Q3 2023 Crocs Inc Earnings Call
Welcome to the Crocs incorporated third quarter 2023 earnings call.
All participants will be in listen only mode.
Should you need assistance. Please signal conference specialist by pressing Tena key followed by zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two please note that this event is being recorded I would now like to turn the conference over to Erin Murphy Senior Vice President of Investor Relations and corporate strategy. Please go ahead.
Good morning, everyone and thank you for joining us today for the Crocs, Inc. Third quarter 2023 earnings call earlier. This morning, we announced our latest quarterly results and a copy of the press release and our slide presentation may be found on our website at crocs Dot com.
We would like to remind you that some of the information provided on this call is forward looking and accordingly is subject to the safe Harbor provisions of the federal Securities laws. These.
These statements include but are not limited to statements regarding our supply chain challenges cost inflation the acquisition of Hey, Jude the.
The benefit therefore.
Crocs strategies plans objectives expectations financial or otherwise and intentions future.
Future financial results and growth potential anticipated product portfolio, and our ability to create and deliver shareholder value. 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 reserve.
Performance 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.
Actors section of our annual report on Form 10-K, and our subsequent filings with the SEC Accordingly actual results could differ materially from those described on this call. Please refer to Crocs annual report on Form 10-K, as well as other documents filed with the SEC for more information regarding.
<unk>.
These risk factors.
Certain financial metrics that we referred to as adjusted or non-GAAP. Our non-GAAP measures. A reconciliation of these amounts to their GAAP counterparts is contained in the press release, we issued earlier this morning.
Joining us on the call today are Andrew Rees, Chief Executive Officer, and Anne Mehlman, Executive Vice President and Chief Financial Officer. Following their prepared remarks, we will open the call for your questions. At this time I will turn the call over to Andrew.
Thank you Eric and good morning, everyone. Let me start by welcoming Aaron Duffy, our new SVP of Investor Relations and corporate strategy and by thanking Carlin as she transitions to a new role within crocs and for her dedication to leading investor relations over the past three years.
We delivered strong third quarter results with quarterly revenues over $1 billion exceeding the high end of guidance.
Led by double digit growth in the Crocs brand, partially offset by high single digit decline in the Hey, Dude Brad.
I am pleased by our team's agility as we continued to operate in an increasingly challenging macro environment.
We drove strong 18% direct to consumer revenue growth at the enterprise level and once again delivered industry, leading margins with 28% adjusted operating margins.
I agree with you our financial results in more detail shortly but here are a few highlights from the third quarter.
Revenues of over $1 billion grew 6% on a constant currency basis.
Adjusted diluted EPS increased 9% to $3 25 per share.
Inventory on an enterprise basis was down 24% year over year.
By brand Cross brand revenues grew 11% constant currency fueled by Asia revenues, increasing 29% North America revenues up 8% and global DTC comparable sales up 15% with strong full price selling.
Hey, Dude, Brian revenues were $247 million with DTC growth growth of 15% offset by declines in wholesale.
During the quarter, we took decisive action around hey, dude to maintain price integrity and elevate our marketplace management strategy to ensure a long term brand health.
I'll elaborate on our strategy in a moment.
I want to start my comments today with our views on the macro economic backdrop and the health of the consumer.
We are operating with greater uncertainty than we started the year with persistent inflation higher interest rates the resumption of student loan payments in the United States and escalating geopolitical tensions across the globe.
Despite this our consumer has been relatively resilient and continues to show up during key shopping events, such as back to school, which was strong for both brands.
In September trend softened across the footwear industry.
We are seeing consumers pullback in between peak shopping events.
Against this backdrop, we will focus on making the right decisions for the house about brands, keeping a tight control of an inventory and.
And investing behind initiatives to support profitable long term growth.
We believe we are well positioned in the current economic backdrop, and see our value oriented price points as a durable competitive advantage.
Moving on to our brand highlights, let's begin with the crops Brett.
We've continued to see broad based consumer love for the Crocs brand.
In Piper Sandler full 'twenty, two 'twenty three taking stock with teens survey crocs was the number six favor a footwear brand among U S teams.
Registering a new record high mindshare with balanced contribution across all genders.
With respect to product innovation, our strategy to diversify our clog offering grow sandals and leveraged personalization is working.
We demonstrated double digit growth in clogs with outsized momentum with a height orientated offerings, including the crush and Mega crushed styles.
As we look at a broader assortment I want to call out the echo franchise.
Which has developed into a sizeable business across clogs and sandals.
In September we introduced the Echo boot, which is off to a good start.
Turning to sandals in Q3, <unk> revenues grew 6% on top of nearly 20% growth in 2022, and a 35% growth on a trailing 12 month basis.
We had a solid back to school season for sandals in all three regions with Amelia as a standout region in the quarter.
In fact, we were the number one standalone flip flop brand on Amazon U K during the months of August growing 37% over last year.
Globally, the classic and Brooklyn remain a leading final franchises followed by the crush.
This quarter, we proactively destock classic sandals as we prepared to relaunch a new version of this franchise in 2024.
In Q4, we will also test the getaway, our newest sandal innovation.
<unk> is built around our newest proprietary material innovation known as free field technology and will initially come to market with four styles.
For 2023, we expect our sandal business to be approximately $400 million.
Yeah.
From a marketing perspective Q3, how some of our biggest wins to date in July our Bobby collaboration which featured clogs sandals and <unk> sold out quickly ahead of the blockbuster movie launch and we restock the collection twice during the quarter.
It was a number one licensed property in the quarter.
In August we dropped our fourth lightly Mcqueen adult club.
With strong with a very strong unveil on tictoc, garnering approximately 38 million views, our best performing tictoc ever.
Finally in September we launched Shrek globally online and with select retail partners.
This large gathered over $300 million global media impressions and health plan Crocs as the number three on high Pes rankings.
These partnerships amongst several others drove new consumers to our brand and to our social channels.
In fact, we crossed the 2 million followers on Instagram in September and recently crossed the 2 million follow up Marc on ticked up.
In October we celebrated our biggest croc ober, yet with a fan inspired crocs classic cowboy boot generating significant buzz garnering six 2 billion global media impressions through the month long celebration with the boot almost completely selling out globally in a few days.
At $120 per pack. This was our highest price point Crook tober shoe to date and gives us confidence and the permission a brand has with consumers.
Asia is another important long term growth driver for the Crocs brand as the brand is currently underpenetrated relative to the U S. In Q3 Asia revenues grew by 29% in constant currency.
Growth was again broad based with strong brand momentum across the region.
We've continued to invest in talent in the region. During Q3, we welcomed Carole Chan, our new SVP and general manager of APAC, who joined US following a 22 year career at Nike.
Drilling down into China, we had another exceptional quarter of growth with Q3 revenues increased over 90% in constant currency ahead of our expectations.
Crocs rising popularity in China has created a passionate following with the hashtag known as dog man or clocks follow us.
We now have close to 60 million Dong band Hashtags on Red.
From approximately $40 million at the end of Q2.
In the quarter, we had a particularly successful big brand day campaign, which leveraged the introduction of the siren silhouette of Tmall first launch.
Revenue during this campaign bested, our internal targets handily, driven by traffic and record high average order value, which underscores our strategy to drive quality business through new product introductions.
Finally on the sustainability front crocs is taking steps to further assist circularity ambitions with the recent launch of our new retail Takeback program polishing this week and 45% of our U S. Retail stores, we're inviting consumers to give all crocs, new life by dropping crocs in any condition.
In collection bins at participating stores.
Through this effort <unk> is working to keep shoes on feet for those who need them and keep shoes out of landfills.
Turning to Hey, do I remain confident in the brand health metrics that underscore how beloved this brand has with consumers.
This full hey, Dude was the number seven favorite footwear brand in the Piper Sandler taking stock with teens survey.
Taking the highest share we've seen to date.
In Underpenetrated markets like the northeast Mindshare, almost tripled among the team demographic.
Despite a tough footwear backdrop, we're pleased with the performance of our strategic accounts during the back to school season.
Strategic wholesale now represents 50% of our brand sales mix up from 39% last year.
In Q3.
Sell out from our strategic accounts was up 28% year over year offset by the rationalization of our non strategic accounts.
From a product perspective, we will focus on new style introductions that create heat and drive new consumers to our brand while working down our carryover inventory.
During the back to school season top selling styles included core icons like the wallet Socs micro and black alongside our updated icons like the one defunct mono and electric pink.
We also saw continued strength in our Saracco, sneaker, which rounded out our top selling styles.
In the third quarter, we dropped our second marcio collaboration with sell through rates of greater than 60%, attracting an influx of younger consumers to our buyer file.
In September there was tremendous excitement around our first of our collegiate collection, which featured 12 schools alongside several Nal athletes, who will act as brand ambassadors.
We had strong consumer feedback are several schools sold out sold out of the collection in the first five days.
In August we inked a long term partnership with Dude perfect. Our content group that is known for its humor and iconic trick shots.
Perfect has amassed a powerful social community with approximately 90 million followers across Youtube tictoc on Instagram.
And believes in coming together in good times, our brand ethos consistent with hatred.
Leveraging our consumer insights that over 50% of our buyers give hey, twosies gifts dude perfect. We will be the face of a happy holidays holiday programming.
As I reflect on where we are as a brand I remain as confident in the long term opportunities as I was when we acquired hatred.
We believe that the brand's versatility the products easy on and off nature iconic silhouettes and the permission to expand into new categories and regions remains unparalleled.
That said I acknowledged that there have been several growing pains. This past year, some of our own doing and others tied to the macro backdrop.
I want to take the time to share our loadings and our recent actions designed to bring the band to a healthy pull market.
In 2022, we accelerated growth within our strategic accounts and we did it fast the.
The intent of this decision was to build brand awareness and Shaquille shelf space with our most important retail partners.
We have delivered on both of these goals.
As evidenced in our recent brand health tracker aided awareness of the hatred brand in North America is now at 32% in Q3 up from 18% in Q1.
That said, we recognize the need to be better around driving effective segmentation alongside new production introductions to sustain this broader customer base.
There was also more carryover inventory in our legacy customers than we had expected with further diluted our offerings.
Year to date, we've made considerable progress in cleaning up our inventory and are pleased that our hatred inventory ended up ended down 41% from Q3 last year.
We've also made several key hires over the past 12 months to fortify our efforts in North American marketplace management, including the hiring of GM of North America.
<unk> of global category, and channel management, and other talents in product design wholesale sales and insight and consumer insights.
We're already seeing the benefits of the augmented team and believe this collective impact will build as we move throughout 2024.
As we've talked about on our previous calls we are Anniversarying last year's pipeline fill which impacted Q3 by approximately $60 million and we expect to be approximately $50 million headwind in Q4 unchanged from our former outlook.
What has changed since we last updated you in July retailers are more cautious around our <unk> brand and at once demand was lighter than we previously expected.
Will the industry post back to school wholesale market has been soft as consumers a pullback in football has been down double digits.
<unk> brand, which has limited history with retailers have seen a more restricted open to buy as we look into the spring season.
In Sharp contrast, our spring order book for Crocs brand are strong for the first half of 2024, reflecting the ongoing momentum we see in the Crocs brand.
Taking the environment aside we made an important pivot to a digital pricing strategy in September.
Specifically, we made the decision to stop price matching with the gray market goods that are selling on Amazon full.
Fulfilling near term sales to prioritize long term market health.
We know it's the right decision for the brand going forward.
Already we are seeing immediate positive impacts with asps up over $10 on Amazon and the pivot has been acknowledged by our wholesale partners.
While this will hinder sales growth in Q4, and possibly into the first half of next year. We believe this will set us up for a much cleaner marketplace as we move throughout 2024 as well as protect the brand.
Unauthorized inventory levels have improved versus where they were in June and based on our current visibility, we expect gray market goods to be in a substantially better position in the first half of 2024.
While we are not guiding to 2024, we would expect Haydu wholesale revenues in North America to remain negative through Q2.
Tied in part to macro and in part due to our decision to pull back on promotional activity prioritizing brand health of marketplace management.
Beyond this year I would like to provide some of the building blocks on how we're thinking about <unk> growth agenda.
First we are adopting an omnichannel approach to drive engagement and meet consumers where they shop.
In addition to strengthening our digital capabilities and staying disciplined with our strategic wholesale partners will explore blended brand accretive opportunities.
To that end, we're in the early days of developing an outlet retail strategy for the <unk> brand.
Leveraging crocs successful retail playbook.
We have opened our first outlet locations and expect to have five locations by the end of the year.
Second while remaining laser focused on winning with our U S strategic wholesale partners through improved segmentation and differentiation.
In 2024.
We will focus on strengthening our family channel partners.
Further tapping into the sporting goods channel, while we made while we have ample white space and elevating our approach with mall based specialty.
We also expect to start 2024 with a much cleaner account base, having shut at over 50% or 600 accounts during the year.
We have also pulled back on digital rights for accounts that fall outside of our strategic accounts.
Third international.
We have set up a few test markets in the in Europe and are laying the groundwork to expand in new international markets in the next two to three years will.
We will use an approach that is consistent with our <unk> playbook.
Direct markets, where we have direct for crocs and utilized distribution partners in markets, where we are indirect with crocs.
In summary.
<unk> brand has never been stronger and we remain steadfast on executing our global long term strategy.
With Hey, Jude will focus on protecting profitability and elevating marketplace management, even if that comes at the expense of near term revenues and.
In an effort to support consistent profitable growth on the long term.
I will now turn the call over to Ann who will review, our third quarter financial results in more detail.
Thank you Andrea and good morning, everyone I will begin with a short recap of our third quarter results. All revenue growth rates will be sited on constant currency basis, unless otherwise stated for a reconciliation of the non-GAAP announced mentioned to their equivalent GAAP amounts. Please refer to this morning's press release, we had a strong third quarter with over one.
And consolidated revenues, representing approximately 6% growth year over year, we delivered another quarter of industry, leading margins with adjusted gross margins of 57, 4% adjusted operating margin of 28, 3% and adjusted diluted EPS growth of 9%.
Our portfolio is diversified from a brand channel and geography perspective on a trailing 12 month basis, ending Q3 Crocs brand revenues were 75% of total revenues and Haydu brand revenues were 25%.
Channel mix was well balanced with wholesale revenues, representing 53% of TTM revenues and DTC at 47% finally, approximately 33% of total TTM revenues and 40% of Crocs brand TTM revenues were from international markets.
During the third quarter Cross brand revenues were $799 million growing 11% relative to prior year and driven by strong DTC growth of 18, 4%.
The brand sold 29 million pairs of shoes, a decrease of 4% from last year. The unit decline came almost entirely from our Amelia region tied to the corrective actions, we took last quarter to curtail a significant African distributor that we believe is diverting goods to the U S great market.
Crocs brand average selling price during Q3 was $27 25, which.
Which was up 15% on a constant currency basis, driven by product mix fewer DTC promotions international price increases and channel mix.
Within the Crocs brand.
<unk> grew double digits and continued to generate demand, but newer products such as echo Mega crash and high in Asia.
<unk> is also developing into a solid category for the brand and took significant share during the back to school season, representing approximately 20% of footwear revenues.
Handle increased 6% in Q3 as Andrew mentioned Sandal growth was lighter in Q3 as we destock to the classic franchise ahead of re launching an updated line in 2024.
Finally, <unk> continues to create excitement and engagement with consumers around the world growing 15% from last year with growth across all three regions, but particularly strong in Asia.
Now, let's discuss a few cross brand highlights by region and North America third quarter revenues increased 8% to $481 million, we gained significant market share in a declining U S footwear market North America DTC comparable sales were up 10, 2% wholesale revenues decreased 1%.
It's double digit brick and mortar wholesale growth was offset by declines to Amazon as we evolve our distribution model on Amazon.
This shift negatively impacted unit growth and positively impacted ASP growth in our North America region.
As we look into 2024, we are pleased with the strength of our spring order book for North America wholesale.
Crocs brand Q3 revenues in Asia grew 29% to $175 million and growth was broad based across countries and channels Australia.
Australia led to growth with revenues, increasing triple digits, and China grew over 90% versus last year South.
South Korea, and southeast Asia, each saw strong double digit growth rates in the quarter.
Crocs brand revenues for Amelia were $143 million up 3% from the third quarter of 2020 till.
This quarter, we saw robust double digit growth in the UK and France.
This strength was somewhat offset by Germany, which weakened during the quarter against a tough economic backdrop.
As previously mentioned, we terminated our relationship with a significant distributor servicing Africa in Q2.
In Q3, we saw an $8 million revenue headwind from this corrective action and we expect to see a $13 million headwind in Q4, bringing the year to accumulative $29 million revenue headwind.
Turning to Hey, Dude Q3 revenues were $247 million, a decrease of 9% from last year during.
During Q3, the brand sold $8 3 million pairs of shoes, a decrease of 11% over last year.
Hey, Dude average selling price during Q3 was $29 68.
Our 3% higher than prior year as channel mix into DTC and product mix in wholesale was partially offset by double digit pricing declines on e-commerce.
As a reminder, our average selling price is it basic average and not adjusted for channel dynamics.
Wholesale revenues were down 20% from Q3 last year as we continue to lap pipeline fell and as lower consumer footfall led to retailers, taking a more conservative approach to at once orders the.
The DTC channel, which is predominantly e-commerce led the growth with revenues, increasing 15% from last year.
Consolidated adjusted gross margins for the third quarter were 57, 4%, increasing 230 basis points from last year, driven by favorability in ocean freight rates and the absence of airfreight.
Well as lower promotional activity in the craft brand. These were both partially offset by higher overhead in fulfillment costs associated with our <unk> distribution network inefficiency.
Turning to the brand's adjusted gross margin for the Crocs brand was 62, 1% or 460 basis points higher than prior year key drivers of this improvement include 340 basis points from lower freight fewer year over year promotions, partially offset by product mix.
<unk> adjusted gross margins were 42, 8% down 600 basis points from prior year, approximately 500 basis points of margin headwind came from higher levels of discounting in our digital channels distribution.
And logistics inefficiencies also remain headwinds offsetting these headwinds we saw lower inbound freight in the quarter.
During the third quarter consolidated adjusted SG&A represented 29, 1% of revenues, which is a 190 basis points higher than last year as we invested more in talent and marketing for both brands to support our growth trajectory and we annualized additional investment for Hey, Dude.
Our third quarter consolidated adjusted operating income was $296 million, an increase to prior year by 8% and consolidated adjusted operating margins increased 40 basis points remaining best in class at 28, 3%.
Our third quarter non-GAAP diluted earnings per share increased 9% to $3 25.
Our continued strong free cash flow generation enabled us to repay approximately $90 million of debt in Q3, reducing borrowings to approximately $2 billion.
At the end of Q3, our gross leverage was approximately one seven times as we ended the third quarter with $127 million of cash and cash equivalents.
During Q3, we resumed our share repurchase activity and completed a $150 million of share buybacks repurchasing one 4 million shares at an average price of $107 85.
We currently have $900 million remaining on our share repurchase authorization.
We will continue to balance debt repayment and share repurchases and remain committed to our long term net leverage target of one to one five times.
Our inventory balance at September 32023 was $390 million a decline of 24% to last year.
Crocs brand inventory was $279 million down 14% to prior year and hatred inventory with $111 million, a decrease of 41% to prior year inventory.
Inventory turns continue to improve and we are very pleased with the health of our inventory.
As we look forward I would like to share our current outlook for the fourth quarter and full fiscal 2023, all numbers will be on a reported basis unless otherwise stated while we are very pleased by our consolidated results in the first nine months of the year and the standout performance of our Crocs brand, we recognize our Haydu performance has fallen short of.
Expectations as Andrew mentioned, we took actions during Q3 to prioritize longer term marketplace health.
As such we are reducing our expectations for Q4 and the full year for.
For fiscal 2023, we now expect consolidated Crocs, Inc revenue growth to be 10% to 11% compared to 2022 down from the prior range of 12, 5% to 14, 5% growth and resulting in full year revenues of approximately $3 905 to $3 94 zero billion.
From a brand perspective, our expectation for the Crocs brand remain unchanged at 12% to 13% revenue growth. Despite a tougher FX headwind than we previously projected for.
Hey, Dude, we are lowering our full year revenue outlook to approximately 46% on a reported basis down from our prior range of 14% to 18% growth. This translates to a contraction of 4% to 6% on the 2022 performance pro forma revenues of $986 million.
As always we are focused on best in class profitability. We continue to expect our consolidated gross margins to be greater than 55, 5% led by the Crocs brand given the confidence we have in our brands long term, we are making a conscious effort to continue to invest across the enterprise and we now expect full year adjusted operating margins of approximately 27%.
<unk>.
Our adjusted diluted earnings per share outlook move to $11 55 to $11 80, 510th.
Down from our prior guidance range of $11 83 to $12 22.
For Q4, we expect consolidated revenues to be between 903 and $938 million implying.
Implying a contraction of 1% to 4% from last year within the brands, we expect crops to grow 4% to 7% and hey, due to be down 20% to 25%. We expect Q4 adjusted operating margin to be approximately 21% and adjusted diluted earnings per share of $2 <unk> to $2 35.
At this time I'll turn the call back over to Andrew for his final thoughts.
Thank you all as we look forward our focus remains squarely on sustaining brand health investing behind market share gains and supporting durable revenue and profit growth I remain confident in our brands our leadership and a significant opportunity ahead of us to take share in the casual footwear market.
At this time, we will open the call for questions.
We will now begin the question and answer session.
In the interest of time, please limit yourself to one question and one follow up.
To ask a question you May press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys.
Your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Our first question comes from Jonathan Komp from Baird. Please go ahead.
Yeah, Hi, Thank you good morning, I wanted to ask first on the Hey, Dude, maybe and if you could clarify the fourth quarter outlook, just broad expectations for the two channels.
And for your strategic accounts in wholesale are you are you, losing shelf space or what should we make them the.
Reported revenue trend there and then maybe Andrew more broadly for 2024.
And we wanted to get your thoughts.
The brand.
You talked about revenue north of $1 billion for 2024 is that still a goal.
What's the possibility of adjustments pushed out awhile and when you're thinking about the factors to drive sell through is how would you rank order assortment that against opportunities into next year.
Yeah, Okay. Let me, let me talk about Q4 shelf space and will then give you some updates on the channel expectations for <unk>, and then I'll come back and talk about 24. So from a Q4 perspective, yes, we don't believe we're losing shelf space in fact, we're not losing shelf space in our strategic accounts, we have ample ever.
For that we're taking down our sell in expectations to allow.
To allow us to lower in channel inventories were doing that in a number of ways. One proactive cancellation of prior orders so that there's less inventory flowing into the channel. We're also supporting our wholesale partners with.
Some inventory clean up that includes so both returns and also some some markdown funding so they can clean their inventories in the fourth quarter of this year.
The strategic accounts in Q3 were up 28% in terms of the sell out.
And we think they will continue to grow in terms of sellout and gains in the brand will gain share in the fourth quarter.
And then John for your question on clarifying Hey, Jude growth, so our full year <unk> guidance.
On a reported basis is 4% to 6% on our performance.
<unk> it's.
To shrink <unk>, so that implies that our Q4 growth for Hey, David our Q4.
Would be a negative 20 to negative <unk> 25 is that revenue guide and then when you think about it.
Channel that's as we've talked about it's still got implies negative wholesale and then we expect DTC to be slightly better than that.
And then from a 24% to your last part of your question John.
Yes, I think we're very confident in the brand will be north of $1 billion in 2024.
We do anticipate that wholesale sales, which is obviously predominantly north America will be down in the first part of the year, but we're confident that DTC will be up and overall will drive growth for the full year.
Okay and is it possible Andrew just your thinking today I know, it's early but in terms of the biggest contributors to the sell through whether it's some of the distribution capacity new products new geographies. How are you thinking about sort of the biggest drivers of that.
The lineup sitting here today.
Yes, so I think.
There's a few things going on one is I think account rationalization. So.
As we think of sell out sell out at our strategic accounts has been strong as highlighted the 28% growth in the <unk> in Q3, I think we published the growth rates that we've seen in prior quarters. So the strategic accounts, Hey, Jude is performing well with those accounts, we have rationalized a significant number of our <unk>.
Non strategic counsel legacy accounts about 50% of the closed over 600 doors by the time, we get to the end of the year. We've also rationalized the digital selling for the non strategic accounts. The words I think a very long list of accounts that historically had the rights to sell digitally they have all been revoked apart from <unk>.
Core strategic accounts so.
I think we're doing the hard work to get a significant reset.
For the brand in the North American marketplace with our wholesale partners we.
We do anticipate a wholesale partners too.
And our overall business pretty conservatively in this consumer environment, both for the fourth quarter of this year and in the first part of next year.
And I think we also are very focused on driving improved product differentiation and segmentation across our wholesale partners with both new product introductions I.
I think we feel very confident about the pipeline of new products that we have.
And you've seen us start to ramp up the the licensing and collaboration engine that we use on crops in <unk> do you see in a couple of those we talked about it.
<unk> and <unk>.
And that will accelerate through the back half of this year into next year.
Okay. That's very helpful. And then just last one if I could on the fourth quarter operating margin targets.
Could you just comment are you embedding any change in promotional activity for the crocs brand and the gross margin there.
G&A are you changing the expectations at all for that is slightly more challenging.
Top line environment here, Thanks again.
Yeah, So a couple of things.
I would say, we're really pleased overall with our crocs gross margins and we have reaffirmed our gross margin guidance for the year. So we actually think from a promotional standpoint year over year promotions, we're planning.
For last year will participate and.
Normal promotional periods.
But we don't see anticipate any big change.
And then from an SG&A standpoint, we do think it's really important to invest for the future not try to manage one quarter from a profitability standpoint that we do expect to continue to invest SG&A and that's how you get to the overall profitability guidance.
Our next question comes from Jim Duffy from Stifel. Please go ahead.
Got it thank you good morning.
I wanted to ask a few questions on Hey, Dude I guess, Andrew I'll ask you to Monday morning quarterback the Hey, do business. Some you've built a lot of awareness for the brand generated a lot of cash successfully paid down a lot of that from the Hay do deal. If you had to do it over again, what would you have done differently and maybe would that give us some context for the extension.
Of the marketplace challenge and maybe size the spring order declines to give us context for that impact.
Yeah.
Yes, that's a good question as well frame Jim as we kind of look at the brand we've grown at over 60% from a topline perspective since we've owned it we've generated of approximately $472 million of EBIT. Since we've owned it has had strong cash flow and it's been accretive from day, one so I think.
While there are some short term challenges it's been a great addition to our portfolio.
In terms of the challenges I think we've really focused on kind of three key areas. One is getting stronger control of in market inventory.
And I think the the rationale here so the court sort of Monday morning quarterback.
Perspective.
We sold in a lot of inventory in 2022 into the market.
We wanted to penetrate the sort of broad based national accounts very quickly.
And so sorry. This is asking me to move closer to the Mike wanted to penetrate the broad based national accounts for two reasons, we wanted to capture the shelf space. We also wanted to leverage the presence of the product on the shelf in the regions, where the brand has not historically been distributed to raise brand awareness I think that's worked extremely well.
We've definitely capture shelf space and we've raised Brian awareness, we talked in our prepared remarks is how we believe the <unk>.
The awareness of the brand is now 32% on a national basis up from 18% earlier in the year, but.
But I think the level of inventory was too high so really what we're doing.
Is proactively lowering in channel inventories are working with our strategic accounts too to clean up that inventory and putting them in a stronger sell through and a more profitable position. That's painful in terms of sell in which is what you see showing up in our Q4 guidance and what you see in our anticipated spring 'twenty.
<unk> order book the second thing is.
Improving segmentation and differentiation.
Such that all of our key customers that may trade in some cases in the same mall or in the stream same center can continue to grow their businesses collectively.
So as we get a stronger innovation and stronger product pipeline. We believe we can effectively do that in the third thing is taking control of pricing, particularly.
Particularly in the digital realm, we've talked about.
When we closed a lot of our international distributors some of the excess inventory and I think we didn't have full visibility to the amount of inventory that those distributors were holding that has started to show up on Amazon in the gray market. We spent a lot of price pressure from that historically, we had a strategy will be thought we could compete from a price perspective and make sure we captured.
Fair share that was dragging down overall pricing in the market. So we've pivoted from that perspective, that's given us given up quite a bit of revenue expectation in the short term, but its raised our asp's raised our profitability. It's obviously much more supportive of our wholesale customers and we're hoping that that gray market inventory sells down quickly.
And we can reset the digital market. So those are probably the three big buckets from a sort of Monday morning quarterback perspective.
And we're very confident that those will.
Put us in a great position to continue to accelerate described in Atlanta.
Thank you for that.
Question, just on the Hey, Dude profit pool outlook into fiscal 'twenty poor do you still see <unk> gross margin of 50% is achievable in fiscal 'twenty four it looks like the inventories are tight and perhaps maybe even theres less clearance and then this year.
Do you think that the profit pool will be in decline in fiscal 'twenty four.
Yeah. So first I just want to comment that I think both inventory inventories for both brands are in really good shape. So I would say that we're very pleased there and as you mentioned.
<unk> inventory was down about 40% for the quarter, we're not ready to guide for next year at this point, but we do expect to that <unk> gross margins will improve next year as we have less ASP pressure from the grain market as well as as we've talked about we will have better distribution and logistics as we open up.
Our distribution center in Q1 of next year.
Our next question comes from <unk> <unk> from Piper Sandler. Please go ahead.
Great. Thanks, Thanks for taking my question just on the gross margin piece I know, you maintain 55, 5% or greater than 55.5%, but that could still imply some like year over year pressure on the gross margin line item.
We're not planning for a different.
Promotional Cherokee at Crocs can you just help us unpack that.
The pressure on gross margin on a year over year basis.
Yes so.
Can you so from a pressure on gross margin I'm not completely sure that I understand the question Avi I think for the overall.
55, <unk> guide that would imply that gross margins for the fourth quarter will be up.
Versus last year.
For overall consolidated.
Fine I think.
A couple of hundred basis points. So.
Maybe you can.
Maybe we can maybe you can give me what you're thinking.
I guess, just like what like what's driving that that pressure year over year.
So yes, so we expect gross margins to increase.
For the year, and we expect gross margins to be up for the fourth quarter.
Specifically focused on the crop side and again that will be helped overall, we've had freight tailwind all year and more full price selling on the crop side, which.
Which will be slightly offset year over year from the AG side as those gross margins.
Decline in Q4 ads.
As we've seen all year as we have a subpar distribution and logistics strategy.
Just given where we are until we can get into next year, but overall, we do expect gross margins to be up year over year.
In Q4.
Okay got it that's helpful and then just on the go.
Hey, Hey, do DTC expectations for you I know you said it better than wholesale but can you just give any color on what youre seeing I know maybe the pricing.
Controls are impacting that but just any color like quarter to date would be helpful.
Yes, I mean, I can give a little color I don't think we're going to give any split more specific metrics from a DTC perspective.
We have.
Raise prices, particularly on the Amazon component, which shows up in DTC, because it's it's a <unk> model if you remember correct.
So we've we're no longer competing with the gray markets are asps are up.
Even in the last few weeks, we can see asps up on average $10, a pad, which was obviously very significant.
That is given up some some market share the great market is taking a little bit greater share of the market, but we think net net.
With some.
Eunice and excitement that we will inject into the market that we overall kind of grow our DTC business. We also highlighted in our prepared remarks. We've opened we will have opened by the end of the quarter five outlet stores.
There was a proper outlet stores you may remember, we had a number of clearance stores and I would say lower quality centers around the country, where we're looking to liquidate some of the aged inventory that we bought at the acquisition. We have opened five proper outlet stores that showcase full price goods at the front of the store do have some liquidation capability and also I think <unk>.
Okay. So the brand in all of the various components of the brands. So those will also be in the DTC number for the quarter and that will be obviously, a non comp component.
Our next question comes from Tom Nick from Wedbush Securities. Please go ahead.
Hey.
Thanks for taking my question.
I know you've got a lot going on I would hey dude.
Domestically.
In the past you've kind of talked about expanding internationally.
Given how under penetrated the brand is there.
Do your plans to expand internationally get put on hold now or do you kind of pumped the brakes, a little bit give.
Given the challenges that youre seeing in the domestic market.
Yes, good question Tom.
In essence no.
We think the brand has significant global relevance we've talked about in the past.
We've reshaped international business when we bought the brand their distribution strategy was distribution oriented. So they had a portfolio of about 35 distributors across the world most of which were doing a poor job.
We've terminated.
Emanated most of those distributors there are two the continued to do a good job I think we've highlighted this in the past the distributor in Italy, and the distributor in Spain. Those are both really nice businesses.
They do while they do a great job distributed in the brand in the marketplace and if I think about what is really a U S centric brand if they can succeed in those markets. Those are some of the tougher markets in my view for a U S centric brand to perform I think it gives you evidence that the Brian before Paul sorry performed well across.
You know a broad range of international markets.
We are putting some time and effort into I would say.
<unk> says we.
We try to understand where should the right markets to penetrate internationally. We know brand awareness is very very low, but we are putting time effort and some resources against that it will take kind of two to three years, but it does start next year.
Alright, Thanks, Andrew Best of luck this holiday season.
Thank you.
The next question comes from Sam Poser from Williams trading. Please go ahead.
Thank you all for taking my question.
Have.
Want to follow up on Monday morning, Quarterbacking here, a little bit Andrew.
Can you make the argument that you focus much more on supply and demand as you are selling goods in and you're shifting to more of a demand based way youre looking at Hey, Dude business now.
Yes, I think.
I wouldn't say it quite like that but I think in essence, you end up in the same place that right. So yes, we would certainly cutting supply.
Into the wholesale arena to ensure that our supply is pegged.
<unk> at or below demand right. So that is a demand place environment I think as we sold in historically, we didnt know where demand was going to be but I do think we now have a much stronger lens on that so yes that is a reasonable way of saying it.
If you had to do it all over again would you have grown the business as quickly as you did last year.
I, probably would have done but probably.
Would have hoped that we could have had.
I would say strongest segmentation between the accounts such that we could give everybody the opportunity to succeed and they won't competing against each other I do think it was important to graph shelf space.
Which we were able to do very effectively.
Obviously, it's not great if you're a public company to help with one year of great growth in the next year off.
A flat to contracting growth, but net net I think we've put ourselves in a good position from a brand and consumer perspective, so it probably would do it but we'll probably do it in a better way of maybe slightly moderated.
Is Las Vegas distribution center up and running now.
Yes.
Yeah. This is Dan so we have.
We're mostly through construction and then it will be up and running in Q1.
Okay and then.
You talked about the sell through rates or the sell through of 28% in your strategic wholesale accounts, but what were the was how much of that was that the.
How much of that was on sale I mean did the Asps go down to drive that given given the great market in.
The amount of inventory in the marketplace.
The asps and the strategic wholesale accounts were actually up over the prior year. They were strong so that wasn't a cell that wasn't.
That wasn't a promotional obviously there are promotions during back to school, but that wasn't more promotional than the year before the compression on Asps is really on digital on Amazon and on our own dot com.
The yes, so hopefully that answers your question.
The next question comes from Rick Patel from Raymond James. Please go ahead.
Thank you and good morning, I'm looking for additional color on the distribution of Hey, Dude.
Can you paint a picture for what he do distribution look like earlier this year, perhaps in terms of number of doors, and where you expect it to shrink too as the brand right sizing goes on and then as you think about 2024 and leaning into some of the growth areas and higher quality.
Point to the business, where do you see distribution evolving too.
Yeah, I think I'd, probably go back further in the beginning of this year, what I'd say is when we bought the brand.
The brand had about 1300 points of distribution.
That was regional and very much orientated towards small small mom and pop accounts right. So of that 1300 doors, we've closed over 600.
Accounts, so that's a probably more doors in that but we've closed over 600 accounts many of them with single doors, but.
Somewhat might have one or two and we've really extended the brand into large national chains and as we kind of think about the <unk> brand, we see the Haydu Brown essentially been sold almost everywhere that the cross brand itself. So I think about the primary change we're talking about.
Family footwear, we're talking about sporting goods, we're talking about mall based specialty.
Then I will say also some sort of super regional chains.
So I think we're mostly in the customers that we want to be in.
And a lot of those customers were all doors.
And there are a few of those customers. We are partial doors. So we've got expansion opportunity.
So it's been a pretty dramatic reshaping of the overall customer portfolio.
And I think the future growth comes from a number of things where it comes from.
Some customers extending to a broader proportion of the doors. It comes from ship greater share of shelf.
In some doors. It also comes from accelerating sell through with that demand perspective that there's some highlights so hopefully that answers your question Rick.
That's very helpful. Thank you.
And can you also talk about what your fourth quarter operating margin expectations are by brand and then what should we extrapolate from fourth quarter operating margins overall, as we think about what the potential could be in 2024.
Yes.
We don't we don't guide in the fourth quarter operating margins by brand.
Obviously, I think it'll be.
<unk> had strong operating margins at both of our brand our overall operating margin guide of 27%.
Gains in as best in class I wouldn't extrapolate Q4 Q other requires as we said we're going to invest in SG&A.
And so that we can continue to support from a marketing perspective, any consumer perspective, the long term growth potential of both of our brands and not managed for a quarter.
But I think 27% operating margin overall.
I felt really good about that.
Our next question comes from Laura Champine from Loop. Please go ahead.
Thanks for taking my question I first wanted to ask more about this guide for Q4 for Hey, do just because it's such a.
Significant downgrade from what we previously expected.
You bucket the change how much of it is due to decisions that <unk> made to control distribution and how much of it is something that happened to you, meaning wholesale customers ordering less and this sort of glut of inventory in the retail channel.
It's a little bit of both right I think what I'd say.
As we work with our wholesale customers I think they are pretty cautious about the way. The consumer is reacting right now, particularly post back to school, we talked about that in our prepared remarks, and honestly I think that extends well into next year.
So I think they are being cautious so fewer.
Looking to buy less inventory and put themselves in a in a stronger position.
It is also proactive cancellations and returns that we're taking to clean up the inventory for key customers to put them in a much stronger inventory position and our higher profit.
<unk>.
He is also a lower digital selling expectation based on not competing with some of the competitive sources.
On a price perspective.
So, we'll see higher margins higher asps, but less revenues. So it's really a combination of all those factors.
If retailers, who are fairly new to the brand or canceling orders in repositioning for lower inventories in Q4, what gives you the confidence that this brand can grow in 2024.
The sell out that we're seeing so the consumer takeaway right. So.
As we look at.
Data from our major retail customers.
Both in Q3, which you kind of can see 28% increase in sellout and we look at the week to week data that we get right now we are selling more units to the consumer than we sold last year. So the consumer is taking away more goods.
The sell in which is our revenue we're right sizing inventory, but the consumer takeaway continues to grow.
Got it and then as we try to shape. The year do you think that Q1 looks like Q4, meaning for Hey, Dude do you think that there'll still be some.
With some trend off with revenues down in this 20% range or should we see sort of immediate improvement because this is a Q4 issue.
Alright, I don't think were ready to guide specifically for next year, yet we'll guide in our during our normal time periods, but we did say that we believe wholesale will be negative in the first half of next year.
But we haven't kind of given shape to that as we work through kind of our spring order books and our expectations.
Our next question comes from Jeff <unk> from B Riley financial Please go ahead.
Good morning, Thanks for taking my question.
Andrew I was wondering if you could maybe just opine it strikes me that he viewed the similarity between hey, Dude crocs.
Or does.
Awful lot of them and when you.
Joining crocs backend.
Early to mid two thousands is it seems like there's quite a lot of parallels here to where hey, Dude is down we're cross was that and I was just wondering if you could kind of talk through your thought process and how you might use as a blueprint and then lastly is the thought that hey, maybe we should just focus on maximizing profitability as opposed to revenue is that.
And entered into the equation, though.
So I would agree and disagree with Jeff I think that there is a very very important parallels between the two brands and the work that we did to improve dramatically. The performance of Crocs. There are a couple of parallels right. What one was managing the.
The in market inventory is much more closely which is clearly I think we've clearly articulated here.
We're really trying to get on top off will hate to I think the second is driving.
Brand heat or demand I think is some would say for the brands through marketing through limited supply through licenses collaborations and really kind of I would say.
<unk> driven opportunities to drive the consumers to the brand.
And we can accelerate and do more of that for <unk>, which is definitely a parallel to crocs.
I'd say.
<unk>.
Way back when in the consumer's mind Crocs was incredibly cold right. So I think we just kind of to use the Piper Sandler.
So there's a proxy right I think back then crocs is number 38 on that list right. So crocs is now number six pages number 38 pages number seven right. So it is a brand that resonates very strongly with a broad base of consumers. So I think that's a huge.
Huge difference.
In terms of kind of what we're looking at here.
And then in terms of maximizing for profitability, Jeff We're maximizing the long term health of the brand certainly prioritizing profitability from a gross margin standpoint, but not maximizing for profitability. Overall, we think it's really important for us to in fact, we made a conscious decision to continue to invest in Q4, we certainly could maximize for short term profitability.
But we don't actually think that gets us the best long term outcome.
Due to time constraints. This concludes our question and answer session I would like to turn the conference back over to management for any closing remarks.
Yes, I just want to thank everybody for joining us this morning, and their continued interest in our company.
And.
I wish everybody, a happy holiday season, and when it comes around.
Conference has now concluded. Thank you for attending today's presentation you may now disconnect.
[music].
Okay.
[music].
Yeah.
[music].