Favorable (Unfavorable) 2020 2019 2020 2019 Q3 2020-2019 YTD 2020-2019 Q3 2020-2019 YTD 2020-2019 (in thousands) Revenues:Americas $ 234,047 $ 185,192 $ 553,355 $ 484,758 26.4 % 14.2 % 27.3 % 15.0 %Asia Pacific 67,704 74,251 226,736 283,722 (8.8) % (20.1) % (9.0) % (18.5) % EMEA 59,971 53,274 194,248 198,959 12.6 % (2.4) % 10.7 % (0.7) % Total segment revenues 361,722 312,717 974,339 967,439 15.7 % 0.7 % 15.9 % 1.9 % Other businesses 14 49 106 175 (71.4) % (39.4) % (71.4) % (39.4) %
Total consolidated revenues
15.7 % 0.7 % 15.9 % 1.9 % Income from operations:Americas $ 109,895 $ 66,760 $ 220,815 $ 157,314 64.6 % 40.4 % 65.5 % 40.9 %Asia Pacific 14,594 13,124 40,336 67,888 11.2 % (40.6) % 11.6 % (39.6) % EMEA 16,753 13,623 54,752 61,200 23.0 % (10.5) % 22.2 % (8.3) % Total segment income from operations 141,242 93,507 315,903 286,402 51.0 % 10.3 % 51.6 % 11.3 % Other businesses (15,738) (11,958) (41,727) (38,428) (31.6) % (8.6) % (30.7) % (8.1) % Unallocated corporate and other (2) (53,418) (41,665) (124,683) (127,681) (28.2) % 2.3 % (29.0) % 1.9 % Total consolidated income from operations$ 72,086 $ 39,884 $ 149,493 $ 120,293 80.7 % 24.3 % 81.6 % 26.3 % (1) Reflects year over year change as if the current period results were in constant currency, which is a non-GAAP financial measure. See "Use of Non-GAAP Financial Measures" for more information. (2) Unallocated corporate and other includes 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.
The primary drivers of changes in revenues by operating segment were:
Three Months Ended September 30, 2020 vs. 2019 Volume Price (1) Foreign Exchange Total $ Change % Change $ Change % Change $ Change % Change $ Change % Change (in thousands) Segment Revenues: Americas$ 18,599 10.0 %$ 32,000 17.3 %$ (1,744) (0.9) %$ 48,855 26.4 % Asia Pacific (11,849) (16.0) % 5,173 7.0 % 129 0.2 % (6,547) (8.8) % EMEA 4,372 8.2 % 1,318 2.5 % 1,007 1.9 % 6,697 12.6 % Total segment revenues$ 11,122 3.6 %$ 38,491 12.3 %$ (608) (0.2) %$ 49,005 15.7 %
(1) The change due to price for revenues is based on ASP, as defined earlier in this section.
26
--------------------------------------------------------------------------------
Table of Contents Nine Months Ended September 30, 2020 vs. 2019 Volume Price (1) Foreign Exchange Total $ Change % Change $ Change % Change $ Change % Change $ Change % Change (in thousands) Segment Revenues: Americas$ (2,404) (0.5) %$ 74,696 15.4 %$ (3,695) (0.7) %$ 68,597 14.2 % Asia Pacific (56,612) (20.0) % 4,203 1.5 % (4,577) (1.6) % (56,986) (20.1) % EMEA (6,279) (3.2) % 4,977 2.5 % (3,409) (1.7) % (4,711) (2.4) % Total segment revenues$ (65,295) (6.8) %$ 83,876 8.7 %$ (11,681) (1.2) %$ 6,900 0.7 %
(1) The change due to price for revenues is based on ASP, as defined earlier in this section.
Americas Operating Segment Revenues.Americas revenues increased in the three months endedSeptember 30, 2020 , compared to the same period in 2019, particularly in our e-commerce channel, with an increase of 47.4%, and our wholesale channel, with an increase of 29.6%. The overall increase in revenue was primarily due to higher ASP in all three channels, particularly as a result of less promotional activity, product mix, increased prices, and increased sales of charms per shoe, and increased volume, mostly in our wholesale channel, as a result of higher consumer demand from our e-tail and brick-and-mortar accounts as markets reopened. These increases were slightly offset by negative currency changes, primarily in the Brazilian Real. The increase inAmericas revenues in the nine months endedSeptember 30, 2020 , compared to the same period in 2019, was primarily due to increased ASP from product mix, price increases, less promotional activity, and increased sales of charms per shoe. Lower volume in our retail channel offset higher volumes in our wholesale and e-commerce channels, as a result of COVID-19-related closures in the first and second quarters that drove a consumer shift to online shopping. Negative currency changes, largely in the Brazilian Real, also decreased revenues. Income from Operations. Income from operations for ourAmericas segment was$109.9 million for the three months endedSeptember 30, 2020 , an increase of$43.1 million , or 64.6%, compared to the same period in 2019. Gross profit increased$44.3 million , or 41.5%, primarily due to an increase of$36.0 million , or 33.7%, from higher ASP, as a result of less promotional activity, product mix, and increased prices, and lower AUC, as a result of product mix in our wholesale and retail channels. Volume increased$8.9 million , or 8.4%, primarily in our e-commerce and wholesale channels. Negative currency changes of$0.6 million , or 0.6%, partially offset these increases in gross profit. SG&A for ourAmericas segment increased$1.2 million , or 2.9%, during the three months endedSeptember 30, 2020 compared to the same period in 2019, due to increased marketing costs of$1.5 million , as a result of higher variable marketing associated with a higher share of e-commerce sales, and higher other net costs of$0.4 million , partially offset by a$0.7 million decrease in compensation expense due to the elimination of certain roles in response to COVID-19. Income from operations for ourAmericas segment was$220.8 million for the nine months endedSeptember 30, 2020 , an increase of$63.5 million , or 40.4%, compared to the same period in 2019. Gross profit increased$69.9 million , or 25.9%, primarily due to an increase of$82.4 million , or 30.5%, from higher ASP, as a result of less promotional activity, product mix, and increased prices, and lower AUC, as a result of product mix. Lower sales volumes of$11.1 million , or 4.1%, primarily in our retail channel, and a$1.4 million , or 0.5%, decrease as a result of negative currency changes somewhat offset the gross profit increase. SG&A for ourAmericas segment increased$6.4 million , or 5.6%, during the nine months endedSeptember 30, 2020 compared to the same period in 2019. This was primarily due to$8.3 million of inventory donations associated with COVID-19, an increase of$4.4 million in marketing costs from higher variable marketing associated with a higher share of e-commerce sales, and a$2.4 million increase in bad debt expense, largely due to the impact of COVID-19 on our distributors. A reduction in compensation expense of$7.2 million , primarily due to the temporary and permanent elimination of certain roles in response to COVID-19, and a decrease in travel, facilities, and other net costs of$1.5 million partially offset this increase. 27 -------------------------------------------------------------------------------- Table of Contents Asia Pacific Operating Segment Revenues.Asia Pacific revenues decreased in the three months endedSeptember 30, 2020 , compared to the same period in 2019. Volume was lower, as growth in digital sales was offset by declines in our brick-and-mortar wholesale accounts and in our retail channel, as a result of decreased customer traffic and a lack of tourism resulting from the COVID-19 pandemic, as well as right-sizing our retail fleet in certain markets. Higher ASP, due to channel mix, fewer promotions, and less discounting, also partially offset these declines.Asia Pacific revenues decreased in the nine months endedSeptember 30, 2020 , compared to the same period in 2019, due to lower volumes in our wholesale and retail channels, as a result of store closures, decreased customer traffic, and a lack of tourism, all as a result of the pandemic. Higher ASP, due to channel mix, fewer promotions, and less discounting almost entirely offset negative currency impacts, primarily in the Korean Won and Chinese Yuan. Income from Operations. Income from operations for theAsia Pacific segment was$14.6 million for the three months endedSeptember 30, 2020 , a decrease of$1.5 million , or 11.2%, compared to the same period in 2019. Gross profit decreased by$1.4 million , or 3.6%, as a result of lower volume of$5.5 million , or 13.6%, primarily in our wholesale and retail channels, offset in part by net higher ASP and AUC of$4.0 million , or 9.8%. Currency favorably impacted gross margin by$0.1 million , or 0.2%. SG&A for ourAsia Pacific segment decreased$2.9 million , or 10.7%, during the three months endedSeptember 30, 2020 , compared to the same period in 2019, due in part to a reduction in compensation costs of$1.7 million due to the elimination of certain roles in response to COVID-19 and a decrease in bad debt expense of$1.6 million , partially offset by increases in other net costs of$0.4 million . Income from operations for theAsia Pacific segment was$40.3 million for the nine months endedSeptember 30, 2020 , a decrease of$27.6 million , or 40.6%, compared to the same period in 2019. Gross profit decreased by$30.4 million , or 20.1%, mostly due to lower volume of$24.0 million , or 15.9%, from reduced customer traffic and a lack of tourism during the pandemic, and net higher AUC and ASP of$4.0 million , or 2.6%, from higher distribution and logistics costs and an inventory write-off as a result of the impact of COVID-19. Negative currency impacts decreased gross profit by$2.4 million , or 1.6%. SG&A for ourAsia Pacific segment decreased$2.8 million , or 3.4% in the nine months endedSeptember 30, 2020 compared to the same period in 2019, primarily due to a decrease in facilities expense of$3.2 million as a result of savings from variable rent in our company-owned retail stores and a reduction in compensation expense of$2.8 million due to the elimination of certain roles in response to COVID-19. These decreases were partially offset by an increase in inventory donations to healthcare workers and other organizations of$1.4 million , primarily in the first quarter of 2020, and other net costs of$1.8 million . EMEA Operating Segment Revenues. Revenues increased in our EMEA segment in the three months endedSeptember 30, 2020 , compared to the same period in 2019, in part as a result of a consumer shift to online shopping during the pandemic, driving higher volumes in our e-commerce channel of 32.4% and our wholesale channel of 10.2%, offset in part by lower retail volume of 24.6%. We also had higher ASP, as a result of less discounting, and favorable currency changes, primarily in the Euro. During the nine months endedSeptember 30, 2020 , EMEA revenues decreased compared to the same period in 2019, primarily due to lower volumes in our retail channel of 37.4% and wholesale channel of 4.9%, offset in part by increased volume in our e-commerce channel of 35.7% due to a consumer shift to online shopping during the pandemic. Negative currency, primarily in the Russian Ruble, was more than offset by higher ASP in all channels, primarily in e-commerce, as a result of less discounting. Income from Operations. Income from operations for the EMEA segment was$16.8 million for the three months endedSeptember 30, 2020 , an increase of$3.1 million , or 23.0%, compared to the same period in 2019. Gross profit increased$3.2 million , or 11.9%, due to higher volume of$1.6 million , or 5.9%, net higher ASP and AUC of$1.2 million , or 4.6%, and a favorable currency impact of$0.4 million , or 1.4%.
SG&A for our EMEA segment was mostly flat in the three months ended
Income from operations for the EMEA segment was$54.8 million for the nine months endedSeptember 30, 2020 , a decrease of$6.4 million , or 10.5%, compared to the same period in 2019. Gross profit decreased$7.4 million , or 7.3%, due to lower sales volumes of$4.7 million , or 4.7%, negative currency impacts of$1.9 million , or 1.8%, and net higher AUC and ASP, of$0.8 million , or 0.8%, as a result of product mix, price increases, and fewer promotions and less discounts. 28
--------------------------------------------------------------------------------
Table of Contents
SG&A for our EMEA segment decreased$1.0 million , or 2.5%, during the nine months endedSeptember 30, 2020 , compared to the same period in 2019, primarily due to a$1.3 million reduction in compensation expense and a$0.9 million reduction in net other costs, offset in part by increases in marketing costs of$1.2 million as a result of higher variable marketing associated with a higher share of e-commerce sales.
Other Businesses and Unallocated Corporate
During the three months endedSeptember 30, 2020 , total net costs within 'Other Businesses' and 'Unallocated Corporate and Other' increased$15.5 million compared to the same period in 2019. This was mostly due to an increase in compensation expense of$13.7 million , primarily in variable compensation driven by the timing of positive business performance compared to 2019, an increase in supply chain costs of$3.1 million driven in part by investments in our distribution network, and an increase in facilities and other net costs of$0.9 million . These increases were partially offset by a decrease in professional services fees of$2.2 million due to cost saving measures related to COVID-19. During the nine months endedSeptember 30, 2020 , total net costs within 'Other Businesses' and 'Unallocated Corporate and Other' increased$0.3 million compared to the same period in 2019, primarily driven by an increase in compensation expense of$2.8 million due to the strong performance of the business, increased facilities expense of$2.3 million as a result of the opening of our new headquarters inBroomfield, Colorado , and higher supply chain costs of$2.0 million due in part to investment in our distribution network. These increases were mostly offset by a lower investment in marketing of$4.0 million and decreases in travel, professional services, and other net costs of$2.8 million .
Store Locations and Comparable Store Sales
The tables below illustrate the overall change in the number of our
company-operated retail locations by type of store and reportable operating
segment for the three and nine months ended
June 30, September 30, 2020 Opened Closed 2020 Company-operated retail locations: Type: Outlet stores 191 - 5 186 Retail stores 104 - 4 100 Kiosk/store in store 65 - - 65 Total 360 - 9 351 Operating segment: Americas 165 - - 165 Asia Pacific 142 - 6 136 EMEA 53 - 3 50 Total 360 - 9 351 December 31, September 30, 2019 Opened Closed/Transferred 2020 Type: Outlet stores 193 5 12 186 Retail stores 109 3 12 100 Kiosk/store-in-store 65 1 1 65 Total 367 9 25 351 Operating segment: Americas 165 2 2 165 Asia Pacific 145 5 14 136 EMEA 57 2 9 50 Total 367 9 25 351 29
--------------------------------------------------------------------------------
Table of Contents
Digital sales, which includes sales through our company-owned website, third party marketplaces, and e-tailers (which are reported in our wholesale channel), as a percent of total revenues, by operating segment were: Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Digital sales as a percent of total revenues: Americas 30.8 % 26.9 % 38.9 % 28.0 % Asia Pacific 42.3 % 32.9 % 39.0 % 27.6 % EMEA 59.8 % 49.6 % 53.5 % 39.6 % Global 37.7 % 32.2 % 41.8 % 30.3 % Comparable retail store sales and direct-to-consumer store sales by operating segment are shown below. Constant Currency (1) Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019
Comparable retail store sales: (2)
Americas 22.3 % 19.1 % 21.8 % 17.1 % Asia Pacific 2.8 % (4.2) % (0.8) % (1.2) % EMEA (4.7) % 2.4 % (5.6) % 6.3 % Global 16.2 % 12.5 % 13.0 % 11.4 % Constant Currency (1) Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Direct-to-consumer comparable sales (includes retail and e-commerce): (2) Americas 30.7 % 18.5 % 40.1 % 18.6 % Asia Pacific 5.2 % 11.7 % 10.9 % 5.6 % EMEA 22.9 % 9.5 % 28.7 % 13.8 % Global 23.8 % 15.9 % 29.8 % 14.4 % (1) Reflects period over period change on a constant currency basis, which is a non-GAAP financial measure. See "Use of Non-GAAP Financial Measures" for more information. (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. 30 -------------------------------------------------------------------------------- Table of Contents Financial Condition, Capital Resources, and Liquidity
Liquidity
Our liquidity position as of
September 30, 2020 (in thousands) Cash and cash equivalents $ 123,562 Available borrowings 364,400 As ofSeptember 30, 2020 , we had$123.6 million in cash and cash equivalents and up to$364.4 million of remaining borrowing availability under our Facility (as defined below), which was amended inMarch 2020 to provide additional flexibility and borrowing commitments as we continue to operate in a business landscape impacted by the COVID-19 pandemic. We also entered into two revolving credit facility agreements inAsia during the year, which are discussed in more detail under "Asia Revolving Credit Facilities" below. Throughout the year, we have taken several defensive measures to maximize liquidity in response to COVID-19, including reducing expenses, primarily through the temporary and permanent elimination of certain corporate and regional roles, extending payment terms with vendors, managing inventory levels by constraining incoming supply and focusing on core product, deferring discretionary capital expenditures, and suspending our share repurchase and foreign currency exchange derivative programs. While we have begun to reinvest in the business and increase inventory to meet demand, we will continue to closely monitor our costs and adjust as needed in response to changes in the market. Additionally, as ofSeptember 30, 2020 , we have largely returned to standard payment terms with our vendors and customers after more strictly managing accounts payable in the first part of the year and recognizing bad debt expense of$4.4 million in the nine months endedSeptember 30, 2020 , associated with global distributors as a result of the COVID-19 pandemic. ThroughSeptember 30, 2020 , we also received rent concessions from landlords of$6.0 million , the majority of which were either paid back during the three months endedSeptember 30, 2020 or are expected to be paid back by the end of 2020. Based on these actions, we believe that cash flows from operations, our cash and cash equivalents on hand, and available borrowings under our Facility will be sufficient to meet our ongoing liquidity needs and capital expenditure requirements for at least the next twelve months. 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, especially in light of the market volatility and uncertainty as a result of the COVID-19 outbreak. Although we believe we have adequate sources of liquidity over the long term, the success of our operations, the global economic outlook, and the pace of sustainable growth in our markets, in each case, in light of the market volatility and uncertainty as a result of the COVID-19 pandemic, among other factors, could impact our business and liquidity.
Seasonality
Due to the seasonal nature of our footwear, which is more heavily focused on styles suitable for warm weather, revenues generated during our fourth quarter, when the northern hemisphere is experiencing cooler weather, are typically less than revenues generated during our first three quarters. Accordingly, cash flows from operating activities during our first quarter are typically lower as we collect on the related fourth quarter customer receivables and as customer receivables and inventories rise in preparation for the Spring/Summer season. Cash flows from operating activities generated during our second and third quarters are generally higher, when the northern hemisphere is experiencing warmer weather. Accordingly, results of operations and cash flows for any one quarter are not necessarily indicative of expected results for any other quarter or for any other year. Repatriation of Cash As a global business, we have cash balances in various countries, and amounts are denominated in various currencies. Fluctuations in foreign currency exchange rates impact our results of 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 associated with them which could adversely impact our liquidity and our ability to timely access and transfer cash balances between entities.
All of the cash held outside of the
31 -------------------------------------------------------------------------------- Table of Contents primarily used for the ongoing operations of the business in the locations in which the cash is held. None of the$69.5 million held in international locations is limited by local regulations. If the remaining$69.5 million were to be immediately repatriated to theU.S. , no additionalU.S. federal income tax expense would be incurred.
Senior Revolving Credit Facility
InJuly 2019 , the Company and certain of our subsidiaries (the "Borrowers") entered into a Second Amended and Restated Credit Agreement (as amended, the "Credit Agreement"), with the lenders named therein andPNC Bank, National Association , as a lender and administrative agent for the lenders, which provided for a revolving credit facility of$500.0 million , which can be increased by an additional$100.0 million subject to certain conditions (the "Facility"). Borrowings under the Credit Agreement bear interest at a variable rate based on (A) a domestic base rate (defined as the highest of (i) the Federal Funds open rate, plus 0.25%, (ii) the Prime Rate, and (iii) the Daily LIBOR rate, plus 1.00%), plus an applicable margin ranging from 0.25% or 0.875% based on our leverage ratio, or (B) a LIBOR rate, plus an applicable margin ranging from 1.25% to 1.875% based on our leverage ratio. Borrowings under the Credit Agreement are secured by all of the assets of the Borrowers and guaranteed by certain other subsidiaries of the Borrowers. The Credit Agreement requires us to maintain a minimum interest coverage ratio of 4.00 to 1.00, and a maximum leverage ratio of (i) 4.00 to 1.00 untilSeptember 30, 2020 , (ii) 3.50 to 1.00 fromDecember 31, 2020 toDecember 31, 2021 , and (iii) 3.25 to 1.00 fromMarch 31, 2022 and thereafter (subject to adjustment in certain circumstances). The Credit Agreement permits (i) stock repurchases subject to certain restrictions, including after giving effect to such stock repurchases, the maximum leverage ratio does not exceed certain levels; and (ii) certain acquisitions so long as there is borrowing availability under the Credit Agreement of at least$40.0 million . As ofSeptember 30, 2020 , we were in compliance with all financial covenants under the Credit Agreement. As ofSeptember 30, 2020 , the total commitments available from the lenders under the Facility were$500.0 million . AtSeptember 30, 2020 , we had$135.0 million in outstanding borrowings, which are due when the Facility matures inJuly 2024 , and$0.6 million in outstanding letters of credit under the Facility, which reduces amounts available for borrowing under the Facility. As ofSeptember 30, 2020 andDecember 31, 2019 , we had$364.4 million and$240.4 million , respectively, of available borrowing capacity under the Facility. Our borrowings may continue to fluctuate as we manage our liquidity needs.
Asia Revolving Credit Facilities
The revolving credit facility with China Merchants Bank Company Limited,Shanghai Branch (the "CMBC Facility") provides up to30.0 million RMB , or$4.4 million at current exchange rates, and matures inMay 2021 . For RMB loans under the CMBC Facility, interest is determined at the time of borrowing based on variable rates in effect at that time. The revolving credit facility withCitibank (China) Company Limited ,Shanghai Branch (the "Citibank Facility") provides up to an equivalent of$5.0 million and matures inJune 2021 . For RMB loans under the Citibank Facility, interest is based on a National Interbank Funding Center 1-year prime rate, plus 65 basis points. For USD loans under the Citibank Facility, interest is based on a LIBOR rate, plus 1.5%.
We had no borrowings under our
In
32
--------------------------------------------------------------------------------
Table of Contents
© Edgar Online, source