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Investors Cheer Crocs

Investors are more optimistic than analysts on Crocs Inc.

The firm’s shares were trading 2.2 percent higher Thursday morning after it reported higher-than-expected revenue but lower-than-expected profit in the first quarter.

Analysts said the company’s guidance for the second quarter was disappointing.

“While management aggressively expands its retail footprint, sales are just traded between channels, and [earnings per share] is constrained by aggressive spending. This puts margins at risk if growth slows any further,” said Scott Krasik, analyst at BB&T Capital Markets, adding that he would rather see management refocus its strategy toward greater profitability than lower margin sales.

Sterne Agee analyst Sam Poser agreed the firm should focus on expense control.

“Marketing spend continues to increase, with little to no anticipation of near-term revenue growth. The company should focus on making its existing stores more productive rather than opening an additional 90 stores this year,” he said.

Steven Marotta, analyst at CL King & Associates, took a contrarian view, observing that marketing spend was a necessary investment in the brand for the long term.

“To reach the consumer, it’s the right thing to do,” he said. “What is negatively affecting them, like foreign exchange headwinds and less-than-seasonable spring weather trends, is beyond their control.”

John McCarvel, president and CEO of Crocs, also defended management’s position during a conference call with analysts late Wednesday.

“Significant investment in new management talent and retail systems will return a long-term benefit,” he said. “The long-term positioning of the brand through our own direct-to-consumer business, coupled with an increase in marketing spend, is imperative to changing the perception and bringing new consumers to Crocs.”

McCarvel noted the marketing focus is to drive traffic into wholesale and to direct-to-consumer channels, attract new consumers to the brand and increase conversion rates.

For the first quarter ended March 31, the Niwot, Colo.-based firm earned a net income of $29 million, or 33 cents a share, compared with $28.3 million, or 31 cents, in the same period a year ago.
Adjusted for one-time expenses totaling $1.8 million, related to the implementation of a new Enterprise Resource Planning system and other non-operating items, net income was $30.8 million, or 35 cents.

Revenue advanced 14.7 percent to $311.7 million, from $271.8 million. Analysts expected EPS to come in at 34 cents, on revenue of $305.1 million.

“The European market continues to develop. Wholesale business [grew] 9.2 percent in the first quarter and retail increased 21.9 percent,” said McCarvel.

The brand’s Asia-Pacific business is strongest, growing 34 percent for the quarter on a broad range of initiatives in the region, particularly in China, Korea and the Middle East. McCarvel said, “Sell-in and sell-through on a number of our core new products gives us confidence that we will see a strong second quarter in the business.”

For the second quarter, Crocs expects revenue to come in between $360 million and $370 million, and EPS to be between 60 cents and 63 cents. Full-year revenue is expected to increase 10 percent to 11 percent over 2012 levels.

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