Q2 2023 Crocs Inc Earnings Call
[music].
Good morning, and welcome to the Crocs second quarter 2023 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. Please go ahead.
Good morning, everyone and thank you for joining us today for the Crocs, Inc. Second quarter 2023 earnings call earlier. This morning, we announced our latest quarterly results and a copy of the press release may be found member website.
We would 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.
This includes but are not limited to statements regarding our supply chain challenges cost inflation.
Do you get the benefits thereof practice strategies plans objectives expectations, or otherwise and intension 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 company.
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 performance or achievements expressed or implied by the forward looking statements.
Often these are obligated to update these forward looking statements to reflect the impact of future events, except as required by applicable law.
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 FTC Accordingly actual results could differ materially from this 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 reconciliation of these amounts are capped composites is contained in the press release, we issued this morning.
Joining us on the call today are Andrew Rees, Chief Executive Officer, and 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 you Sir.
Thank you Cory and good morning, everyone I'm incredibly pleased with our second quarter results.
We delivered record quarterly revenues of over $1 billion.
The growth in agent brands continued to perform extremely strongly.
As evidenced by 26% direct to consumer revenue growth.
We gained appreciable market share once again delivered industry leading profitability.
30% operating margins.
A review our financial results in more detail shortly but here are a few highlights from the second quarter.
Revenues of over $1 billion grew 12% on a constant currency basis.
Cross brand revenues grew at 15% constant currency fueled by Adrian revenues, increasing 39%.
Global DTC comparable sales rising 20%.
The cross brand continues to gain market share in North America with revenues up 13% driven by sandals and new product introductions.
Hey, Jude Brian revenues were $279 million with exceptional DTC growth was 30% digital growth of 37% constant currency.
Adjusted diluted earnings per share increased 11% to $3 59 per share.
Gross leverage ended up one eight net leverage was one seven times at quarter end, allowing us to repurchase $50 million of shares in July .
Finally crossing was named to the time 100, most influential companies for 2023.
In summary, we had an excellent quarter and our teams globally remains focused on driving brand health.
Market share gains and profitable growth in the back half of the year.
I would now like to provide updates for each of our brands.
Our cross brand love its strong revenue growth since 2018.
As we built both clubs and Brian Robbins across the globe.
This past quarter, our product and marketing efforts continued to deliver newness and excitement to the current Brian France, while simultaneously, reaching new consumers, who may not have considered up Brian in the past.
With respect to product innovation, we are diversifying our plug offering and growing samples.
We've seen significant success with a number of height orientated, new club introductions, including the crush Mega crush and more recently the siren.
In addition, our recent launch of doing a more elevated fashion forward club is very encouraging.
The Echo continues to outperform our initial expectations.
Personalization continues to drive global relevance for the classic.
Turning to samples.
As we have shared this category is an important growth initiative for crops.
Allowing us to expand into the adjacent 30 billion dollar global some category, where we believe I'm older technologies accessible price points strong go to market will allow us to compete effectively in a relatively fragmented market.
We're excited by our incredible sound performance, where revenues grew 34% compared to Q2 last year and 40% growth on a trailing 12 month basis.
Growth was robust in all regions driven by our diversified offerings.
New product introductions and robust marketing calendar.
The classic in Brooklyn continues to be a leading some franchises.
In addition, the more recent mellowed on crush introductions have been extremely successful and are also top selling styles.
We will continue to drive some awareness and customer acquisition with Activations, such as a new policy slide with the Lady Benbrook.
Overall, we're pleased with it sounds trajectory I'm very confident that <unk> revenues will grow to in excess of $400 million of shifts.
From a collaboration perspective, we announced plans for two year partnership with the LAE Bembry, who will serve as creative director of the crops times poll that pod to introduce innovative new styles.
This quarter, we introduce a polyp slide which sold out instantly and providing a halo for Osama offerings globally.
More recently, we partnered with wrap up no nasdaq's to showcase our high collection such as siren.
Crush.
Darren Paris fashion week, we took over the same Murphy pump up space.
Although marketing highlights from the quarter include a mellow slide with Taco Bell.
A clause collaboration with Parisian running Brian satisfied.
Slide I'd call the partnership with Korean food, Brian O Turkey.
Finally, this month that Bobby collection, featuring clogs sandals and Jim It quickly sold out ahead of the blockbuster movie launched last weekend.
Asia is another important long term growth driver for the cross Brad.
Brian is currently underpenetrated relative to here in the U S.
In Q2 Asia revenues grew by 39% constant currency.
Growth was again broad based with strong brand momentum throughout the region, including China, Australia, South Korea, and South East Asia.
We're particularly encouraged by another exceptional quarter of growth in China.
But Q2 revenues increased over 100% ahead of our expectations and one more sign of the potential within this market.
The leadership team and I had the opportunity to visit China in June for the first time in three years and was wonderful to see how much the Brian Grub, we've met with our partners suppliers and visited many stores.
We have been deploying the same playbook, we've used globally, including influences collaborations and personalization.
We've partnered with local celebrities, including Viking thing.
Joe you can tone to style collaborations and products and their own authentic way.
Crocs creations, but for emerging Chinese designers from fashion incubator LIBOR will feature at Shanghai fashion week.
And Jim is our vehicle to self expression continue to surprise and delight consumers and create great excitement in our stores.
Cross rising popularity in China, that's created a passionate following with the hashtag known as dogma, while clock followers.
On Red a leading Chinese social lap topics related to crops have accumulated over 310 million views.
During the popular mid season Festival in June Crocs sales rank second on T mall within casual footwear brands.
And do your own Chinese ticked up we ranked first in South Korea.
Mid season of basketball.
In summary, we're incredibly excited by the cross brand momentum in China and are even more confident about the potential for the crocs brand and the second largest market in the world.
Now to Hey, Dude, we're incredibly pleased with the exceptional DTC growth of 30%.
Constant currency digital growth of 37%.
Our product and marketing innovation is driving new customer acquisition and its growing awareness on the coasts.
Our E Commerce data demonstrates that Q2 revenues on both the east and West coast increased 45% compared to last year.
New product introductions, which range from new colors to new silhouettes and driving excitement.
Our Americana styles with top sellers ahead of Memorial day, and fourth of July holidays, amongst men women and kids.
As a demonstration of our test and learn approach. This year Americana collection featured over 20 patents and colors building on the early success, we saw last year.
The new Wally and Wendy funk and wash canvas styles performed strongly in both DTC and wholesale.
And our efforts to expand the brand beyond the iconic <unk> Wendy within sneakers are off to a great start there.
Karina for women and the newly introduced Scirocco sold out quickly when the process of getting them back in stock.
On the marketing front, we focused on enhancing Brian the words.
We launched our first ever Haydu collaboration this quarter with outdoor lifestyle, Brian Mossy Oak when we saw great sell through.
We are also starting to see it up back to the conference collection on social channels and look forward to launching our collection featuring colleges from the southeastern conference or FCC in September .
Finally, with respect to wholesale revenues as we discussed in June of last part of last year's revenue related to pipeline fill.
Unused strategic Alliance partners.
We estimate pipeline fill was $70 million for the second quarter of last year and $220 million in fiscal 'twenty two.
This pipeline is filled with very conscious decision to Napa to secure shelf space, knowing there will be competition in the marketplace.
And that consumer takeaway for the brand across all channels, we estimate to be up approximately 27%. During Q2 2023 based on over 80% increase in our strategic alliance accounts shrinkage in our non strategic wholesale accounts and 30% DTC growth.
Retail tracking service data from Jakarta, formerly MPD indicates the ancient rose from the number 15 fashion footwear brand in Q2 of last year to number eight in Q2 of this year based on U S sales.
As we look towards the remainder of the year as an agent we are lowering our outlook for revenues.
Wholesale growth is expected to be low.
As we outlined in June there was $220 million in non comparable sales last year due to the rapid expansion to major U S strategic customers and the discontinuation of relationships with some smaller customers.
Since then well our wholesale partners are very pleased with the performance and how you're doing in a number of called this out in their recent earnings. Many are cautious in terms of future bookings based on the overall market outlook and lack of historical data on <unk> performance.
Finally, as we previously shared we anticipate constrained distribution capabilities, particularly related to at once in the back half of the year due to ERP and warehouse transitions.
Even with this lower near term revenue outlook. The hatred, Brian is acquiring new customers and it's gaining penetration in strategic accounts and on the coasts.
We remain incredibly optimistic about the long term potential of the brand on a global basis.
Finally, turning to digital for both brands, we saw an exceptional 21% constant currency growth.
By new product introductions that are resonating well with consumers globally.
For the Crocs brand the App is rapidly scaling and gaming consumer traction reaching.
Reaching penetration over 20% in South Korea.
In the U S. We continue to be excited by our loss of customization and on our site now operate an online configuration organizations designed custom closets and get us.
Our global CRM database is also accelerating in key markets with the expansion of programs like SMS and the App.
As we mentioned last quarter to gain better control of that Brian and realized higher asps.
We anticipate transitioning some about crocs E tail business that sits in our wholesale segment to a direct digital sale both on cross dot com as well as market places, where we will directly what will sell directly to the consumer.
Yeah.
This will result in lower wholesale sales and higher DTC sales.
Well, Hey, Dude, we're investing in digital capabilities, such as in home site experience payment offerings to improve the customer journey.
We're also scaling our digital marketing investments to acquire and retain new customers.
These efforts coupled with new product introductions have led to strong growth rates across all our digital channels, including being a top performing brands during Amazon's recent prime day.
Overall, our digital first approach is working and it's driving strong growth globally.
In summary, we have tremendous confidence in and clear evidence that the underlying strength and growth potential of both the crux unhedged brands.
Sell through from both loved brands continues to be robust and we believe we are benefiting from our democratic price points and gaining share in a difficult market.
I will now turn the call over to Ann who will review, our financial second quarter financial results in more detail.
Thank you Andrew and good morning, everyone I will begin with a short recap of our second quarter results.
All revenue growth rates will be decided on a constant currency basis, unless otherwise stated.
For a reconciliation of the non-GAAP amounts mentioned to their equivalent GAAP amounts. Please refer to this morning's press release.
We had an excellent second quarter with over $1 billion in consolidated revenue, representing 12% year on year graph, we delivered another quarter of industry, leading profitability with adjusted gross margin of 58, 1% adjusted operating margin of 33% and adjusted diluted EPS growth of 10 point of interest.
Our portfolio is diversified from a branch channel and geography perspective.
On a trailing 12 month basis, ending Q2, you do have Grand revenues were 26% of total revenue channel mix was well balanced wholesale revenues, representing 54% of trailing 12 month revenues and DTC at 46% finally, approximately 31% of total TTM revenues and 40% of craft brand TTM revenue.
Were from international markets.
During the second quarter Cross brand revenues were $833 million growing 14, 9% to prior year and driven by strong DTC growth at 26, 8%.
The brand saw 33 million pairs of shoes, an increase of one 8% the cross brand average selling price during Q2 with $25, which was up 12, 8% on a constant currency basis, driven by price increases and fewer DTC promotion internationally.
Within the cross brand clients grew double digits and continue to generate demand with newer products such as echo crushed in sandals.
He handles and important growth pillars for the future increased 34% in Q2 with growth in all regions to represent 16% of Krotz Springs.
Finally, <unk> continues to create excitement even can you connect with consumers around the world.
Growing 13% from last year with strong growth internationally.
Now, let's discuss a few cross brand highlights by region in North America second quarter revenue increased 12, 5% to $475 million in first half revenue increased 11, 5%.
We gained significant market share in a declining U S footwear market in North America DTC channel for the Crocs brand and an indicator of underlying consumer demand with a key growth driver the DTC comparable sale of 12, 9%.
Wholesale revenues were also robust increasing five 5% despite a more challenging wholesale environment.
Asia Pacific delivered significant growth as we execute on our long term growth plan to ignite the brand in the region.
Cross brand Q2 revenues in Asia grew 39% to $198 million and growth was broad based across countries and channels.
China, and Australia led to growth with revenue increasing over triple digits, while South Korea, and Southeast Asia also had strong double digit growth.
Cross brand revenues for Amelia were $160 million a decline of one 4% from the second quarter of 2022.
As a reminder, Q2 last year benefited from a $40 million revenue shift out of Q1 and following the Vietnam shutdowns.
This quarter strong growth drive markets, including the U K and France, as well as outstanding DTC comp growth of 36% was offset by a decline in distributors.
In connection with the newly implemented marketplace management program in the quarter, we terminated a relationship with a significant distributor servicing Africa. This was not anticipated going into the quarter and we terminated the relationship after finding evidence price diversion to the gray market outside of their approved territories. This impacted revenue by eight.
Millions of dollars in Q2 and will impact second half revenues by $21 million, we expect Amelia revenue growth to reaccelerate in the back half of this year.
Turning to Hey, do Q2 revenues were $239 $4 million, an increase of two 9% from last year. During Q2, the brand sold $8 3 million pairs of shoes, an increase of three 6% over last year.
Can you do to average selling price during Q2 with $28 eight tenths of a 0.6% lower than prior year due to price pressure from gray market selling on Amazon.
The DTC channel, which is predominantly e-commerce led the growth with revenues, increasing 29, 7% from last year digital sales increased 36, 6% and digital penetration increased 1000 basis points to 41, 8% and Andrew explained earlier underlying consumer demand for the <unk> brand is incredibly.
It really healthy.
Consolidated adjusted gross margins for the second quarter were 58, 1%, increasing 290 basis points from last year, driven by a favor ability and ocean freight rates and the absence of the airfreight that was partially offset by higher overhead and took down and costs associated with our HAE distribution network inefficiency.
Currency negatively impacted consolidated gross margins by approximately 50 basis points.
Turning to the brain adjusted gross margin for the cross brand was 62% or 410 basis points higher than prior year reduced airfreight of approximately 380 basis points combined with lower inbound freight rates higher prices internationally and channel mix were partially offset by product mix currency negatively.
Impacted margins by 80 basis points.
Hey, Dude adjusted gross margins were 47, 1% flat with prior year.
Continue to see a reduction in inbound freight rates. However, this has been offset by additional inventory storage and network costs related to the transition of our sub scaled distribution network combined with grain market pressures on ESG and our digital channels during.
During the second quarter consolidated adjusted SG&A represented 27, 8% of revenue, which is 270 basis points higher than last year as we invested more in marketing and talent for both brands to support our growth trajectory and annualized additional investments for E Mail.
Our second quarter consolidated adjusted operating income was $325 million, an increase to prior year by 11, 7% and consolidated adjusted operating margins remain best in class and increased 20 basis points to 33%.
Our second quarter non-GAAP diluted earnings per share increased 10, 8% to $3.59.
Our continued strong free cash flow generation enabled us to repay approximately $300 million of debt in the first half reducing borrowings to $2 billion at the end of Q2 adjusted gross leverage was one eight times.
Cheating or mid year leverage goal and net leverage was approximately one seven times as we ended the second quarter was $166 million of cash and cash equivalents.
Our exceptional free cash flow generation has enabled us to quickly deleverage and resume our share repurchase program in July we completed $50 million of share buybacks repurchasing 425000 shares at an average price of $117.72.
We currently have a $1 billion remaining on our share repurchase authorization and we will continue to methodically balance debt repayment and share repurchase as we approach our long term net leverage target of one to one five times.
Our inventory balance at June 32023 was $436 million.
Decline of 13% in Q2 last year.
<unk> inventory was $307 million.
Down eight 4% to prior year and heated inventory was $130 million a decrease of 22, 3% to prior year.
Inventory turns continue to improve and we are very pleased with the help of our inventory.
As we look forward I would like to share our current outlook for the third quarter and the balance of 2023.
All numbers will be on a reported basis unless otherwise stated.
Having completed an exceptional first half and with improved visibility and confidence around the second half, particularly for the Crocs brand. We are raising our full year 2023 outlets for revenue and profitability.
We now expect revenue growth of 12, five to 14, 5% on a reported basis compared to 2022 up from prior guidance of 11% to 14% growth and resulting in full year revenues of approximately $4 million.
On a consolidated basis as always we are focused on best in class profitability and are raising our adjusted operating margin to be approximately 27, 5% for the full year.
We are confident in our ability to deliver higher operating margins as gross margins have outperformed and we have been able to closely manage SG&A, while investing for future growth.
We are also raising our adjusted diluted earnings per share outlook to be between approximately $11 83 to $12.22 up from the prior guidance of $11 17 to $11 73.
From a brand perspective, we are raising our expectations for the cross brand and now expect to grow at 12%, 13% on a reported basis up from 79% previously with H I expect it to deliver the highest gross and PTC outperformance expected to continue.
For he viewed as Andrew mentioned, we are lowering our full year growth outlook to be between 14, and 18% revenue growth on a reported basis.
This translates to approximately $3 five to seven 5% growth and in 2022 pro forma revenues of $986 million.
While we continue to anticipate strong growth in wholesale sell out for the <unk> brand. Our wholesale partners are planning to manage their inventory very closely for the remainder of the year and we have a constrained warehouse that limits our at once capability.
On a two year basis <unk> growth is very healthy at approximately 80% and we remain excited about the long term growth potential of this brand.
For Q3, we expect consolidated revenues to grow approximately three 5% and you've got a significant pipeline fill for Egypt. We expect Q3, adjusted operating margin to be approximately 27% and adjusted diluted earnings per share of $3.07 to $3 15 in summary, we are incredibly.
Pleased that we were able to raise expectations for revenue operating margin and EPS.
At this time I'll turn the call back over to Andrew for his final thoughts.
Thank you.
As we look forward, we're incredibly confident in the strength of the crux of behavior trends and our ability to drive market share gains and sustainable profitable growth.
Our focus remains squarely on sustaining brand health and creating long term shareholder value operator, please open the call for questions.
Thank you we will now begin the question and answer session.
Ask 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'll pause momentarily to assemble our roster.
Our first question comes from Jonathan Komp from Baird. Please go ahead.
Hi, good morning, Thanks, everyone I wanted to start just by asking.
A little more detail about your outlook for Hey, Dude could you give a little more color on what you're expecting for the third quarter.
Betting in your total revenue guide it to just how to think about that channel expectations in third quarter for Hey, Dude.
Maybe a bigger picture question I know when you bought the brand you pointed to at least 1 billion of revenue by 2024, you're delivering that this year, but how should we think about the growth drivers as we get beyond 2023.
Great. Thank you Jonathan so.
Yeah, So maybe I'll do the last part of your question first and kind of set the stage behavior. Then we can come back to Q3. So as we look at the period since we've owned the <unk> look we've been rapidly expanded distribution to what I would say is essentially the same or very similar distribution to two crocs, along as part of that.
Spansion was last year and I'll come back to that at the same time, we've introduced a new innovative silhouettes that we think are doing well, but we know we're doing well.
We see we've dramatically strengthened the team.
We look at Q2 sell out to the brand up 27% as we look across all channels and consumer satisfaction is incredibly high NPS for the brand is 71, which is about 50% higher than frankly, most brands in the casual footwear space as we look at the back half of the year, we are reducing our expectations for the brand.
Simply related to wholesale and there's a few things going on that number one as I talked about in prepared remarks, we got $220 million of sell in that we did last year that it's pretty hard to comp.
Second.
We are seeing our wholesale partners.
Three quarters in the back half of the year I think they're being cautious for kind of three reasons. One is they're just cautious about overall traffic trends and the trajectory of the consumer they've got some overstocking.
And some other brands principally some of the big Athletic brands that are going to walk through and they don't have good history on pages in the back half of the year. So we're seeing very cautious bookings.
We combine that with some constraints that we have around our at once business.
We will be transitioning towards the end of the year, our warehouse and our ERP system. So we're being realistic about our <unk> capabilities.
And then lastly, I assume you know we've seen some some gray market from on the Amazon platform, which we think is principally coming from the distributors that we closed last year, we are seeing a slight mitigation of that.
But we're also working hard to.
Clean up.
It's been presentation. So.
I think hopefully that gives you a strong picture of whats happening with Hey, Dude, we're incredibly confident with the brand I'm incredibly confident the loan to a growth trajectory. We're not ready to guide next year's growth I think that was embedded in your question, but we feel well positioned for the long term growth of the hatred brand both here in the U S.
And internationally.
Some commentary around Q3.
Andrew Hi, John I think the biggest thing for Q3 is just to remember we're still dealing with as Andrew mentioned and non comp isn't it obtained data or the pipeline fell to for Q3, we do expect <unk> to be down and that's primarily.
That's really related to a wholesale part of the business as Andrew just mentioned and you can see from my presentation, we had about $60 million of pipeline fill last year and then we expect direct to consumer to be up in crocs, obviously to continue to grow and that that provides the color around the overall Q3 guidance for revenue growth.
Okay. That's very helpful. And then if I could just ask separately about crocs.
Given some of the sales that it looks like Youre going to Miss in the second half maybe close to 30 million from the distributor you mentioned, but you are still raising guidance for the year could you just highlight maybe where you're seeing upside for crocs and maybe tie in with that.
Any updated thoughts on how the gross margin for the year for crocs into it looks like it was quite strong in the quarter. Thank you.
Yeah. Thanks, John .
Look our core business is very strong and we're seeing the brand.
Formed strongly.
And frankly, many regions I've told me call out a couple.
DTC is very strong, particularly here in North America, but also in Asia.
Our U S wholesale business.
It's probably a little bit stronger than we thought it was going to bake. So we feel really good about that China. I think we gave you a lot of color around China.
In our prepared remarks, but it's performing very well and broader Asia is also performing well so.
Think what we're seeing is continued strength in crops really driven by.
The same things that we've kind of talked about a few times, but it is really product innovation, it's marketing innovation, we see it across clubs as well as samples as well as Jim, but so I would feel very confident.
Overall, our crops trajectory and pick up on your gross margin point.
I would also just add that aneel, yet GTC is actually incredibly strong as well so even though the distributor part is impacting that we saw very strong growth in EMEA.
M E T C F I think around 40%, so Adam but overall from a gross margin perspective. So cross gross margins are also flowing through stronger some of that is just.
Stronger channel at DTC outperformed.
The second piece is we've taken quite a bit of price in our international markets, which are really supporting margin and then we've seen promotional levels kind of level out in North America.
And then obviously, we've been able to recoup the freight airfreight last year as well as just lower freight rates.
So I would say overall, we expect margins to be higher than that kind of original guidance I think we're gonna be like a little bit higher than 58, and now we're thinking we're probably going to be north of that so overall, our gross margin expectations for the year are higher than the kind of 55 and a half we talked about last time and that supports the operating margin rate.
Alright, Thank you very much.
Thank you.
Hi, Yeah. Thanks for taking my questions. So just first can you just comment on any differences I guess that you're seeing from your wholesale partner behavior between crocs and he did in the U S. Specifically is there you know is there any difference between sell out between the brands or is this really that non comp dynamic and then just not having that historical.
Just.
Historical data on what happened in the second half weighted.
Yeah, I think that is obviously a question that we've we've definitely been kind of asking ourselves and look I'm looking closely at Abbvie and I would say a lot of it is really the newness of the brand we feel crocs is clearly performing well.
I would say Cogs.
S wholesale it's the newness, it's both clubs as both saddles that it's performing well.
I would say the hey, Dude sellout is also very strong I think we gave you some visibility to that in the strategic partners.
It's drew.
Dramatically I think close to 8%.
Sell out in aggregate across all channels. Our estimate this is up 27%. So consumer takeaway is strong it's definitely performing at wholesale we think the principle issue is they they have years and years in history on crocs and how it performs in the back half of the year. The history is.
For the back half of the year, and we're seeing cautious bookings and as I highlighted in my earlier answer it's hard for us to react to that without once given out kind of a warehouse situations. So that that's really a diagnosis.
Got it that makes sense and then just on the inventory management was really strong during the quarter ago, you talked about Haydu gross margin was flat year over year, but you know some pressure from those storage costs. So you know.
As you've cleared their inventory when do you think you could start to see maybe some benefit to the Hadrian gross margin. Thanks.
Yeah, we're very pleased about overall inventory, obviously down for both brands and really coming in line with our longer term target for return targets for both brands being about four times I think from a gross margin perspective overall.
Overall, there's kind of two pieces pressuring media gross margin one piece that you mentioned is the additional kind of storage and subpar logistics situation for that brand, which we expect to.
Your next year with the opening up of our new Las Vegas distribution Center and the second piece is we are seeing quite a lot of gray market activity on Amazon pressure arcade U S. P. S and that's really related to some of the terminations that we did when we went through and terminated some of the legacy International distributors and also some of the legacy U S partners.
So we expect to work through that and that to improve throughout the year. So I expect next year, our gross margin.
Should be back in line kind of with where we originally thought which as you know more unwind that's around 50% in the shorter term.
Got it thank you.
Yes.
The next question comes from Tom Nickelic from Wedbush Securities. Please go ahead.
Hey, Thanks for taking my question.
So.
I guess, when we think about hey dude.
Obviously, yes.
I believe you said down in Q3 and.
That would imply that you know there's a.
Pretty significant step up in.
In the fourth quarter.
Hmm.
Based on the slide deck is also a pretty significant amount of.
New door contribution last year I'm not sure if that channel fill or felt in <unk>.
And we felt that it had been earlier in the year or whatever but I guess, how do we get comfortable with kind of the reacceleration.
That's embedded in hey, Dude for the fourth quarter.
Yeah I think.
There's a few things one is in the fourth quarter, we anticipate that the DTC balance of the business is bigger right. It typically is with the.
With the with the holiday period. So we think DTC is the bigger items you can see we've gotten nice trajectory on our DTC business.
We also.
Looked at our wholesale business and yes, there is still a component of sort of pipeline fill that's harder to comp in the fourth quarter, but I think the balance of the business, we won't see a rebound in Q4.
Alright.
And then I just want to follow up on inventories. So I think inventory was down 13% year over year.
Should we think about inventories being down year over year in the back half as well.
Yeah, I don't think we don't typically guide inventory I would say that we expect by the end of the year to look at to be closer to our four turn target. So I think it depends a lot on obviously from a revenue perspective, and we will both for both brands tend to bring inventories ahead of.
A very high selling season for wholesale in Q1, so some of that depends on our Q1 came on order are obviously, but we think that our inventories will be back in line probably around four turns.
Thank you Paul.
Understood. Thanks, Dan Thanks, Andrew Best of luck in the back half.
Thanks for that Tom.
The next question comes from Jay sole from UBS. Please go ahead.
Doug you gave us that nice data point that sandals continue to expect it to be 400 million for the Crocs brand. I mean, you also mentioned some new styles from Hey, Dude I think you pointed out in the slide deck the phone the scirocco.
What percentage of Hey, Dude revenue as the wallet in the one day right now and where it maybe where was it a year ago and where do you see it going from here. Thank you.
We will not be providing that David J, but I can qualitatively tell you that.
A very large portion of the AG business is while in one date, that's the iconic silhouette and wawa, highlighting new styles, which we think is important to continue to.
To diversify and build out the brand and take the brand into kind of other silhouettes and other wearing occasions.
A ton of our effort from a southern product innovation and newness perspective is going into the wallet. Wendy I think we will highlight a great example is the patriotic pack right. So last year.
Essentially.
When we bought the brand they had a stars and stripes shoe that did really well going into memorial day and fourth of July we saw great traction with that so we expanded that to I think we said 20 plus style colors across men's women's and kids and that did amazing so yes.
Yes.
A large portion of a very large portion of business while it <unk>. Our innovation is going into all your Wendy plus also the additional silhouettes and I would call out sirocco in particular, which is kind of a running oriented so casual running it's performing very well in our DTC business and in our key wholesale accounts.
Okay got it and if I could maybe ask one more keep it gave us an update on the cash use plans for Q3 and Q4, obviously paid down a lot of debt in the quarter bought back some stock, but would you expect those trends to continue at a similar rate or a different rate that would be helpful. Thank you.
Yeah, I think thanks, Jay Weird, Yeah, we're incredibly pleased with our historical debt Paydown and what we anticipate so we've obviously done a lot of work on Derisking, the balance sheet and paid down $850 million of debt since we purchased <unk>.
We do expect to continue to generate incredible free cash flow. So that's free cash flow given these dynamics.
After we will funding our business, obviously, we will continue to deploy capital so we'll prioritize paying down debt.
To get to our target net leverage longer term ratio one to one and a half as we've stated and we will look to Opportunistically also buy back shares. So we will balance off in the back half of the year.
And is that included in the EPS guidance.
I know the EPS guidance include debt pay down and excludes any opportunistic share buyback.
Got it okay. Thank you so much.
Thank you. Thank you.
Our next question comes from Samuel Mark Poser from Williams trading. Please go ahead.
Good morning, everybody. Thanks for taking my questions.
Alright.
Yes.
At the Fannie show, we were told that when showing a lot of new product that you know to help ballads. Hugh you run them Bap program, but you have map holidays. My question to you is how do you or what are you doing with core product in both cross said, hey, dude to create more realm.
Scarcity. So you don't need the map holidays. So you can drive a better you know.
More of a full price business, because I think everybody out there has seen a good amount of promotion and then I want to follow up on how you're controlling at Amazon.
And how long that's going to take to get that all cleaned up.
Okay Alright.
So I think let me do the first part first so what I'd say is.
Full cross on Hey, Dude.
We operate map.
Well no we try and make sure our key styles are mapped and so theyre not promoted on an ongoing basis.
And then we give the retailers I think five holidays, yeah throughout the year, which is frankly pretty typical obviously most brands follow that cadence.
And give them the opportunity to drive some promotion those are all the key promotional periods when the consumer is expecting.
Promotion.
And we think that is a very sensible strategy to maintain.
Majority is full price sell through plus also give our wholesale partners an opportunity to drive a little less for business at key times and compete with with other brands.
I would highlight particularly for crocs fluid that's been in place for some period of time that is driving a very high overall achieve gross margin rate.
And have a great deal of profitability for the brand.
And then.
So then what you want to ask you a question associated with with Amazon playing up.
Well, yeah, but I mean, I understand but if people.
If you have a brand that appears as strong as both your brands are and you have a strong map policy.
Wouldn't.
Wouldn't the consumer start waiting for the sale periods over time versus.
Versus just control. It. So you know I understand promoting stuff you need to clear, but if you have core colors that youre going to promote I.
I mean, you know it just yeah I don't think so.
Yeah, I would say it sounds it's not all of the evidence for that right, we see our core products.
Coal close co products. So we can week out right. So there's really not a lot of evidence that.
They're waiting for the map periods and.
And I would say the the math breaks on the calls are pretty light.
And I would say you know look we're doing a ton of other things with with scarcity right. So we do.
Multiple callouts a week to drive.
Cassidy and drive consumer interest in the brand.
And a reason to buy we have huge amounts of kind of seasonal product in and out.
And do you think about the core classic clog.
A whole range of seasonal colors that don't get replenished and so the consumer knows that they don't buy them.
They're not available later, so I think the balance of the.
Cone labs marketing activity consumer activation.
Is it is kind of what can really well to be honest in terms of driving the overall trajectory of the brand as well as the.
The sales and gross margin achievement.
And then apply that to hey, dude, including the.
The second question.
Yeah.
We're transitioning to a similar strategy for how to do it right. So we've rapidly expanded.
The distribution of the brand essentially to the same partners that does.
Both have crux.
We're following kind of a similar pricing approach.
But I would say we are seeing quite a lot of pressure.
In terms of Amazon Gray market and are working really hard to close that down I think we highlighted that we think a lot of that product is coming from the distributors that we closed internationally. So the amount of product that they have available is finite and will run out and we believe is running out.
And so it's a disruption temporary disruption to the to the business, but I think we're very clear about what it is and how we deal with it.
Okay. Thank you very much.
Okay. Thanks.
The next question comes from Jeff <unk> from B Riley. Please go ahead.
Good morning, guys Congrats on a great second quarter.
Andrew and I was wondering your.
Q2 presentation that you put out a June seven.
No. The implication is you take the Hindu guidance from <unk>.
Mid twenty's down to the 14 to 18, the implication of these things we're probably on track at that point.
You know given how you go about your IR effort and your communications.
Just wondering if you could walk us through some color as to what happened.
On June seven to today.
In terms of your.
How would you get the feedback.
Any color on how how things deteriorated a little bit changed.
Yeah look I think the biggest thing Geoff this is what I highlighted earlier.
Earlier question, right, which was as we look at it or.
There's really two big pieces, one is wholesale there there is is it sort of.
Our efforts to clean up the grain market.
The biggest probably is the wholesale.
As we look at our bookings for the fourth quarter. They were more conservative than we thought they were going to be.
That's really the biggest change and <unk>.
Reasons, we think the.
The reasons that we've been told in the reasons that we understand for that is number one you know that.
Wholesale channel majority of the wholesale channel as being pretty cautious about the back half of this year.
They have some inventory overhang.
Some other brands that they need to work through so they are open to buy dollars are a little bit more constrained than they'd like debate now you could argue that they should invest in the performing brands and then deal with the the overstock rents separately, which certainly has made that argument and we'll continue to make that argument.
And they don't have strong history of immediate right. So.
Unlike crocs with that years and years of history and can see exactly how it performs in the back half of the year. They don't have the same.
History, and confidence and hey, Dude and pushing a bit at the responsibility back on us in terms about once but but we don't have the ability to deal with that to the degree they'd like us to him. So.
We just stop at this point it was prudent to lower expectations for the back half of the year.
So that's really what changed as we look beyond the back half of this year.
We see lots of growth opportunities for the brand.
Both from a territory perspective from a customer perspective, but also from a silhouette or new product introduction perspective.
Just a quick follow up on the direct to consumer Hey, Dude at $29 seven I'm curious is that a.
Relative to the 46 in Q1 on a two year is that are those comparable it seems like that probably decelerated a little bit and then I was wondering.
As you guys measure the great market impact how much of an impact in terms of percentage points might that have on.
DTC revenue percentage.
Yeah, So Jeff that 40% with just.
That was just March if you remember that was direct to consumer comp for March because we didn't own them, but just before that the 29, 7% total growth for direct to consumer which is E. Com and then we have a small amount of retail clinic retail tech and clearance stores. So that's a 27% Kraft senior comparing kind of three months to one month when we.
So I'm not sure it's a totally fair comparison, but we felt pretty good about a 30% direct to consumer growth.
Sure if we can actually or were ready to kind of talk about how much. The crane market has hurt from a growth perspective, I would say actually on both brands.
Not insignificant, it's actually pressured ASP and also obviously we lose that.
<unk> and being able to sell directly to the consumer so we've been very aggressive in attacking that we've talked about we've launched AD market clean up kind of program and.
Obviously cancelled a pretty significant distributor.
And we will continue to be very focused on making sure that our product ends up where it should be.
Great. Thanks very much.
Thank you Jeff.
The next question comes from Jim Duffy from Stifel. Please go ahead.
Thank you good morning.
Furthermore syndrome.
I'm, hoping you can speak to develop moved the charter market place opportunity you have to build maybe the store just can you size the baseline while the moving parts with Covid give us a sense for.
The size of that business now and then maybe speak to the current channel mix.
And then would that back or if you could speak to the different avenues for girls will digital through the principal churro or do you plan to open more stores in China as well.
Yes.
Let me talk about the strategy about what we're going to do in China. All have come in at the end and talk to about the size of the base and gives you remiss to give you some perspective right. So from a strategy perspective.
The way to think about it and we've talked about this historically through the clean up so the way to think about it.
In China today, we have a large digital business would definitely invested very heavily digital.
It's probably it's probably our most important channel within within China.
And then secondly, we have a small footprint of company owned stores. Those company owned stores are in the major cities and in the best malls, which are sort of quite expensive for your distributors your distribution partners in country to invest in that.
That's super important because state showcase all of our latest products they drive authenticity with the consumer.
And then we have outlet stores that we also own directly ourselves important because they are highly profitable and also they allow you to keep your inventories clean and then the third component of our strategy is the franchise.
Or a partner BARDA branded stores.
So as we look at growth, we think growth will principally come from two things because he got a digital business will continue to grow and that's diversified across the platform. So that's T ball, that's J D, but also increasingly dump increasingly.
China has picked up.
What we do what we do a lot of social selling in China, and so the growth will come from digital and will also come from partner operated stores. So as we look at the part in the portfolio. They will continue to grow their store footprint.
Notably quite aggressively.
The stores that they're operating for crops are performing extremely well that makes it a lot of money for those in there that really can bucks of animals, if they they're making money and they can see it up she knows what stores they will and obviously, we'll encourage that so it really the partner operated stores and the digital will drive the business in the future.
Yeah. So I think historically from a size perspective would be that China was about 5% of the crops revenue base.
And obviously you know our longer term growth as we expect it to go out to be about 10%, which would be at $500 million.
Faith, roughly if you do the math historically, we thought it would.
More like a $60 million.
We we obviously.
It very quickly so it's outgrowing its taking share and really on track with that as kind of that long term trajectory. So we're pretty pleased overall with how how China is growing and that is on track.
And then instead of margin accretive business.
So we're investing quite heavily in it right now right and where we're investing outside.
Marketing into that business, but long term, obviously, you leverage that and the gross margins in that business are incredibly strong.
Great.
Last question for me is just on the <unk> do this you Mary I'm curious if you could all adjusted it for the.
The tougher revenue view.
I'm, sorry can you say that again I missed the last part of your question. It's the Hey, Dude SG&A I'm curious if you've adjusted your planned.
SG&A investment he viewed Grand tour, the tempered revenue view.
Oh, I understand I know actually we continue to accelerate.
And two hey Dude.
In line with our original plan because again this is not a consumer takeaway is shield and till we felt very strongly that we need to invest in our brands and Luckily we can still generate 27, 5% operating margin for the benefit of having a portfolio and also with the benefit of having one one branch that Tim is talking about it. So we will continue.
To invest and he did SG&A throughout the year at the same pace.
Excellent. Thank you.
Thank you.
The next question comes from Laura Champine from Loop. Please go ahead.
Thanks for taking my question.
So I hear that the shift from expecting hated to grow in the mid twenty's to more like high teens. This year is because of wholesale customer orders.
Orders coming in conservatively does that impact your own internal thoughts about the growth rate for hey, Dude for next year and beyond.
No Laura I think you know connected to tons answer to Jim's question.
<unk> no we are we see hey, dude on.
Essentially the same trajectories, we saw it on when we bought the company since we've owned it.
We still have very high expectations for the long term growth of the brand.
And we continue to make I would say the SG&A investments to talent investments.
On the marketing investments that we had anticipated, making even before taking down.
This adjusted.
To outgrowth right.
And we will continue to do that we're very confident in the long term potential of the brand and are what.
We're managing this brand for its ultimate potential.
Kind of one year sort of one quarter or one outperformed one half year performance.
Understood and then just a follow up on the sort of wild wild west environment on an Amazon and the great goods sold there has there been a change in your own policy for wholesale customers for Hey, Dude to retell on Amazon and if so how much is that impacting.
That guide for this year.
Yeah, there has been a change so.
And we will make further changes so what.
What we did last year, so that doesn't impact our guidance. This year just to be clear what we did last year as we did terminate some customers.
That we're operating I would say, one or two stores, but buying goods principally to sell on Amazon.
So we terminated several customers that were doing that.
That was done last year, that's not this year.
Also very clear not tons of sale to all of our partners that they are not allowed to sell on Amazon that doesn't mean that some do some do because they do.
But that is our policy, we will slow as we go through the back end of this year Constricts, our wholesale customers' rights to sell on.
Our own dot coms as well right. So this is essentially moving Ah Hey, Dude to the same policy, we have for crocs, which is a logical sell customers so think about.
Footwear or.
Or.
Foot locker theyre, absolutely have the rights to sell on their own dot com, but the mom and pop retailers will not have the rights to sell on any web presence that they have.
So we're in the process of their sort of continued raining in all of digital seller.
Got it.
Just to emphasize we're getting it to the same place with crocs. It we're not we're not restricting both of them.
Makes sense and and have you been can you be specific on how much that has impacted the guide for 2023.
Look it's probably had some impact.
We can't break that out and be specific around that but it probably is a factor.
Thank you.
The next question comes from Rick Patel from Raymond James. Please go ahead.
Good morning, everyone. Thank you for taking the question.
Can you talk about the drivers of the Crocs brand in North America going forward I'm, just curious how we should think about the contribution of pricing versus volume in the back half and also if there's anything to call out in terms of the wholesale business in light of the trends that you're seeing at Hey Dude.
Yeah, I mean, the drivers of crops.
I think your question is kind of a multi period question. So.
We see <unk>.
New product introductions.
We see <unk>.
<unk> marketing support we see collaborations continue to drive very high interest in the Crocs brand and in fact growing interest in the cross brand, we will capture that interest through continuing to diversify clogs continue to grow our cloud business as.
As well as the rapid acceleration of sandal penetration in some categories and also continued.
Innovation with it.
You bet.
So we really see those core businesses towards the back end of this year. We will also continue to experiment with I would say kind of new and innovative silhouette. So we think that the crocs brand can be particularly relevant.
Continue to see us push.
Push the envelope in terms of experimentation.
That's super important.
And so it's in a pretty confident.
As evidenced by our DTC growth and a strong wholesale performance that will continue to drive kind of a multi year trajectory for the crocs brand in North America.
Can you also update us on where you are with addressing hey, Dude ERP in capacity constraint issues and and I believe you touched on working through that next year, but I'm. Just curious if it's going to be a first half versus second half event and when that does happen what kind of change we can expect from hey, Dude from a go to market.
Strategy perspective in terms of.
And she will add new wholesale partners or accelerate international efforts.
Yes, we plan to transition to a new ERP and our warehouse essentially at the end of the year. So was so that that will be the transition period.
And that will that will release, a couple of important constraints.
One is we're incurring a lot of extra costs to move goods around double handle goods and have good started in <unk>.
<unk> scaled places so that will reduce that'll alleviate some expense.
And also some flexibility and the ability to react to the business. It will also give us the opportunity to have a much larger at once business.
In the.
And the following year and it will also allow us a little bit more flexibility with some of our major wholesale partners with whom today, we're really trying to do a lot of direct shipments, which can be efficient and cost effective but also not very flexible so it'll give us a lot more flexibility that.
That'll give us lower cost flexibility and the opportunity for larger at once business.
Thanks very much.
This concludes our question and answer session I would like to turn the conference back over to Andrew <unk> for any closing remarks.
So just to close I think I'd like to just thank everybody for their continued interest in the business. Obviously, we had a phenomenal second quarter and I think what Youre also seeing is the real.
Cash generating power of our portfolio.
The ability to.
Pay down debt very rapidly and give us a lot of balance sheet flexibility. So thank you bear interest and.
We will talk to you again next quarter.
Okay.
Conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
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