Q4 2022 Crocs Inc Earnings Call
Good day and welcome to the Crocs, Inc, fourth quarter and full year 2022 earnings conference call.
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I would now like to turn the conference over to Cory Lynn Vice President Corporate Finance. Please go ahead.
Good morning, everyone and thank you for joining us today for the Crocs fourth quarter and full year 2022 earnings call earlier. This morning, we announced our latest quarterly and annual 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. These statements include but are not limited to statements regarding the acquisition of Hey, Dude and the benefits thereof.
Our strategy plans objectives expectations financial and 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 the Crocs annual report on Form 10-K, as well as other documents filed with the SEC for more information relating to these risk factors adjusted gross profit adjusted gross margin adjusted selling general and administrative expenses adjusted income from operations and operating margin adjusted income tax benefit and effective tax rate adjusted.
Basic and diluted earnings per common share are non-GAAP measures. A reconciliation of these amounts to their GAAP counterparts is contained in the press release, we issued earlier this morning Geordie.
Joining us on the call today are Andrew Rees, Chief Executive Officer, and Anne Mehlman, Executive Vice President and Chief Financial Officer find 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.
As you saw in our press release issued this morning, we delivered extraordinary 2022 results, including record $3 $5 billion in sales and industry, leading adjusted operating margins of 27, 7%.
These results underscore the high consumer demand globally for the Crocs brand and the growing momentum of the hatred brand and our ability to consistently deliver strong profitability, while investing for the future.
Looking forward to 'twenty to 'twenty three we expect another year of robust revenue growth top tier margins and significant cash flow generation.
Now, let me share a few highlights from the full year of 2022.
Total revenues grew 54% as we have added a second fast growing brands he did it.
Crocs brand revenues with $2 7 billion, increasing 19% on a constant currency basis.
Crocs brand international growth was exceptional up 47% constant currency for 'twenty to 'twenty, two and accelerating to 75% constant currency growth for Q4 in both Asia and Amelia.
Hey, Dude brand revenues exceeded initial expectations and reached nearly $1 billion on a pro forma basis and delivered over $275 million and adjusted operating income.
Consolidated digital revenues grew 58% to represent 37, 8% of 2022 revenues.
Exceptional adjusted gross margins of 54%, even with significant freight and inflationary pressures.
Adjusted income from operations increased 42% to nearly $1 billion in adjusted operating margins of nearly 28%.
Adjusted diluted earnings per share increased 31% to $10 92 sets and strong cash flow allowed us to reduce gross leverage from three one times upon the acquisition of Hey, Dude to 2.25 times at year end.
As we transition into 'twenty twenty-three I wanted to give you additional insights into three of our long term growth drivers for the Crocs brand sandals International and innovation in both product and marketing as well as provide an update on hey Dude.
Battles and important growth initiative for crocs, allowing us to extend into the adjacent 30 billion dollar global Sandal category, while we believe our molded technologies excel.
Festival price points strong go to market will allow us to compete effectively in a relatively fragmented market.
The category also provides an additional entry point to the crocs brand for consumers, who may not choose to engage with the clock.
We know of Sandoz resonate with consumers since saddle consideration is now on par with that of clogs.
And we already have a sizable $310 million sandal business.
Within sandals, we refined our focus on four subcategories everyday style Street slashed sport and adventure.
The everyday category offers broad reaching classics for everyone and includes a personalised both slides two straps and flips.
I'll style category is female centric trend driven and includes styles, such as the Brooklyn crush and Mega crush.
Our streets last sport category is rooted in street style with a focus on him, but inclusive of ha and includes a new EKO and Mila franchises.
Finally, our adventure category has functioned as designed for the whole family and includes our all terrain and Swiftwater franchises.
2022 for the Crocs brand sandals was a year of two halves in the first half sandal revenues declined due to the lack of newness following the Vietnam factory shutdowns in 2021.
In the second half of 2022 saddles grew by 31% as we introduced a strong cadence of newness such as the crush mellow and echo supported by effective channel specific marketing.
We're incredibly confident in solid growth in 2023, given planned newness and a significant increase in marketing allocated to sandals on the strong crocs brand trajectory and important sandal markets, such as India and Southeast Asia.
With respect to newness in our style credit Gary we're planning additional height of new Apis and our popular Brooklyn franchise.
And our streets slashed sport category, we continue to use innovative technology and a mellow franchise and will launch a new flip during the year.
With the new product introductions marketing investments and regional brand momentum, we expect samples to be our fastest growing product category and 'twenty twenty-three, reaching approximately $400 million in sales.
Moving to another important growth driver for the Crocs brand our international markets. We have now seen eight consecutive quarters of strong double digit growth outside of North America.
We anticipate even greater growth as a cross brand has approximately one third to penetration internationally that it has here in the U S.
The drivers of this growth are in essence, the same drivers of growth that we saw in the U S.
First focusing on our iconic clog and driving relevance with innovation and collaborations.
Second leveraging gibbus for personalization and consumer engagement.
Third expanding our addressable market with channels, and finally always on social and digital marketing to continuously engage our existing and new consumers.
Our unique playbook for Crocs has been successful in the U S and across all of our key focus markets in Amelia Western Europe grew revenues by 38% constant currency was the United Kingdom are up 105% constant currency.
In Asia, South Korea grew over 30% constant currency, despite having an already high level of penetration India grew 91% constant currency. Additionally, we see our global brand building activities, having a halo and many of our distributor markets, resulting in triple digit revenue growth in Latin America, the middle East and South.
East Asia.
China has been a unique case as you know we completed the repositioning of our China business in 2020 one.
Since then China has been constrained by Covid Lockdowns yet.
Yet, we still invested in our team and in marketing to build brand relevance with.
We have seen green shoots in the second half of 2022.
Revenues grew 35% constant currency.
As China reopens in the consumer returns to more normalized shopping we're excited about the prospect of building significant crocs brand presence in 2023 and beyond.
While still a smaller base than we would like we expect China to grow approximately 30% in 2023.
Well, that's a marketing innovation is another important driver of the Crocs brand.
Our marketing calendar is extremely robust as we look to put more crux of more consumers.
In 2023, we expect to have record new product introductions, some of which I mentioned when discussing sandals.
Product newness will be critical to our always on Brian drumbeat as well as a strong pipeline of more than 60 global brand partnerships across a healthy mix of celebrities mega brands and licenses of which 25% will be regionally let.
Okay.
We will invest in a record amount of marketing dollars over 200 million to drive the crocs brand relevance amplifying, our products and engaging new and existing consumers.
This will be achieved by maintaining our digitally led and social first approach to engage consumers through digital first drops social innovation and brand ambassadors.
Turning now to Hey, Dude.
<unk> represents our first full year of ownership and we've accomplished a lot.
The integration is on track although is although there is still much work to be done.
We've developed a clear plan for the brand and the future is bright.
With respect to recent accomplishments there are many.
We have updated the brand identity and clarified its purpose and meaning.
We've expanded the line with several new icons to be Trialed in 2023.
Stopped the entire leadership team and hired over 150 Ross.
Stabilized and expanded the manufacturing footprint developed.
Developed a business systems roadmap.
Expanded distribution capabilities to handle the immediate throughput needs.
Turned over many international distributors.
And spent nearly $60 million of marketing in the second half alone, which on an annualized basis was almost forex the amount spent in 2021.
We are also seeing great initial results exceeding our expectations.
Brand revenues in 2022 grew 70% on a pro forma basis, driven by wholesale partner expansion in the United States.
DTC revenues were approximately 36% of sales.
Gross margins have been lower than anticipated due to channel mix unfavorable pre acquisition freight contracts and higher inventory handling costs as we work to expand the Haydu distribution center to support the $1 billion and growing brand.
Even with this haydu generated over $275 million and adjusted operating income of 31% adjusted operating margin.
While we have more to do we are incredibly excited about our results thus far the potential for the <unk> brand and the value of this acquisition will generate for shareholders.
The addition of Hey, Dude has brought other benefits as well it enables us to access a larger addressable market, which is now approximately 160 billion on a global basis versus 40 billion prior to the acquisition.
We are now far more diversified from a product perspective, with casual hey, Dude silhouettes, representing 27% of 22 revenues on a pro forma basis.
<unk>, representing 57% of consolidated revenues finally, we substantially leveraged our shared services across the two brands further supporting our industry, leading operating margins.
Before I turn the call over to Ann I'm incredibly proud that our five year annualized T. S. R a 54%.
I would've placed Crocs, Inc. As the number two best performing company in the S&P 500.
This exceptional performance is a testament to our strategy our execution and our talented team.
I wanted to express my gratitude to the entire Crocs, Inc. Organization for the hard work and commitment to delivering best in class growth and profitability.
2022 was a transformational year as we integrated Hey Dude.
But the crux and Hey, Dude brands and to 2023 was incredible strength and momentum.
I'm confident in our brands, our team and a demonstrated ability to deliver sustainable growth profitability and shareholder value.
With that and we will now review our financial results in more detail.
Thank you Andrea and good morning, everyone I'll begin with a recap of our fourth quarter results.
All revenue growth rates will be decided on a constant currency basis, unless otherwise stated for.
For a reconciliation of the non-GAAP amounts mentioned to their equivalent GAAP amounts. Please refer to our press release.
Our fourth quarter results were outstanding with $945 million in consolidated revenues.
64, 8% increase to prior year aided by the addition of Hey Dude.
We continued to deliver top tier profitability with adjusted gross margin of 53, 3% adjusted operating margin of 26% and adjusted earnings per share of $2.65 at 23% to fourth quarter of last year.
Strong profitability and tight working capital management enabled us to repay $300 million on our term loan b facility in the quarter.
I will now detail our revenue highlights by brand beginning with the Crocs brand.
During the quarter, we sold 27 million pairs of shoes, an increase of 28% over last year, our average selling price in Q4 was $23.95 a six 8% decline on a reported basis and a three 6% decline on a constant currency basis as a slight decline in North America.
Associated with higher DTC promotions.
Offset constant currency ASP increases internationally.
Importantly, while the North American markets became more promotional in the second half of the year and helped right sized channel inventories to a healthy level, the crocs brand, but still less promotional in the fourth quarter and for the full year then pre pandemic.
From a product perspective for the fourth quarter results continued to be driven by our key product pillars clogs sandals inhibits sales of clogs increased 9% to become 79% of Crocs brand revenues with growth of our profitable classic clog franchise outpacing that of other clocks.
Sandoz grew 53% in the quarter to represent 10% of brand revenues.
It's continued to drive consumer engagement and grew 13% to become eight per cent of brand revenue for the full year costs were 77% of brand revenues sandals were 12% and <unk> grew 27% to become 8% brand revenues.
Now, let's review Crocs brand highlights by region for the quarter North America revenues of $457 million were relatively flat from 2020. One it's strong DTC growth of 18% an indicator of underlying consumer demand was largely offset by a 25% decline in wholesale.
DTC comparable sales for North America increased 13% on top of 53% DTC comparable sales growth in the fourth quarter of 2021.
Digital led the growth driven by brand strengths and newness.
Wholesale declined as we continued to proactively manage market health with our partners in the fourth quarter.
Rick and mortar channel inventory in North America is very healthy with on hand inventory levels down double digits versus prior year.
Similar to the third quarter Crocs brand growth was led by international with both Asia, and Emilia revenues up 75% in the quarter.
Asia Q4 revenues were $91 million up 74, 8% from last year as Andrew mentioned, we saw broad based growth across all channels and all of our key focus markets, South Korea, and India continue to outperform anchors strong double digits during the quarter and year.
China face periodic Covid Lockdowns, however grew 38% for the quarter falling 34% growth in Q3.
Amelia revenues increased an exceptional 75, 6% over Q4 2021, despite our exit of direct Russia operations momentum has been building over the last two years and resulted in broad based growth in our direct and distributor markets.
Overall, we are extremely pleased with the underlying strength of the crocs brand internationally.
Turning to Hey, Dude revenues were $279 million growing 36, 6% from Q4 of 'twenty. One digital sales were particularly strong during holiday and constituted 51, 6% of brand sales in the quarter. We remain confident in the potential of the brand and look forward to sharing our growth strategies and plans in the future.
From a channel perspective digital remains our top priority for both brands as it enables us to meet our consumers in their preferred channel. During Q4 2022, our consolidated digital business, which combines e-commerce and E tail grew 80% on top of 41% growth in Q4 of 2021.
Digital penetration for the quarter was 45, 1% up from 43% last year and 34, 2% in 2019, our digital growth benefited from product newness refined user experience and additional marketing activities that drove strong traffic consolidated adjusted gross margin for the quarter.
It was 53, 3% down approximately 1000 basis points from last year.
About half of the compression to consolidated adjusted gross margin is related to the addition of the hatred brand.
Crocs brand adjusted gross margin was 56, 1% or 760 basis points lower than prior year, which was an atypical year. As we took price ahead of inflation and had an overall lack of promotions in the industry. The decline in adjusted gross margin is attributable to approximately 340 basis points of promotions.
80 basis points of inflationary costs, and 180 basis points of higher freight and inventory handling costs.
Currency negatively impacted gross margins by 70 basis points.
He do brand gross margin for the quarter was 46, 4% as positive channel mix was offset by the continued effect of legacy freight contract costs.
Inventory storage costs as we work to expand distribution center capabilities to support the larger business in.
And holiday promotional activity.
Our Q4 adjusted SG&A at 27, 3% of revenues improved by 780 basis points compared to prior year. This excludes $18 million of costs in Q4, primarily related to the shutdown of our Russia direct operations and the <unk> acquisition and integration.
For full year 2022, adjusted SG&A leveraged 490 basis points to 26, 7% the.
The significant decrease in adjusted SG&A rate for the quarter and the full year is due to leverage of shared services across both brands, even as we invested over $215 million this year and additional marketing talent and infrastructure to support future growth.
Our fourth quarter adjusted operating margin declined 260 basis points to 26% compared to 28, 6% for the same period last year as gross margin pressures.
SG&A leverage fourth quarter adjusted diluted earnings per share increased 23, 3% to $2.65.
For the full year 2022, let me recap a few highlights.
Total revenues grew 54% to 355 billion with Crocs brand revenues, increasing 19% on a constant currency basis on top of 65% growth in 2021, and he did brand revenues, reaching nearly $1 billion on a pro forma basis.
Crocs brand international growth was exceptional at 47% constant currency adjust.
Adjusted income from operations increased 42% to $986 million and adjusted operating margin of 27, 7% remains industry leading.
Oh year adjusted diluted earnings per share increased 31% to $10 92.
We concluded 2022 with a strong liquidity position comprised of $192 million of cash and cash equivalents and $749 million of borrowing capacity on our revolver.
Through strong cash flow generation and tight working capital management, we prepaid $300 million on the term loan b during Q4, reducing total borrowings to $2 3 billion in gross leverage of 225 times and net leverage to approximately two one times, we remain focused on deleveraging to under two times.
Gross leverage by the middle of 2023.
Our inventory balance at December 31, 2022, with $472 million inclusive of $169 million of Hey, Dude inventory. The crocs brand inventory balance was $303 million or 42% increase over prior year and continues to decline sequentially down seven.
Percent versus the third quarter, our higher inventory reflects revenue growth higher costs and inventory and a very low level of inventory last year due to limited availability with the factory closures.
Well, Hey, Dude inventories slightly elevated from pre acquisition purchases Crocs brand inventory is very healthy our entire team is extremely focused on inventory health, especially as we grow.
In 2022 capital expenditures were $104 million a little over half of this investment was in our distribution centers as we expand and automate our facilities the balance of the investment was in our information technology retail fleet and corporate offices all of these investments to support future growth and as I mentioned, we will continue to.
And best in the business to fuel <unk> growth now.
Now turning to the future I would like to share our current outlook for Q1, and then full year 2023.
For Q1, we expect consolidated revenues to grow approximately 27% to 30% at current currency rates with the crocs brand growing double digits. We expect adjusted operating margin to be between 24, and 25% and adjusted diluted earnings per share of $2 <unk> to $2 19.
For the full year 2023, our guidance contemplates some conservatism as we are cautious about the impact of macroeconomic events, particularly on the U S and European consumer as the year progresses.
Even with this we continue to expect revenue growth of 10% to 13% assuming current currency rates for Crocs brand revenues, we expect to grow 6% to 8% and 9% to 11% in constant currency with growth in all regions and all channels for.
Hey, Dude brand revenues, we expect growth to be in the mid twenties on a reported basis.
We expect consolidated adjusted operating profit margins of approximately 26%. This includes an anticipated benefit to crocs brand gross margin associated with lower inbound freight rates and the claw back of airfreight slightly offset by channel mix and the growth in sandals.
For the full year 2023, we expect our underlying non-GAAP tax rate, which approximates cash tax paid to be approximately 20% our GAAP tax rate will be approximately 24%.
We anticipate non-GAAP earnings per share to be approximately $11 to $11.31 in 2023, which does not assume any impact from potential future share repurchases. It also incorporates increased interest expense on our floating rate debt associated with the current rate environment to support growth for both.
<unk>, we expect to invest approximately $165 million to $180 million in capital expenditures.
Investments include expansion of our distribution capabilities, including our new <unk> DC in Las Vegas.
Implementation of new technology systems for Hey, Dude and expansion of our corporate facilities to support our growth.
In 2023, we estimate approximately $30 million of one time charges, primarily related to the aforementioned capital investments and are fairly balanced across Cogs and SG&A.
We expect the combined brands to generate significant cash flow, allowing us to achieve two times or less gross leverage by the middle of this year, our capital allocation priorities are first to invest in the business and second to balance deleveraging with the ultimate goal of reaching one to one five times net leverage and resuming our historically successful share repo.
This program.
In summary throughout 2022, we delivered strong revenue growth profitability and cash flow with the underlying strength of the core crocs fitness and the addition of Hey, Dude. We're confident we have positioned ourselves for sustained profitable growth strong cash flow generation and significant value creation for our shareholders.
At this time I'll turn the call back over to Andrew for his final thoughts.
Thank you Anne.
<unk>, Inc had an exceptional year in 2022 to.
The cross brand is resonating strongly with consumers throughout the world.
Our confidence in continued growth led by sandals on international.
The <unk> acquisition is exceeding expectations.
Integration is going well and we have a clear plan for growth.
I could not be more excited for the future and the tremendous value creation opportunity for shareholders.
Operator, please open the call for questions.
Thank you and we will now begin the question and answer session to ask a question you May Press Star and then one on your telephone keypad.
If youre using a speakerphone please pick up your handset before pressing the keys.
Withdraw your question. Please press Star then two.
At this time, we will pause for a moment to assemble our roster.
And our first question today will come from Jonathan Komp of Baird. Please go ahead.
Yeah, Hi, Thank you good morning, and can I ask a follow up on the first quarter guidance I believe you said.
The crocs brand should grow double digits could you give a little more color how that might look geographically and then a bigger picture question for 2023 for the Crocs brand or are you expecting North America to grow for the full year.
And could you comment on some of the drivers across up.
Some of the product initiatives and in the channel performance we're expecting.
Sure Jonathan Good morning, So let me start with full year, then I'll talk about Q1, so for full year as shared we expect the crocs brand new guards, 6% to 8%, which is about 9% to 11%.
At constant currency.
And growth is really going to be powered by international but the U S will grow I think we're currently cautious about the consumer in the U S, especially in the back half, but we're still anticipating growth over last year.
And that growth is really going to be driven by sandals and newness and we do expect North America to have good growth in Q1 as well.
And then from just an overall channel perspective, we still expect DTC to lead the growth in our North America region for this year is that it will continue to focus, especially on our ecommerce site and just about maybe a tad of color to that John I think one of the reasons that DTC is leading the growth that's where we have the new units the fast.
This right we were able to bring a lot of.
New sandals, and new styles to DTC environments in Q4, and they are showing up foster as you'd expect in our DTC environments. Both E Commerce and store in Q1, we're extremely pleased with this at this point with the.
The performance, we're seeing and we're excited as those new products are supported by <unk>.
Social digital marketing flows to also.
That's great and then one follow up just on the outlook for the Crocs brand gross margin it looks like you've quantified a little over 400 basis points from Airfreight investment and then higher freight and inventory handling in 2022. So as we think about some of those costs coming back into their businesses.
What would you expect crocs brand gross margin going back to the 58% level or could you maybe just give some color on the on the puts and takes you see there. Thank you Yeah. Let me yeah. That's a great question. So let me just take a minute to recap in 2022, obviously, we're anniversarying a high point for 2021, So our cross brand adjusted gross margin.
Finished at 56, 7%, which is about a 500 basis point decline to 2021 and as you. As you mentioned, we had about 220 basis points of airfreight that will come back and then about 190 basis points of higher freight and inventory handling costs that we talked about coming back over the year and then the rest is really related to inflationary costs, we had promotions for it.
That 90 basis points and currency.
For 2023, we do believe that cross brand will be largely in line with our long term expectations of about 58% gross margin and then hey Dude.
<unk> to increase year over year, but it will ramp slowly slower throughout the year, because we need to continue to work through the subscale GNL network. So our overall consolidated adjusted gross margins for this year, we're projecting to be about 55% to 55, 5%, including obviously the impact of Hey, Duke and.
And we will continue to just one side note. We will continue to provide gross margin color by brand for that remainder of the year.
That's all really helpful. Thank you.
Well thank you.
Our next question today will come from Tom <unk> of Wedbush I'm, Sorry, Wedbush Securities. Please go ahead.
Yeah.
Hey, Andrew Hey, Thanks.
Thanks for taking my question.
I wanted to ask so.
I believe you said North America wholesale was down.
25%.
Q4, I think on the Q3 call you know you kind of gave us.
Uh huh wholesale sell through.
Just kind of give us a better indication of the demand for the brand in the wholesale channel how did the sell throughs.
In North America wholesale for Q4.
Yeah, I would say, Tom we were very happy with the performance of North American wholesale in Q4, we ended the year with inventories in channel down double digits and that was one of our primary goals was to make sure that.
That we took is obviously going to be a promotional quarter, we anticipated that and.
We took advantage of that promotional quarter to make sure. We're clearing out of end of season goods and also enabling our wholesale partners to effectively compete in what would be a promotional time period. So we're very happy with the performance of the wholesale business was important to keep our inventories in line and as we kind of look at.
In channel inventories with think that we're very well positioned for 2023.
Okay.
Can I also ask on the on the inventory growth for the core Crocs brand.
I realize it's kind of coming down sequentially, but opex.
Optically it's still a.
A pretty big number.
Plus I believe it's about <unk>.
How should we kind of think about that working its way down over the course of 'twenty three.
Do you see any risk that you're potentially.
Over inventoried.
Yeah.
I would say Tom I think there's a couple of weeks a couple of things to think about one is yes. It's a it's a 40% growth over the same period last year, but if you remember that same period last year was an exceptional low because it was immediately after the Vietnam factory closures right. So.
On a normalized basis.
We actually think the crux inventories is very well positioned relative to our future growth plans.
So on a normalized basis it puts us at approximately a four ton, which is where we'd like to be from an inventory to sales ratio.
So that's kind of one of the best in the industry. That's best in class in terms of working capital management and it allows us to have healthy core inventories in fill out once demand. It allows us to bring in new products at the rate, we want to but not have excess inventories on that so we think it's about where we want it to be given.
What we expect for future growth.
Understood. Thanks, Andrea and if I could just sneak one more in for you the $30 million of one time charges that you're expecting for 2023 can you give us a little bit more color as to.
That comes from.
Yes.
The description in the press release.
Investments for growth.
Which normally are.
Included in the adjusted numbers I'm, just kind of curious what those one time charges for sure.
Three buckets. The majority of those are things that we're just consistent in how we talked about it to the distribution center overlap, where we might be transitioning distribution center. So I was kind of overlap hard as we're bringing up the <unk> distribution center.
Costs, where we're playing particularly kept rent and things like that also seem like we're making some changes as we talked about some investments in.
Some corporate headquarters to expand and we're paying for the duplicate rent. There. So those are the majority of the charges and then the other one is we're implementing.
Our new ERP system for Hey, Dude and those costs, we typically call out as a one time as we don't typically implement ERP systems.
That's helpful. Thanks Andrea.
Best of luck in 2023.
Thank you. Thank you.
Yeah.
Our next question today will come from abbey's upticks from Piper Sandler. Please go ahead.
Hey, guys. Thanks, so much for taking my question. So how should we think about the cadence of gross margin in terms of tailwind from lapping airfreight versus the promotions and the greater mix of revenue and then just on the the heated inventory composition. I think you said, it's a bit elevated can you just talk about the reasons for this is due to changes in hold.
They'll partner behavior in Warsaw, and logistics, just any color there would be helpful. Thank you.
Thank you Abby and let me start with gross margin and then I'll, let Andrew talk about that he did inventory. So from a gross margin perspective from a cross brand I expect it to be a pretty normal cadence throughout the year. So.
Turning to seasonal pattern Q1 tends to be low just given the wholesale channel mix.
In the quarter. So I would just model that out it's kind of normal normal kind of seasonal pattern given the guidance I think from <unk> perspective, we do expect as I mentioned earlier to be lower in the <unk>.
First half is we're still rolling through some of those higher freight and storage costs and then as we get into rolling off those costs as well as into a better size distribution center.
Expect that to increase into the back half of the year and that plays into our overall gross margin that we talked about from 55 to 55 and a half.
Yeah, and I think on the second part of your question I'll be around hated inventories, yes, we feel that the aged inventory is a heavier than we'd want to be on a go forward basis.
And I say it was principally related to a number of factors one is.
Inbound receipts that are that we're afforded pre <unk> acquisition.
That was probably not the right composition that we would have.
Have liked in terms of we know that was probably heavier on things that haven't sold as quickly.
So we're going to have to work our way through those there was also just the process of getting the whole planning function up and running effectively so that we can match demand with supply effectively and we've been pretty good at that historically on the cross brand we have not been as good at that on Hey, Dude over the last year, but I think we're confident we'll get there.
We I.
We have plenty of opportunities to sell this inventory over a over the coming year were not panicked about it but it's a little bit heavier than we'd like at this point.
Perfect.
Our own inventory, just if I could point out fairly quickly.
No that's our own inventory, we're actually very satisfied with the inventory that we haven't channel from a headcount perspective.
Yeah got it and then I wonder on promotions should we think about this is like more of a normalized level, especially as you guys are bringing in more more newness and more like fashion risk or how are you thinking about the go forward promotional environment, yes.
So from a personal standpoint, I mean, I think Q4 played out exactly as we anticipated.
From a promotions on that on the crop side, especially I think.
For this year, we expect it to be.
Normalized promotion environment again, I don't think it has to do with more of our product mix I think it had more of a just a return to the norm of a promotional environment against very low promotional environment in 'twenty. One as we said in our prepared remarks, we are still actually less promotional than we were pre pandemic. So I do expect promotions too.
Just maintain and pretty much be in lined up from this point going forward.
Got it thank you so much.
Thank you. Thank you.
Our next question today will come from Laura Champine of loop. Please go ahead.
Thanks for taking my question and congratulations on the international growth in Q4, if if growth continues to be mix towards international how is that likely to impact gross margins.
If if the mix continues to shift in that direction in 2023.
Yeah, Hi, Laurie it it does depend a little bit on where that growth occurs so if it occurs.
Rack to to consumer channels like anywhere else in the World. Then that's obviously helpful from a gross margin standpoint.
Obviously, we've had really strong distributor growth, which is a headwind to gross margin.
But curious no SG&A so the higher the distributor growth of outperformed it will impact gross margins, a little bit, but again be accretive overall, because theres no SG&A associated with it.
And that would be interested obviously, we've embedded good international growth into our guidance so that would be embedded in our current margin guidance from a profit perspective.
And are you incorporating sort of a stable mix of distributor versus DTC or do you think the outsized growth in distributors continues through this year.
I know, it's a it's a pretty stable mix actually I think last year, we had really strong distributor growth as we saw tourism returned to a lot of markets and we saw some restocking I think this year, it's actually a much more balanced mix between DTC and distributor.
Thank you.
Yeah.
Our next question today will come from Sam Poser of Williams trading. Please go ahead.
Thank you for taking my questions I have a small handful.
Number one.
You mentioned that Youre going to increase the marketing I would assume for both brands pretty aggressively.
What kind of ROI are you assuming.
Those increased investments.
So, yes I think.
I would say, we're going to increase our dollar spent Sam.
We're expanding we're investing at about the same rate that we have invested historically so if you remember we've run the crocs brand at between 7% and 8% of sales in terms of marketing that includes both our brand marketing and a lot of our digital marketing on our social marketing and we're maintaining that rate, but all the.
As the brand has grown over the last several years that dollar amount is a lot more significant and thats one of the important factors around scale in this business. If you have scale and you invest as percentage of sales you can reach a lot more consumers from a <unk> perspective, it will be an increase over last year, because we underinvested in the first half.
The year is we were died.
Digesting the brand.
Did invest at right.
At about at a similar rate in the back half of the year for the <unk> brand. So it will be an increase in the first half and then similar in the backup but of course, we're also getting growth there as well so the dollar amount will be larger.
Well, let me follow up on that.
When you.
When you went into 2022 and you said, we're going to invest X. What's the return on your investment higher than what you anticipated.
And return on investment was consistent with our expectations.
Alright, thank you.
What and where.
What is our.
What is the expectation for the for.
<unk> North American wholesale isn't going to look like Q4 just.
For Q4 were similar and then DTC similar as well is that sort of how to think about it.
In North America, given it appears retailers hesitancy to step up at the moment.
Yeah, I mean, I'll take that we don't guide.
By channel by region.
We never have but what I would say is I think the way to think about it I think what you are trying to get at is how healthy is the wholesale channel and how do we expect sell in to kind of normalize with sell through right and as we kind of think about the first half of 2023.
We're pretty confident the sell in will normalize with sell through because we've got all kind of in channel inventories down double digits at year end.
There.
We're very confident that we're kind of well positioned within channel inventories the only challenges that we could expect our some of our partners are still heavy some are not but the heavy with other brands and trying to manage you know constrained D season.
Dubai constrained. So we are focused we are dealing with that and that's a little bit of an unknown. We are starting to deliver substantial newness to our north American wholesale I.
I think we're confident enough at this point, but with some of that is better known and so but I think in the first half of 2023, we'll definitely see a normalization of north American wholesale sell in and sell out.
And then.
And can you tell me the interest what is your assumed like sort of.
Gross interest expense.
Interest expense youre expecting for the full year.
Yeah, so from an interest rate.
Perfect. It so our guidance, obviously assumes higher interest rate expense than last year, driven by the full year of debt related to hey, Dude in the rate environment. So as a reminder, we locked in $700 million of fixed rate debt at an average rate of four 2% and then the balance of our debt is the $1 7 billion term loan b, that's floating rate, which is silver plus $3.
50, so on average its like seven 7%.
If you want to model the interest rate and then.
Obviously, we paid out $550 million debt in 2022, and we anticipate really strong cash flow this year and significant pay it out again, this year, which will offset some but interest will be higher this year than it was last year.
Thanks, very much continued success.
Thanks, Jeff.
And our next question is from Jim Duffy with Stifel. Please go ahead.
And Tim Your line is now live.
Okay.
You may be muted sorry about that yeah. It was on.
Yeah.
Good morning, Ann Good morning, Andrew.
Couple of questions around margins for the brands.
<unk>.
First on.
We had some unforeseen challenges.
Margins, however were still running at 31%.
Which is above your original objective of 26, 27% I guess I'm curious does that make you rethink the margin opportunity for the <unk> brand.
Yeah, Hi, Jeff. Thank you so much I do believe that the heated margins, we're very pleased with our overall the operating margins.
One thing when we originally guided hate you to operating margins, we hadn't pulled out the shared service cost for both brands are now we've pulled that out and both brands are running higher operating margins and then we have obviously pulled out that debt.
The shared service costs to get to our overall operating margin guide of 26%.
So obviously you know last year, we ran higher we delivered 27, seven but our long term guidance around 26% as we continued to invest in both brands to support the growth.
Helpful. Thank you and then I know you don't want to get into regional margin guidance, but for the Crocs brand can you speak to the next direction in the regional profit pools, where you see a meaningful shift towards international or does planned investments and growth for international.
Keep the margin mix of the.
<unk> excuse me the profit mix of the regions relatively consistent.
Yes, so a couple of things there obviously from an operating margin perspective, all of our regions are very profitable as we continue to scale International markets. We will continue to see that profitability expand in Asia, we've been investing significantly in China to support that growth and so.
As those Egypt markets.
Scale, then obviously it drives leverage and continues to expand your profit margin. So I don't expect a significant operating margin change based on our international mix.
Okay. Thank you very much.
Thank you.
Our next question is from Mitch permits all Seaport research. Please go ahead.
Yes, thanks for taking my questions.
First question on Hey, Dude, you gave the guide and reported.
I think by my math, the pro forma works out to be kind of mid teens growth year over year I'm curious to know.
If you expect that to be kind of a straight line cadence over the quarters I know that the.
Growth has been moderating a little bit I think as you're lapping larger numbers and.
I think that as you go through that you're continuing to kind of lap larger numbers. So I'm wondering if we should be thinking of that sort of mid teens on a straight line basis pro forma or or or do you expect that to kind of moderate as the year goes spot.
Yeah. Good morning, Mitch I think obviously Q1 is the highest growth just as we didn't own them for a full year. So as you mentioned.
On a reported basis.
We havent guided by quarter I think we see good growth throughout the year as Andrew also mentioned, we're cautious in the back half of the year, just given cautious on the Crocs brand, but also have just cautious overall.
On the consumer so we've incorporated that into our guidance.
For that for the back half of the year.
Okay and then.
On the crop business. So you just a couple a couple of questions.
You mentioned Cogs growth in the quarter and I think it was the classic kind of.
The clog category overall, I'm curious to know how line clogs performed in the quarter and I believe that was a pretty healthy business for you guys last year in Q4, and I'm curious how that lapped this year and then I guess secondly on on sandals.
Andrew you referenced kind of for kind of big sandal segments, there I'm kind of curious if you.
You know how the how that kind of performed by segment in the back half and then sort of your outlook for 'twenty.
Assume that the kind of the everyday piece is the biggest for both segments, but I'm wondering if you're seeing kind of outsized growth there versus the other isn't if that would be expected to continue in 'twenty three.
Okay makes a lot of questions. There. So classic has performed extremely well in Q4, it performed extremely well all year long right and Thats kind of we mentioned in our prepared remarks, as we look to gain share in a lot of international markets. It's important that we really <unk>.
On land the classic and we've been doing an exceptional job of that so.
So that's been driving strong classic growth plastics also continued to do online class. It continues to do extremely well in the U S.
I'm aligned perspective.
Mind, I would say the aligned business in the U S peaked last year.
So that was probably a high watermark of consumer takeaway of lined that moderated a little bit this year and we expect that to moderate in the future right. We think we're going to be.
We reset the line business at a little bit of a lower level is still very important component for our.
Our fourth quarter business we.
We think we've got some really strong innovation coming into that area I would say international for line is a completely different story. So on an international basis lines still has a lot of incremental penetration opportunities in.
In in those markets the kind of demand a winter line products, So think nor.
Northern Europe think.
Northern parts of Asia, right, so stupid, but a different story in line in different parts of the world.
From our sandals perspective, yes, we talked about H, two for sandals, 30% plus growth.
And Youre right that if you think about Q4 growth in samples. It was 50 plus percent. So 50 plus percent growth rate for Q4, and sandals really driven by a lot of those new styles that we brought to market.
As well as a strong sell in of samples to distributor markets and some of those distributor market. So saddle heavy if you think about southeast Asia.
Okay. That's helpful. Thanks, and good luck.
Yeah.
Our next question is from Jay sole of UBS. Please go ahead.
Hi, Good morning. This is motor you've had them on behalf of Jason Thanks for taking our question.
Relations on the result, maybe.
Wanted to ask a little bit more.
If you could provide more details on the European business, how is that performing and.
What are your expectations for this year.
In that particular business when we look at it from a.
Wholesale and DTC perspective.
Also as we think about the gross margin outlook for 2023, when do you think we lap returned to more normalized promotional level.
And lastly.
On.
You know the health of the balance sheet. It seems to be on track to getting to your target leverage ratio should we expect the company to resume buyback activity soon in second half of 2023.
At a similar rate to what you were doing prior to the <unk> acquisition.
So maury so I'll give you a little color on EU, and then and I'll talk about gross margin and our balance sheet. So.
Looking at the the Emilia.
Amelia business Amilia segments resolve asleep Europe , Middle East Africa, and Latam performed extremely well in the fourth quarter, 75% growth is obviously exceptional if we kind of isolate down to Europe , we're seeing very strong trajectory for the crocs brand in the European market I think in our prepared.
Remarks, we called out as an example of that.
105% growth in the in the UK, which is obviously an important market.
Europe , So we're seeing very strong trajectory for the brand that showing up.
<unk> in our DTC business, which in Europe is primarily digital.
And it's also showing up in our wholesale business as we look to 2023.
Don't think we're going to lap 75% growth, but we still see very strong trends in our European business. So we're very confident and that's really about the brand trajectory to brown, who is getting traction.
And we're not seeing.
Significant pullback from the consumer for our brand and I'm, not saying, that's not true across broader product categories, but they still have there's still buying trucks.
Yeah, and then I think your second question was on gross margin outlook and so as I mentioned I think you know from a margin perspective Q4 played out exactly as we anticipated with margins.
As well as the promotional environment I think our seasonal promotions and liquidation of aged inventory was very successful and you know that continues Q1 January tends to be or cycling through liquidation period, and then you get to a more normalized throughout the quarters.
I think from a return of the promotional environment, we're still less promotional than we were pre pandemic until we feel like we're at a pretty normalized level. This year I don't see anything that's out of the ordinary.
And then your second question on capital allocation, and where we paid down $550 million of debt in 2022, which we're really pleased with and our priority. During 2023 is to continue to pay down debt to get to that two times gross leverage and then continue past that.
Then we have some.
Options of how we want to allocate so at current interest rates we would.
Equally paid out debt that would be a priority as we target to get one to one five times net leverage and then we will also look at resuming our share repurchases at that point.
Great. Thank you so much.
Okay.
Again, it is star one to ask a question. Our next question is from Abra TLO with BNP Paribas. Please go ahead.
Good morning, Thanks, so much for taking my question.
Wanted to start out with the SG&A outlook for 2023.
Just given youre being a little more cautious with your view.
On the revenue guide for this year, a little lower than the long term algo.
Or just any more detail on where you are able to pull back on SG&A to preserve the 26% EBIT margin.
Yeah sure. So in 2023, we plan to invest.
Principally in marketing and talent and that as Andrew mentioned earlier on the call. We are marketing, we invest as a percentage of sales at 7% to 8%. So obviously.
Revenue with to significantly decline that's an area. We can look at people are pulling back on although it's usually we try not to because we want to really preserve the brand. So I don't think it's necessary for us to pull back from an SG&A standpoint, you hit the 26%, obviously, we're investing more year over year because this year in 2022.
Over the 26%.
But if business doesn't turn out as expected, we can pull SG&A levers and pretty quickly deleverage given the flexibility of our cost our cost structure.
Yeah, Yeah, I think it really I prefer to emphasize <unk>. Our perspective is the opposite of your question, which is with.
With growth in the business and expansion in gross margins were actually able to continue to invest to drive future growth.
From an SG&A and you got it.
Yes got it.
And then maybe just one on <unk> just given the amount of growth. The last couple of years has been so impressive can you can you help us understand.
How much more room, there is domestically for the brand in terms of wholesale door penetration, but how far along you are with that was that process and how much how much opportunity is left in the U S.
Yeah, Great question. So we've made really good progress.
First year of ownership instead of wholesale store penetration in the U S right. So.
Really pleased with the progress we've made and as you kind of implied in your question that has fueled our growth as we look at 2023, we do feel like there is incremental door penetration and there is still long term DAU penetration are available in the U S. There are still a number of key and significant customers that we have not yet penetrated.
We're obviously working on and I think in addition to that.
There's a lot of share by door opportunity right. So as we continue to bring new styles to market as we continue to drive greater brand awareness for the <unk> brand consistently across the U S. If you remember when we purchased the brand. It was a it's awareness was regional I would describe it as.
So as we invest in marketing to drive awareness, we will see both DAU penetration will ship share expansion of share by door and we will see we believe increase in rates of sell through.
So that will be somewhat constrained in.
In 2023, because we're dealing with a constrained.
Distribution network with our P&L capabilities are not consistent with our growth potential so but over a long run we see lots of runway for us for North American growth and hatred.
Great and then maybe if I could just follow up quickly on that.
Any update on the time frame for expanding internationally with needed and is there.
Does any of that reflected in the guide for the year.
Yeah, I think actually one point I just wanted to go back in my last answer and add to it I think PD released some information just recently and indicated that Hey Dude was.
One off if not the fastest growing brand in the U S. In Q4.
So in dollar terms, so that's obviously exceptional from an international perspective.
Yes, we're super clear right. So.
Our game plan for 2023 is to continue to test the brand internationally that will involve direct distribution with some select wholesale customers and a digital presence in the UK and Germany that will come up later in the second to third quarter. It will also involve.
<unk> distribution with some key wholesale partners.
In this sort of middle East.
Sorry in southern Europe , and the Middle East. So we've been you know that's our plan for Asia International We think it's critically important that we get really strong feedback from these important markets. We've done a lot of research associated with kind of brand receptivity, but that's our plan it's relatively modest in terms of dollars in 'twenty three it's all.
All about testing and positioning for the future.
Thank you so much.
Thank you. Thank you.
At this time, we will conclude our question and answer session I'd like to turn the conference back over to Andrew Rees for any closing remarks.
Thank you very much everybody appreciate everybody's interest and great questions. This morning, and as you can tell from our prepared remarks and also the answer questions. We're incredibly confident in terms of how our brand is positioned to have brands are positioned for another exciting year in 2023. Thank you.
The conference has now concluded we thank you for attending today's presentation. You may now disconnect your lines.