Gross & Operating Margin

SUMMARY:

Business conditions following 2008 crisis were very severe for Crocs. The company was forced to implement a restructuring plan in order to survive. All of this had a huge impact on profit and profit margins.

Nowadays, gross margin is stable at around 54% as one expects it to remain at these levels with a slightly downwarding trend as the company uses new materials to expand their line of products.

Operating profit is increasing as the company's business conditions are improving, but is yet to be comparable with 2007 levels as the company is investing a lot to expand the retail business channel.

GROSS MARGIN

Although gross profit has been increasing ever since 2008 (AAGR = 32%) and is actually higher than in 2007 (before crisis), the gross margin is somewhat stable around 54% compared to 60% in 2007. This is due to broader line of footwear collections, which include more raw materials other than Croslite. As this trend continues, it is expected that de gross margin to slightly decrease.

In 2008 and 2009 gross margin was afected by the drop in demand and the company's cost structure that didn't allow for a fast response (fixed costs). 

It is important to notice that the increase of the retail business channel, and Internet channel contributed to the increase in gross margin as the costs associated with this channels are included in the "Selling, General and Administrative Expenses" item.

Also, in 2008 and 2009 Crocs implemented a restructuring plan, which we'll see in greater detail when discussing the operating profit. The portions of restructuring and impairment related to manufacturing assets are recognized in cost of sales. The portions related to non-product, non-manufacturing assets are reflected in restructuring charges and asset impairment charges as appropriate.

OPERATING MARGIN

The most important regular item is "Selling, General and Administrative Expenses". It represents 40% of revenues in 2011 and consists primarily of selling, marketing, wages and related payroll and employee benefit costs for selling, marketing and administrative employees, travel and insurance expenses, depreciation, amortization, unrealized gains or losses on foreign currency exchange, all retail related expenses, including rent and depreciation, and professional fees, facility expenses, bank charges and non-cash charges for share-based compensation.

In 2008 there was an increase in these expenses related to marketing (sponsorship and advertising), rents (expansion of retail space) and legal expenses (register and protection of trademarks and patents). In 2009 marketing and legal expenses were lower, but as sales decreased even more, the weight of selling expenses was still very high. After 2009 there has been a constant increase in salaries, rent and other retail-related costs largely driven by the expansion of the retail sales channel. Global increase in demand allowed for the revenues to increase at a faster pace, justifying the lower weight of selling expenses.

In 2008 and 2009, Crocs implemented a restructuring plan to face the harsh environment conditions. With this came the restructuring and asset impairment charges. Also in 2009 the dramatic drop in stock price forced Crocs to register abou $24 million in goodwill impairment charges.

Summary on Restructuring:

• Discontinue Canadian and Brazilian manufacturing operations and consolidating Canadian distribution activities with other existing North American distribution operations;
• Abandon certain manufacturing equipment and molds that represent excess capacity;
• Consolidate global distribution centers and warehousing;
• Reductions in personnel;
• Write-downs related to losses on future purchase commitments for inventory with a market value lower than cost;

Restructuring Charges (2008): Recorded $8.5 million in restructuring charges related to the closure of our facilities in Canada and Brazil.

Restructuring Charges (2009): Recorded $5.6 million in the process of consolidation warehousing, distribution and office space worldwide;

                                               Recorded $3.8 million in the termination of sponsorships agreements and manufacturing agreements;

                                               Recorded $3.7 million in severace costs;

Restructuring Charges (2010): Recorded $2.0 million in severance costs.

Asset Impairment Charges: These are related to fixed assets, mainly equipment and shoe molds the company doesn't intend to use anymore, for some reason.

Operating profit was severely afected by the lower gross profit, higher selling expenses and restructuring charges through the crisis. Although gross profit surpassed the 2007 levels, operating profit in 2011 is less than 60% of the 2007 profit. This is related to the mentioned strategy of increasing brand awareness through an expansion of retail stores. 

Americas:

• Operating Profit is growing fast after the 2008 drop, but is still less than half of 2007 profit;
• In 2011 growth of operating profit was only 15% compared to previous year;
• It's where the company has the lowest margin, which actually decreased in 2011.

Asia: 

• Operating profit is already higher than in 2007 (63% higher), and is growing at an AAGR of 95% ssince 2008.
• Operating profit jumped more than 50% last year and is where the company has the highest margin.

Europe:

• Lowest profit, but great growth pace (65% growth in 2011 facing 2010).
• Margins are improving very fast too (23% improve in 2011)

No comments found.