# Crocs, Inc.: Form 10-Q for the period ended Mar 31, 2017

- Company: [Crocs, Inc.](/companies/crox.md) (CIK 1334036)
- Form: 10-Q
- Filed: 2017-05-10
- Accepted by EDGAR: May 10, 2017, 13:52 ET
- Period: 2017-03-31
- Accession: 0001628280-17-005321
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1334036/000162828017005321/crox2017331-10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1334036/000162828017005321/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2017-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Cost of revenue | 3 months, 2017-01-01 to 2017-03-31 | $134.3m | us-gaap:CostOfGoodsSold |
| Gross profit | 3 months, 2017-01-01 to 2017-03-31 | $133.6m | us-gaap:GrossProfit |
| Research and development | 3 months, 2017-01-01 to 2017-03-31 | $2.9m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2017-01-01 to 2017-03-31 | $118.0m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2017-01-01 to 2017-03-31 | $15.6m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2017-01-01 to 2017-03-31 | $184.0k | us-gaap:InterestExpense |
| Income tax | 3 months, 2017-01-01 to 2017-03-31 | $4.9m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2017-01-01 to 2017-03-31 | $11.0m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2017-01-01 to 2017-03-31 | $0.08 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2017-01-01 to 2017-03-31 | $0.08 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2017-01-01 to 2017-03-31 | 74,561,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Capital expenditure | 3 months, 2017-01-01 to 2017-03-31 | $3.2m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2017-03-31 | $88.9m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2017-03-31 | $462.5m | us-gaap:AssetsCurrent |
| Total assets | at 2017-03-31 | $601.2m | us-gaap:Assets |
| Current liabilities | at 2017-03-31 | $168.5m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2017-03-31 | $187.0m | us-gaap:Liabilities |
| Shareholders' equity | at 2017-03-31 | $234.4m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 39,040 characters.

### 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:

- Softening of the global economy and a cautious retail environment may continue to negatively affect customer purchasing trends.
- Foreign exchange rates may continue to unfavorably impact revenues from our foreign operations for the foreseeable future.
- Consumers 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, which has been largely offset by declining foot traffic in our retail locations.
- We anticipate lower retail revenues and selling, general and administrative expenses 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 have identified reductions in selling, general and administrative expenses (“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 $25 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. In conjunction with these actions, we anticipate closing approximately 160 company operated retail stores by the end of 2018, thereby reducing our total store count to approximately 400 from 558 at the end of 2016.

### 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 non-GAAP 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 March 31, 2017:

- Revenues for the three months ended March 31, 2017 were $267.9 million, a decrease of $11.2 million, or 4.0%, compared to the same period in 2016.
- Cost of sales for the three months ended March 31, 2017 was $134.3 million, a decrease of $15.5 million, or 10.3%, compared to the same period in 2016.
- Gross profit for the three months ended March 31, 2017 was $133.6 million, an increase of $4.2 million, or 3.3%. Gross margin increased 350 basis points to 49.9%, compared to the same period in 2016.
- Selling, general and administrative expenses increased $2.9 million, or 2.5%, including $2.2 million in strategic consulting and reorganization costs, for the three months ended March 31, 2017 compared to the same period in 2016.
- Net income attributable to common stockholders increased $0.8 million to income of $7.2 million compared to $6.4 million for the same period in 2016. Net earnings per common share (“EPS”) was $0.08 for the three months ended March 31, 2017 compared to $0.07 for the three months ended March 31, 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) developing **powerful product stories** supported with effective marketing,

(2) driving global **cohesive brand positioning,**

(3) increasing **working marketing spend,**

(4) enhancing engagement with **key wholesale accounts,**

(5) gaining greater strategic and **economic leverage** from our direct-to-consumer assets,

(6) prioritizing investment in **larger-scale geographies,**

(7) streamlining our **cost structure** by reducing duplication and complexity across regional offices and the corporate center, and

(8) investing to drive **supply chain effectiveness and reliability.**

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.

### Results of Operations

### Comparison of the Three Months Ended March 31, 2017 and 2016

*(in thousands, except per share data and average selling price)*

|  | Three Months Ended March 31, 2017 | 2016 | Change |  |
| --- | ---: | ---: | ---: | ---: |
| Revenues | $267,907 | $279,140 | $(11,233) | (4.0)% |
| Cost of sales | 134,323 | 149,774 | (15,451) | (10.3)% |
| Gross profit | 133,584 | 129,366 | 4,218 | 3.3% |
| Selling, general and administrative expenses | 118,002 | 115,123 | 2,879 | 2.5% |
| Income from operations | 15,582 | 14,243 | 1,339 | 9.4% |
| Foreign currency gain (loss), net | 276 | (1,247) | 1,523 | 122.1% |
| Interest income | 150 | 216 | (66) | (30.6)% |
| Interest expense | (184) | (243) | 59 | (24.3)% |
| Other income, net | 124 | 82 | 42 | 51.2% |
| Income before income taxes | 15,948 | 13,051 | 2,897 | 22.2% |
| Income tax expense | (4,938) | (2,905) | (2,033) | 70.0% |
| Net income | 11,010 | 10,146 | 864 | 8.5% |
| 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 | (855) | (785) | (70) | 8.9% |
| Net income attributable to common stockholders | $7,155 | $6,361 | $794 | 12.5% |
| Net income per common share: |  |  |  |  |
| Basic | $0.08 | $0.07 | $0.01 | 14.3% |
| Diluted | $0.08 | $0.07 | $0.01 | 14.3% |
| Gross margin | 49.9% | 46.3% | 350 | 7.6% |
| Operating margin | 5.8% | 5.1% | 70 | 13.7% |
| Footwear unit sales | 16,396 | 16,268 | 128 | 0.8% |
| Average footwear selling price | $16.11 | $16.85 | $(0.74) | (4.4)% |

***Revenues.*** Revenues decreased $11.2 million, or 4.0%, in the three months ended March 31, 2017, compared to the same period in 2016. The decrease in revenues was due to the net effect of: (i) an increase of $2.2 million, or 0.8%, due to higher unit sales volumes, (ii) a decrease of $14.3 million, or 5.1%, due to lower average selling prices, and (iii) an increase of $0.9 million, or 0.3%, from foreign currency translation.

***Cost of sales.*** During the three months ended March 31, 2017, cost of sales decreased $15.5 million, or 10.3%, compared to the same period in 2016. The decrease in cost of sales was due to the net impact of: (i) an increase of $1.2 million, or 0.8%, due to higher unit sales volumes, (ii) a decrease of $18.5 million, or 12.3%, due to lower average costs per unit, and (iii) an increase of $1.8 million, or 1.2%, from foreign currency translation. Lower average costs per unit were primarily the result of product mix, including sandals and clog silhouettes which cost less to produce, and lower negotiated inbound ocean freight costs.

***Gross profit.*** During the three months ended March 31, 2017, gross profit increased $4.2 million, or 3.3%, and gross margin increased 350 basis points to 49.9% compared to the same period in 2016. The increase in gross profit is due to the net impact of: (i) an increase of $4.1 million, or 3.2%, due to the combined impact of decreases in average costs per unit which exceeded decreases in average selling prices, (ii) an increase of $1.0 million, or 0.8%, due to higher sales unit volumes, and (iii) a decrease of $0.9 million, or 0.7%, from foreign currency translation.

***Selling, general and administrative expenses.*** SG&A increased $2.9 million, or 2.5%, during the three months ended March 31, 2017, compared to the same period in 2016. The increase was primarily due to the combined impact of: (i) an increase of $3.8 million in marketing expense related to our 2017 spring and summer advertising and promotional activities; (ii) increases in other expenses of $0.9 million, none of which were individually significant; offset by (iii) cash recoveries of previously reserved accounts receivable of $1.1 million; and (iv) lower SG&A related to the disposition of our Taiwan and South Africa businesses of $0.7 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 three months ended March 31, 2017, we recognized realized and unrealized net gains of $0.3 million compared to net losses of $1.2 million on foreign currency during the three months ended March 31, 2016.

***Income tax expense.*** During the three months ended March 31, 2017, income tax expense increased $2.0 million compared to the same period in 2016. The effective tax rate for the three months ended March 31, 2017 was 31.0% compared to an effective tax rate of 22.1% for the same period in 2016, an 8.9% 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 31.0% for the three months ended March 31, 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

*(in thousands)*

| Wholesale: | Three Months Ended March 31, 2017 | 2016 | Change $% |  | Constant Currency Change (1) $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Americas | $71,023 | $74,155 | $(3,132) | (4.2)% | $(4,279) | (5.8)% |
| Asia Pacific | 70,935 | 77,154 | (6,219) | (8.1)% | (6,220) | (8.1)% |
| Europe | 40,583 | 39,062 | 1,521 | 3.9% | 2,137 | 5.5% |
| Other businesses | 190 | 172 | 18 | 10.5% | 21 | 12.2% |
| Total wholesale | 182,731 | 190,543 | (7,812) | (4.1)% | (8,341) | (4.4)% |
| Retail: |  |  |  |  |  |  |
| Americas | 32,829 | 35,749 | (2,920) | (8.2)% | (2,958) | (8.3)% |
| Asia Pacific | 21,532 | 22,519 | (987) | (4.4)% | (1,164) | (5.2)% |
| Europe | 7,419 | 7,555 | (136) | (1.8)% | (411) | (5.4)% |
| Total retail | 61,780 | 65,823 | (4,043) | (6.1)% | (4,533) | (6.9)% |
| E-commerce: |  |  |  |  |  |  |
| Americas | 13,869 | 14,226 | (357) | (2.5)% | (392) | (2.8)% |
| Asia Pacific | 5,877 | 4,829 | 1,048 | 21.7% | 1,103 | 22.8% |
| Europe | 3,650 | 3,719 | (69) | (1.9)% | (32) | (0.9)% |
| Total e-commerce | 23,396 | 22,774 | 622 | 2.7% | 679 | 3.0% |
| Total revenues | $267,907 | $279,140 | $(11,233) | (4.0)% | $(12,195) | (4.4)% |

(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.

***Wholesale channel revenues.*** During the three months ended March 31, 2017, revenues from our wholesale channel decreased $7.8 million, or 4.1%, compared to the same period in 2016. The decrease in wholesale channel revenues was due to the net impact of: (i) an increase of $2.2 million, or 1.1%, in unit sales volumes, (ii) a decrease of $10.5 million, or 5.5%, due to lower average selling prices, and (iii) an increase of $0.5 million, or 0.3%, from foreign currency translation.

***Retail channel revenues.*** During the three months ended March 31, 2017, revenues from our retail channel decreased $4.0 million, or 6.1%, compared to the same period in 2016. The decrease in retail channel revenues was due to the net impact of: (i) a decrease of $3.1 million, or 4.7%, in unit sales volumes, (ii) a decrease of $1.4 million, or 2.2%, due to lower average selling prices, and (iii) an increase of $0.5 million, or 0.8%, from foreign currency translation.

***E-commerce channel revenues.*** During the three months ended March 31, 2017, revenues from our e-commerce channel increased $0.6 million, or 2.7%, compared to the same period in 2016. The increase in e-commerce revenues was due to the net impact of: (i) an increase of $2.4 million, or 10.5%, in unit sales volumes (primarily due to increased sales volumes in the Americas and Asia Pacific segments), (ii) a decrease of $1.7 million, or 7.5%, due to lower average selling prices, and (iii) a decrease of $0.1 million, or 0.3%, 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 March 31, 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:

*(in thousands)*

| Revenues: | Three Months Ended March 31, 2017 | 2016 | Change $% |  | Constant Currency Change (1) $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Americas | $117,722 | $124,130 | $(6,408) | (5.2)% | $(7,629) | (6.1)% |
| Asia Pacific | 98,344 | 104,502 | (6,158) | (5.9)% | (6,281) | (6.0)% |
| Europe | 51,651 | 50,336 | 1,315 | 2.6% | 1,694 | 3.4% |
| Total segment revenues | 267,717 | 278,968 | (11,251) | (4.0)% | (12,216) | (4.4)% |
| Other businesses | 190 | 172 | 18 | 10.5% | 21 | 12.2% |
| Total revenues | $267,907 | $279,140 | $(11,233) | (4.0)% | $(12,195) | (4.4)% |
| Income from operations: (2) |  |  |  |  |  |  |
| Americas | $22,002 | $16,576 | $5,426 | 32.7% | $5,306 | 32.0% |
| Asia Pacific | 26,726 | 25,851 | 875 | 3.4% | 816 | 3.2% |
| Europe | 12,274 | 6,523 | 5,751 | 88.2% | 5,835 | 89.5% |
| Total segment operating income | 61,002 | 48,950 | 12,052 | 24.6% | 11,957 | 24.4% |
| Other businesses (3) | (5,617) | (6,074) | 457 | (7.5)% | 423 | (7.0)% |
| Unallocated corporate and other (4) | (39,803) | (28,633) | (11,170) | 39.0% | (11,238) | 39.2% |
| Total operating income | $15,582 | $14,243 | $1,339 | 9.4% | $1,142 | 8.0% |

(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) Income from operations in the Americas increased primarily as a result of lower product costs. Income from operations in Asia increased as a result of both lower product costs and lower selling, general and administrative expenses. Income from operations in Europe increased as a result of higher product gross margin due to less discount channel sales, and lower selling, general and administrative expenses.

(3) Other businesses consists primarily of our owned manufacturing facilities.

(4) 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 three months ended March 31, 2017, revenues for our Americas segment decreased $6.4 million, or 5.2%, compared to the same period in 2016. The decrease in the Americas segment revenues was due to the net impact of: (i) a decrease of $5.4 million, or 4.3%, related to lower unit sales volumes, (ii) a decrease of $2.3 million, or 1.8%, related to a decrease in average selling prices, and (iii) an increase of $1.3 million, or 0.9%, due to foreign currency translation.

***Cost of Sales.*** During the three months ended March 31, 2017, cost of sales for our Americas segment decreased $12.0 million, or 17.2%, compared to the same period in 2016. The decrease in the Americas segment cost of sales was due to the net impact of: (i) a decrease of $3.0 million, or 4.3%, due to lower unit sales volumes, (ii) a decrease of $9.8 million, or 14.1%, due to lower average costs per unit, and (iii) an increase of $0.8 million, or 1.2%, due to foreign currency translation.

***Gross Profit.*** During the three months ended March 31, 2017, gross profit for the Americas segment increased $5.5 million, or 10.2%, and gross margin increased 710 basis points to 51.0%, compared to the same period in 2016. The increase in the Americas segment gross profit is due to the net impact of: (i) a decrease of $2.4 million, or 4.3%, due to lower unit sales volumes, (ii) an increase of $7.5 million, or 13.8%, due to a decline in average costs per unit which exceeded the decline in average selling prices and, (iii) an increase of $0.4 million, or 0.7%, due to foreign currency translation.

***SG&A.*** During the three months ended March 31, 2017, SG&A for our Americas segment increased $0.1 million, or 0.3%, compared to the same period in 2016. The increase in SG&A was primarily due to the net impact of: (i) an increase of $0.7 million in salaries and wages, (ii) an increase of $0.4 million in marketing expense, and (iii) a decrease of $1.0 million in facilities, services and other expenses, none of which were individually significant.

### Asia Pacific Operating Segment

***Revenues.*** During the three months ended March 31, 2017, revenues for our Asia Pacific segment decreased $6.2 million, or 5.9%, compared to the same period in 2016. The decrease in the Asia Pacific segment revenues was due to the net impact of: (i) an increase of $13.3 million, or 12.7%, due to higher unit sales volumes, (ii) a decrease of $19.6 million, or 18.7%, in average selling prices, and (iii) an increase of $0.1 million, or 0.1%, from foreign currency translation.

***Cost of Sales.*** During the three months ended March 31, 2017, cost of sales for our Asia Pacific segment decreased $2.3 million, or 4.9%, compared to the same period in 2016. The decrease in the Asia Pacific segment cost of sales was due to the net impact of: (i) an increase of $5.9 million, or 12.7%, due to higher unit sales volumes, (ii) a decrease of $8.3 million, or 17.7%, due to lower average costs per unit, and (iii) an increase $0.1 million, or 0.1%, from foreign currency translation.

***Gross Profit.*** During the three months ended March 31, 2017, gross profit for the Asia Pacific segment decreased $3.9 million, or 6.7%, and gross margin decreased 47 basis points to 54.8% compared to the same period in 2016. The decrease in the Asia Pacific segment gross profit is due to the net impact of: (i) an increase $7.3 million, or 12.7%, due to higher unit sales volumes, (ii) a decrease of $11.3 million, or 19.5%, due to a decline in average selling prices that exceeded the decline in average costs per unit, and (iii) a $0.1 million, or 0.0%, increase from foreign currency translation.

***SG&A.*** During the three months ended March 31, 2017, SG&A for our Asia Pacific segment decreased $4.8 million, or 14.9%, compared to the same period in 2016. The decrease in SG&A was primarily due to the net impact of: (i) a decrease of $1.1 million due to bad debt recoveries, (ii) a decrease of $1.3 million in salaries and wages, (iii) a decrease of $1.4 million in facilities costs, and (iv) a decrease of $1.0 million in marketing expense, services and other costs, none of which were individually significant.

### Europe Operating Segment

***Revenues.*** During the three months ended March 31, 2017, revenues for our Europe segment increased $1.3 million, or 2.6%, compared to the same period in 2016. The increase in the Europe segment revenues was due to the net impact of: (i) a decrease of $3.1 million, or 6.2%, due to lower unit sales volumes, (ii) an increase of $4.8 million, or 9.6%, due to a higher average selling prices, and (iii) a decrease of $0.4 million, or 0.8%, from foreign currency translation.

***Cost of Sales.*** During the three months ended March 31, 2017, cost of sales for our Europe segment decreased $1.7 million, or 6.2%, compared to the same period in 2016. The decrease in the Europe segment cost of sales was due to the net impact of: (i) a decrease of $1.7 million, or 6.2%, due to lower sales volumes, (ii) an increase of $0.2 million or 0.7%, in higher average costs per unit, and (iii) a decrease of $0.2 million, or 0.7%, from foreign currency translation.

***Gross Profit.*** During the three months ended March 31, 2017, gross profit for the Europe segment increased $3.0 million, or 13.4%, and gross margin increased 475 basis points to 49.7% compared to the same period in 2016. The increase in the Europe segment gross profit is due to the net impact of: (i) a decrease of $1.4 million, or 6.2%, due to lower unit sales volumes, (ii) a $4.6 million, or 20.5%, increase due to a higher average selling prices, and (iii) a $0.2 million, or 0.9%, decrease from foreign currency translation.

***SG&A.*** During the three months ended March 31, 2017, SG&A for our Europe segment decreased $2.7 million, or 16.8%, compared to the same period in 2016. The decrease in SG&A was primarily due to the net impact of: (i) a $1.0 million decrease in marketing expense, (ii) a $0.5 million decrease in salaries and wages, (iii) a $0.6 million decrease in sales expense, (iv) a $0.3 million decrease in facilities expense, and (v) decreases in services and other costs of $0.3 million.

### Unallocated Corporate and Other

***SG&A.*** During the three months ended March 31, 2017, SG&A costs within Unallocated Corporate and Other increased by $11.2 million or 39.0%, compared to the same period in 2016. The increase was primarily due to: (i) an increase of $1.5 million in salaries and wages, including $0.8 million in severance costs, (ii) an increase of $5.0 million in marketing expenses primarily related to our advertising and promotional activities to support our spring and summer selling seasons, (iii) an increase of $1.3 million in strategic consulting service fees, and (iv) an increase of $3.4 million in other corporate costs, none of which were individually significant.

### 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:

| Company-operated retail locations: (1) Type: | December 31, 2016 | Opened | Closed | March 31, 2017 |
| --- | ---: | ---: | ---: | ---: |
| Kiosk/store-in-store | 98 | — | 8 | 90 |
| Retail stores | 228 | 3 | 12 | 219 |
| Outlet stores | 232 | 7 | 6 | 233 |
| Total | 558 | 10 | 26 | 542 |
| Operating segment: |  |  |  |  |
| Americas | 190 | 1 | 5 | 186 |
| Asia Pacific (1) | 270 | 9 | 19 | 260 |
| Europe | 98 | — | 2 | 96 |
| Total | 558 | 10 | 26 | 542 |

(1) In April and May 2017, we entered into agreements to transfer certain company-operated stores located in the Middle East and China to distributors.

Comparable retail store sales and direct to consumer store sales by operating segment are as follows:

| Comparable store sales (retail only): (1) | Constant Currency (1) Three Months Ended March 31, 2017 | 2016 |
| --- | ---: | ---: |
| Americas | (6.0)% | 2.9% |
| Asia Pacific | (1.4)% | 2.0% |
| Europe | (7.7)% | 7.5% |
| Global | (4.8)% | 3.1% |

| Direct to consumer comparable store sales (includes retail and e-commerce): (2) | Constant Currency (1) Three Months Ended March 31, 2017 | 2016 |
| --- | ---: | ---: |
| Americas | (5.0)% | 12.2% |
| Asia Pacific | 5.5% | 5.8% |
| Europe | (5.2)% | 9.7% |
| Global | (2.2)% | 9.9% |

(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.

### 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 March 31, 2017, we had $88.9 million in cash and cash equivalents and up to $75.2 million in available borrowings under our revolving credit facility. At March 31, 2017, $83.5 million of our $88.9 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:

*(in thousands)*

|  | Three Months Ended March 31, 2017 | 2016 | Change |
| --- | ---: | ---: | ---: |
| Cash used in operating activities | $(49,890) | $(56,938) | $7,048 |
| Cash used in investing activities | (6,248) | (7,690) | 1,442 |
| Cash provided by (used in) financing activities | (1,116) | 4,000 | (5,116) |
| Effect of exchange rate changes on cash | (1,427) | 6,367 | (7,794) |
| Net change in cash and cash equivalents | $(58,681) | $(54,261) | $(4,420) |

***Operating Activities.*** Cash used in operating activities decreased $7.0 million for the three months ended March 31, 2017 compared to the three months ended March 31, 2016. The decrease in cash used in operating activities resulted from a favorable change in net income as adjusted for non-cash items of $5.5 million, and a favorable change in our operating assets and liabilities of $1.6 million. Net income as adjusted for non-cash items increased primarily due to: (i) an increase of $6.5 million from net unrealized foreign currency forward contracts gains and losses, (ii) an increase of $0.9 million from higher net income, (iii) a decrease of $1.0 million in bad debts, and (iv) a decrease of $0.9 million in other non-cash items. The net increase from operating assets and liabilities was due to: (i) an increase of $2.8 million from accounts receivable, (ii) a decrease of $14.2 million from inventory largely driven by inventory management initiatives, (iii) an increase of $16.4 million in prepaids and other expenses driven primarily by our advertising and promotional expenditures and a customs duty settlement, and (iv) a decrease of $3.4 million from lower accounts payable and accrued expenses.

***Investing Activities.*** The $1.4 million decrease in cash used in investing activities for the three months ended March 31, 2017 compared to the three months ended March 31, 2016 is primarily due to the net impact of: (i) a $0.9 million decrease in long-term restricted cash, and (ii) a $0.5 million decrease in cash paid for intangible assets during the prior comparative three months ended March 31, 2016. Our capital expenditures in the three months ended March 31, 2017 did not change significantly compared to the same period in 2016.

***Financing Activities.*** The $5.1 million decrease in cash provided by financing activities for the three months ended March 31, 2017 compared to the three months ended March 31, 2016 resulted from lower borrowings and repayments during the three months ended March 31, 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 three months ended March 31, 2017 were due primarily to the following: (i) higher accounts receivable of $66.9 million, primarily due to the higher seasonal sales volumes in the first quarter as compared to the fourth quarter of last year, (ii) higher inventories of $28.6 million in advance of our spring and summer selling seasons, (iii) lower prepaid expenses and other assets of $9.6 million due primarily to a customs duty settlement of $7.0 million and amortization of prepaid advertising, endorsement and other prepaids of $2.6 million, and (iv) higher accounts payable, accrued expenses and other of $13.8 million, primarily related to increased inventory levels in advance of our spring and summer selling seasons. Cash on hand decreased $58.7 million as of March 31, 2017 compared to December 31, 2016.

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 as of March 31, 2017 was 3.54%. As of March 31, 2017, we were in compliance with all covenants.

As of March 31, 2017, we had borrowings of $3.5 million on the Facility and $1.3 million of outstanding letters of credit, resulting in $75.2 million of available credit for future financing needs.

### Long-term Bank Borrowings

As of March 31, 2017 and December 31, 2016, we had $0.9 million and $2.3 million, respectively, of current debt outstanding under notes payable. As of March 31, 2017, the notes bear interest rates ranging from 1.99% to 2.63%.

### 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.

As of March 31, 2017, we had $118.7 million of remaining common stock repurchase authorizations under our 2013 stock repurchase plan. During each of the three months ended March 31, 2017 and 2016, we had no repurchases.

### Capital Assets Expenditures

During the three months ended March 31, 2017, net capital assets acquired, inclusive of intangible assets, were $5.4 million compared to $5.9 million during the three months ended March 31, 2016. As of March 31, 2017, we have committed to additional purchases of capital assets of approximately $9.7 million. Capital spend during the three months ended March 31, 2017 related primarily to information technology investments, opening new retail stores and renovating existing stores.

### 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 $13.4 million of current earnings during the three months ended March 31, 2017 without a tax impact. Further cash repatriation will depend on future cash requirements in the U.S. As of March 31, 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 March 31, 2017, we held $83.5 million of our total $88.9 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 $83.5 million, $1.1 million could potentially be restricted, as described above. If the remaining $82.4 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.

### 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.

## Market risk

As filed, 4,193 characters.

### Foreign Currency Exchange Risk

As a global company, we have significant revenues and costs denominated in currencies other than the U.S. Dollar. We are exposed to the risk of gains and losses resulting from changes in exchange rates on monetary assets and liabilities within our international subsidiaries that are denominated in currencies other than the subsidiary’s functional currency. Likewise, our U.S. companies are also exposed to the risk of gains and losses and the resulting changes in exchange rates on monetary assets and liabilities that are denominated in a currency other than the U.S. Dollar.

We have experienced and will continue to experience changes in international currency rates, impacting both results of operations and the value of assets and liabilities denominated in foreign currencies. We enter into forward foreign exchange contracts to buy or sell various foreign currencies to selectively protect against volatility in the value of non-functional currency denominated monetary assets and liabilities. Changes in the fair value of these forward contracts are recognized in earnings in the period that the changes occur. As of March 31, 2017, the U.S. Dollar notional value of our outstanding foreign currency forward exchange contracts was approximately $259.2 million. The net fair value of these contracts at March 31, 2017 was a liability $1.3 million.

We perform a sensitivity analysis to determine the effects that market risk exposures may have on the fair values of our foreign currency forward exchange contracts. To perform the sensitivity analysis, we assess the risk of loss in fair values from the effect of hypothetical changes in foreign currency exchange rates. This analysis assumes a like movement by the foreign currencies in our hedge portfolio against the U.S. Dollar. As of March 31, 2017, a 10% appreciation in the value of the U.S. Dollar would result in a net increase in the fair value of our derivative portfolio of approximately $5.9 million.

### Effects of Changes in Exchange Rates on Translated Results of International Subsidiaries

Changes in exchange rates have a direct effect on our reported U.S. Dollar consolidated financial statements because we translate the operating results and financial position of our international subsidiaries to U.S. Dollars using current period exchange rates. Specifically, we translate the statements of operations of our foreign subsidiaries into the U.S. Dollar reporting currency using average exchange rates each reporting period. As a result, comparisons of reported results between reporting periods may be impacted significantly due to differences in the exchange rates used to translate the operating results of our international subsidiaries.

For example, in our European operating segment, when the U.S. Dollar strengthens relative to the Euro, our reported U.S. Dollar results are lower than if there had been no change in the exchange rate, because more Euros are required to generate the same U.S. Dollar translated amount. Conversely, when the U.S. Dollar weakens relative to the Euro, the reported U.S. Dollar results of our Europe segment are higher compared to a period with a stronger U.S. Dollar relative to the Euro. Similarly, the reported U.S. Dollar results of our Asia Pacific operating segment, where the functional currencies are primarily the Japanese Yen, Chinese Yuan, Korean Won and the Singapore Dollar, are comparatively lower or higher when the U.S. Dollar strengthens or weakens, respectively, relative to these currencies.

An increase of 1% of the value of the U.S. Dollar relative to foreign currencies would have increased our income before taxes during the three months ended March 31, 2017 by approximately $0.3 million. The volatility of the exchange rates is dependent on many factors that cannot be forecasted with reliable accuracy. See Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations in Part I of this Form 10-Q for a discussion of the impact of the change in foreign exchange rates on our U.S Dollar condensed consolidated statement of operations for the three months ended March 31, 2017 and 2016.

## Controls and procedures

As filed, 1,542 characters.

### Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures as such item is defined under Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended ("Exchange Act"). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2017, to provide reasonable assurance that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management necessarily applies its judgment in assessing the costs and benefits of such controls and procedures that, by their nature, can only provide reasonable assurance regarding management's control objectives.

### Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) during the three months ended March 31, 2017, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 137 characters.

There have been no material changes to the risk factors contained in our Annual Report on Form 10-K for the year ended December 31, 2016.

Filed May 10, 2017.
Source: SEC EDGAR, the filing index for accession 0001628280-17-005321. Last ingested by Listed: Nov 6, 2026, 18:01 ET. No prices; not investment advice.