Q1 2022 Crocs Inc Earnings Call
Good morning, and welcome to the Crocs incorporated first quarter 2022 earnings call.
All participants will be in listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero. After today's presentation there'll be an opportunity to ask questions. Please note. This event is being recorded I would now.
Like to turn the conference over to Cory Lin Vice President of corporate Finance. Please go ahead.
Good morning, everyone and thank you for joining us today for the Crocs first quarter 2022 earnings call earlier. This morning, we announced our latest quarterly results and a copy of the press release may be found on our website at crocs Dot com.
I'd like to remind you that some of the information provided on this call is forward looking and accordingly are subject to the safe Harbor provisions of the federal Securities laws.
It must include but are not limited to statements regarding the acquisition of Hey, Jude and the benefits thereof, Crocs strategy plans objectives expectations financial or otherwise and intentions future financial results and growth potential anticipated product portfolio, our ability to create and deliver shareholder value and statements regarding potential impacts to our.
Business related to the COVID-19 pandemic. These statements involve known and unknown risks uncertainties and other factors, which may cause our actual results performance or achievements to be materially different from any future results performances or achievements expressed or implied by the forward looking statements.
Crocs is not obligated to update these forward looking statements to reflect the impact of future events, except as required by applicable law.
We caution you that all forward looking statements are subject to risks and uncertainties described in the risk factors section of our annual report on Form 10-K, and our subsequent filings with the SEC Accordingly actual results could differ materially from those described on this call. Please refer to Crocs annual report on Form 10-K, as well as other documents filed with the SEC for more information relating to these.
Risk factors.
Certain financial metrics that we referred to as adjusted or non-GAAP . Our non-GAAP measures. A reconciliation of these amounts to their GAAP counterparts is contained in the press release, we issued earlier this morning Joy.
Joining us on the call today are Andrew Rees, Chief Executive Officer, and Anne Mehlman, Executive Vice President and Chief Financial Officer. Following their prepared remarks, we will open the call for your questions. At this time I'll turn the call over to Andrew.
Thank you Carl and good morning, everyone.
We're very pleased today to announce that we had an exceptional first quarter. Despite a number of headwinds.
Revenues grew by 47% on a constant currency basis, adjusted operating margins were extremely strong with 27% of sales.
We generated $2 <unk> of adjusted diluted EPS.
Within our overall company results the cross brand performed very strongly across all regions and channels.
While we've only owned <unk> for six weeks during the quarter, we are rapidly assimilate into the company and it's very clear the demand for the brand is exceptional and we're confident in our robust growth runway.
And review our financial results in more detail shortly but here are a few highlights from the first quarter of 2022.
Overall consolidated revenue growth, including both Crocs on Hey, Dude was 47% on a constant currency basis.
On a constant currency basis, Crocs brand grew 22%, including strong DTC growth of 20% and digital growth of 23%.
Hey, Dude revenue exceeded our expectations at $115 million since February 17th on a pro forma basis Q1 revenues were $205 million up 81%.
So hey, Dude integration is proceeding well and is on track.
Adjusted operating margins on a consolidated basis, including Crocs on Hey, Dude with best in class at 27%.
Adjusted diluted EPS was an exceptional $2.05 per share.
Both brands ranked in the top 10 of Piper Sandler Spring, taking stock with teens survey with Crocs at number six preferred footwear brand up from number eight last spring and Hey, Dude as the number nine preferred footwear brand.
Finally, we released our 2021 ESG report reiterating a bold commitment to become a net zero company by 2030.
Moving to our brand highlights for the quarter, let's begin with the Crocs brand.
We experienced a strong Q1 with constant currency growth of 22%.
Our strong DTC growth evidences the continued demand consumers have for the brand.
Another indicator of the crux of crux demand is that it jumped up two spots in the Piper Sandler Spring Teen survey to become the number six preferred footwear brand amongst teens.
We continue to drive cross brand relevance in consideration through many activations.
We made waves at the Grammys, when Justin Bieber wore a hard crocs sandals created in collaboration with luxury fashion House, Balenciaga and Quest Love World well, the Polacks clog from our partnership with renowned footwear designer for La <unk>.
In China, we introduced fashion and entertainment icon Nana.
China's newest crocs ambassador leveraging her creativity and ingenuity.
We continue to run many innovative digital marketing campaigns.
For oncology collaborations, we curated a custom playlist with Spotify and the popular playlists, Veeva Latina, which.
Which helped drive $1 4 million visits to the crux website during the campaign.
The <unk> Instagram announcements also became the second most light post and Croc social history.
To drive Sandler consideration amongst athletes, we teamed up with Slam magazine to develop a content series highlighting how full global basketball stars incorporate crops into their of cookbooks.
We experienced additional basketball themed success was crux ranked in the top five most popular brands in the M. B a two K video game series.
Oh, Valentine's day collaboration with sweetheart, Kennedy to create the classic sweetheart, FERC clog drove 200000 unique visitors to our site.
And the novelty crux, where a topic of conversation on the late late show between host James Gordon and guest Nicki Minaj.
Our new cozy to strap line Sandal W did in a digital first launch on the crux App and finally, we had a very promising start to our newly launched light ride 360 franchise. The features enhanced <unk> ability and comfort as well as a higher price point than our original light right franchise.
From a channel perspective, we achieved strong growth in both DTC and wholesale as revenues benefited from higher pricing favorable product mix and lower promotional levels as compared to last year.
Brooks brand DTC revenues, which includes revenues from E Commerce and company owned retail stores grew by 20% on a constant currency basis over 2021.
Wholesale which includes brick and mortar E tail on distributors grew revenues, 23% on a constant currency basis.
Our digital business experienced another strong quarter with 23% growth on a constant currency basis.
Turning to Hey, Dude, we closed the acquisition on February 17th and are even more excited about the opportunities ahead of us.
Hey, Dude brand revenues exceeded our expectations contributing $115 million for the first quarter or $205 million on a pro forma basis.
Demand was incredible both in wholesale and digital fueling 81% pro forma growth for the quarter.
Underlying momentum as exceptional full hey, dude.
Brian ranked ninth in the Piper Sandler Spring 2022 survey.
Cracking the top 10 for the second consecutive survey.
And remains particularly strong in the Midwest and south.
To drive future growth, we're focused on building out the brand platform for Hey, Dude, you will begin to see some of this work in the marketplace later this year.
By investing in talent marketing and digital we look forward to taking this highly successful brands that consumers love and growing and is a $1 billion plus brand across the U S and high potential international markets.
From an integration standpoint, it's early days, but everything is progressing to plan as.
As we mentioned during our fourth quarter conference call. We've hired many of the key leadership positions.
We're integrating the shared service functions, including HR finance legal and supply chain with the integration on track and results already exceeding expectations. We look forward to continued success of this high growth highly profitable brand.
Another notable achievement is that we published the crux, Brad ESG report, reflecting important progress and our commitment to becoming more sustainable and equitable company.
Overtime. This report will evolve to capture both brands and continue to be guided by the SaaS fee and UN sustainable development goals.
As a brand that is proud to invite everyone to be comfortable in their own shoes. The report demonstrates how we've applied our common view our values into an actionable III pillar approach to ESG comfort without carbon come from for our communities and comfort for all people.
We're excited about the transparency of our sustainability efforts, especially around sustainable innovation in renewable energy and this report reinforces our bulk commitment to become a net zero company by 2030.
Now, let me turn to the future.
As we discussed on our fourth quarter call the macro environment remains challenging.
The backdrop of high inflation rising interest rates and supply chain disruptions has only become more complicated with the war in Ukraine, and the ongoing shutdowns caused by the zero carbon policy in China.
The impact of all these factors on consumer confidence remains uncertain.
However, we have tremendous confidence and clear evidence to the underlying strength and growth potential of both the crux and <unk> brands.
We look forward to continuing to execute on our long term vision for both brands and are extremely confident about our ability to grow the crocs brand to $5 billion in revenues by 2026, and the <unk> brand to $1 billion of revenue by 2024.
With that and we will now review our financial results in more detail.
Thank you Andrew and good morning, everyone I'll begin with a short recap of our first quarter results for a reconciliation of the non-GAAP announced mentioned to their equivalent GAAP amounts. Please refer to our press release and <unk>.
Already seen from our press release, we had an excellent first quarter, we delivered strong and consistent revenue growth within the cross brand across all regions and channels and Hey, Jude revenues exceeded expectations gross margins remain very strong despite freight headwinds and leverage and adjusted SG&A led to another quarter best in class adjusted operating.
Margin and adjusted earnings per share.
With the Hey, Jude acquisition now closed our reportable operating segments for the Crocs brand are North America Asia Pacific.
Europe Middle East Africa, and Latin America, Latin America has moved from the previous Americas segment to the newly formed Amelia segment and we've added a segment that is now the <unk> brand.
First quarter consolidated revenues were $660 million.
Our growth rate of 43, 5% over last year comprised of $545 million from the crocs brand or 18, 5% growth and $115 million from the Hey, Dude brand. Following the acquisition closed on February 17th press.
<unk> achieved 18, 5% growth despite losing revenues from Russia in the latter half of the quarter and unfavorable currency movements intra quarter. During the first quarter for the cross brand, we sold $25 6 million pairs of shoes, which slightly declined by one 1% over last year. The crocs brand average selling price during Q1 was 21.
And 10 cents a year over year increase of 19, 6% driven by price increases reduced promotions and discounting and incremental <unk> penetration.
Let's review a few cross brand highlights by region, beginning with North America, where Q1 revenues increased 19, 5% to $319 million to prior year, driven by higher prices and strong sell throughs.
TCE revenues increased 18, 5% on top of an exceptional 131, 3% growth last year and clearly signals the strength of the cross brand in North America.
The Crocs brand in Asia generated revenues of $96 million or 22, 1% growth on a constant currency basis, driven by higher pricing less discounting and greater wholesale volume.
South Korea, India, and Singapore, all posted strong double digit revenue growth versus last year. This momentum was slightly offset by softness in China, and Japan as Covid Lockdowns in a conservative Japanese consumer remain headwinds.
DTC revenue growth of 26% on a constant currency basis was strong with growth accelerating from the period last year digital channels posted excellent double digit growth led by India, South Korea and Australia.
Cross brand revenues for Amelia, our new combined EMEA and Latin American regions grew 26, 8% on a constant currency basis to $130 million, even as we pause Russia operations double digit DTC revenue increases were driven by higher ecommerce traffic and strong growth in core styles offset by inventory.
Constraints.
Turning to Hey, Dude revenues exceeded our expectations contributing $115 million since February 17th on a pro forma basis Q1 revenues grew 81% to $205 million.
With regards to margin, we will provide visibility into brand gross margin for the remainder of 2022, and we will report it on a consolidated basis only beginning next year.
Consolidated adjusted gross margins for the first quarter were 53, 9% versus last year's 55, 2%.
Importantly, adjusted gross margin for the Crocs brand with 54, 9% only 30 basis points lower than last year, even with 650 basis points of incremental freight and 50 basis points of unfavorable purchasing power at higher prices and fewer promotions almost entirely offset the significant headwinds.
Adjusted gross margins at the consolidated level declined due to the addition of hey, do during the quarter, which carried a lower gross margin.
Adjusted gross margin excludes the $28 million inventory write off in connection with the Hey, Jude acquisition, and a $2 million inventory reserve due to the positive Russia operations.
During the first quarter of 2022 consolidated SG&A improved 60 basis points to 27, 3% of revenues versus 27, 9% in last year's first quarter. The decrease in adjusted SG&A rate was achieved while investing an additional $52 million versus prior year, primarily in marketing and talent.
We will continue to invest to support the long term growth of our business, particularly in Hey, Dude, where we have noted significant investment is required in infrastructure marketing and talent.
Nonrecurring SG&A expenses for the first quarter included $21 million related to the Hey, Jude acquisition.
Nonrecurring expenses included $5 million of bad debt related to the parts of our Russia operations.
Our first quarter consolidated adjusted operating income of $175 million increased 39, 6% from $126 million last year, including $16 million attributable to Hey, Dude.
Adjusted operating margin declined to 26, 6% from 27, 3% last year SG&A leverage only partially offset the gross margin headwinds of incremental freight and the addition of the hatred brand.
For the first quarter, our non-GAAP tax rate was 19, 8% versus 19, 5% last year, our first quarter non-GAAP diluted earnings per share increased 37, 6% to $2 <unk> from a dollar and 49 cents last year.
Our liquidity position remains strong as we ended the first quarter with $172 million of cash and cash equivalents and $365 million of borrowing capacity on our upsized revolver. Our net borrowings at the end of Q1 were $2 9 billion.
After issuing a $2 billion term loan b and borrowing $235 million on our revolver.
Our inventory balance at March 31, 2022 with $408 million. This includes the addition of $92 million of Hey, Dude inventory and another $28 million of inventory step up related to the acquisition of Hey Dude.
We continue to experience significant in transit inventory increases as a result of elevated in transit times.
In stock levels on core products have improved particularly in the U S. Partially as a result of the investments we are making in airframe.
Turning to the future I would like to share our current outlook for 2022 and Q2, all numbers will be on a reported basis unless otherwise stated.
For full year 2022, we are raising our consolidated revenue guidance to approximately $3 5 billion.
From approximately $3 $4 billion, representing year over year growth of 52% to 55%.
We still expect cross brand revenue growth of over 20% following an outstanding first quarter for Hey, Dude, we're raising our expectations for the full year and now expect hey, Jude revenues to be between $750 million to $800 million on a reported basis, implying $840 million to $890 million on a pro forma base.
Yes.
We are also raising our adjusted operating margin range to be approximately 26% to 27%.
As a result of outstanding anticipated growth and best in class margins for 2022, we are raising our non-GAAP diluted earnings per share expectations to be approximately between $10 and five.
To $10 65.
For Q2, 2022, we expect consolidated revenues to be between $918 million and $957 million, representing 43% to 49% growth from prior year, We expect crocs brand revenues to grow approximately 17% to 20% growth in constant currency, which is 12% to 15% at current currency.
<unk>.
Excluding currency and the positive Russia, Crocs brand growth would be approximately 20% to 23%, which is above full year guidance.
We expect <unk> revenues to be approximately $200 million to $220 million, even with significant investment expected in airfreight in SG&A to support growth, we expect adjusted operating margin to be approximately 26%.
Given our strong revenue and cash flow projections for the year, we now expect to be below two times gross leverage by mid year next year, which would allow us to repurchase shares should we choose to do so.
In summary, inspite of the challenging global operating environment, the Crocs brand and our fundamentals are incredibly strong and the <unk> brand is already accretive to growth and profitability.
At this time I'll turn the call back over to Andrew for his final thoughts.
Thank you Ed.
As our Q1 performance indicated we have great momentum in both of our brands.
Our cross brand continues to grow in all regions and channels.
Hey, Dude brand has already exceeded expectations and we're excited to unlock the full potential of this exciting young brand.
We remain focused on achieving the long range targets, we've laid out for both brands and the significant shareholder value this will create.
Operator, please open the call for questions.
Thank you we will now begin the question and answer session.
A question you May Press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Yeah.
Our first question comes from Jonathan Komp from Baird. Please go ahead.
Yeah, Hi, good morning, Thank you.
First question I wanted to ask when you look at the performance of that business along with the Q2 guidance and then really it looks like an embedded second half acceleration could you maybe just comment a little bit more what's supporting your outlook, especially in the second half and for the Crocs brand and the factors that you think will contribute to the.
The acceleration in top line growth.
Yeah, Hi, John Thank you for the question. So just to reiterate our guidance, we're very confident in our full year guidance, which is both the 20 plus percent and cross brand and the upward revision of the <unk> brand, which carries best in class operating margins for the combination our full year, 20% guide for the Crocs brand and 840 to $2 90 per.
Hey, Jude brand is based on really the continued strong pre books that we see for both brands innovation pipeline brand Renaissance and <unk>.
Performance, we're seeing overall globally, then turning to Q2, specifically our cross brand revenue guide of 17% to 20% constant currency translates to 12% to 15% on a reported basis and then if you add back the pause in Russia, we'd be at $20 to 23% growth, which is obviously above that 20% plus so.
That sort of gives you the color on Q2, and we look forward to continuing to execute obviously on our long term, which is the cross brand of $5 billion and the Hebron. He viewed brand two 1 billion and then I'll, let Andrew add a little extra color. Yeah. I think look I think you can come at it a couple of different ways. Jonathan. So we can look at our pre books, we can look at the trajectory in our DTC businesses and I think on referenced that.
I think the other thing is we just look at the underlying strength of the brand as we look at our brand metrics that we look at some of the external brand metrics. The crocs brand continues to perform very well.
There's clearly residents for the brand both here in the United States and in key International markets.
And we really see a strong trajectory and I would say that is despite what we would kind of consider less than.
Ideal NPI introductions in the first quarter as we look at quarter, two and quarter three we'll have a much stronger flow of of NPI that so far.
Factory closures late last year, certainly impacted that so well.
We're pretty optimistic about the rest of the year and then from a hey Dude perspective.
Really impressed by the.
The consumer advocacy.
Advocacy the consumer takeaway in the enthusiasm, which are wholesale accounts have for the brand and the kind of results. They are sitting on it in the current quarter, and obviously thats translating into and how they are buying into the brand for the back half of the year and the conversations we're having with them about next year. So I think we see.
We're very fortunate we see great great underlying strengths in both brands.
That's great and if I could follow up on the <unk> business you've had it.
Part of the company for less than 90 days.
Raised the outlook pretty significantly for this year. So could you maybe just elaborate more what surprised you so far.
Much visibility you have on supply.
The upside to the guidance and then maybe the broader picture I know you've highlighted at least the $1 billion by 2024 are there scenarios, where you could achieve that level much sooner. Thank you.
Yeah, I think we talked a little bit about this last call. Jonathan is we due diligence of the company and we brought it on what we knew they had a very strong revenue book right. We knew we could see the trajectory in DTC, which behavior. It is principally digital both dot com and Amazon, which is repaid we had a great order book.
Look from our wholesale customers.
We had strong visibility into supply, but we had some questions. So I think thats, probably the biggest thing that's changed as we as we look at the last several weeks obviously just six weeks, we reported in the first quarter and the period. Since then we're working very well with the Haydu team.
And I think we have much more confidence in both inbound supply and logistics of getting that to to our customers. So more ideal I wouldn't say things are arriving on time.
We've got a lot more confidence around supply, which is really the principal reason for for raising the.
The 'twenty two guidance, but hey dude.
<unk>.
Well.
I don't really want to say any more at this stage about the.
The ultimate potential for this brand.
We have clear line of sight to the $1 billion that we talked about originally when you've got a lot of work to do around integrating the brand into the company building out the brand platform. We're doing a lot of really great work around that today, but we're very optimistic we think this is a young brand with enormous potential.
That's really helpful. Thank you.
The next question comes from Susan Anderson from B Riley. Please go ahead.
Hi, Good morning, Alex on for Susan Thanks for taking your question.
Just to go back on Hey, Dude and the supply chain I believe the product you mentioned was primarily made in China have you seen any challenges with the shutdowns there.
Other point.
Point of production or Oh.
Shipping centers. Thanks.
Yes, Youre right, Hey, Dude as predominant made in China, we have seen some factory closures over the last couple of months.
Within Hey, Dude, but in the Grand scheme of things relative to our overall supply base and the production that we're expecting not material and that is incorporated in our in our revised guidance.
I think you also referenced a shipping and logistics.
And that question and that's been one of the nice benefits of integrating <unk> into into crux, we obviously have a far more robust logistics operation. So we're able to step in and really help manage the logistics. So I'd say all of those factors, but to date are incorporated in our guidance.
Yeah, I would just add that.
No it's not a it's not an impact from a supply chain perspective, we do have an impact on the cockpit and that's based on their Shanghai.
<unk> downs related to our e-commerce business that shifted out of Shanghai, So that and that's incorporated into our Q2 guidance as well, but that has impacted our China business for crocs for Q2.
Okay, Perfect and then just to follow up on Hey, Dude I believe last year. It was a record margin year. It was 40% plus I guess whats the delta between that record year and that long term expectation of 26% plus.
Yeah, So I think.
<unk>, obviously was a young brand and under invested from an SG&A infrastructure perspective, they did a wonderful job of growing very very quickly and they haven't scaled that back end infrastructure. So I believe last year their EBIT margins were approximately 38%.
We filed pro forma is a little bit later today, so you'll be able to see that laid out for the last 12 months, but they.
We talked about when we bought the brand that we really needed to invest in the infrastructure.
The difference there is our investment in SG&A in order in marketing because they haven't spent much in marketing at all and so we intend to invest in marketing and people and the infrastructure to build a stable brands going forward.
Thank you nice job on the quarter and best of luck the rest of the year.
Thanks, Alex Alex.
Again, if you have a question. Please press Star then one.
Our next question comes from Laura Champine from Loop. Please go ahead.
Yeah.
Thanks for taking my question can you comment on how successful your efforts to drive pricing higher have been.
And what your assessment is of the promotional environment year on year as we move through spring.
Yeah, I think thank you Laura.
I think you can see that very clearly in our Q1 results. So if you look at the Q1 results the underlying gross margin increases in the first quarter.
From pricing from reduced promotions.
And also from <unk> sales was over 600 basis points, So I would say very significant.
Underlying margin increases from those factors if you remember.
Last year, we took price increases in in DTC in April they flowed to our major wholesale customers later in the year, we took some additional pricing in some select international markets earlier this year, so I would say.
Those price changes were in advance of what we anticipate to be inflationary cost increases and they positioned us extremely well if we look at the promotional environment that we monitor closely the promotions that we're doing relative to last year and relative to competition.
Our promotional cadence in aggregate was less than last this time last year.
It is also generally competitive with competition.
So I think we feel really good about the place that we are that you can see in that Hans cadence of some promotional activity in the market.
We do feel like it's important to participate in key events around Easter Memorial day or fourth of July so, but we feel really good about the way the brand is positioned on the rate of sale was saying of the current prices.
Yes, I would just add that our asps were up 20% so as Andrew mentioned on the margins, but our Asps were also up 20%.
As well got it.
Got it if I look at the Q2 guide for the cross brand it seems like Oh.
Top line deceleration from Q1 is the way to think about that.
Units are slowing because Q1, you saw improvements in supply chain that let you ship, what you wanted to ship or or is it that promotions are increasing in Q2.
Yeah. So the way that I would talk about Q2 is that we are actually last year. In Q2, we grew 93% year over year. So it's actually an extremely it's the highest growth rate. We had last year. So it is a high growth quarter and then if you neutralize for currency and the Russia impact I would say that growth.
It's still above our full year guide and equivalent to Q1. So we felt really good about Q1 Q2, I don't think that we see in that doesn't anticipate slowing.
Understood. Thank you.
Thank you. Thank you.
Again, if you have a question. Please press Star then one.
There are no more questions in the queue. This concludes our question and answer session.
I'd like to turn the conference back over to Andrew <unk> for any closing remarks.
Look I'd just I'd say, thank you very much for everybody who joined US today and their continued interest in the company and thank you for joining us.
Great day.
Conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
Okay.
Okay.
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