UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________________________________________________________________________________________________
FORM 10-K
ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2018
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File No. 0-51754
________________________________________________________________________________________________________________________________
CROCS, INC.
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) | 20-2164234 (I.R.S. Employer Identification No.) | |
7477 East Dry Creek Parkway
Niwot, Colorado 80503
(303) 848-7000
(Address, including zip code and telephone number, including area code, of registrant’s principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: | Name of each exchange on which registered: | |||
Common Stock, par value $0.001 per share | The NASDAQ Global Select Market | |||
Securities registered pursuant to Section 12(g) of the Act: None
____________________________________________________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to submit such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to the Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer,” “smaller reporting company,” and “emerging growth company,” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ý | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | Emerging growth company o | ||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No ý
The aggregate market value of the voting common stock held by non-affiliates of the registrant as of June 29, 2018 was approximately $857.0 million. For the purpose of the foregoing calculation only, all directors and executive officers of the registrant and owners of more than 10% of the registrant’s common stock are assumed to be affiliates of the registrant. This determination of affiliate status is not necessarily conclusive for any other purpose.
The number of shares of the registrant’s common stock outstanding as of February 20, 2019 was 73,336,332.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates certain information by reference from the registrant’s proxy statement for the 2019 annual meeting of stockholders to be filed no later than 120 days after the end of the registrant’s fiscal year ended December 31, 2018.
Cautionary Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). From time to time, we may also provide oral or written forward-looking statements in other materials we release to the public. Such forward-looking statements are subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995.
Statements that refer to industry trends, projections of our future financial performance, anticipated trends in our business and other characterizations of future events or circumstances are forward-looking statements. These statements, which express management’s current views concerning future events or results, use words like “anticipate,” “assume,” “believe,” “continue,” “estimate,” “expect,” “future,” “intend,” “plan,” “project,” “strive,” and future or conditional tense verbs like “could,” “may,” “might,” “should,” “will,” “would,” and similar expressions or variations. Examples of forward-looking statements include, but are not limited to, statements we make regarding:
• | our expectations regarding future trends, selling, general and administrative cost savings, expectations, and performance of our business; |
• | our belief that we have sufficient liquidity to fund our business operations during the next twelve months; |
• | our expectations about the impact of our strategic plans; and |
• | our expectations regarding our level of capital expenditures in 2019. |
Forward-looking statements are subject to risks, uncertainties and other factors, which may cause actual results to differ materially from future results expressed or implied by such forward-looking statements. Important factors that could cause actual results to differ materially from the forward-looking statements include, without limitation, those described in Part I — Item 1A. Risk Factors of this Annual Report on Form 10-K, elsewhere throughout this Annual Report on Form 10-K, and those described from time to time in our past and future reports filed with the Securities and Exchange Commission (the “SEC”). Caution should be taken not to place undue reliance on any such forward-looking statements. Moreover, such forward-looking statements speak only as of the date of this report. We undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.
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Crocs, Inc.
Table of Contents to the Annual Report on Form 10-K
For the Year Ended December 31, 2018
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PART I
ITEM 1. Business
The Company
Crocs, Inc. and its consolidated subsidiaries (collectively the “Company,” “Crocs,” “we,” “our,” or “us”) 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 Crocs’ collection contain Croslite™ material, a proprietary, molded footwear technology, delivering extraordinary comfort with each step. The Company, a Delaware corporation, is the successor to a Colorado corporation of the same name, and was originally organized in 1999 as a limited liability company.
Products
Since we first introduced a single-style clog in six colors in 2002, we have grown to be a world leader of innovative, casual footwear for men, women and children. Recognized globally for our unmistakable iconic clog silhouette, we have taken the successful formula of a simple design aesthetic, paired it with modern comfort, and expanded into a wide variety of casual footwear products including sandals, flips and slides, which we collectively refer to as sandals, shoes, and boots that meet the needs of the whole family. In 2018, Crocs reinforced its mission of “everyone comfortable in their own shoes” with the second year of its global Come As You Are™ campaign.
Crocs offers a broad portfolio of all-season products, while remaining true to its core molded footwear heritage. The vast majority of Crocs™ shoes feature Croslite™ material, a proprietary, revolutionary technology that gives each pair of shoes the soft, comfortable, lightweight, non-marking and odor-resistant qualities that Crocs fans know and love. Since sales began in 2002, Crocs has sold more than 630 million pairs of shoes in more than 90 countries.
At the heart of our brand’s DNA are our clogs and sandals. The Classic Clog and Crocband, our most iconic silhouette for adults and children, embody our innovation in molding, simplicity of design, and all-day comfort. The unique look and feel of the Classic clog can be experienced throughout the vast majority of our product line due to the use and design of CrosliteTM. Sandals are a natural extension of our brand, leveraging our signature molding technology to provide casual, comfortable footwear for a variety of wearing occasions.
We are now using CrosliteTM with two new technologies in our LiteRideTM and RevivaTM collections, as we focus on visible comfort technology. LiteRideTM features comfort focused, proprietary foam insoles which are soft, lightweight and resilient, and our newest collection, RevivaTM, features a footbed with built-in air bubbles providing bounce and a massage effect.
We strive to provide our global consumers with comfortable, casual, colorful, and innovative footwear styles, with a focus on molded product. Our collections address many wearing occasions and meet the needs of the entire family. We enjoy licensing partnerships with Disney, Marvel, Nickelodeon, and Warner Bros., among others, which allow us to bring popular global franchises and characters to life on our product in a fun, exciting way.
Sales and Marketing
We run our business across three geographic regions: the Americas, Asia Pacific, and Europe, Middle East, and Africa (“EMEA”), which are discussed in more detail in “Business Segments and Geographic Information” below. We prioritize five core markets including: (i) the U.S., (ii) Japan, (iii) China, (iv) South Korea and (v) Germany. These countries represent key geographies where we believe the greatest opportunities for growth exist. We are also concentrating our marketing efforts on these countries, in an effort to increase customer awareness of both our brand and our full product range.
Each season we focus on presenting a compelling brand story and experience for our new product introductions as well as our on-going core products. We employ social and digital marketing centered on showcasing our clog and sandal silhouettes. We are growing our clog silhouette with new colors, graphics, licensed images, embellishments, and accessories that allow for personalization. We are expanding our sandal offerings as we pursue a greater share of a large market, with no clear global leader. We are investing in designer and celebrity collaborations and celebrity brand ambassadors to raise consumer engagement with our brand. For the years ended December 31, 2018, 2017, and 2016, total marketing costs, inclusive of advertising, production, promotional, and agency expenses, including variable marketing expenses, were $68.6 million, $59.1 million, and $56.0 million, respectively.
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Distribution Channels
The broad appeal of our footwear has allowed us to market our products in more than 90 countries through three distribution channels: wholesale, retail, and e-commerce. Our wholesale channel includes domestic and international multi-brand retailers, e-tailers, and distributors; our retail channel consists of company-operated stores; and our e-commerce channel includes company-operated e-commerce sites and third-party marketplaces.
Wholesale Channel
During the years ended December 31, 2018, 2017, and 2016, 53.1%, 52.4%, and 52.7% of revenues, respectively, were derived through our wholesale channel. Our wholesale channel is made up of e-tailers, distributors, and traditional brick-and-mortar accounts, e-commerce sites operated by wholesalers, and in certain countries, also includes partner store operators. Brick-and-mortar customers typically include family footwear retailers, national and regional retail chains, sporting goods stores, and independent footwear retailers.
Outside the U.S., we use distributors when we believe such arrangements are preferable to direct sales. Distributors purchase products pursuant to a price list and are granted the right to resell those products in a defined territory, usually a country or group of countries. Our typical distribution agreements have terms of one to five years and can be terminated or renegotiated if minimum requirements are not met. No single wholesale customer accounted for 10% or more of our total revenues for any of the years ended December 31, 2018, 2017, and 2016.
Retail Channel
During the years ended December 31, 2018, 2017, and 2016, 30.1%, 33.0%, and 34.7%, respectively, of our revenues were derived through our retail channel. We operate through three platforms: company-operated full-price retail and outlet stores, kiosks, and store-in-store locations. With the worldwide consumer shift toward e-commerce, we are carefully managing our retail fleet, especially full-priced retail stores, and focusing on enhancing the profitability of this channel. In the third quarter of 2018, we completed the store reduction program announced in early 2017 and ended 2018 with 383 company-operated stores, down from 558 at December 31, 2016. During the year ended December 31, 2018, we closed 68 and opened 4 company-operated stores.
Full-Price Retail Stores
Our company-operated full-price retail stores allow us to effectively showcase the full extent of our product range to consumers and provide us with the opportunity to interact with those consumers directly. We believe the optimal space for our retail stores is between 1,500 and 1,800 square feet, located in high foot-traffic shopping malls or districts. During the year ended December 31, 2018, we closed 42 and opened 1 full-price retail store. As of December 31, 2018, 2017, and 2016, we operated 120, 161, and 228 full-price retail stores, respectively.
Outlet Stores
Our company-operated outlet stores allow us to sell discontinued and overstocked merchandise directly to consumers at discounted prices. We also sell full-priced products in certain of our outlet stores as well as built-for-outlet products. Outlet stores are similar in size to our full-price retail stores; however, they are generally located within outlet shopping centers. During the year ended December 31, 2018, we closed 23 and opened 3 outlet stores. As of December 31, 2018, 2017, and 2016, we operated 195, 215, and 232 outlet stores, respectively.
Kiosk / Store-in-Store Locations
Our company-operated kiosks and store-in-store locations allow us to market specific product lines, with flexibility to tailor products to consumer preferences in shopping malls and other high foot traffic areas. With efficient use of retail space, and limited capital investment, we believe that kiosks and store-in-store locations can be effective vehicles for marketing our products in certain geographic areas. During the year ended December 31, 2018, we closed 3 kiosk and store-in-store locations, with no new openings. As of December 31, 2018, 2017, and 2016, we operated 68, 71, and 98 kiosks and store-in-store locations, respectively.
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Company-Operated Retail Stores
The following table illustrates the net change in 2018 in the number of our company-operated retail stores by reportable operating segment and country:
December 31, 2017 | Opened | Closed/Transferred | December 31, 2018 | |||||||||
Americas | ||||||||||||
United States | 161 | 1 | 7 | 155 | ||||||||
Canada | 9 | — | — | 9 | ||||||||
Puerto Rico | 5 | — | 1 | 4 | ||||||||
Total Americas | 175 | 1 | 8 | 168 | ||||||||
Asia Pacific | ||||||||||||
Korea | 86 | 1 | 1 | 86 | ||||||||
China | 42 | 2 | 16 | 28 | ||||||||
Japan | 20 | — | 6 | 14 | ||||||||
Singapore | 14 | — | — | 14 | ||||||||
Australia | 9 | — | — | 9 | ||||||||
Hong Kong | 15 | — | 13 | 2 | ||||||||
Total Asia Pacific | 186 | 3 | 36 | 153 | ||||||||
EMEA | ||||||||||||
Russia | 36 | — | 5 | 31 | ||||||||
Germany | 15 | — | 1 | 14 | ||||||||
France | 10 | — | 2 | 8 | ||||||||
Austria | 6 | — | — | 6 | ||||||||
Netherlands | 4 | — | 1 | 3 | ||||||||
Spain | 4 | — | 4 | — | ||||||||
Great Britain | 3 | — | 3 | — | ||||||||
Finland | 3 | — | 3 | — | ||||||||
Other | 5 | — | 5 | — | ||||||||
Total EMEA | 86 | — | 24 | 62 | ||||||||
Total | 447 | 4 | 68 | 383 | ||||||||
E-commerce Channel
As of December 31, 2018, we offered our products through 13 company-operated e-commerce sites worldwide and also through third-party marketplaces. During the years ended December 31, 2018, 2017, and 2016, 16.8%, 14.6%, and 12.6%, respectively, of our revenues were derived through this channel. Our e-commerce presence facilitates increased access to our consumers and provides us with an opportunity to educate them about our products and brand. We continue to leverage increasingly sophisticated digital marketing activities to enhance the consumer experience and drive sales, thereby benefiting from the continued migration of consumers to online shopping.
Business Segments and Geographic Information
We have three reportable operating segments based on the geographic nature of our operations: Americas, Asia Pacific, and EMEA. In the third quarter of 2018, certain revenues and expenses previously reported within the Asia Pacific segment were shifted to the EMEA segment. The previously reported amounts for these segments and channels have been revised for the years ended December 31, 2017 and 2016 to conform to the current period presentation. Other businesses aggregates insignificant operating segments, including company-operated manufacturing facilities located in Mexico and Italy, which ceased operations in 2018.
Americas
The Americas segment consists of revenues and expenses related to product sales in North and South America. Americas wholesale channel customers consist of a broad range of family footwear and sporting goods stores, e-tailers, and independent retailers and distributors. The Americas retail channel sells directly to consumers through 168 company-operated retail stores and Americas e-
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commerce channel sales are generated through company-operated e-commerce sites. During the years ended December 31, 2018, 2017, and 2016, revenues from the Americas segment were 47.8%, 46.9%, and 45.1% of our consolidated revenues, respectively. Revenues from the U.S. were 40.7%, 38.0%, and 37.1% of our consolidated revenues, respectively, for the years ended December 31, 2018, 2017, and 2016.
Asia Pacific
The Asia Pacific segment consists of revenues and expenses related to product sales throughout Asia, Australia, and New Zealand. Asia Pacific wholesale channel customers consist of a broad range of retailers similar to those in the Americas, plus distributors in select markets. We also sell products directly to consumers through 153 company-operated retail stores as well as through company-operated e-commerce sites and third-party marketplaces. During the years ended December 31, 2018, 2017, and 2016, revenues from our Asia Pacific segment were 31.7%, 32.8%, and 34.2% of our consolidated revenues, respectively.
Europe, Middle East, and Africa
The EMEA segment consists of revenues and expenses related to product sales throughout Europe, Russia, the Middle East, and Africa. The EMEA segment wholesale channel customers consist of a broad range of retailers, similar to those in the Americas, plus distributors in select markets. We also sell our products directly to consumers through 62 company-operated retail stores as well as through our e-commerce sites. During the years ended December 31, 2018, 2017, and 2016, revenues from our EMEA segment were 20.2%, 20.2%, and 20.6% of our consolidated revenues, respectively.
Raw Materials
CrosliteTM, our proprietary closed-cell resin brand, is the primary material formulation used in the vast majority of our footwear and some of our accessories. CrosliteTM is formulated to create soft, comfortable, lightweight, non-marking, and odor-resistant footwear. We continue to invest in research and development to refine our materials to enhance these properties and develop new properties for specific applications.
CrosliteTM is produced by compounding elastomer resins purchased from major chemical manufacturers, together with certain other production inputs such as color dyes. Multiple suppliers produce the elastomer resins used in CrosliteTM. In the future, we may identify and utilize materials produced by other suppliers as an alternative to, or in addition to, those elastomer resins. All of the other raw materials that we use to produce CrosliteTM products are readily available for purchase from multiple suppliers.
Some of the products we offer are constructed using leather, textile fabrics, or other non-CrosliteTM materials, such as LiteRideTM. These materials are obtained from a number of third-party sources and we believe these materials are also broadly available.
Sourcing
Our strategy is to maintain a flexible, globally-diversified, low-cost third-party manufacturing capability. Our company-operated production facilities in Mexico and Italy, which had produced less than 15% of our products during each of the past three years, ceased operations in 2018.
We source the remaining footwear production from multiple third-party manufacturers, primarily in Vietnam and China. During the years ended December 31, 2018, 2017, and 2016, our largest third-party manufacturer, operating in both Vietnam and China, produced 44.5%, 41.3%, and 43.2%, respectively, and our second largest third-party manufacturer, operating in Vietnam, produced 21.4%, 19.0%, and 11.5%, respectively, of our footwear unit volume. We believe that the manufacturing capabilities required to produce our footwear are broadly available.
Distribution and Logistics
We strive to enhance our distribution and logistics network to further streamline our supply chain, increase our speed to market, and lower operating costs. As of December 31, 2018, we stored our finished goods inventory in company-operated warehouse and distribution and logistics facilities located in the U.S., the Netherlands, and Japan. We also utilized third-party operated distribution centers located in China, Japan, Hong Kong, Australia, Korea, Singapore, India, Russia, and Brazil. As of December 31, 2018, our company-operated warehouse and distribution facilities provided us with 0.7 million square feet, and our third-party operated distribution facilities provided us with 0.2 million square feet. We also ship directly to certain of our wholesale customers from our third-party manufacturers.
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Intellectual Property and Trademarks
We rely on a combination of trademarks, copyrights, trade secrets, trade dress, and patent protections to establish, protect, and enforce our intellectual property rights in our product designs, brands, materials, and research and development efforts, although no such methods can afford complete protection. We own or license the material trademarks used in connection with the marketing, distribution, and sale of all of our products, both domestically and internationally, in most countries where our products are currently either sold or manufactured. Our major trademarks include the Crocs logo and the Crocs word mark, both of which are registered or pending registration in the U.S., the European Union, Japan, Taiwan, China, and Canada, among other countries. We also have registrations or pending trademark applications for other marks and logos in various countries around the world.
In the U.S., our patents are generally in effect for up to 20 years from the date of filing the patent application. Our trademarks registered within and outside of the U.S. are generally valid as long as they are in use and their registrations are properly maintained and have not been found to have become generic. We believe our trademarks and patents are crucial to the successful marketing and sale of our products. We strategically register, both domestically and internationally, the trademarks and patents covering the product designs and branding that we utilize today. We aggressively police our patents, trademarks, and copyrights and pursue those who infringe upon them, both domestically and internationally, as we deem necessary.
We consider the formulations of the materials used to produce our footwear covered by our trademark CrosliteTM, LiteRideTM, and RevivaTM valuable trade secrets. The material formulations are manufactured through a process that combines a number of components in various proportions to achieve the properties for which our products are known. We use multiple suppliers to source these components but protect the formulations by using exclusive supply agreements for key components, confidentiality agreements with our third-party processors, and by requiring our employees to execute confidentiality agreements concerning the protection of our confidential information. Other than our third-party processors, we are unaware of any third party using our formulations in the production of footwear. We believe the comfort and utility of our products depend on the properties achieved from the compounding of CrosliteTM and LiteRideTM, which constitutes a key competitive advantage for us, and we intend to continue to vigorously protect this trade secret.
We also actively combat counterfeiting by monitoring of the global marketplace. We use our employees, sales representatives, distributors, and retailers, as well as outside investigators, attorneys and customs agents, to police against infringing products by encouraging them to notify us of any suspect products and to assist law enforcement agencies. Our sales representatives and distributors are also educated on our patents, pending patents, trademarks, and trade dress to assist in preventing potentially infringing products from obtaining retail shelf space. The laws of certain countries do not protect intellectual property rights to the same extent or in the same manner as do the laws of the U.S., and, therefore, we may have difficulty obtaining legal protection for our intellectual property in certain foreign jurisdictions.
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 are typically less than revenues generated during our first three quarters, when the northern hemisphere is experiencing warmer weather. Our quarterly results of operations may also fluctuate significantly as a result of a variety of other factors, including, but not limited to, the timing of new model introductions, general economic conditions, and consumer confidence. 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.
Backlog
A significant portion of orders from our wholesale customers and distributors remain unfilled as of any given date and, at that point, represent orders scheduled to be shipped at a future date. We refer to these unfilled orders as backlog, which can be canceled by our customers at any time prior to shipment. Backlog only relates to wholesale and distributor orders for the next season and current season fill-in orders, and excludes potential sales in our retail and e-commerce channels. Backlog as of a particular date is affected by a number of factors, including seasonality, manufacturing schedules and the timing of product shipments. Backlog also is affected by the timing of customers' orders and product availability. Due to these factors and business model differences around the globe, and because backlog is cancelable at any time prior to shipment, we believe backlog is an imprecise indicator of future revenues that may be achieved in a fiscal period and cannot be relied upon.
Competition
The global casual, athletic, and fashion footwear markets are highly competitive. Although we do not believe that we compete directly with any single company with respect to the entire spectrum of our products, we believe portions of our wholesale, retail,
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and e-commerce businesses compete with companies including, but not limited to: NIKE Inc., adidas AG, Under Armour, Inc., Deckers Outdoor Corporation, Skechers USA, Inc., Steve Madden, Ltd., Wolverine World Wide, Inc. and VF Corporation. Our company-operated retail locations and e-commerce sites also compete with footwear retailers such as Genesco, Inc., Macy’s Inc., Dillard’s, Inc., Dick’s Sporting Goods, Inc., The Finish Line Inc., and Foot Locker, Inc.
The principal elements of competition in these markets include brand awareness, product functionality, design, comfort, quality, price, customer service, and marketing and distribution. We believe that our unique footwear designs, our CrosliteTM material, our prices, our product line, and our distribution network position us well in the marketplace. However, a number of companies in the casual footwear industry have greater financial resources, more comprehensive product lines, broader market presence, longer standing relationships with wholesalers, longer operating histories, greater distribution capabilities, stronger brand recognition, and greater marketing resources than we have.
Effects of Changes in Exchange Rates on Translated Results of International Subsidiaries
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 international currency exchange rates (“exchange rates”) on monetary assets and liabilities within our international subsidiaries that are denominated in currencies other than the subsidiaries’ functional currencies. Likewise, our U.S. companies are also exposed to the risk of gains and losses resulting from 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 exchange rates, impacting both our statements of operations and the value of our 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 monetary assets and liabilities that are denominated in currencies other than that of our subsidiaries. Changes in the fair value of these forward contracts are recognized in earnings in the period that they occur.
Changes in exchange rates have a direct effect on our reported U.S. Dollar consolidated financial statements because we translate the statements of operations and financial position of our international subsidiaries to U.S. Dollars using current period exchange rates. As a result, comparisons of reported results between reporting periods may be impacted significantly due to changes in the exchange rates used to translate the operating results of our international subsidiaries. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II of this Annual Report on Form 10-K for a discussion of the impact of the change in foreign exchange rates on our U.S. Dollar consolidated statements of operations for the years ended December 31, 2018, 2017, and 2016.
Employees
As of December 31, 2018, we had 3,901 full-time, part-time, and seasonal employees, of which 2,577 were engaged in retail-related functions.
Available Information
We file with, or furnish to, the SEC reports including our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended. These reports are available free of charge on our corporate website (www.crocs.com) as soon as reasonably practicable after they are electronically filed with or furnished to the SEC. Copies of any materials we file with the SEC can be obtained at www.sec.gov. The foregoing website addresses are provided as inactive textual references only. The information provided on our website (or any other website referred to in this report) is not part of this report and is not incorporated by reference as part of this Annual Report on Form 10-K.
ITEM 1A. Risk Factors
The reader should carefully consider the following risk factors and all other information presented within this Annual Report on Form 10-K. The risks set forth below are those that our management believes are applicable to our business and the industry in which we operate. These risks have the potential to have a material adverse effect on our business, results of operations, cash flows, financial condition, liquidity, or access to sources of financing. The risks included here are not exhaustive and there may be additional risks that are not presently material or known. Since we operate in a very competitive and rapidly changing environment, new risk factors emerge from time to time and it is not possible for management to predict all risk factors, nor can it assess the impact of all such risk factors on our business. You should carefully consider each of the following risks described below in conjunction with all other information presented in this report.
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Risks Specific to Our Company
Our success depends substantially on the value of our brand; failure to strengthen and preserve this value, either through our actions or those of our business partners, could have a negative impact on our financial results.
We believe much of our success has been attributable to the strength of the Crocs global brand. To be successful in the future, particularly outside of the U.S., where the Crocs global brand is less well-known and perceived differently, we believe we must timely and appropriately respond to changing consumer demand and leverage the value of our brand across all sales channels. We may have difficulty managing our brand image across markets and international borders as certain consumers may perceive our brand image to be out of style, outdated, or otherwise undesirable. Brand value is based in part on consumer perceptions on a variety of subjective qualities. In the past, several footwear companies, including ours, have experienced periods of rapid growth in revenues and earnings followed by periods of declining sales and losses, and our business may be similarly affected in the future. Consumer demand for our products and our brand equity could also diminish significantly if we fail to preserve the quality of our products, are perceived to act in an unethical or socially irresponsible manner, fail to comply with laws and regulations, or fail to deliver a consistently positive consumer experience in each of our markets. Business incidents that erode consumer trust, such as perceived product safety issues, whether isolated or recurring, in particular incidents that receive considerable publicity or result in litigation, can significantly reduce brand value and have a negative impact on our business and financial results. Additionally, counterfeit reproductions of our products or other infringement of our intellectual property rights, including unauthorized uses of our trademarks by third parties, could harm our brand and adversely impact our business.
We may be unable to successfully execute our long-term growth strategy, maintain or grow our current revenue and profit levels, or accurately forecast geographic demand and supply for our products.
Our ability to maintain our revenue and profit levels or to grow in the future depends on, among other things, the continued success of our efforts to maintain our brand image, our ability to bring compelling and profit enhancing footwear offerings to market, our ability to effectively manage or reduce expenses and our ability to expand within our current distribution channels and increase sales of our products into new locations internationally. Successfully executing our long-term growth and profitability strategy will depend on many factors, including our ability to:
• | Strengthen our brand globally; |
• | Focus on relevant geographies and markets, product innovation and profitable new growth platforms while maintaining demand for our current offerings; |
• | Effectively manage our company-operated retail stores, including closures of existing stores, while meeting operational and financial targets at the retail store level; |
• | Accurately forecast the global demand for our products and the timely execution of supply chain strategies to deliver product around the globe efficiently based on that demand; |
• | Use and protect the Crocs brand and our other intellectual property in new and existing markets and territories; |
• | Achieve and maintain a strong competitive position in new and existing markets; |
• | Attract and retain qualified wholesalers and distributors; |
• | Consolidate our distribution and supply chain network to leverage resources and simplify our fulfillment process; |
• | Maintain and enhance our social digital marketing capabilities and digital commerce capabilities; and |
• | Execute multi-channel advertising, marketing, and social media campaigns to effectively communicate our message directly to our consumers and employees. |
If we are unable to successfully implement any of the above mentioned strategies and the many other factors mentioned throughout these risk factors, our business may fail to grow, our brand may suffer, and our business and financial results may be adversely impacted.
There can be no assurance that the strategic plans we have been implementing will continue to be successful or that future strategic plans will be successful.
We believe our strategic initiatives will better position Crocs to adapt to changing consumer demands and global economic developments. We are focusing on our core molded footwear heritage by narrowing our product line with an emphasis on higher
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margin products, 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 by 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 in smaller markets and in markets where local expertise is advantageous. Further, we intend to expand our engagement with leading wholesale accounts in select markets and increase our use of social media to drive sales growth, optimize product placement and enhance brand reputation. We intend to also expand our engagement with the consumer through enhancing our social digital marketing capabilities.
While these strategic plans, along with other steps to be taken, are intended to improve and grow our business, there can be no assurance that this will be the case, or that additional steps or accrual of additional material expenses or accounting charges will not be required. If additional steps are required, there can be no assurance that they will be properly implemented or will be successful.
If our online e-commerce sites, or those of our customers, do not function effectively, our business and financial results could be materially adversely affected.
An increasing amount of our products are sold on our e-commerce sites as well as third-party e-commerce sites. Any failure on our part or third-parties to provide effective, reliable, user-friendly e-commerce platforms that offer a wide assortment of our products could place us at a competitive disadvantage, result in the loss of sales, and could have a material adverse impact on our business and financial results. Our e-commerce business may be particularly vulnerable to cyber threats including unauthorized access and denial of service attacks. Sales in our e-commerce channel may also divert sales from our retail and wholesale channels.
Our business relies significantly on the use of information technology. A significant disruption to our operational technology or those of our business partners, a privacy law violation, or a data security breach could harm our reputation and/or our ability to effectively operate our business, as well our financial results.
We rely heavily on the use of information technology systems and networks across all business functions, as do our business partners. The future success and growth of our business depend on streamlined processes made available through information systems, global communications, internet activity, and other network processes. We rely exclusively on third-party information services providers worldwide for our information technology functions including network, help desk, hardware and software configuration. Additionally, we rely on internal networks and information systems and other technology, including the internet and third-party hosted services, to support a variety of business processes and activities, including procurement and supply chain, manufacturing, distribution, invoicing and collection of payments. We use information systems for certain human resource activities and to process our employee benefits, as well as to process financial information for internal and external reporting purposes and to comply with various reporting, legal, and tax requirements. We also have outsourced a significant portion of work associated with our finance and accounting, human resources, and other information technology functions to third-party service providers. Despite our current security and cybersecurity measures, our systems, and those of our third-party service providers, we may be vulnerable to information security breaches, acts of vandalism, computer viruses, credit card fraud, phishing, and interruption or loss of valuable business data. Any disruption to these systems or networks could result in product fulfillment delays, key personnel being unable to perform duties or communicate throughout the organization, loss of sales, significant costs for data restoration, and other adverse impacts on our business and reputation. Denial of service attacks could also materially adversely affect our business.
We routinely possess sensitive customer and employee information. Hackers and data thieves are increasingly sophisticated and operate large-scale and complex automated attacks on a daily basis. Any breach of our network may result in the loss of valuable business data, misappropriation of our consumers' or employees' personal information, including credit card information, or a disruption of our business. Despite our existing cybersecurity procedures and controls, if our network is breached, it could give rise to unwanted media attention, materially damage our customer relationships, or harm our business, our reputation, and our financial results, which could result in fines or lawsuits. The costs we incur to protect against such information security breaches may materially increase, including increased investment in technology, the costs of compliance with consumer protection laws, and costs resulting from consumer fraud. Our business partners in our supply chain and customer base also rely significantly on information technology. Despite their existing cybersecurity procedures and controls, if their information systems become compromised, it could, among other things, cause delays in our product fulfillment or reduce our sales, which could harm our business.
In addition, the European Union’s new General Data Protection Regulation and other similar privacy laws impose additional obligations on companies regarding the handling of personal data and provide certain individual privacy rights to persons whose
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data is stored, and they may harm or alter the operations of our e-commerce business, add additional compliance costs and obligations and subject us to significant fines and penalties for non-compliance. Compliance with these and other foreign legal regimes and the associated costs may have a material adverse impact on our business and results of operations.
We face significant competition.
The footwear industry is highly competitive. Our competitors include most major athletic and non-athletic footwear companies and retailers with their own private label footwear products. A number of our competitors have significantly greater financial resources than us, more comprehensive product lines, a broader market presence, longer standing relationships with wholesalers, a longer operating history, greater distribution capabilities, stronger brand recognition, and spend substantially more than we do on product marketing. Our competitors’ greater financial resources and capabilities in these areas may enable them to better withstand periodic downturns in the footwear industry and general economic conditions, compete more effectively on the basis of price and production, launch more extensive or diverse product lines and more quickly develop new and popular products. Continued demand in the market for casual footwear and readily available offshore manufacturing capacity has also encouraged the entry of new competitors into the marketplace and has increased competition from established companies. Some of our competitors are offering products that are substantially similar, in design and materials, to our products. If we are unable to compete successfully in the future, our sales and profits may decline, we may lose market share, our business and financial results may deteriorate, and the market price of our common stock would likely fall.
Our brand value could be harmed by a number of factors, including some outside of our control.
Our brand value depends, in part, on our ability to maintain a positive consumer perception of our corporate integrity and brand culture. Negative claims or publicity involving us, our products or any of our key employees, endorsers or business partners could materially damage our reputation and brand image, regardless of whether such claims are accurate. Social media, which accelerates and potentially amplifies the scope of negative publicity, can accelerate, and increase the impact of, negative claims. Adverse publicity about regulatory or legal action against us, or by us, could also damage our reputation and brand image, undermine consumer confidence in us and reduce long-term demand for our products, even if the regulatory or legal action is unfounded or not material to our operations. Maintaining, promoting and growing our brand will also depend on our design and marketing efforts, including product innovation and product quality advertising and consumer campaigns. In addition, our success in preserving and strengthening our brand image depends on our ability to adapt to a rapidly changing media environment, including our increasing reliance on social media and digital dissemination of advertising campaigns. If the reputation or image of our brand is harmed or if we receive negative publicity, then our product sales, financial condition and results of operations could be materially and adversely affected.
Continuing to rationalize our existing product assortment and introducing new products may be difficult and expensive. If we are unable to do so successfully, our brand may be adversely affected and we may not be able to maintain or grow our current revenue and profit levels.
To successfully continue to refine our footwear product line, we must anticipate, understand, and react to the rapidly changing tastes of consumers and provide appealing merchandise in a timely manner. New footwear models that we introduce may not be successful with consumers or our brand may fall out of favor with consumers. If we are unable to anticipate, identify, or react appropriately to changes in consumer preferences, our revenues may decrease, our brand image may suffer, our operating performance may decline, and we may not be able to execute our growth plans.
In producing new footwear models, we may encounter difficulties that we did not anticipate during the product development stage. Our development schedules for new products are difficult to predict and are subject to change in response to consumer preferences and competing products. If we are not able to efficiently manufacture new products in quantities sufficient to support wholesale, retail, and e-commerce distribution, we may not be able to recover our investment in the development of new styles and product lines and we would continue to be subject to the risks inherent to having a limited product line. Even if we develop and manufacture new footwear products that consumers find appealing, the ultimate success of a new style may depend on our pricing. We have a limited history of introducing new products in certain target markets; as such, we may introduce products that are not popular, set the prices of new styles too high for the market to bear, or we may not provide the appropriate level of marketing in order to educate the market and potential consumers about our new products. Achieving market acceptance will require us to exert substantial product development and marketing efforts, which could result in a material increase in our selling, general and administrative expenses. There can be no assurance that we will have the resources necessary to undertake such efforts effectively or that such efforts will be successful. Failure to gain market acceptance for new products could impede our ability to maintain or grow current revenue levels, reduce profits, adversely affect the image of our brand, erode our competitive position and result in long-term harm to our business and financial results.
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If we do not accurately forecast consumer demand, we may have excess inventory to liquidate or have greater difficulty filling our customers’ orders, either of which could adversely affect our business.
The footwear industry is subject to cyclical variations, consolidation, contraction and closings, as well as fashion trends, rapid changes in consumer preferences, the effects of weather, general economic conditions and other factors affecting consumer demand. In addition, purchase orders from our wholesale customers are generally subject to rights of cancellation and rescheduling by the wholesaler. These factors make it difficult to forecast consumer demand. If we overestimate demand for our products, we may be forced to liquidate excess inventories at discounted prices resulting in losses or lower gross margins. Conversely, if we underestimate consumer demand, we could have inventory shortages which can result in lower sales, delays in shipments to customers, expedited shipping costs, and adversely affect our relationships with our customers and diminish brand loyalty. Excess inventory or any failure on our part to satisfy increased demand for our products, could adversely affect our business and financial results.
Our financial success depends in part on the strength of our relationships with, and the success of, our wholesale and distributor customers.
Our financial success is related to the willingness of our current and prospective wholesale and distributors customers to carry our products. We do not have long-term contracts and sales to our wholesalers and distributors are generally on an order-by-order basis and subject to cancellation and rescheduling. If we cannot fill orders in a timely manner, the sales of our products and our relationships may suffer. Alternatively, if our wholesalers or distributors experience diminished liquidity or other financial issues, we may experience a reduction in product orders, an increase in order cancellations and/or the need to extend payment terms which could lead to larger outstanding balances, delays in collections of accounts receivable, increased expenses associated with collection efforts, increases in bad debt expenses and reduced cash flows if our collection efforts are unsuccessful. We have recorded material allowances for doubtful accounts in the past and could do so again in the future. Future problems with customers may have a material adverse effect on our product sales, financial condition, results of operations and our ability to grow our product line.
Changes in foreign exchange rates, most significantly but not limited to the Euro, Russian Ruble, Japanese Yen, Chinese Yuan, South Korean Won, or other global currencies could have a material adverse effect on our business and financial results.
As a global company, we have significant revenues and costs denominated in currencies other than the U.S. Dollar (“USD”). Our ability to sell our products in foreign markets and the USD value of the sales made in foreign currencies can be significantly influenced by changes in exchange rates. A decrease in the value of foreign currencies relative to the USD could result in lower revenues, product price pressures, and increased losses from currency exchange rates. Foreign exchange rate volatility could also disrupt the business of the third-party manufacturers that produce our products by making their purchases of raw materials more expensive and more difficult to finance. We pay the majority of our third-party manufacturers, located primarily in Vietnam and China, in USD. In 2018, we experienced an increase of approximately $6.7 million in our Asia Pacific segment revenues as a result of increases in the value of Asian currencies relative to the USD, and an increase of approximately $8.7 million in our EMEA revenues as a result of increases in the Euro and decreases in the Russian Ruble relative to the USD. Strengthening of the USD against Asian and European currencies, and various other global currencies, adversely impacts our USD reported results due to the impact on foreign currency translation. While we enter into foreign currency exchange forward contracts to reduce our exposure to changes in exchange rates on monetary assets and liabilities, the volatility of foreign currency exchange rates is dependent on many factors that cannot be forecasted with reliable accuracy and, as a result, our forward contracts may not prove effective in reducing our exposures.
We conduct significant business activity outside the U.S. which exposes us to risks of international commerce.
A significant portion of our revenues is generated from foreign sales. Our ability to maintain the current level of operations in our existing international markets is subject to risks associated with international sales operations as well as the difficulties associated with promoting products in unfamiliar cultures. We operate retail stores and sell our products to retailers outside of the U.S. and utilize foreign-based third-party manufacturers. Foreign manufacturing and sales activities are subject to numerous risks including: tariffs, anti-dumping fines, import and export controls, and other non-tariff barriers such as quotas and local content rules; delays associated with the manufacture, transportation and delivery of products; increased transportation costs due to distance, energy prices, or other factors; delays in the transportation and delivery of goods due to increased security concerns; restrictions on the transfer of funds; restrictions and potential penalties, due to privacy laws, on the handling and transfer of consumer and other personal information; changes in governmental policies and regulations; political unrest, changes in law, terrorism, or war, any of which can interrupt commerce; potential violations of U.S. and foreign anti-corruption and anti-bribery laws by our employees, business partners or agents, despite our policies and procedures relating to compliance with these laws; expropriation and nationalization; difficulties in managing foreign operations effectively and efficiently from the U.S.; difficulties in understanding and complying with local laws, regulations and customs in foreign jurisdictions; longer accounts receivable payment terms and difficulties in collecting foreign accounts receivables; difficulties in enforcing contractual and intellectual property rights; greater
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risk that our business partners do not comply with our policies and procedures relating to labor, health and safety; and increased accounting and internal control costs. In addition, we are subject to customs laws and regulations with respect to our export and import activity which are complex and vary within legal jurisdictions in which we operate. We cannot assure that there will be not be a control failure around customs enforcement despite the precautions we take. We are currently subject to audits by customs authorities. Any failure to comply with customs laws and regulations could be discovered during a U.S. or foreign government customs audit, or customs authorities may disagree with our tariff treatments, and such actions could result in substantial fines and penalties, which could have an adverse effect on our business and financial results. In addition, changes to U.S. trade laws may adversely impact our operations. These changes and any changes to the trade laws of other countries may add additional compliance costs and obligations and subject us to significant fines and penalties for non-compliance. Compliance with these and other foreign legal regimes may have a material adverse impact on our business and results of operations. For more information, please see “-We depend solely on third-party manufacturers located outside the U.S.” and “-Our business relies significantly on the use of information technology. A significant disruption to our operational technology or data security breach could harm our reputation and/or our ability to effectively operate our business.”
In addition, as a global company, we are subject to foreign and U.S. laws and regulations designed to combat governmental corruption, including the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act. Violations of these laws and regulations could result in fines and penalties, criminal sanctions against us, our officers, or our employees, prohibitions on the conduct of our business and on our ability to offer our products and services in one or more countries and a materially negative effect on our brand and our operating results. Although we have implemented policies and procedures designed to ensure compliance with these foreign and U.S. laws and regulations, including the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act, there can be no assurance that our employees, business partners or agents will not violate our policies.
Changes in global economic conditions may adversely affect consumer spending and the financial health of our customers and others with whom we do business, which may adversely affect our financial condition, results of operations, and cash resources.
Uncertainty about current and future global economic conditions may cause consumers and retailers to defer purchases or cancel purchase orders for our products in response to tighter credit, decreased cash availability, and weakened consumer confidence. Our financial success is sensitive to changes in general economic conditions, both globally and in specific markets, that may adversely affect the demand for our products including recessionary economic cycles, higher interest rates, higher fuel and other energy costs, inflation, increases in commodity prices, higher levels of unemployment, higher consumer debt levels, higher tax rates and other changes in tax laws, or other economic factors. If global economic and financial market conditions deteriorate or remain weak for an extended period of time, the following factors, among others, could have a material adverse effect on our business and financial results:
• | Changes in foreign currency exchange rates relative to the USD could have a material impact on our reported financial results. |
• | Slower consumer spending may result in our inability to maintain or increase our sales to new and existing customers, cause reduced product orders or product order delays or cancellations from wholesale accounts that are directly impacted by fluctuations in the broader economy, difficulties managing inventories, higher discounts, and lower product margins. |
• | If consumer demand for our products declines, we may not be able to profitably establish new retail stores, or continue to operate existing retail stores, due to higher fixed costs of the retail business. |
• | A decrease in credit available to our wholesale or distributor customers, product suppliers and other service providers, or financial institutions that are counterparties to our credit facility or derivative instruments may result in credit pressures, other financial difficulties, or insolvency for these parties, with a potential adverse impact on our business, our financial results, or our ability to obtain future financing,. |
• | If our wholesale customers experience diminished liquidity, we may experience a reduction in product orders, an increase in customer order cancellations, and/or the need to extend customer payment terms which could lead to larger balances and delayed collection of our accounts receivable, reduced cash flows, greater expenses for collection efforts, and increased risk of nonpayment of our accounts receivable. |
• | If our manufacturers or other parties in our supply chain experience diminished liquidity, and as a result are unable to fulfill their obligations to us, we may be unable to provide our customers with our products in a timely manner, resulting in lost sales opportunities or a deterioration in our customer relationships. |
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Opening and operating company-operated retail stores incurs substantial fixed costs. If we are unable to generate sales, operate our retail stores profitably or otherwise fail to meet expectations, we may be unable to reduce such fixed costs and avoid losses or negative cash flows.
Opening and operating company-operated retail stores requires substantial financial commitments, including fixed costs, and are subject to numerous risks including consumer preferences, location and other factors that we do not control. Declines in revenue and operating performance of our company-operated retail stores could cause us to record impairment charges and have a material adverse effect on our business and financial results. During 2018, we opened 4 and closed 68 retail stores, and we operated 383 retail stores at December 31, 2018.
Although our strategic plan initiatives included a net reduction in our retail sales channel, we intend to continue to open new retail locations globally. Our ability to open new stores, including kiosks and store-in-store locations, successfully depends on our ability to identify suitable store locations, negotiate acceptable lease terms, hire, train, and retain store personnel and satisfy the fashion preferences in new geographic areas. Many of our company-operated retail stores are located in shopping malls and outlet malls and our success depends in part on obtaining prominent locations and the overall ability of the malls to successfully generate and maintain customer traffic. We cannot control the success of individual malls or store closures by other retailers, which may lead to mall vacancies and reduced customer foot traffic. In addition, consumer spending and shopping preferences have shifted, and may continue to further shift, away from brick and mortar retail to e-commerce channels, which may contribute to declining foot traffic in company-operated retail locations. Continued reduced customer foot traffic could reduce sales at our company-operated retail stores, including kiosks and store-in-store locations, or hinder our ability to open retail stores in new markets, including kiosks and store-in-store locations, which could in turn negatively affect our business and financial results. In addition, some of our company-operated retail stores occupy street locations that are heavily dependent on customer traffic generated by tourism. Any substantial decrease in tourism resulting from an economic slowdown, political, terrorism, social or military events or otherwise, is likely to adversely affect sales in our existing stores.
We may be required to record impairments of long-lived assets or incur other charges relating to our company-operated retail operations.
Impairment testing of our retail stores’ long-lived assets requires us to make estimates about our future performance and cash flows that are inherently uncertain. These estimates can be affected by numerous factors, including changes in economic conditions, our results of operations, and competitive conditions in the industry. Due to the fixed-cost structure associated with our retail operations, negative cash flows or the closure of a store could result in impairment of leasehold improvements, impairment of other long-lived assets, write-downs of inventory, severance costs, significant lease termination costs or the loss of working capital, which could adversely impact our business and financial results. For example, during 2018, 2017, and 2016, we recorded impairments of which $0.9 million, $0.5 million, and $2.7 million, respectively, related to our retail stores. These impairment charges may increase as we continue to evaluate our retail operations. The recording of additional impairments in the future may have a material adverse impact on our business and financial results.
We depend solely on third-party manufacturers located outside of the U.S.
All of our footwear products are manufactured by third-party manufacturers, the majority of which are located in Vietnam and China. We depend on the ability of these manufacturers to finance the production of goods ordered, maintain adequate manufacturing capacity and meet our quality standards. We compete with other companies for the production capacity of our third-party manufacturers, and we do not exert direct control over the manufacturers’ operations. As such, from time to time we have experienced delays or inabilities to fulfill customer demand and orders. We cannot guarantee that any third-party manufacturer will have sufficient production capacity, meet our production deadlines or meet our quality standards.
Foreign manufacturing is subject to additional risks, including transportation delays and interruptions, work stoppages, political instability, expropriation, nationalization, foreign currency fluctuations, changing economic conditions, changes in governmental policies and the imposition of tariffs, import and export controls, and other barriers. Since we ceased internal manufacturing in 2018, we can no longer offset any interruption or decrease in supply of our products by increasing production in internal manufacturing facilities, and we may not be able to substitute suitable alternative third-party manufacturers in a timely manner or at acceptable prices. Any disruption in the supply of products from our third-party manufacturers may harm our business and could result in a loss of sales and an increase in production costs, which would adversely affect our results of operations. In addition, manufacturing delays or unexpected demand for our products may require us to use faster, more expensive transportation methods, such as aircraft, which could adversely affect our profit margins. The cost of fuel is a significant component in transportation costs. Increases in the price of petroleum products can increase our transportation costs and adversely affect our product margins.
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In addition, because our footwear products are manufactured outside the U.S., the possibility of adverse changes in trade or political relations between the U.S. and other countries, political instability, increases in labor costs, changes in international trade agreements and tariffs, or adverse weather conditions could significantly interfere with the production and shipment of our products, which would have a material adverse effect on our operations and financial results. For example, the Trump Administration has instituted trade policies that include the re-negotiation or termination of trade agreements, the imposition of higher tariffs on imports into the U.S., economic sanctions on individuals, corporations or countries, and other government regulations affecting trade between the U.S. and other countries where we conduct our business. It may be time-consuming and expensive for us to alter our business operations in order to adapt to or comply with any such changes.
Furthermore, as a result of recent policy changes and U.S. government proposals, there may be greater restrictions and economic disincentives on international trade. The tariffs and other changes in U.S. trade policy could trigger retaliatory actions by affected countries, and certain foreign governments have instituted or are considering imposing trade sanctions on certain U.S. goods. For example, in 2018, the U.S. government announced tariffs on certain steel and aluminum products imported into the U.S., which has resulted in reciprocal tariffs from the European Union on goods imported from the U.S. In September 2018, the U.S. government placed additional tariffs of approximately $200 billion on goods imported from China. China has already imposed tariffs on a wide range of U.S. products in retaliation for tariffs on steel and aluminum. Additional tariffs could be imposed by China in response to the proposal to increase tariffs on products imported from China. Certain products that we sell in the U.S. are manufactured in China. Any further escalation of trade tensions could have a significant, adverse effect on world trade and the world economy. While we are unable to predict whether or how the recently enacted tariffs will impact our business, the imposition of tariffs on items imported by us from China could require us to increase prices to our customers or, if unable to do so, result in lowering our gross margin on products sold. Tariffs on footwear imported from China could have a material adverse effect on our business and results of operations.
We, similar to many other companies with overseas operations, import and sell products in other countries besides China that could be impacted by changes to the trade policies of the U.S. and foreign countries (including governmental action related to tariffs, international trade agreements, or economic sanctions). Such changes have the potential to adversely impact our industry and the global demand for our products, and as a result, could have a material adverse effect on our business, financial condition and results of operations.
Our third-party manufacturing operations must comply with labor, trade and other laws. Failure to do so may adversely affect us.
We require our third-party manufacturers to meet our quality control standards and footwear industry standards for working conditions and other matters, including compliance with applicable labor, environmental, and other laws; however, we do not control our third-party manufacturers or their respective labor practices. A failure by any of our third-party manufacturers to adhere to quality standards or labor, environmental and other laws could cause us to incur additional costs for our products, generate negative publicity, damage our reputation and the value of our brand, and discourage customers from buying our products. We also require our third-party manufacturers to meet certain product safety standards. A failure by any of our third-party manufacturers to adhere to such product safety standards could lead to a product recall which could result in critical media coverage and harm our business, brand and reputation and cause us to incur additional costs.
In addition, if we or our third-party manufacturers violate U.S. or foreign trade laws or regulations, we may be subject to extra duties, significant monetary penalties, the seizure and the forfeiture of the products we are attempting to import, or the loss of our import privileges. Possible violations of U.S. or foreign laws or regulations could include inadequate record keeping of our imported products, misstatements or errors as to the origin, quota category, classification, marketing or valuation of our imported products, and fraudulent visas or labor violations. The effects of these factors could render our conduct of business in a particular country undesirable or impractical and have a negative impact on our operating results. We cannot predict whether additional U.S. or foreign customs quotas, duties, taxes other charges, or restrictions will be imposed upon the importation of foreign produced products in the future or what effect such actions could have on our business, or results. For more information, please see “-We depend solely on third-party manufacturers located outside the U.S.”
We depend on a limited number of suppliers for key production materials, and any disruption in the supply of such materials could interrupt product manufacturing and increase product costs.
We depend on a limited number of sources for the primary materials used to make our footwear. We source the elastomer resins that constitute the primary raw materials used in compounding our CrosliteTM and LiteRideTM products, which we use to produce our various footwear products, from multiple suppliers. If the suppliers we rely on for elastomer resins were to cease production of these materials, we may not be able to obtain suitable substitute materials in time to avoid interruption of our production schedules. We are also subject to market issues related to supply and demand for our raw materials. We may have to pay substantially
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higher prices in the future for the elastomer resins or any substitute materials we use, which would increase our production costs and could have an adverse impact on our product margins. If we are unable to obtain suitable elastomer resins or if we are unable to procure sufficient quantities of the CrosliteTM and LiteRideTM materials, we may not be able to meet our production requirements in a timely manner or may need to modify our product characteristics, which could result in less favorable market acceptance, lost potential sales, delays in shipments to customers, strained relationships with customers and diminished brand loyalty.
Failure to adequately protect our trademarks and other intellectual property rights and counterfeiting of our brand could divert sales, damage our brand image and adversely affect our business.
We utilize trademarks, trade names, copyrights, trade secrets, issued and pending patents and trade dress, and designs on nearly all of our products. We believe that having distinctive marks that are readily identifiable trademarks and intellectual property is important to our brand, our success and our competitive position. The laws of some countries, for example, China, do not protect intellectual property rights to the same extent as do U.S. laws. We frequently discover products that are counterfeit reproductions of our products or that otherwise infringe on our intellectual property rights. If we are unsuccessful in challenging another party’s products on the basis of trademark or design or utility patent infringement, particularly in some foreign countries, or if we are required to change our name or use a different logo, or it is otherwise found that we infringe on others intellectual property rights, continued sales of such competing products by third parties could harm our brand or we may be forced to cease selling certain products, which could adversely impact our business, financial condition, revenues, and results of operations by resulting in the shift of consumer preference away from our products. If our brand is associated with inferior counterfeit reproductions, the integrity and reputation of our brand could be adversely affected. Furthermore, our efforts to enforce our intellectual property rights are typically met with defenses and counterclaims attacking the validity and enforceability of our intellectual property rights. We may face significant expenses and liability in connection with the protection of our intellectual property, and if we are unable to successfully protect our rights or resolve intellectual property conflicts with others, our business or financial condition could be adversely affected.
We also rely on trade secrets, confidential information, and other unpatented proprietary rights and information related to, among other things, the CrosliteTM material and product development, particularly where we do not believe patent protection is appropriate or obtainable. Using third-party manufacturers and compounding facilities may increase the risk of misappropriation of our trade secrets, confidential information and other unpatented proprietary information. The agreements we use in an effort to protect our intellectual property, confidential information, and other unpatented proprietary information may be ineffective or insufficient to prevent unauthorized use or disclosure of such trade secrets and information. A party to one of these agreements may breach the agreement and we may not have adequate remedies for such breach. As a result, our trade secrets, confidential information, and other unpatented proprietary rights and information may become known to others, including our competitors. Furthermore, our competitors or others may independently develop or discover such trade secrets and information, which would render them less valuable to us.
Our quarterly revenues and operating results are subject to fluctuation as a result of a variety of factors, including seasonal variations, which could increase the volatility of the price of our common stock.
Sales of our products are subject to seasonal variations and are sensitive to weather conditions. A significant portion of our revenues are attributable to footwear styles that are more suitable for fair weather and are derived from sales in the northern hemisphere. We typically experience our highest sales activity during the first three quarters of the calendar year, when there is warmer weather in the northern hemisphere. The effects of favorable or unfavorable weather on sales can be significant enough to affect our quarterly results which could adversely affect our common stock price. Quarterly results may also fluctuate as a result of other factors, including new style introductions, general economic conditions or changes in consumer preferences. Results for any one quarter or year are not necessarily indicative of results to be expected for any other quarter or for any year. This could lead to results outside of analyst and investor expectations, which could increase volatility of our stock price.
Our financial results may be adversely affected if substantial investments in businesses and operations fail to produce expected returns.
From time to time, we may invest in business infrastructure, expansion of existing businesses or operations, and acquisitions of new businesses, which require substantial cash investment and management attention. We believe cost effective investments are essential to business growth and profitability; however, significant investments are subject to risks and uncertainties. The failure of any significant investment to provide the returns or profitability we expect, or implementation issues, or the failure to integrate newly acquired businesses could have a material adverse effect on our financial results and divert management attention from more profitable business operations.
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Specifically, over the last several years, we have implemented numerous information systems designed to support various areas of our business, including a fully-integrated global accounting, operations, and finance enterprise resource planning system, and warehouse management, order management, and internet point-of-sale systems, as well as various interfaces between these systems and supporting back office systems. Issues in implementing or integrating new business operations and new systems with our current operations, failure of these systems to operate effectively, problems with transitioning to upgraded or replacement systems, or a breach in security of these systems could cause delays in product fulfillment and reduced efficiency of our operations and require significant additional capital investments to remediate, and may have an adverse effect on our business and financial results.
Failure to continue to obtain or maintain high-quality endorsers of our products could harm our business.
We establish relationships with celebrity endorsers to develop, evaluate, and promote our products, as well as strengthen our brand. In a competitive environment, the costs associated with establishment and retention of these relationships may increase. If we are unable to maintain current associations and/or to establish new associations in the future, this could adversely affect our brand visibility and strength and result in a negative impact to financial results. In addition, actions taken by celebrity endorsers associated with our products that harm the public image and reputations of those endorsers could also seriously harm our brand image with consumers and, as a result, could have an adverse effect on our sales and financial condition.
Our senior revolving credit facility agreement (as amended to date, the “Credit Agreement”) contains financial covenants that require us to maintain certain financial measures and ratios and includes restrictive covenants that limit our ability to take certain actions. A breach of any of those restrictive covenants may cause us to be in default under the Credit Agreement, and our lenders could foreclose on our assets.
Our Credit Agreement requires us to maintain certain financial covenants. A failure to maintain current revenue levels or an inability to control costs or capital expenditures could negatively impact our ability to meet these financial covenants. If we breach any of these restrictive covenants, the lenders could either refuse to lend funds to us or accelerate the repayment of any outstanding borrowings under the Credit Agreement. We may not have sufficient assets to repay such indebtedness upon a default or be unable to receive a waiver of the default from the lender. If we are unable to repay the indebtedness, the lender could initiate a bankruptcy proceeding or collection proceedings with respect to our assets, all of which secure our indebtedness under the Credit Agreement.
The Credit Agreement also contains certain restrictive covenants that limit, and in some circumstances prohibit our ability to, among other things: incur additional debt, sell, lease or transfer our assets, pay dividends on our common stock, make capital expenditures and investments, guarantee debt or obligations, create liens, repurchase our common stock, enter into transactions with our affiliates and enter into certain merger, consolidation or other reorganizations transactions. These restrictions could limit our ability to obtain future financing, make acquisitions or needed capital expenditures, withstand the current or future downturns in our business or the economy in general, conduct operations or otherwise take advantage of business opportunities that may arise, any of which could place us at a competitive disadvantage relative to our competitors.
The risks of maintaining significant cash abroad could adversely affect our cash flows in the U.S. and our business and financial results.
We have substantial cash requirements in the U.S., but the majority of our cash is generated and held abroad. We generally consider unremitted earnings of subsidiaries operating outside the U.S. to be indefinitely reinvested and it is not our current intent to change this position. Cash held outside of the U.S. is primarily used for the ongoing operations of the business in the locations in which the cash is held. Most of the cash held outside of the U.S. could be repatriated to the U.S., and under the U.S. Tax Cuts and Jobs Act (the “Tax Act”), could be repatriated without incurring additional U.S. federal income taxes, although some states will continue to subject cash repatriations to income tax. 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. These limitations may affect our ability to fully utilize our cash resources for needs in the U.S. or other countries and may adversely affect our liquidity.
Changes in tax laws and unanticipated tax liabilities and adverse outcomes from tax audits or tax litigation could adversely affect our effective income tax rate and profitability.
We are subject to income taxes in the U.S. and numerous foreign jurisdictions. Our effective income tax rate in the future could be adversely affected by a number of factors, including changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes in tax laws, and the outcome of income tax audits or tax litigation in various jurisdictions around the world. We are regularly subject to, and are currently undergoing, audits by tax authorities in the U.S. and foreign jurisdictions for prior tax years. Please refer to Note 14 — Commitments and Contingencies and Note 16 — Legal Proceedings in the accompanying notes to the consolidated financial statements included in Part II - Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K for additional details regarding current tax
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audits. The final outcome of tax audits and related litigation is inherently uncertain and could be materially different than that reflected in our historical income tax provisions and accruals. Moreover, we could be subject to assessments of substantial additional taxes and/or fines or penalties relating to ongoing or future audits, which could have an adverse effect on our financial position and results of operations. Future changes in domestic or international tax laws and regulations could also adversely affect our effective tax rate or result in higher income tax liabilities. Recent developments, including U.S. tax reform, the European Commission’s investigations of local country tax authority rulings and whether those rulings comply with European Union rules on state aid, as well as the Organization for Economic Co-operation and Development’s project on Base Erosion and Profit Shifting, continue to change long-standing tax principles. These and any other additional changes could adversely affect our effective tax rate or result in higher cash tax liabilities.
We are subject to periodic litigation, which could result in unexpected expenditures of time and resources.
From time to time, we initiate litigation or are called upon to defend ourselves against lawsuits relating to our business. Due to the inherent uncertainties of litigation, we cannot accurately predict the ultimate outcome of any such proceedings. For a detailed discussion of our current material legal proceedings, see Note 16 — Legal Proceedings in the accompanying notes to the consolidated financial statements included in Part II - Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K. An unfavorable outcome in any of these proceedings or any future legal proceedings could have an adverse impact on our business, and financial results. In addition, any significant litigation in the future, regardless of its merits, could divert management’s attention from our operations and result in substantial legal fees. In the past, securities class action litigation has been brought against us. If our stock price is volatile, we may become involved in this type of litigation in the future. Any litigation could result in substantial costs and a diversion of management’s attention and resources that are needed to successfully run our business.
We rely on technical innovation to compete in the market for our products.
Our success relies on continued innovation in both materials and design of footwear, such as our branded CrosliteTM, LiteRideTM, and RevivaTM. Research and development is a key part of our continued success and growth, and we rely on experts to develop and test our materials and products. CrosliteTM, our branded proprietary closed-cell resin, is the primary raw material used in the vast majority of our footwear and some of our accessories. CrosliteTM is carefully formulated to create soft, durable, extremely lightweight, and water-resistant footwear that conforms to the shape of the foot and increases comfort. We continue to invest in research and development in order to refine our materials to enhance these properties and to develop new properties for specific applications. We strive to produce footwear featuring fun, comfort, color, and functionality. If we fail to introduce technical innovation in our products, consumer demand for our products could decline, and if we experience problems with the quality of our products, we may incur substantial expense to remedy the problems.
We depend on key personnel across the globe, the loss of whom would harm our business.
We rely on executives and senior management to drive the financial and operational performance of our business. Turnover of executives and senior management can adversely impact our stock price, our results of operations, and our client relationships and may make recruiting for future management positions more difficult or may require us to offer more generous compensation packages to attract top executives. Changes in other key management positions may temporarily affect our financial performance and results of operations as new management becomes familiar with our business. When we experience management turnover, we must successfully integrate any newly hired management personnel within our organization in a timely manner in order to achieve our operating objectives. The key initiatives directed by these executives may take time to implement and yield positive results, and there can be no guarantee they will be successful. If our new executives do not perform up to expectations, we may experience declines in our financial performance and/or delays or failures in achieving our long-term growth strategy.
If our internal controls are ineffective, our operating results and market confidence in our reported financial information could be adversely affected.
Our internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud. Even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. If we fail to maintain the adequacy of our internal controls or if we experience difficulties in their implementation, our business and operating results and market confidence in our reported financial information could be harmed, we could incur significant costs to evaluate and remediate weaknesses, and we could fail to meet our financial reporting obligations.
The existence of a material weakness precludes management from concluding that our internal control over financial reporting is effective and precludes our independent auditors from issuing an unqualified opinion that our internal controls are effective. In
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addition, a material weakness could cause investors to lose confidence in our financial reporting and may negatively affect the price of our common stock. We also can make no assurances that we will be able to remediate any future internal control deficiencies timely and in a cost effective manner. Moreover, effective internal controls are necessary to produce reliable financial reports and to prevent fraud. If we are unable to satisfactorily remediate future deficiencies or if we discover other deficiencies in our internal control over financial reporting, such deficiencies may lead to misstatements in our financial statements or otherwise negatively impact our business, financial results and reputation.
Labor disruptions could adversely impact our business.
Our business depends on our ability to source and distribute products in a timely, efficient, and cost-effective manner. Labor disputes impacting our suppliers, manufacturers, transportation carriers, or ports pose significant threats to our business, particularly if such disputes result in work slowdowns, lockouts, strikes or other disruptions during our peak importing, or manufacturing and selling seasons. Any such disruption could result in delayed or canceled orders by customers, unplanned inventory accumulation or shortages, and increased transportation and labor costs, negatively impacting our results of operations and financial position.
Our reported financial results may be adversely affected by changes in United States generally accepted accounting principles.
Generally accepted accounting principles in the United States are subject to interpretation by the Financial Accounting Standards Board, the Securities and Exchange Commission, and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant impact on our reported financial results, and could affect the reporting of transactions completed before the announcement of a change.
Extreme weather conditions or natural disasters could negatively impact our operating results and financial condition.
Natural disasters such as earthquakes, hurricanes, tsunamis, or other adverse weather and climate conditions, whether occurring in the U.S. or abroad, and the consequences and effects thereof, including damage to our supply chain, manufacturing or distribution centers, retail stores, changes in consumer preferences or spending priorities, energy shortages, and public health issues, could harm or disrupt our operations or the operations of our vendors other suppliers, or customers, or result in economic instability that may negatively impact our operating results and financial condition. Additionally, certain catastrophes are not covered by our general insurance policies, which could result in significant unrecoverable losses.
Risks Specific to Our Capital Stock
Our restated certificate of incorporation, amended and restated bylaws and Delaware law contain provisions that could discourage a third party from acquiring us and consequently decrease the market value of an investment in our stock.
Our restated certificate of incorporation, amended and restated bylaws, and Delaware corporate law each contain provisions that could delay, defer, or prevent a change in control of us or changes in our management. These provisions could discourage proxy contests and make it more difficult for our stockholders to elect directors and take other corporate actions, which may prevent a change of control or changes in our management that a stockholder might consider favorable. In addition, Section 203 of the Delaware General Corporation Law may discourage, delay, or prevent a change in control of us. Any delay or prevention of a change of control or change in management that stockholders might otherwise consider to be favorable could cause the market price of our common stock to decline.
We may fail to meet analyst and investor expectations, which could cause the price of our stock to decline.
Our common stock is traded publicly and various securities analysts follow our financial results and frequently issue reports on us which include information about our historical financial results as well as their estimates of our future performance. These estimates are based on their own opinions and are often different from management’s estimates or expectations of our business. If our operating results are below the estimates or expectations of public market analysts and expectations of our investors, our stock price could decline.
Future sales of common stock by Blackstone Capital Partners VI L.P. and certain of its permitted transferees or affiliates (“Blackstone”) may adversely affect the market price of our common stock.
We issued shares of Series A Convertible Preferred Stock (“Series A Preferred”) to Blackstone and certain of its permitted transferees (collectively, the “Blackstone Purchasers”) in January 2014. In December 2018, we repurchased 100,000 shares of Series A Preferred from the Blackstone Purchasers and the Blackstone Purchasers converted their remaining shares of Series A Preferred into 6,896,548 shares of common stock.
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Subject to certain exceptions, the Blackstone Purchasers agreed not to transfer the shares of common stock they received under the share repurchase agreement until, and including, the date immediately prior to the first date (the “Lock-Up Release Date”) on which our trading window opens following release of our Quarterly Report on Form 10-Q to be filed with the SEC for the quarterly period ended June 30, 2019 (but in any event, the Lock-Up Release Date shall be no later than August 12, 2019). After the Lock-Up Release Date, sales of a substantial number of shares of common stock by Blackstone could adversely affect prevailing market prices of our common stock. We have granted the Blackstone Purchasers registration rights in respect to the shares to facilitate the resale of such securities into the public market. Sales by Blackstone of a substantial number of shares of our common stock in the public market, or the perception that such sales might occur, could have a material adverse effect on the price of our common stock.
Blackstone may exercise significant influence over us, including through its ability to elect up to one member of our Board of Directors (the “Board”).
As of December 31, 2018, the shares of common stock owned by Blackstone represented approximately 9.4% of the voting rights of our common stock, so Blackstone will have the ability to significantly influence the outcome of any matter submitted for the vote of our stockholders. Blackstone may have interests that diverge from, or even conflict with, those of our other stockholders. For example, Blackstone and its affiliates may have an interest in directly or indirectly pursuing acquisitions, divestitures, financings or other transactions that, in their judgment, could enhance their other equity investments, even though such transactions might involve risks to us. Blackstone and its affiliates are in the business of making or advising on investments in companies, including businesses that may directly or indirectly compete with certain portions of our business. They may also pursue acquisition opportunities that may be complementary to our business, and, as a result, those acquisition opportunities may not be available to us.
In addition, the investment agreement with Blackstone grants Blackstone certain rights to designate directors to serve on our Board. For so long as Blackstone beneficially owns shares of common stock that represent more than 25% of the number of shares of the as-converted common stock initially purchased pursuant to this investment agreement, Blackstone will have the right to designate for nomination one director to our Board. The directors designated by Blackstone are entitled to serve on Board committees, subject to applicable law and stock exchange rules. As of December 31, 2018, Blackstone has the right to designate for nomination one director to our Board, but continues to have two designees currently serving on the Board.
ITEM 1B. Unresolved Staff Comments
None.
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ITEM 2. Properties
Our principal executive and administrative offices are located at 7477 East Dry Creek Parkway, Niwot, Colorado 80503. We lease all of our domestic and international facilities. We currently enter into short-term and long-term leases for office, warehouse, and retail, including kiosk and store-in-store, space. The terms of our leases include fixed monthly rents and/or contingent rents based on percentage of revenues for certain of our retail locations, and expire at various dates through the year 2033. The general location, use, and approximate size of our principal properties, and the reportable operating segment are given below.
Location | Reportable Operating Segment | Use | Approximate Square Feet | |||
Dayton, Ohio (1) | Americas | Warehouse | 555,000 | |||
Ontario, California (1) | Americas | Warehouse | 399,000 | |||
Rotterdam, the Netherlands | EMEA | Warehouse | 174,000 | |||
Narita, Japan | Asia Pacific | Warehouse | 156,000 | |||
Niwot, Colorado | Americas | Corporate headquarters and regional office | 98,000 | |||
Padova, Italy | Other Businesses | Product development office | 45,000 | |||
Hoofddorp, the Netherlands | EMEA | Regional office | 31,000 | |||
Shenzhen, China | Asia Pacific | Regional office | 22,000 | |||
Singapore | Asia Pacific | Regional office | 17,000 | |||
Westwood, Massachusetts | Americas | Global commercial center | 16,000 | |||
Shanghai, China | Asia Pacific | Regional office | 11,000 | |||
(1) In the fourth quarter of 2018, the Company entered into a lease agreement for a new distribution center in Dayton, Ohio, which is expected to replace the Company’s existing facility in Ontario, California in 2019.
Aside from the principal properties listed above, we lease various other offices and distribution centers worldwide to meet our sales and operational needs. We also lease 383 retail locations worldwide. See Item 1. Business of this Annual Report on Form 10-K for further discussion regarding global company-operated stores.
In January 2019, Crocs entered into a lease, which will commence in March 2020, for its new corporate headquarters and regional office in Broomfield, Colorado. The new location is approximately 88,000 square feet, and the relocation from our Niwot office is planned for early 2020.
ITEM 3. Legal Proceedings
A discussion of legal matters is found in Note 16 — Legal Proceedings in the accompanying notes to the consolidated financial statements included in Part II - Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K.
ITEM 4. Mine Safety Disclosures
Not applicable.
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PART II
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock is listed on the NASDAQ Global Select Market under the stock symbol “CROX.”
Performance Graph
The following performance graph illustrates a five-year comparison of cumulative total return of our common stock, the NASDAQ Composite Index and the Dow Jones U.S. Footwear Index from December 31, 2013 through December 31, 2018. The graph assumes an investment of $100.00 on December 31, 2013 and assumes the reinvestment of all dividends and other distributions.
The Dow Jones U.S. Footwear Index is a sector index and includes companies in the major line of business in which we compete. This index does not encompass all of our competitors or all of our product categories and lines of business. The Dow Jones U.S. Footwear Index consists of Crocs, Inc., NIKE, Inc., Deckers Outdoor Corporation., adidas AG, Skechers U.S.A., Inc., Steven Madden Ltd. and Wolverine World Wide, Inc., among other companies. As Crocs, Inc. is part of the Dow Jones U.S. Footwear Index, the price and returns of our stock have an effect on this index. The Nasdaq Composite Index is a market capitalization-weighted index and consists of more than 3,000 common equities, including Crocs, Inc. The stock performance shown on the performance graph above is not necessarily indicative of future performance. We do not make or endorse any predictions as to future stock performance.
Holders
The approximate number of stockholders of record of our common stock was 82 as of February 20, 2019.
Dividends
We have never declared or paid cash dividends on our common stock, and we do not anticipate paying any cash dividends on our common stock in the foreseeable future. Our financing arrangements do not permit us to pay cash dividends on our common stock.
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Any future determination to declare cash dividends on our common stock will be made at the discretion of our Board, subject to compliance with covenants under any then-existing financing agreements.
Purchases of Equity Securities by the Issuer
Issuer Purchases of Equity Securities | ||||||||||||||
Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) | Maximum Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs | ||||||||||
October 1-31, 2018 | 821,059 | $ | 19.26 | 821,059 | $ | 165,987,464 | ||||||||
November 1-30, 2018 | 49,937 | 25.00 | 49,937 | 164,739,623 | ||||||||||
December 1-31, 2018 (2) | 368,351 | 24.49 | 368,351 | 155,723,037 | ||||||||||
Total | 1,239,347 | $ | 21.05 | 1,239,347 | $ | 155,723,037 | ||||||||
(1) On December 26, 2013, the Company’s Board of Directors approved and authorized a program to repurchase up to $350.0 million of our common stock, and on February 20, 2018, the Board approved an increased repurchase authorization up to $500.0 million of our common stock. As of December 31, 2018, approximately $155.7 million remained available for repurchase under our share repurchase authorization. The number, price, structure and timing of the repurchases, if any, will be at our sole discretion and future repurchases will be evaluated by us depending on market conditions, liquidity needs, restrictions under our revolving credit facility, and other factors. Share repurchases 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.
(2) Number of shares purchased in December 2018 does not include 100,000 shares of Series A Convertible Preferred Stock purchased for an aggregate cost of $183.7 million. See Note 9 — Equity in the accompanying notes to the consolidated financial statements included in Part II - Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K.
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ITEM 6. Selected Financial Data
The following table presents selected historical financial data for each of our last five years. The information in this table should be read in conjunction with our consolidated financial statements and accompanying notes presented in Item 8. Financial Statements and Supplementary Data, and Item 7. Management’s Discussion and Analysis of Financial Conditions and Results of Operations in Part II of this Annual Report on Form 10-K.
Year Ended December 31, | |||||||||||||||||||
2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||||||
(in thousands, except per share data) | |||||||||||||||||||
Revenues | $ | 1,088,205 | $ | 1,023,513 | $ | 1,036,273 | $ | 1,090,630 | $ | 1,198,223 | |||||||||
Cost of sales | 528,051 | 506,292 | 536,109 | 579,825 | 603,893 | ||||||||||||||
Restructuring charges (1) | — | — | — | — | 3,985 | ||||||||||||||
Gross profit | 560,154 | 517,221 | 500,164 | 510,805 | 590,345 | ||||||||||||||
Gross margin | 51.5 | % | 50.5 | % | 48.3 | % | 46.8 | % | 49.3 | % | |||||||||
Selling, general and administrative expenses | 495,028 | 494,601 | 503,174 | 559,095 | 565,712 | ||||||||||||||
Selling, general and administrative expenses as a % of revenues | 45.5 | % | 48.3 | % | 48.6 | % | 51.3 | % | 47.2 | % | |||||||||
Restructuring charges (1) | — | — | — | 8,728 | 20,532 | ||||||||||||||
Asset impairments (2) | 2,182 | 5,284 | 3,144 | 15,306 | 8,827 | ||||||||||||||
Income (loss) from operations | $ | 62,944 | $ | 17,336 | $ | (6,154 | ) | $ | (72,324 | ) | $ | (4,726 | ) | ||||||
Income (loss) before income taxes | $ | 65,157 | $ | 18,180 | $ | (7,213 | ) | $ | (74,744 | ) | $ | (8,549 | ) | ||||||
Income tax expense (benefit) | 14,720 | 7,942 | (9,281 | ) | (8,452 | ) | 3,623 | ||||||||||||
Net income (loss) | 50,437 | 10,238 | (16,494 | ) | (83,196 | ) | (4,926 | ) | |||||||||||
Dividends on Series A convertible preferred stock(3) | (108,224 | ) | (12,000 | ) | (12,000 | ) | (11,833 | ) | (11,301 | ) | |||||||||
Dividend equivalents on Series A convertible preferred stock related to redemption value accretion and beneficial conversion feature (3) | (11,429 | ) | (3,532 | ) | (3,244 | ) | (2,978 | ) | (2,735 | ) | |||||||||
Net loss attributable to common stockholders | $ | (69,216 | ) | $ | (5,294 | ) | $ | (31,738 | ) | $ | (98,007 | ) | $ | (18,962 | ) | ||||
Net loss per common share: | |||||||||||||||||||
Basic | $ | (1.01 | ) | $ | (0.07 | ) | $ | (0.43 | ) | $ | (1.30 | ) | $ | (0.22 | ) | ||||
Diluted | $ | (1.01 | ) | $ | (0.07 | ) | $ | (0.43 | ) | $ | (1.30 | ) | $ | (0.22 | ) | ||||
Weighted average common shares: | |||||||||||||||||||
Basic | 68,421 | 72,255 | 73,371 | 75,604 | 85,140 | ||||||||||||||
Diluted | 68,421 | 72,255 | 73,371 | 75,604 | 85,140 | ||||||||||||||
Cash provided by (used in) operating activities | $ | 114,162 | $ | 98,264 | $ | 39,754 | $ | 9,698 | $ | (11,651 | ) | ||||||||
Cash used in investing activities (4) | (10,110 | ) | (11,538 | ) | (19,856 | ) | (18,488 | ) | (56,790 | ) | |||||||||
Cash provided by (used in) financing activities (5) | (148,802 | ) | (65,370 | ) | (16,443 | ) | (101,260 | ) | 23,431 | ||||||||||
(1) We commenced a restructuring in July 2014 and concluded in December 2015.
(2) Asset impairments consist of impairments of long-lived assets of retail locations in all years, as well as a $1.3 million write-off of supply chain assets in 2018, a $4.8 million write-off of a discontinued project in 2017, and $0.4 million of goodwill impairment in 2016.
(3) On December 5, 2018, all issued and outstanding shares of Series A Convertible Preferred Stock were repurchased in exchange for cash or converted to common stock. As a result, amounts reported for the year ended December 31, 2018, include amounts resulting from the repurchase and conversion, in addition to payments made to induce conversion and accretion of dividend equivalents prior to December 5, 2018.
(4) Prior year amounts have been recast to reflect adoption of new guidance requiring that restricted cash be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period amounts reported in the statements of cash flows. For more information, see Note 2 — Recent Accounting Pronouncements.
(5) Cash used in financing activities for the year ended December 31, 2018 reflects the impacts of $183.7 million used to repurchase Series A Preferred in 2018 and $120.0 million of borrowings. Cash used in financing activities also includes approximately $63.1 million, $50.0
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million, $85.9 million, and $145.9 million, including commissions, used to repurchase shares of the Company’s common stock during 2018, 2017, 2015, and 2014, respectively. The Company did not repurchase shares in 2016.
December 31, | |||||||||||||||||||
2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||||||
(in thousands) | |||||||||||||||||||
Cash and cash equivalents | $ | 123,367 | $ | 172,128 | $ | 147,565 | $ | 143,341 | $ | 267,512 | |||||||||
Inventories | 124,491 | 130,347 | 147,029 | 168,192 | 171,012 | ||||||||||||||
Working capital | 195,807 | 268,031 | 276,335 | 278,852 | 441,523 | ||||||||||||||
Total assets (1) | 468,901 | 543,695 | 566,390 | 608,020 | 806,931 | ||||||||||||||
Long-term liabilities | 134,102 | 18,379 | 17,966 | 19,294 | 27,849 | ||||||||||||||
Total stockholders' equity | 150,308 | 185,865 | 220,383 | 245,972 | 452,518 | ||||||||||||||
(1) Prior year amounts have not been recasted to reflect adoption of new revenue recognition guidance as of January 1, 2018. For more information, see Note 2 — Recent Accounting Pronouncements.
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ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Business Overview
Crocs, Inc. and its consolidated subsidiaries (collectively, the “Company,” “Crocs,” “we,” “our,” or “us”) 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 global leader in the sale of molded footwear characterized by functionality, comfort, color, and lightweight design. The vast majority of our products utilize our proprietary closed-cell resin, called CrosliteTM, along with a range of other materials. The broad appeal of our footwear has allowed us to market our products through a wide range of distribution channels. We currently sell our products in more than 85 countries, through three distribution channels: wholesale, retail, and e-commerce. Our wholesale channel includes domestic wholesalers as well as international wholesalers and distributors; our retail channel includes company-operated stores; and our e-commerce channel includes company-operated e-commerce sites and third-party-operated marketplace activity.
Known or Anticipated Trends
Based on our recent operating results and our assessment of the current operating environment, we anticipate certain trends to impact our future operating results:
• | Consumer 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, as well as on various e-tail sites operated by wholesalers, and contributed to declining foot traffic in our retail locations. |
• | A cautious retail environment may negatively affect customer purchasing trends. |
• | Foreign exchange rate volatility will continue to impact our reported U.S. Dollar results from our foreign operations. |
• | In 2017 we identified annual reductions in ‘Selling, general and administrative expenses’ (“SG&A”) in the amount of $75 to $85 million, which we projected would generate an annual $30 to $35 million improvement in earnings before interest and taxes in 2019, compared to 2016 (“SG&A reduction plan”). We have successfully completed our SG&A reduction plan, by eliminating approximately $75 million of annualized expenses that previously burdened our cost structure. We have elected to reinvest some of those savings in marketing and our e-commerce business, to further strengthen our brand and drive incremental sales growth. |
• | As a result of the repurchase and conversion of our Series A Convertible Preferred Stock on December 5, 2018, we will no longer be required to pay $12 million annually in preferred stock dividends. |
• | Non-recurring charges relating to the Company’s new distribution center are expected to reduce gross margin by approximately 100 basis points in 2019. |
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 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, 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 and trends. Investors should not consider constant currency in isolation from, or as a substitute for, financial information prepared in accordance with U.S. GAAP.
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2018 Financial and Operational Highlights
Revenues were $1,088.2 million for the year ended December 31, 2018, a 6.3% increase compared to the year ended December 31, 2017. The increase in 2018 revenues compared to 2017 revenues was due to the net effects of: (i) higher sales volumes, which increased revenues by $25.8 million, or 2.5%; (ii) higher average selling prices as our product and channel mix continued to change, which increased revenues by $27.7 million, or 2.7%; and (iii) favorable changes in exchange rates, which increased revenues by $11.2 million, or 1.1%.
The following were significant developments affecting our businesses and capital structure during the year ended December 31, 2018:
• | In 2018, the impact of operating with a net of 64 fewer company-operated stores and certain business model changes reduced our revenues by approximately $60 million. |
• | We sold 59.8 million pairs of shoes worldwide, an increase of 3.4% from 57.9 million pairs in 2017. |
• | Gross margin improved 100 basis points compared to 2017 to 51.5% for the year ended December 31, 2018. We drove this improvement by continuing to prioritize high-margin molded products, increasing prices on select products, and conducting fewer promotions in combination with better inventory management. |
• | SG&A was $495.0 million, an increase of $0.4 million, or 0.1%, compared to 2017. As a percent of revenues, SG&A improved 280 basis points to 45.5% of revenues. This included $21.1 million of non-recurring charges associated with our previously announced SG&A reduction plan, the completion of the closure of all company-operated manufacturing and related distribution facilities, and some charges related to the relocation of our corporate headquarters, which is planned for early 2020. |
• | Income from operations was $62.9 million for the year ended December 31, 2018 compared to income from operations of $17.3 million for the year ended December 31, 2017. Income from operations as a percent of revenues rose to 5.8% compared to 1.7% in 2017. |
• | In December 2018, we completed a transaction with Blackstone to repurchase 100,000 shares of Series A Convertible Preferred Stock (“Series A Preferred”) for $183.7 million and to convert the remaining 100,000 shares of Series A Preferred into 6,896,548 shares of our common stock, which resulted in the elimination of $12 million in annual dividends and an overhang on our common stock. Crocs also agreed to pay Blackstone a $15 million inducement payment in connection with the transaction. |
• | Net loss attributable to common stockholders was $69.2 million compared to a loss of $5.3 million in 2017, including the accounting treatment for charges incurred related to the repurchase and conversion of our Series A Preferred. Basic and diluted net loss per common share was $1.01 for the year ended December 31, 2018, compared to a basic and diluted net loss per common share of $0.07 for the year ended December 31, 2017. |
• | To continue improving the efficiency and profitability of our retail business we closed or transferred to distributors 68 stores in 2018, 61.8% of which were full-priced locations, for a net reduction of 64 company-operated retail stores. Since we began our store reduction program early in 2017, we have closed a net total of 175 stores and reduced our total company-operated store count to 383 from 558 at the end of 2016. The majority of these store closures occurred upon expiration of the leases. We have also placed greater priority on outlet stores, so that they now represent 50.9% of our store base, up from 41.6% at the end of 2016. |
• | We continued to focus on simplifying our product line and disciplined inventory management to allow investment in higher margin, faster-turning product. As a result, we reduced our inventory by $5.9 million, or 4.5%, from $130.3 million to $124.5 million. |
• | During 2018, we repurchased 3.6 million shares of common stock at an aggregate cost of $63.1 million and eliminated the overhang of 6.9 million shares (on an as-converted basis) associated with the repurchase of 100,000 shares of the Series A Preferred. |
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Results of Operations
Comparison of the Years Ended December 31, 2018, 2017, and 2016
Year Ended December 31, | $ Change | % Change | |||||||||||||||||||||||
2018 | 2017 | 2016 | 2018-2017 | 2017-2016 | 2018-2017 | 2017-2016 | |||||||||||||||||||
(in thousands, except per share data, margin, and average selling price data) | |||||||||||||||||||||||||
Revenues | $ | 1,088,205 | $ | 1,023,513 | $ | 1,036,273 | $ | 64,692 | $ | (12,760 | ) | 6.3 | % | (1.2 | )% | ||||||||||
Cost of sales | 528,051 | 506,292 | 536,109 | (21,759 | ) | 29,817 | (4.3 | )% | 5.6 | % | |||||||||||||||
Gross profit | 560,154 | 517,221 | 500,164 | 42,933 | 17,057 | 8.3 | % | 3.4 | % | ||||||||||||||||
Selling, general and administrative expenses | 495,028 | 494,601 | 503,174 | (427 | ) | 8,573 | (0.1 | )% | 1.7 | % | |||||||||||||||
Asset impairments | 2,182 | 5,284 | 3,144 | 3,102 | (2,140 | ) | 58.7 | % | (68.1 | )% | |||||||||||||||
Income (loss) from operations | 62,944 | 17,336 | (6,154 | ) | 45,608 | 23,490 | 263.1 | % | 381.7 | % | |||||||||||||||
Foreign currency gains (losses), net | 1,318 | 563 | (2,454 | ) | 755 | 3,017 | 134.1 | % | 122.9 | % | |||||||||||||||
Interest income | 1,281 | 870 | 692 | 411 | 178 | 47.2 | % | 25.7 | % | ||||||||||||||||
Interest expense | (955 | ) | (869 | ) | (836 | ) | (86 | ) | (33 | ) | (9.9 | )% | (3.9 | )% | |||||||||||
Other income | 569 | 280 | 1,539 | 289 | (1,259 | ) | 103.2 | % | (81.8 | )% | |||||||||||||||
Income (loss) before income taxes | 65,157 | 18,180 | (7,213 | ) | 46,977 | 25,393 | 258.4 | % | 352.0 | % | |||||||||||||||
Income tax expense | 14,720 | 7,942 | 9,281 | (6,778 | ) | 1,339 | (85.3 | )% | 14.4 | % | |||||||||||||||
Net income (loss) | 50,437 | 10,238 | (16,494 | ) | 40,199 | 26,732 | 392.6 | % | (162.1 | )% | |||||||||||||||
Dividends on Series A convertible preferred stock | (108,224 | ) | (12,000 | ) | (12,000 | ) | (96,224 | ) | — | 801.9 | % | — | % | ||||||||||||
Dividend equivalents on Series A convertible preferred stock related to redemption value accretion and beneficial conversion feature | (11,429 | ) | (3,532 | ) | (3,244 | ) | (7,897 | ) | (288 | ) | (223.6 | )% | (8.9 | )% | |||||||||||
Net loss attributable to common stockholders | $ | (69,216 | ) | $ | (5,294 | ) | $ | (31,738 | ) | $ | (63,922 | ) | $ | 26,444 | (1,207.4 | )% | 83.3 | % | |||||||
Net loss per common share: | |||||||||||||||||||||||||
Basic | $ | (1.01 | ) | $ | (0.07 | ) | $ | (0.43 | ) | $ | (0.94 | ) | $ | 0.36 | (1,342.9 | )% | 83.7 | % | |||||||
Diluted | $ | (1.01 | ) | $ | (0.07 | ) | $ | (0.43 | ) | $ | (0.94 | ) | $ | 0.36 | (1,342.9 | )% | 83.7 | % | |||||||
Gross margin (1) | 51.5 | % | 50.5 | % | 48.3 | % | 100bp | 220bp | 2.0 | % | 4.6 | % | |||||||||||||
Operating margin (1) | 5.8 | % | 1.7 | % | (0.6 | )% | 410bp | 230bp | 241.2 | % | 383.3 | % | |||||||||||||
Selling, general and administrative expenses as a percentage of revenues | 45.5 | % | 48.3 | % | 48.6 | % | 280 | bp | 30 | bp | 5.8 | % | 0.6 | % | |||||||||||
Footwear unit sales | 59,815 | 57,850 | 56,097 | 1,965 | 1,753 | 3.4 | % | 3.1 | % | ||||||||||||||||
Average footwear selling price - nominal basis | $ | 17.71 | $ | 17.31 | $ | 18.21 | $ | 0.40 | $ | (0.90 | ) | 2.3 | % | (4.9 | )% | ||||||||||
(1) Changes for gross margin and operating margin are shown in basis points (“bp”).
Revenues. Revenues increased $64.7 million, or 6.3%, during the year ended December 31, 2018 compared to the same period in 2017. The increase in revenues was driven by 22.5% growth in our e-commerce channel and 7.8% growth in our wholesale
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channel, which more than offset a reduction in our retail channel of 3.2%. The decrease in retail revenues was driven by our targeted reduction in the number of company-operated retail stores, partially offset by same store sales growth in our remaining company-operated retail stores. Higher unit sales volume, particularly in our clog and sandal silhouettes, increased revenues by $25.8 million, or 2.5%, and an increase of $27.7 million, or 2.7%, was attributable to higher average selling price (“ASP”) as a result of changes in product mix, reduced promotional activities, and price increases. Favorable exchange rate activity drove an increase of $11.2 million, or 1.1%.
Revenues decreased $12.8 million, or 1.2%, during the year ended December 31, 2017 compared to the same period in 2016. The revenues decreased primarily due to the sale of our Taiwan business in the fourth quarter of 2016, the sale of our Middle East business in the second quarter of 2017, reductions in the number of company-operated retail stores, and additional actions taken to optimize our wholesale, retail, and e-commerce channels. The revenue decline associated with store closures and transfers was approximately $39.1 million. Higher unit sales volume increased revenues by $39.6 million, or 3.8%, offset by lower ASP, which decreased revenues by approximately $57.2 million, or 5.5%, as our product and channel mix continued to change. Favorable exchange rate activity drove an increase of $4.8 million, or 0.5%.
Cost of sales. Cost of sales increased by $21.8 million, or 4.3%, during the year ended December 31, 2018 compared to the same period in 2017. Higher unit sales volume resulted in an increase of $17.2 million, or 3.4%, partially offset by a decrease of $0.7 million, or 0.1%, due to a lower average cost per unit. Lower average cost per unit were primarily the result of product mix, reflecting our ongoing focus on core molded products, which cost less to produce, and continued supply chain cost reductions. The effect of foreign currency translation was an increase of $5.3 million, or 1.0%.
Cost of sales decreased by $29.8 million, or 5.6%, during the year ended December 31, 2017 compared to the same period in 2016. Lower average cost per unit was primarily the result of changes in our product mix, reflecting an ongoing focus on core molded products, which cost less to produce, and continued supply chain cost reductions, including a reallocation of third-party manufacturing production to lower-cost suppliers within the Asia Pacific region. Higher unit sales volume increased cost of sales by $16.8 million, or 3.1%, but was more than offset by a reduction of approximately $49.6 million, or 9.3%, due to lower average costs per unit, while foreign currency translation drove an increase of $3.0 million, or 0.6%.
Gross profit. Gross profit increased $42.9 million, or 8.3%, during the year ended December 31, 2018 compared to the same period in 2017. Gross margin improved 100 basis points to 51.5% compared to the same period in 2017, driven by favorable product mix, reduced promotional activities, less excess and obsolete inventory, and the favorable impact of currency on inventory costs in our overseas markets. Higher unit sales volume drove an increase of approximately $17.6 million, or 3.4%, and an increase of $19.4 million, or 3.8%, resulted from a higher ASP. Foreign currency translation drove an increase of $5.9 million, or 1.1%, to gross profit.
During the year ended December 31, 2017, gross profit increased $17.0 million, or 3.4%, and gross margin increased 220 basis points to 50.5%, compared to the same period in 2016. The increase in gross profit was primarily due to our ongoing focus on higher margin core molded products, particularly clogs and sandals, and our reduction of low-margin European discount channel sales. A decrease of $0.3 million, or 0.1%, resulted from a decrease in our ASP which exceeded a decrease in average cost per unit, and an increase of approximately $15.7 million, or 3.1%, resulted from higher unit sales volume. Foreign currency translation drove an increase of $1.6 million, or 0.4%, to gross profit.
Selling, general and administrative expenses. SG&A increased $0.4 million, or 0.1%, during the year ended December 31, 2018, compared to the same period in 2017. As a percent of sales, SG&A improved by 280 basis points to 45.5%. The increase in our SG&A expenses was due to non-recurring expenses of $21.1 million related to the SG&A reduction plan, the closure of our manufacturing facilities, and also our planned corporate relocation, compared to non-recurring charges of $17.0 million in 2017, primarily related to our SG&A reduction plan and a discontinued project. SG&A also included higher marketing expense of $9.5 million and higher compensation expense of $3.7 million. The increase in compensation expense reflects higher variable compensation expense associated with higher revenues, partially offset by decreases associated with our SG&A reduction plan and supply chain initiatives. These increases were partially offset by decreases of $11.7 million in professional service fees, $8.5 million in facilities expense as a result of fewer company-owned retail stores, and a net increase in other expenses of $3.3 million.
SG&A decreased $8.6 million, or 1.7%, during the year ended December 31, 2017, compared to the same period in 2016. This includes the effects of $17.0 million in non-recurring charges and approximately $10 million of incremental costs related to variable compensation in 2017. The decrease was primarily due to the combined impacts of a decrease in facilities expenses of $13.1 million as a result of fewer company-operated retail stores and the sales of our Taiwan and Middle East businesses, and lower bad debts expense of $3.8 million. These savings were offset in part by higher marketing expenses of $3.1 million and higher net other expenses of $5.2 million, which were individually insignificant.
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Asset impairment charges. During the years ended December 31, 2018, 2017, and 2016, we incurred $0.9 million, $0.5 million, and $2.7 million, respectively, in retail asset impairment charges related to certain underperforming retail locations that were unlikely to generate sufficient cash flows to fully recover the carrying value of the stores’ assets over their remaining economic lives. In addition, during the year ended December 31, 2018, we incurred additional charges of $1.3 million associated with the closure of company-operated manufacturing and distribution facilities. During the year ended December 31, 2017, we incurred $4.8 million related to a discontinued project. In the year ended December 31, 2016, we incurred $0.4 million of goodwill impairment.
Foreign currency gain (loss), net. Foreign currency gain (loss), net, consists of unrealized and realized 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 year ended December 31, 2018, we recognized realized and unrealized net foreign currency gains of $1.3 million compared to net gains of $0.6 million during the year ended December 31, 2017. During the year ended December 31, 2016, we recognized realized and unrealized net foreign currency losses of $2.5 million.
Income tax expense. During the year ended December 31, 2018, we recognized income tax expense of $14.7 million on pre-tax book income of $65.2 million, representing an effective tax rate of 22.6%, compared to income tax expense of $7.9 million on pre-tax book loss of $18.2 million in 2017, which represented an effective tax rate of 43.7% and income tax expense of $9.3 million on pre-tax book loss of $7.2 million in 2016, which represented an effective tax rate of 128.7%. Our effective tax rate has varied dramatically in recent years due to differences in our profitability level and relative operating earnings across multiple jurisdictions, and is most notably impacted by the significant amount of operating losses that cannot be utilized for tax purposes.
Effective Income Tax Rate Reconciliation
The following provides additional information about the effective income tax rate reconciliation presented in Note 12 — Income Taxes in the accompanying notes to the consolidated financial statements included in Part II - Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K:
• | The change in 'Foreign differential' is principally driven by differences in pre-tax book income between the periods compared and the source of this income, which is subject to different jurisdictional tax rates. During 2018, the effect of rate differences resulted in an $7.6 million tax expense, or an 11.6% unfavorable rate impact, compared to a $11.8 million tax benefit, or a 64.7% favorable rate impact, in 2017. The change was driven primarily by tax expense relative to profitable jurisdictions, partially offset by operating losses in certain jurisdictions where the Company has determined that it is not more likely than not to realize the associated tax benefits. Further, we employ a tax planning strategy that directly impacts the total tax expense directly attributable to the level of foreign earnings in the specific jurisdictions. However, we note that the impact on the effective tax rate is different due to book earnings recorded in 2018 compared to 2017. |
• | ‘Enacted changes in tax law’ represents the transition tax and rate change impacts of the Tax Act. During the year ended December 31, 2018, we completed our accounting for the Tax Act. As such, we finalized our measurement period adjustments in relation to Staff Accounting Bulletin No. 118 (“SAB 118”) and recognized measurement period adjustments related to deemed repatriation tax and valuation allowance on certain foreign tax credits. We have not changed our indefinite reinvestment assertion. While we consider our accounting for the Tax Act to be complete, we continue to evaluate new guidance and legislation as it is issued. For 2018, we recorded a $0.5 million tax expense, or an 0.8% unfavorable rate impact, compared to a $17.6 million tax expense, or 97.1% unfavorable rate impact in 2017. |
• | ‘GILTI, net’ represents the net global intangible low-taxed income impacts of the Tax Act. We have elected to account for the impact of global intangible low tax income based on the period cost method. The reported amounts are the net GILTI inclusions before applicable foreign tax credits. For 2018, we recorded a $3.4 million tax expense, or 5.3% unfavorable rate impact. |
• | ‘Non-deductible/non-taxable items’ resulted in a $3.6 million tax expense in 2018, representing an unfavorable rate impact of 5.5%, compared to a $6.0 million tax expense in 2017, representing an unfavorable rate impact of 33.0%. The expense recognized in 2018 primarily relates to non-deductible executive and foreign share-based compensation, which we anticipate will recur in the foreseeable future. |
• | We continue to evaluate the realizability of our deferred tax assets. The impact of ‘Changes in valuation allowance’ to the effective tax rate was a favorable $5.3 million, equating to an 8.1% favorable rate impact. The specific circumstances regarding management's assertion of the realizability of certain deferred tax assets is discussed as part of the disclosures in Note 12 — Income Taxes. We maintain total valuation allowances of approximately $113.2 million as of December 31, 2018, which may be reduced in the future depending upon the achieved or sustained profitability of certain entities. |
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• | 'U.S. tax on foreign earnings' includes the impact of the tax expense accrued on undistributed foreign earnings net of the related foreign tax credits. There is no income tax provision impact associated with this activity in 2018. During 2017, the Tax Act significantly changed the U.S. taxation of foreign earnings. As a result, the impact of the transition tax as well as distributions, and reversal of the deferred tax liability associated with undistributed earnings and profits attributable to foreign subsidiaries, in 2017 the Company recorded a $32.4 million tax benefit, which equated to a 178.4% favorable impact on the rate reconciliation. |
• | During both 2018 and 2017, we recorded tax expense for ‘Audits settlements’ during the year of $0.2 million and $0.4 million, respectively. The amount included in settlements during 2018 and 2017 is netted against total uncertain tax position releases during the same period relating to the same positions. Furthermore, in Note 12 — Income Taxes the ‘Uncertain tax benefits’ line item in 2018 includes net accruals related to current year positions recorded, and is consistent with amounts accrued during prior years. We have released a portion of historical uncertain tax benefits based on effective and actual settlements. There is not currently an expectation that uncertain tax positions will significantly impact our tax expense on an ongoing basis. |
• | During both 2018 and 2017, we recorded state income tax expenses including the impact of certain minimal state income taxes. |
In 2017, we began operating under a tax holiday in one of our foreign jurisdictions. This tax holiday is in effect through 2022, and may be extended if certain additional requirements are met. The tax holiday is conditioned upon our meeting certain employment and investment thresholds. The impact of the tax holiday in 2018 decreased tax expense in that jurisdiction by approximately $0.1 million and had no impact to our reported earnings per diluted share.
Revenues by Channel
Year Ended December 31, | % Change | Constant Currency % Change (1) | |||||||||||||||||||||
2018 | 2017 | 2016 | 2018-2017 | 2017-2016 | 2018-2017 | 2017-2016 | |||||||||||||||||
(in thousands) | |||||||||||||||||||||||
Wholesale: | |||||||||||||||||||||||
Americas | $ | 216,797 | $ | 211,342 | $ | 202,211 | 2.6 | % | 4.5 | % | 4.6 | % | 3.8 | % | |||||||||
Asia Pacific (2) | 203,110 | 184,995 | 200,060 | 9.8 | % | (7.5 | )% | 7.9 | % | (7.3 | )% | ||||||||||||
EMEA(2) | 154,992 | 138,909 | 142,992 | 11.6 | % | (2.9 | )% | 6.0 | % | (4.8 | )% | ||||||||||||
Other businesses | 3,145 | 870 | 745 | 261.5 | % | 16.8 | % | 261.8 | % | 13.4 | % | ||||||||||||
Total wholesale | 578,044 | 536,116 | 546,008 | 7.8 | % | (1.8 | )% | 6.5 | % | (2.4 | )% | ||||||||||||
Retail: | |||||||||||||||||||||||
Americas | 204,806 | 188,367 | 191,855 | 8.7 | % | (1.8 | )% | 8.8 | % | (1.9 | )% | ||||||||||||
Asia Pacific (2) | 87,264 | 106,041 | 117,778 | (17.7 | )% | (10.0 | )% | (19.4 | )% | (9.7 | )% | ||||||||||||
EMEA (2) | 35,358 | 43,825 | 49,971 | (19.3 | )% | (12.3 | )% | (19.4 | )% | (16.0 | )% | ||||||||||||
Total retail | 327,428 | 338,233 | 359,604 | (3.2 | )% | (5.9 | )% | (3.7 | )% | (6.4 | )% | ||||||||||||
E-commerce: | |||||||||||||||||||||||
Americas | 98,589 | 80,437 | 72,940 | 22.6 | % | 10.3 | % | 22.6 | % | 10.1 | % | ||||||||||||
Asia Pacific | 54,224 | 45,036 | 37,446 | 20.4 | % | 20.3 | % | 17.0 | % | 22.9 | % | ||||||||||||
EMEA | 29,920 | 23,691 | 20,275 | 26.3 | % | 16.8 | % | 22.5 | % | 13.7 | % | ||||||||||||
Total e-commerce | 182,733 | 149,164 | 130,661 | 22.5 | % | 14.2 | % | 20.9 | % | 14.4 | % | ||||||||||||
Total revenues | $ | 1,088,205 | $ | 1,023,513 | $ | 1,036,273 | 6.3 | % | (1.2 | )% | 5.2 | % | (1.7 | )% | |||||||||
(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) In the third quarter of 2018, certain revenues previously reported within the ‘Asia Pacific’ segment were shifted to the ‘Europe, Middle East, and Africa’ (“EMEA”) segment. The previously reported amounts for wholesale and retail revenues in these regions for the years ended December 31, 2017 and 2016 as well as e-commerce revenues for the year ended December 31, 2016 have been revised to conform to the current year presentation. See ‘Impact on revenues of segment composition change’ table below for more information.
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Impact on revenues of segment composition change:
Year Ended December 31, | ||||||||
2017 | 2016 | |||||||
Increase (Decrease) | ||||||||
(in thousands) | ||||||||
Wholesale: | ||||||||
Asia Pacific | $ | (30,767 | ) | $ | (32,481 | ) | ||
EMEA | 30,767 | 32,481 | ||||||
Retail: | ||||||||
Asia Pacific | (2,827 | ) | (7,259 | ) | ||||
EMEA | 2,827 | 7,259 | ||||||
E-commerce: | ||||||||
Asia Pacific | — | (54 | ) | |||||
EMEA | — | 54 | ||||||
Wholesale channel revenues. During the year ended December 31, 2018, revenues from our wholesale channel increased $41.9 million, or 7.8%, compared to the year ended December 31, 2017. An increase of $29.4 million, or 5.5%, resulted from higher unit sales volume due to increased customer demand from distributors and from e-tail customers as consumers shift towards online purchasing. A $5.5 million, or 1.0%, increase was due to higher ASP. The effect of foreign currency translation was an increase of $7.0 million, or 1.3%, to revenues.
During the year ended December 31, 2017, revenues from our wholesale channel decreased $9.9 million, or 1.8%, compared to the year ended December 31, 2016. A $35.1 million, or 6.4%, decrease was due to a lower ASP as we shifted to higher margin, lower-priced molded product. Higher unit sales volume increased revenues by approximately $21.9 million, or 4.0%, despite the impact of strategic reductions in sales via discount channels in our EMEA operating segment as well as the decline in our wholesale business in Japan while we strengthened our wholesale network. The effect of foreign currency translation was an increase of $3.3 million, or 0.6%, to revenues
Retail channel revenues. During the year ended December 31, 2018, revenues from our retail channel decreased $10.8 million, or 3.2%, compared to the year ended December 31, 2017. The decrease in retail channel revenues was due to targeted reductions in our company-operated retail store fleet, consistent with our store reduction plan, partially offset by ASP gains and favorable foreign currency impacts. As of December 31, 2018, we operated 64 fewer stores compared to December 31, 2017. Unit sales volume decreased revenues by $25.3 million, or 7.5%. Favorable product mix and improved quality of revenues, the results of less promotional discounting and improved inventory composition, resulted in a higher ASP impact of $12.8 million, or 3.8%. An increase of $1.7 million, or 0.5%, resulted from foreign currency translation.
During the year ended December 31, 2017, revenues from our retail channel decreased $21.4 million, or 5.9%, compared to the year ended December 31, 2016. Unit sales volume decreased revenues by approximately $12.8 million, or 3.6%, primarily due to a net decrease of 111 company-operated retail stores as we optimized our store fleet and shifted our store mix from full-price retail to outlet. ASP was lower by $10.3 million, or 2.9%, as we shifted to higher margin, lower-priced molded product. These declines were partially offset by an increase of $1.7 million, or 0.6%, from foreign currency translation.
E-commerce channel revenues. Revenues from our e-commerce channel, which includes our own e-commerce sites as well as our sales through third-party marketplaces, increased $33.6 million, or 22.5%, during the year ended December 31, 2018 compared to the year ended December 31, 2017 as this channel continued to grow in each region. Revenues increased by approximately $21.8 million, or 14.6%, due to higher unit sales volume, and higher ASP related to mix contributed an additional $9.4 million, or 6.3%. Favorable foreign currency translation resulted in an increase of $2.4 million, or 1.6%
During the year ended December 31, 2017, revenues from our e-commerce channel increased $18.5 million, or 14.2%, compared to the year ended December 31, 2016. We invested in marketing with an enhanced digital focus, and we continued to grow our e-commerce team and work toward global adoption of best practices. Revenues increased by approximately $30.6 million, or 23.4%, due to higher unit sales volume, partially offset by decreases of $11.8 million, or 9.0%, due to lower ASP and $0.3 million, or 0.2%, due to the unfavorable impact of foreign currency translation.
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Reportable Operating Segments
The following table sets forth information related to our reportable operating business segments for the years ended December 31, 2018, 2017, and 2016:
Year Ended December 31, | % Change | Constant Currency % Change (1) | |||||||||||||||||||||
2018 | 2017 | 2016 | 2018-2017 | 2017-2016 | 2018-2017 | 2017-2016 | |||||||||||||||||
(in thousands) | |||||||||||||||||||||||
Revenues: | |||||||||||||||||||||||
Americas | $ | 520,192 | $ | 480,146 | $ | 467,006 | 8.3 | % | 2.8 | % | 9.2 | % | 2.5 | % | |||||||||
Asia Pacific (2) | 344,598 | 336,073 | 355,284 | 2.5 | % | (5.4 | )% | 0.5 | % | (4.9 | )% | ||||||||||||
EMEA (2) | 220,270 | 206,424 | 213,238 | 6.7 | % | (3.2 | )% | 2.5 | % | (5.7 | )% | ||||||||||||
Segment revenues | 1,085,060 | 1,022,643 | 1,035,528 | 6.1 | % | (1.2 | )% | 5.0 | % | (1.7 | )% | ||||||||||||
Other businesses | 3,145 | 870 | 745 | 261.5 | % | 16.8 | % | 261.8 | % | 13.4 | % | ||||||||||||
Total consolidated revenues | $ | 1,088,205 | $ | 1,023,513 | $ | 1,036,273 | 6.3 | % | (1.2 | )% | 5.2 | % | (1.7 | )% | |||||||||
Income from operations: (3) | |||||||||||||||||||||||
Americas | $ | 138,940 | $ | 96,740 | $ | 72,689 | 43.6 | % | 33.1 | % | 45.4 | % | 33.4 | % | |||||||||
Asia Pacific | 82,780 | 72,950 | 67,077 | 13.5 | % | 8.8 | % | 11.1 | % | 9.1 | % | ||||||||||||
EMEA | 59,539 | 37,185 | 34,114 | 60.1 | % | 9.0 | % | 52.6 | % | 6.2 | % | ||||||||||||
Segment income from operations | 281,259 | 206,875 | 173,880 | 36.0 | % | 19.0 | % | 34.6 | % | 23.2 | % | ||||||||||||
Reconciliation of segment income from operations to income (loss) before income taxes: | |||||||||||||||||||||||
Other businesses (4) | (55,583 | ) | (22,861 | ) | (26,935 | ) | 143.1 | % | (15.1 | )% | |||||||||||||
Unallocated corporate and other (5) | (162,732 | ) | (166,678 | ) | (153,099 | ) | (2.4 | )% | 8.9 | % | |||||||||||||
Total consolidated income (loss) from operations | 62,944 | 17,336 | (6,154 | ) | 263.1 | % | (381.7 | )% | |||||||||||||||
Foreign currency transaction gain (loss), net | 1,318 | 563 | (2,454 | ) | 134.1 | % | 122.9 | % | |||||||||||||||
Interest income | 1,281 | 870 | 692 | 47.2 | % | 25.7 | % | ||||||||||||||||
Interest expense | (955 | ) | (869 | ) | (836 | ) | 9.9 | % | (3.9 | )% | |||||||||||||
Other income | 569 | 280 | 1,539 | 103.2 | % | (81.8 | )% | ||||||||||||||||
Income (loss) before income taxes | $ | 65,157 | $ | 18,180 | $ | (7,213 | ) | 258.4 | % | 352.0 | % | ||||||||||||
(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) In the third quarter of 2018, certain revenues and expenses previously reported within the ‘Asia Pacific’ segment were shifted to the ‘EMEA’ segment. The previously reported amounts for revenues and income from operations for the years ended December 31, 2017 and 2016 have also been revised to conform to the current period presentation. See ‘Impact of segment composition change’ table below for more information.
(3) In 2018, certain global marketing expenses previously reported within the operating segments were managed and reported within ‘Unallocated corporate and other’. The previously reported amounts for income from operations for the years ended December 31, 2017 and 2016 have been revised to conform to the current year presentation. See ‘Impact of global marketing expense realignment’ table below for more information.
(4) “Other businesses” increases are primarily due to costs incurred in conjunction with the closure of company-operated manufacturing and distribution facilities, which ceased operations in 2018, increased variable compensation associated with higher revenues, and other expenses as a result of outsourcing, and other supply chain cost changes.
(5) “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.
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Impact of segment composition change:
Year Ended December 31, | ||||||||
2017 | 2016 | |||||||
Increase (Decrease) | ||||||||
(in thousands) | ||||||||
Impact on revenues: | ||||||||
Asia Pacific | $ | (33,594 | ) | $ | (39,794 | ) | ||
EMEA | 33,594 | 39,794 | ||||||
Impact on income from operations: | ||||||||
Asia Pacific | (10,166 | ) | (13,451 | ) | ||||
EMEA | 10,166 | 13,451 | ||||||
Impact of global marketing expense realignment:
Year Ended December 31, | ||||||||
2017 | 2016 | |||||||
Increase (Decrease) | ||||||||
(in thousands) | ||||||||
Impact on income from operations: | ||||||||
Americas | $ | 9,860 | $ | 13,845 | ||||
Asia Pacific | 3,843 | 1,621 | ||||||
EMEA | 1,283 | 2,906 | ||||||
Unallocated corporate and other | (14,986 | ) | (18,372 | ) | ||||
Americas Operating Segment
Revenues. During the year ended December 31, 2018, revenues for our Americas segment increased $40.0 million, or 8.3%, compared to the year ended December 31, 2017. The growth was led by a 22.6% increase in e-commerce revenues due to increased traffic and units per transaction. Retail revenues increased by 8.7%, despite operating 7 fewer retail stores compared to the same period last year, due to comparable sales growth of 14.0%. Higher unit sales volume resulted in an increase of approximately $22.0 million, or 4.6%, while higher ASP resulted in an increase of $22.3 million, or 4.6%. The effect of foreign currency translation was a decrease of $4.3 million, or 0.9%.
During the year ended December 31, 2017, revenues for our Americas segment increased $13.1 million, or 2.8%, compared to the year ended December 31, 2016. The increase was led by a 10.3% increase in e-commerce revenues, while a modest increase in wholesale revenues was partially offset by a decrease in retail revenues, reflecting 15 fewer company-operated retail stores compared to last year. Higher unit sales volume resulted in an increase of approximately $17.0 million, or 3.7%, while lower ASP resulted in a decrease of $5.5 million, or 1.2%, and foreign currency translation resulted in an increase of $1.6 million, or 0.3%.
Income from Operations. During the year ended December 31, 2018, income from operations for our Americas segment was $138.9 million, an increase of $42.2 million, or 43.6%. Gross profit for the year ended December 31, 2018 increased $39.0 million, or 15.8%, and gross margin increased 360 basis points to 55.0%, compared to the year ended December 31, 2017. The increase in gross profit is due to the net impact of an increase of $10.7 million, or 4.3%, due to higher unit sales volume, an increase of $30.7 million, or 12.4%, due to a decrease in our average cost per unit which exceeded a decrease in ASP, and a decrease of $2.4 million, or 0.9%, from foreign currency translation.
During the year ended December 31, 2018, SG&A for our Americas segment decreased $2.9 million, or 1.9%, compared to the same period in 2017. The decrease in SG&A was primarily due to decreases of $2.3 million in facilities expenses as a result of reductions in the number of company-operated retail stores and our SG&A reduction efforts and a net decrease of $0.6 million in services and other expenses. Impairment expense related to company-operated retail stores decreased by $0.3 million compared to 2017.
During the year ended December 31, 2017, income from operations for our Americas segment was $96.7 million, an increase of $24.1 million, or 33.1%. Gross profit for the year ended December 31, 2017 increased $21.4 million, or 9.5%, and gross margin increased 310 basis points to 51.4%, compared to the year ended December 31, 2016. The increase in gross profit is due to the net impact of an increase of $10.3 million, or 4.6%, due to higher sales volumes, despite a net reduction of 15 company-operated retail stores, an increase of $10.9 million, or 4.8%, due to a decrease in our average cost per unit which exceeded a decrease in ASP, and an increase of $0.2 million, or 0.1%, from foreign currency translation.
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During the year ended December 31, 2017, SG&A for our Americas segment decreased $1.4 million, or 0.9%, compared to the same period in 2016. The decrease in SG&A was primarily due to the net impact of a decrease of $3.1 million in facilities expenses as a result of reductions in the number of company-operated retail stores and our SG&A reduction efforts, offset by a net increase of $1.7 million in marketing and other expenses. Impairment expense related to company-operated retail stores decreased by $1.3 million compared to 2016.
Asia Pacific Operating Segment
Revenues. During the year ended December 31, 2018, revenues for our Asia Pacific segment increased $8.5 million, or 2.5%, compared to the year ended December 31, 2017. E-commerce revenues increased by 20.4%, with growth in every country in which we operate, and wholesale revenues increased by 9.8%. Retail revenues decreased by 17.7% as a result of 33 fewer company-operated retail stores compared to December 31, 2017. For all channels combined, there was an increase in unit sales volume of $0.5 million, or 0.1%, and an increase in ASP of $1.3 million, or 0.4%.The impact of foreign currency translation was an increase of $6.7 million, or 2.0%.
During the year ended December 31, 2017, revenues for our Asia Pacific segment decreased $19.2 million, or 5.4%, compared to the year ended December 31, 2016. Wholesale revenues were lower as we continued to pursue business model changes to drive higher quality revenues and improve profitability across the Asia Pacific region, including the sales of our Taiwan and Middle East businesses and the strengthening of our wholesale network in Japan. Retail revenues decreased as a result of a net reduction of 84 company-operated retail stores. E-commerce revenues increased by 20.3%, with particularly strong performance in China. An increase in unit sales volume of approximately $34.7 million, or 9.8%, was offset by a decrease in ASP of $52.2 million, or 14.7%, as we shifted to higher margin, lower-priced molded product. The impact of foreign currency translation was a decrease of $1.7 million, or 0.5%.
Income from Operations. During the year ended December 31, 2018, income from operations for our Asia Pacific segment was $82.8 million, an increase of $9.8 million, or 13.5%. Gross profit for the year ended December 31, 2018 increased $2.0 million, or 1.0%, and gross margin decreased 80 basis points to 56.1% compared to the year ended December 31, 2017 as our channel mix continued to shift toward a more outlet-focused retail footprint. The decrease in Asia Pacific segment gross profit was due to the net impact of an increase in unit sales volumes of $6.0 million, or 3.1%, offset by a decrease in our ASP that exceeded the decline in our average cost per unit of $8.0 million, or 4.2%, and an increase of $4.0 million, or 2.1%, from foreign currency translation.
During the year ended December 31, 2018, SG&A for our Asia Pacific segment decreased $8.5 million, or 7.2%, compared to the same period in 2017. The decrease in SG&A was primarily due to decreases of $4.9 million in facilities expenses, a result of the reduction in the number of company-operated retail stores and our SG&A reduction efforts, and of $4.7 million in salaries and wages, partially offset by lower recoveries of bad debt of $1.6 million, and a net decrease of $0.5 million in services and other costs. Impairment expense related to company-operated retail stores increased by $0.7 million compared to 2017.
During the year ended December 31, 2017, income from operations for our Asia Pacific segment was $73.0 million, an increase of $5.9 million, or 8.8%. Gross profit for the year ended December 31, 2017 decreased $10.5 million, or 5.2%, and gross margin increased 10 basis points to 56.9% compared to the year ended December 31, 2016 as our channel mix shifted toward a more outlet-focused retail footprint. The decrease in the Asia Pacific segment gross profit was due to the net impact of an increase in unit sales volumes of $18.3 million, or 9.1%, offset by a decrease in our ASP that exceeded the decline in our average cost per unit of $27.9 million, or 13.8%, and a decrease of $1.0 million, or 0.5%, from foreign currency translation.
During the year ended December 31, 2017, SG&A for our Asia Pacific segment decreased $15.9 million, or 11.9%, compared to the same period in 2016. The decrease in SG&A was primarily due to the net impact of decreases of $2.2 million in salaries and wages and $7.5 million in facilities expense as a result of the reduction in the number of company-operated retail stores and our SG&A reduction efforts, including the sale of our Middle East business, decreased marketing expense of $3.3 million, lower bad debt expense of $0.9 million, and a decrease of $2.0 million in services and other costs. Impairment expense related to company-operated retail stores decreased by $0.5 million compared to 2016.
Europe, Middle East, and Africa Operating Segment
Revenues. During the year ended December 31, 2018, revenues for our EMEA segment increased $13.8 million, or 6.7%, compared to the year ended December 31, 2017. E-commerce revenue grew 26.3%, reflecting higher online traffic, and wholesale revenue grew 11.6%, more than offsetting a decline of 19.3% in retail results as we operated 24 fewer retail stores in the region compared to last year. Approximately $1.1 million, or 0.5%, of the increase was due to higher unit sales volumes, and a higher ASP drove an increase of $4.0 million, or 2.0%, while the impact of foreign currency translation was an increase of $8.7 million, or 4.2%.
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During the year ended December 31, 2017, revenues for our EMEA segment decreased $6.8 million, or 3.2%, compared to the year ended December 31, 2016, as we continued to reduce discount channel sales and company-operated retail stores, while growing our e-commerce business. Approximately $13.6 million, or 6.4%, of the decrease was due to lower unit sales volumes, partially offset by an increase of $1.5 million, or 0.7%, from a higher ASP, and an increase of $5.3 million, or 2.5%, from foreign currency translation.
Income from Operations. During the year ended December 31, 2018, income from operations for our EMEA segment was $59.5 million, an increase of $22.4 million, or 60.1%. Gross profit for the year ended December 31, 2018 increased $12.2 million, or 11.7%, and gross margin increased by 240 basis points to 52.7% compared to the year ended December 31, 2017. The increase in our EMEA segment gross profit is due to an increase of $2.1 million, or 2.0%, due to higher unit sales volumes, an increase of $5.9 million, or 5.6%, due to an increase in ASP, and an increase of $4.2 million, or 4.1%, from foreign currency translation.
During the year ended December 31, 2018, SG&A for our EMEA segment decreased $10.1 million, or 15.1%, compared to the same period in 2017. The decrease in SG&A was primarily due to a decrease in facilities expense of $4.3 million as a result of the net reduction of 24 company-operated retail stores and SG&A reduction efforts, lower compensation expense of $3.3 million, and lower bad debt expense of $1.0 million, as well as a net decrease in services and other costs of $1.5 million. Impairment expense decreased by $0.1 million compared to 2017.
During the year ended December 31, 2017, income from operations for our EMEA segment was $37.2 million, an increase of $3.1 million, or 9.0%. Gross profit for the year ended December 31, 2017 decreased $1.7 million, or 1.6%, and gross margin increased by 80 basis points to 50.3% compared to the year ended December 31, 2016. The increase in the EMEA segment gross profit is due to the net impact of a decrease of $6.6 million, or 6.2%, due to lower unit sales volumes, offset by an increase of $2.1 million, or 2.0%, due to an increase in ASP, and an increase of $2.8 million, or 2.6%, from foreign currency translation.
During the year ended December 31, 2017, SG&A for our EMEA segment decreased $4.0 million, or 5.6%, compared to the same period in 2016. The decrease in SG&A was primarily due to a decrease in facilities expense of $3.8 million, a result of the net reduction of 24 company-operated retail stores and SG&A reduction efforts, and lower bad debt expense of $2.5 million, offset in part by an increase in services and other costs of $2.3 million, none of which were individually significant. Impairment expense decreased by $0.8 million compared to 2016.
Other Businesses, Unallocated Corporate
During the year ended December 31, 2018, total net costs within ‘Other businesses’ and ‘Unallocated corporate’ increased by $28.8 million, or 16.0%, compared to the same period in 2017. The increase was due to a $16.3 million increase in compensation costs, primarily related to higher variable compensation associated with higher revenues, $13.7 million in expenses related to our Mexico and Italy manufacturing and distribution facility closures, including the recognition of $4.4 million in non-cash cumulative foreign currency translation, an increase of $5.0 million in marketing expenses, primarily related to our endorsement and promotional activities, and $1.3 million related to our corporate headquarters relocation project, partially offset by a decrease of $10.7 million in professional services. Other costs, none of which were individually significant, increased by a net of $3.2 million.
During the year ended December 31, 2017, total net costs within ‘Other businesses’ and ‘Unallocated corporate’ increased by $9.5 million, or 5.3%, compared to the same period in 2016. The increase was due to an increase of $9.8 million in salaries and wages, primarily related to our variable compensation, an increase of $4.4 million in marketing expenses, primarily related to our endorsement and promotional activities, and increased impairments of $4.8 million, which were partially offset by a decrease of $3.8 million in travel and entertainment costs and a decrease of $7.7 million in supply chain costs. Services and other costs, none of which were individually significant, increased by $2.0 million.
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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:
December 31, 2016 | Opened | Closed/Transferred | December 31, 2017 | Opened | Closed/Transferred | December 31, 2018 | ||||||||||||||
Type: | ||||||||||||||||||||
Outlet stores | 232 | 13 | 30 | 215 | 3 | 23 | 195 | |||||||||||||
Retail stores | 228 | 6 | 73 | 161 | 1 | 42 | 120 | |||||||||||||
Kiosk/store-in- store | 98 | — | 27 | 71 | — | 3 | 68 | |||||||||||||
Total | 558 | 19 | 130 | 447 | 4 | 68 | 383 | |||||||||||||
Operating segment: | ||||||||||||||||||||
Americas | 190 | 2 | 17 | 175 | 1 | 8 | 168 | |||||||||||||
Asia Pacific (1) | 258 | 14 | 86 | 186 | 3 | 36 | 153 | |||||||||||||
EMEA (1) | 110 | 3 | 27 | 86 | — | 24 | 62 | |||||||||||||
Total | 558 | 19 | 130 | 447 | 4 | 68 | 383 | |||||||||||||
(1) In the third quarter of 2018, certain revenues and expenses previously reported within the ‘Asia Pacific’ operating segment were shifted to the ‘EMEA’ operating segment. The previously reported store counts as of December 31, 2017 and 2016 and activity for the year ended December 31, 2017 have also been revised to conform to the current period presentation.
Comparable retail store sales and direct-to-consumer comparable store sales by reportable operating segment are as follows:
Constant Currency (1) | ||||||||
Year Ended December 31, | ||||||||
2018 | 2017 | 2016 | ||||||
Comparable retail store sales (2) | ||||||||
Americas | 14.0 | % | 1.3 | % | (2.3 | )% | ||
Asia Pacific (3) | 4.0 | % | (2.0 | )% | (6.1 | )% | ||
EMEA (3) | 10.1 | % | (1.4 | )% | 1.1 | % | ||
Global | 10.8 | % | — | % | (3.0 | )% | ||
Constant Currency (1) | ||||||||
Year Ended December 31, | ||||||||
2018 | 2017 | 2016 | ||||||
Direct-to-consumer comparable store sales (includes retail and e-commerce) (2) | ||||||||
Americas | 16.7 | |||||||