Q2 2024 Crocs Inc Earnings Call
Andrew Rees, Unknown Executive, Erinn Murphy
Operator: Good day, and welcome to the Crocs Second Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode.
Speaker Change: Good day and welcome to the Crocs 2nd Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode.
Operator: Should you need assistance, please signal a conference specialist by pressing the star key, followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press the star key, then one on a touchtone phone.
Speaker Change: Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touch-tone phone. To withdraw your question, please press star, two.
Operator: To withdraw your question, please press star, two. Please limit yourself to one question, and please note this event is being recorded. I would now like to turn the conference over to Erinn Murphy, Senior Vice President of Investor Relations and Corporate Strategy at Crocs. Please go ahead.
Speaker Change: Please limit yourself to one question, and please note this event is being recorded. I would now like to turn the conference over to Erinn Murphy, Senior Vice President of Investor Relations and Corporate Strategy of Crocs. Please go ahead.
Erinn Elisabeth Murphy: Erinn Murphy, Senior Vice President of Investor Relations and Corporate Strategy of Crocs. Good morning, and thank you for joining us to discuss Crocs Inc.'s second quarter results. With me today are Andrew Rees, Chief Executive Officer, and Susan Healy, Chief Financial Officer. Following their prepared remarks, we will open the call for your questions, which we ask that you limit to one per caller.
Speaker Change: Good morning, and thank you for joining us to discuss Crocs Inc's second quarter results.
Speaker Change: With me today are Andrew Rees, Chief Executive Officer, and Susan Healy, Chief Financial Officer. Following their prepared remarks, we will open the call for your questions, which we ask that you limit to one per caller.
Erinn Elisabeth Murphy: Before we begin, I 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 law. These statements include, but are not limited to, statements regarding our strategy, plans, objectives, expectations, and intentions, including our financial outlook. These statements involve known and unknown risks, uncertainties, and other factors which may cause our actual results, performance, or achievements to differ materially.
Speaker Change: Before we begin, I 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.
Speaker Change: These statements include, but are not limited to, statements regarding our strategy, plans, objectives, expectations and intentions, including our financial outlook.
Speaker Change: These statements involve known and unknown risks, uncertainties, and other factors which may cause our actual results, performance, or achievements to differ materially.
Erinn Elisabeth Murphy: Please refer to our quarterly report on Form 10-Q and other reports filed with the SEC for more information on these risks and uncertainties. Additionally, certain financial metrics that we refer to as adjusted or non-GAAP are non-GAAP measures.
Speaker Change: Please refer to our quarterly report on Form 10-Q and other reports filed with the SEC for more information on these risks and uncertainties.
Speaker Change: Certain financial metrics that we refer to as adjusted or non-GAAP are non-GAAP measures. A reconciliation of these amounts to their GAAP counterparts is contained in the press release we issued earlier this morning.
Speaker Change: All revenue growth rates will be cited on a constant currency basis, unless otherwise stated.
Andrew Rees: A reconciliation of these amounts to their GAAP counterparts is contained in the press release we issued earlier this morning. All revenue growth rates will be cited on a constant currency basis unless otherwise stated. At this time, I'll turn the call over to Andrew Rees, Crocs Inc.'s Chief Executive Officer. We reported second quarter revenue of more than $1.1 billion, which represents the highest quarterly achievement in the company's history and exceeded our guidance.
Speaker Change: At this time, I'll turn the call over to Andrew Rees, Crocs Inc. Chief Executive Officer.
Andrew Rees: Thank you, Erin, and good morning, everyone.
Speaker Change: Thank you for joining us today. Before we discuss the quarter, I'd like to start by welcoming Susan Healy to her first Crocs Inc. earnings call.
Andrew Rees: Coupled with robust, adjusted gross margin expansion of 330 basis points, adjusted earnings per share grew by 12% to $4.01, even as we accelerated strategic investment. This performance resulted in record free cash flow for Crocs Inc., which we used to pay down $200 million in debt and repurchase $175 million of our common stock. Our enterprise initiatives remain consistent, and we focus on three primary levers to fuel durable long-term growth.
Speaker Change: This performance resulted in record free cash flow for Crocs Inc, which we utilized to pay down $200 million in debt and repurchase $175 million of our common stock.
Andrew Rees: Ignite icons across both of our brands to drive awareness and global relevance for new and existing consumers, to drive market share gains across our tier one markets through strategic investment in talent, marketing, digital, and retail. And three, attract new consumers to our brands through methodically diversifying our product range and usage occasion. Starting with the Crocs brand, the investments we are making in product and marketing are enabling us to win with consumers around the world.
Speaker Change: 1. Ignite icons across both of our brands to drive awareness and global relevance for new and existing consumers.
Speaker Change: We have continued to evolve our partnership model with a clear intent to drive engagement, build consumer love, and ultimately fuel brand heat.
Andrew Rees: Along with this, we released a number of partnerships that range from Pringles to Nerudo to Treasures, a Korean brand, and Minions. We continue to push into sneaker and lifestyle opportunities, as exemplified through a Salehi Juniper sneaker release, which sold out within minutes at $140. The sandal category strengthened in the quarter as the consumer reacted favorably to the novelty that we have brought to the market this year.
Speaker Change: Along with this, we released a number of partnerships that range from Pringles to Nerudo to Treasures, a K-pop brand, and Minions.
Andrew Rees: In particular, our style samples are performing well, across both new franchises like the Getaway and Miami, as well as established franchises like the Brooklyn, and we see them purchasing with high frequency and average order value. Strength was driven by better at once demand from our retail partners and solid DTC channel growth. This momentum drove outside strength in the Midsummer Festival, where Crocs led the conversation and took a notable share on T-Mall and Doyon, despite more promotional activity for the industry at large. For the first time ever, Crocs N' Merge was a top 10 overall fashion brand on T-Mold during the festival, and was one of only two footwear brands mentioned in the top 10 fashion ranks.
Speaker Change: The growth of our gibbous business during the quarter was led by strong double-digit growth in Asia.
Speaker Change: which was also our highest penetration by geography.
Speaker Change: Our gibbets consumer continues to be one of our most valuable consumers, and we see them purchasing with high frequency and average order value.
Speaker Change: Our strategic priorities within Jibbitz are centered around driving higher penetration in digital and wholesale channels, enhancing speed of market, and continually introducing product freshness.
Speaker Change: Moving to a review of our business by geography, we saw broad-based strength led by our tier 1 markets.
Speaker Change: Strength was driven by better at-once demand from our retail partners and solid DTC channel growth.
Speaker Change: For the first half, our North American revenues grew 6% against a broader market that was essentially flat.
Speaker Change: International revenue grew 22% versus prior year, supported by exceptional growth in China and Australia.
Speaker Change: While there is evidence in the market that the Chinese consumer is becoming more cautious, we see our accessible, authentic, and personalizable brand position as a clear competitive advantage.
Speaker Change: Coming off the strength of our super brand day in the first quarter, we emerged as the number one women's footwear brand on Tmall in the days that followed.
Speaker Change: For the first time ever, Crocs N' Merge is a top 10 overall fashion brand on T-Mold during the festival.
Andrew Rees: Our direct markets within Europe registered double-digit growth in the quarter, led by the UK and Germany, and we continue to see ample opportunity for growth in the future. We've made progress in improving the health of our underlying business in North America, exemplified by pricing on digital up versus the prior year, a solid recovery in gross margins, and our inventory turning in excess of four turns. That said, running a wholesale business with Hey Dude remains challenging.
Speaker Change: We've made progress in improving the health of our underlying business in North America, exemplified by pricing on digital up versus prior year, solid recovery in gross margins, and our inventory turning in excess of four turns.
Speaker Change: That said, a wholesale business for the Hey Dude remains challenging, and we expect that to continue through the second half of the year.
Andrew Rees: And we expect that to continue through the second half of the year. From a product perspective, we're bringing more focus around our core across Wendy and Wally, and we're leaning into three primary styles: Scratch Socks, Scratch Canvas, and Funk Monarch, and Added Cushion and Height retailing for $85. We initially tested this product in DTC, and we'll bring it to wholesale in time for back to school. From a distribution perspective, we opened 13 new Hey Dude Outlet locations in the quarter, bringing our total year-to-date openings to 19.
Speaker Change: As we shared in the first quarter earnings call, sell-in and sell-out are down versus last year, and we'll focus on energizing the brand through improved marketing effectiveness and new product introductions.
Speaker Change: During the quarter, we brought new Hey Jude partnerships to the market, including Corona, a four-piece collection with the iconic Bear Bridge Band featuring O'Wally, Wendy, and Hudson styles.
Speaker Change: A lead partnership, Denim and Dudes, marked the first HeyDude collaboration with international reach.
Speaker Change: While leading from the core is our focus, we'll make calculated bets with key sneaker and boot styles that the brand is also known for.
Speaker Change: As we look into 2025, we see an opportunity to optimize our skew count while still improving our channel segmentation and bringing new innovations to market.
Speaker Change: For example, we introduced a comp this quarter, leveraging our Wendy and Wally DNA and added cushion and height, retailing for $85.
Speaker Change: We initially tested this product in DTC and will bring it to wholesale in time for back-to-school.
Speaker Change: From a distribution perspective, we opened 13 new Hey Dude! Outlet locations in the quarter, bringing our total year-to-date openings to 19.
Andrew Rees: We are pleased with our new stores and see growing consumer engagement and shopping across genders and ages, as consumers can experience the full breadth of the line. During the quarter, we also introduced Haymakers, our personalization proposition within our direct channel. These stations are creating buzz in our stores as consumers explore self-expression with the brand. We plan to introduce the brand in a methodical and consistent way and get more shoes on. This annual report highlights our commitment to and progress on our purpose to create a more comfortable world for all through action-oriented ambitions of inclusivity, climate stability, circularity, and community. I encourage you to check out the report for more information on these initiatives.
Speaker Change: We are pleased with our new stores and see growing consumer engagement and shopping across genders and ages, as consumers can experience the full breadth of the line.
Speaker Change: During the quarter, we also introduced Haymakers, our personalization proposition within our direct channels. These stations are creating buzz in our stores as consumers explore self-expression with the brand.
Speaker Change: For the year, we plan to open approximately 30 outlet stores. On the wholesale side, we will continue to optimize our account base and focus on improving customer segmentation.
Speaker Change: and have plans to expand into select distributor markets in 2025.
Speaker Change: We plan to introduce the brand in a methodical and consistent way and get more shoes on feet.
Speaker Change: Before turning the call over to Susan to review our financial results, I want to call out the publication of our 2023 Crocs Inc. comfort report released in June .
Speaker Change: This annual report highlights our commitment to, and progress on our purpose, to create a more comfortable world for all through action-orientated ambitions of inclusivity, climate stability, circularity, and community.
Susan L. Healy: I will now turn the call over to Susan to walk through our financials for the quarter. Thank you, Andrew, and good morning, everyone. Before I review the quarter, I'd like to say what an honor it is to have the opportunity to serve as the CFO of Crocs Inc. This is a company with strong financial performance brought to life by its culture, brands, people, and purpose. I look forward to working with Andrew and our talented management team to further advance the company's strategic and financial goals, as well as to getting to know many of you in the investment community in the weeks ahead.
Speaker Change: I will now turn the call over to Susan to walk through our financials for the quarter.
Susan: Thank you, Andrew, and good morning, everyone.
Susan: Before I review the quarter, I'd like to say what an honor it is to have the opportunity to serve as the CFO of Crocs, Inc.
Susan: I look forward to working with Andrew and our talented management team to further advance the company's strategic and financial goals, as well as to get to know many of you in the investment community in the weeks ahead.
Susan: Now for a review of our second quarter financial performance.
Susan L. Healy: We generated over $1.1 billion in consolidated revenues in the quarter, growing 5% over last year, led by the Crocs brand. Our second quarter results exceeded the high end of our guidance for the enterprise. For the Crocs brand, revenues were $914 million, growing 11% compared to the prior year, driven by DTC growth of 14% and wholesale growth of 9%. The growth came from a mix of volume and ASP, with units increasing 6% versus last year, to a total of 35 million pairs of shoes sold, and brand ASP increasing 4%, to $25.96.
Susan: Our second quarter results exceeded the high end of our guidance for the enterprise.
Susan L. Healy: As Andrew noted, North America revenues came in ahead of our expectations, growing 3% versus the prior year to $489 million. Growth was led by DTC, which was up 7%, while wholesale was down 4%. However, underlying North American brick-and-mortar growth was at mid-single digit.
Susan: As Andrew noted, North America revenues came in ahead of our expectations, growing 3% versus the prior year to $489 million.
Speaker Change: Underlying North American brick-and-mortar growth was at mid-single digits.
Susan L. Healy: International revenue of $425 million was up 22% from the prior year, led by DTC growth of 28% and wholesale growth of 18%. China led the way, growing over 70% on top of triple-digit revenue growth last year, and we also saw exceptional growth in Australia. In addition, our direct European markets grew by strong double digits. We sold 6 million pairs of shoes, 23% below last year. Crocs brand adjusted gross margin was 64.1%, or 210 basis points higher than prior year, driven by lower freight costs, channel mix, and higher ASPs, partially offset by investments in infrastructure. Our second quarter adjusted SG&A dollars increased 19% compared to the prior year.
Speaker Change: International revenue of $425 million was up 22% from prior year, led by DTC growth of 28% and wholesale growth of 18%.
Susan: In addition, our direct European markets grew by strong double digits.
Susan: Turning to Hey Dude, revenues were $198 million, down 17.5% from last year and within our guidance range.
Susan: Consistent with our strategy to strengthen the Hey Dude brand for the long term, brand ASPs were up 7% to $30.76 while volumes were lower.
Susan: We sold 6 million pairs of shoes, 23% below last year.
Susan: Consolidated adjusted gross margin for the second quarter was 61.4%, up 330 basis points from last year.
Susan: Crocs brand adjusted gross margin with 64.1% or 210 basis points higher than prior year.
Susan: Lower freight costs and higher international pricing.
Speaker Change: Hey Dude brand gross margin was 49.1% and 200 basis points higher than prior year, driven by lower freight costs, channel mix, and higher ASPs, partially offset by investments in infrastructure.
Susan: Our second quarter adjusted SG&A dollars increased 19% the prior year.
Susan L. Healy: It is driven by continued investment in talent, marketing, and DTC to support long-term market share gains. Our second quarter adjusted operating margin declined 100 basis points to 29.3% compared to 30.3% for the same period last year, but it was favorable to our expectations on higher gross margin and revenue. Second quarter adjusted diluted earnings per share increased 12% to $4.01. Our non-GAAP effective tax rate was 17.8 percent.
Susan: Second quarter adjusted diluted earnings per share increased 12% to $4.01.
Susan L. Healy: Both of our brands achieved inventory turns above our goal of four times on an annualized basis. Our liquidity position remains strong, comprised of $168 million of cash-in-cash equivalents and $559 million of borrowing capacity on our revolvers. We completed $175 million of share buybacks during the quarter, repurchasing 1.2 million shares at an average price of $149.53 per share. We currently have $700 million remaining on our share repurchase authorization
Speaker Change: Both of our brands achieved inventory turns above our goal of four times on an annualized basis.
Speaker Change: Our liquidity position remains strong, comprised of $168 million of cash-in-cash equivalents and $559 million of borrowing capacity on our revolver.
Speaker Change: We ended the quarter within our long-term net leverage target range of 1 to 1.5 times.
Susan L. Healy: In the second half of 2024, we plan to continue to buy back stock and pay down debt, enabled by our best-in-class free cash flow generation. Now, turning to 2024 guidance. We are reaffirming our full-year top-line guidance range and raising our operating margin and EPS expectations to reflect the beat in Q2, partially offset by continuing investment in talent and marketing in the back half of the year. We are maintaining our full-year revenue outlook of 3-5% growth, despite $11 million of incremental FX headwind, underscoring the underlying strength of our business.
Susan: In the second half of 2024, we plan to continue to buy back stock and pay down debt enabled by our best-in-class free cash flow generation.
Speaker Change: Now turning to 2024 guidance.
Speaker Change: We are maintaining our full-year revenue outlook of 3-5% growth, despite $11 million of incremental FX headwind, underscoring the underlying strength of our business.
Susan L. Healy: Our guidance assumes currency rates as of June 30th. For the Crocs brand, we continue to expect revenue growth between 7% and 9%, led by international, to a range of $12.45 to $12.90. Consistent with our previous guidance policy, this range reflects future debt repayment but does not assume any impact from future share repurchase. We are maintaining our expectations of the underlying non-GAAP effective tax rate, which approximates cash taxes paid, to be approximately 18%, and the GAAP effective tax rate to be 21.5%.
Speaker Change: For the Crocs brand, we continue to expect revenue growth between 7% and 9% led by international.
Speaker Change: For Hey Dude, we continue to expect revenues to contract between 8-10% and expect wholesale to be negative for the year and DTC trends to be better than wholesale as we communicated last quarter.
Speaker Change: We are raising our guidance for consolidated adjusted operating margins from approximately 25% to more than 25% for the year.
Speaker Change: We are maintaining our guidance for enterprise gross margin, as well as Crocs and Hey Dude brand gross margins, to be up for the year versus 2023.
Speaker Change: We remain focused on investing behind brand accretive and strategic SG&A initiatives which we believe will drive second half SG&A dollar growth to be above the first half.
Speaker Change: We are raising our 2024 adjusted diluted earnings per share guidance from a range of $12.25 to $12.73 to a range of $12.45 to $12.90.
Speaker Change: Our updated full-year range balances the strength we saw in Q2, along with appropriate caution around consumer spending trends and the geopolitical landscape, as well as the timing of our SG&A investments.
Speaker Change: Consistent with our previous guidance policy, this range reflects future debt repayment, but does not assume any impact from future share repurchases.
Speaker Change: We are maintaining our expectations of underlying non-GAAP effective tax rate, which approximates cash taxes paid, to be approximately 18%, and the GAAP effective tax rate to be 21.5%.
Susan L. Healy: Our annual capital expenditures are now planned between $100 to $110 million, down from $120 to $130 million, tied to the cash timing of select operational projects. Turning to our guidance for Q3, We expect consolidated revenues to be in the range of down 1.5% to up 0.5% at currency rates as of June 30, with the Crocs brand growing 3-5%, led almost entirely by international growth. We expect Hey Dude revenue to be down between 14-16% in the quarter, showing modest sequential improvement versus Q2.
Speaker Change: Our annual capital expenditures are now planned between $100 to $110 million, down from $120 to $130 million, tied to the cash timing of select operational projects.
Speaker Change: Turning to our guidance for Q3.
Speaker Change: We expect consolidated revenues to be in the range of down 1.5% to up 0.5% at currency rates as of June 30th, with the Crocs brand growing 3-5%, led almost entirely by international growth.
Speaker Change: We expect HeyDude revenue to be down between 14 to 16% in the quarter, showing modest sequential improvement versus Q2.
Susan L. Healy: Embedded in our Hey Dude guidance is the impact of lapping significant discounting on our marketplace for most of Q3 last year, as well as the timing of wholesale orders. We expect Adjusted Operating Margin to be approximately 24.5% and Adjusted Diluted Earnings Per Share to be between $2.95 and $3.10.
Speaker Change: We expect SG&A spend to be up in the low to mid 20% range in Q3, with talent and marketing investments elevated versus the year-to-date trend.
Speaker Change: We expect Adjusted Operating Margin to be approximately 24.5%
Speaker Change: and adjusted diluted earnings per share to be between $2.95 and $3.10.
Andrew Rees: As we look to the fourth quarter for the HeyDude brand, we expect revenue growth to be supported by one, easing comparisons, two, the timing of wholesale shipments, three, the contributions from new retail stores, four, sell-in to new international distributors, and five, lapping last year's pricing reset on digital late in Q3. In summary, we had a record second quarter. We have clear plans to invest further in our business to fuel long-term profitable growth, and I am confident in our abilities to achieve our 2024 objectives. I will now turn the call back over to Andrew for his final comments. Thank you, Susan.
Speaker Change: As we look to the fourth quarter for the Hey Dude brand, we expect revenue growth to be supported by, one, easing comparisons,
Speaker Change: In summary, we had a record second quarter. We have clear plans to invest further in our business to fuel long-term profitable growth, and I am confident in our abilities to achieve our 2024 objectives.
Andrew Rees: We're pleased by the results our teams have delivered through the first half, including our ability to pay down debt and return significant capital to shareholders. We will now begin the question and answer session. To ask a question, you may press star 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys.
Speaker Change: At this time, we'll open the call for questions.
Speaker Change: We will now begin the question and answer session.
Speaker Change: If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw it, please press star then 2. At this time, we ask that you please limit yourself to one question only. I will pause momentarily so we may assemble our roster.
Jonathan Robert Komp: If at any time your question has been answered and you would like to withdraw it, please press star, then 2. At this time, we ask that you please limit yourself to one question only. I will pause momentarily so we may assemble our roster. Our first question comes from Jonathan Komp of Baird. Yeah, hi, thank you. Good morning.
Andrew Rees: I want to ask about the second half of the revenue outlook. Could you maybe talk, Andrew, about your assumptions and what you're seeing in terms of the core North America Crocs sell-throughs and how you're expecting that to trend? And then, Susan, just to follow up on the fourth quarter Hey Dude Outlook. I know you highlighted four or five reasons for the inflection in year-over-year performance. Could you maybe just talk about the underlying assumptions in terms of the sell-through rates or the consumer end demand that's needed to hit the guidance in Q4 for Hey Dude? Thank you. And I'll let Susan talk about HeyDude, and I'll maybe add something at the end. Yeah. Hello Jonathan.
Speaker Change: Yeah, hi, thank you. Good morning. I want to ask about the second half revenue outlook.
Speaker Change: for the inflection and year-over-year performance. Could you maybe just talk about the underlying assumptions in terms of the sell-through rates or the consumer end demand that's needed to hit the guidance in Q4 for HeyDude? Thank you.
Speaker Change: Look, before I start, obviously, we're really thrilled we had an exceptional Q2, we're thrilled to announce those results today. In terms of the back half for Crocs, we're obviously not adjusting our overall expectations for the Crocs brand, but we had an exceptional first half for the Crocs brand. As we look at the back half in North America, you know, I think we're very satisfied with the share gains that we've achieved in the first half, we've grown about 6% on through the first half. That's against a market that is approximately flat, so substantial share gains.
Susan L. Healy: So when you think about HeyDude in the back half of the year, you've got to really think about Q3 and Q4 in tandem. So we expect Q3 wholesale to be down from last year and below Q2 versus last year, and we anticipate Q4 sell-in to be up. Part of what's driving that is the fact that last year, we had some orders that we shipped in Q3, and we deliberately did that to get them ahead of our planned ERP implementation just to avoid any potential disruption.
Susan: And I'll let Susan talk about HeyDude and I'll maybe add something at the end. Yeah, hello Jonathan. So when you think about HeyDude in the back half of the year, you've got to really think about Q3 and Q4 in tandem.
Susan: So we expect Q3 wholesale to be down to last year and below Q2 versus last year, and we anticipate Q4 sell-in to be up.
Susan: Part of what's driving that is the fact that last year we had some orders that we shipped in Q3, and we deliberately did that to get them ahead of our planned ERP implementation just to avoid any potential disruption. And so when you look at Q4 then, you're going to see more normalized wholesale flow between Q3 and Q4. And then there's also some other sort of non-comp compares, things like our rollout of retail stores, which are ramping up this year, our sell-in to new international distributors, and then you're also lapping last year's pricing reset in digital, which took place late in Q3.
Susan L. Healy: And so when you look at Q4, then, you're going to see more normalized wholesale flow between Q3 and Q4. And then there's also some other sort of non-comp comparables, things like our rollout of retail stores, which are ramping up this year, our sell-in to new international distributors, and then you're also lapping last year's pricing reset in digital, which took place late in Q3. Yeah.
Speaker Change: Thank you.
Speaker Change: Yes, thank you very much, and congrats on the nice quarter.
Speaker Change: I guess my question is on the SG&A, the Talent and Brand Accretive Marketing. Can you give us examples of what has worked thus far in the year-to-date period, where you're placing those incremental investments in the third quarter, and when do you see the type of payback, the return on that ad spend and the talent investments? Thank you very much. Thank you. Thank you.
Andrew Rees: Yeah, Adrienne, I would say these are long-term investments we're making. You know, our company, as it stands today, is exceptionally profitable. Our four-year guide for EBIT is now 25.5%, which is an exceptional number.
Susan: Yeah.
Speaker Change: Yeah, Adrienne, I would say these are long-term investments we're making, you know, our company, as it stands today, is exceptionally profitable. You know, our four-year guide for EBIT is now 25.5%. This is an exceptional number.
Andrew Rees: And we've grown extremely rapidly over the last several years, both organically and across banner, also through the acquisition of HeyDude. At this time, we're making a, you know, a series of investments in talent to enable us to grow in the future. Some examples of that would be enhancing our international teams for Crocs, where we're growing very rapidly in Asia and also in Europe, and investing in our marketing functions for both Crocs and HeyDude in terms of talent.
Andrew Rees: We've historically made some meaningful investments in terms of distribution infrastructure, and we're actually seeing some nice benefits from the efficiency of our distribution infrastructure. And I think the really big one is really marketing, right? We see a consumer that's obviously, I think, somewhat cautious here in the United States.
Andrew Rees: We're a little concerned about the cautiousness of the consumer in China as well, and we believe it's extremely important in these environments to engage the consumer. So we're offering our marketing investment against Crocs, but we're also meaningfully offering our marketing investment against HeyDude, where we've obviously, you know, got new talent in place in terms of HeyDude leadership. And I think we've got some really great ideas and a strong point of view about how we can bring that brand to life. Our next question comes from Jim Duffy of Stephen. Please go ahead. Oh, thank you. Hi Andrew.
Speaker Change: in China as well. And we believe it's extremely important in these environments to engage the consumer. So we're offering our marketing investment against Crocs.
Speaker Change: Our next question comes from Jim Duffy of Stiefel. Please go ahead.
James Vincent Duffy: Welcome, Susan. Susan, I'm looking forward to working with you. With respect to the guide for the remainder of the year, the fiscal third quarter got, I think, more cautious than most had expected. Can you, Andrew, speak to what you saw across July and key considerations in your outlook for the back-to-school season? Then also, perhaps, speak to tactical strategies, product flow, and considerations as it relates to holiday? on that. We
Jim Duffy: With respect to the guide for the remainder of the year, the fiscal third quarter got, I think, more cautious than most had expected. Can you, Andrew, speak to what you saw across July and key considerations in your outlook for the back-to-school season?
Andrew Rees: But what I would say is that the consumer is behaving cautiously. We anticipated that, we expected that, as we kind of thought about this year. And that is definitely true.
Andrew Rees: So we think it's definitely prudent to plan the rest of our year that way, and we've done that from a Crocs perspective. And then obviously, there's a lot going on with the hey-do guide between Q3 and Q4. I think Susan thoroughly elucidated what that looks like.
Andrew Rees: So it's not really interquarta trends that we're calling out because I note that we really haven't changed our four-year perspective. We expected this and have planned accordingly. Our next question comes from Rick Patel of Raymond G. Please go ahead. Yeah, so I think maybe I'll hit the second bit first, okay? So, and I think I think it's been a couple of times, but what I would say, and I'm not sure what you mean in terms of lumpiness, what are you referring to, Rick?
Andrew Rees: We expected this and have planned accordingly.
Jim Duffy: Our next question comes from Rick Patel of Raymond James.
Speaker Change: Please go ahead.
Rick Patel: Thank you. Good morning and great to have you on the call, Susan. For the Crocs brand, can you talk about how the B2C strategy on Amazon may be affecting how results are being reported, as we think about wholesale versus direct-to-consumer? And just given the lumpiness of the results,
Rakesh Babarbhai Patel: I'm just talking about the sequential slowing that's embedded in the third quarter guidance. So, I think that's the piece, and I think that's only prudent, right? We want to plan our business that way to ensure that we keep inventories clean and fresh in the channel. We want to make sure that we don't get over-invented and aren't pouring our cash into inventory versus returning it to shareholders, so that's, I think, just prudent planning. And then the first part of your question was about the Amazon trajectory.
Speaker Change: I'm just talking about the sequential slowing that's embedded in the third quarter guidance.
Speaker Change: Yeah, so I think that's pretty simple, right? So as we think about the first half for the Crocs brand in North America, we had 6% growth, right? Against a market that was approximately flat, so significant market share gains.
Speaker Change: In the back half, we're guiding the Crocs band to be approximately flat. Right, so that's, I don't think that's lumpiness, but that's a distinct change in first half to second half, and that is due to anticipated consumer softness.
Speaker Change: So I think that's the piece, and I think that's only prudent, right? We want to plan our business that way to ensure that we keep inventories clean and fresh in the channel. We want to make sure that we don't get over-inventoried and end up pouring our cash into inventory versus returning it to shareholders. So that's, I think, just prudent planning.
Andrew Rees: Look, I think Amazon continues to be a really important global partner. From our perspective, we want to be on the marketplaces where the customer shops, that is, Amazon in the U.S. and, in fact, in many parts around the world. And we are shifting sometimes how we manage the marketplace in terms of 1P versus 3P. I don't think that change in terms of where it shows up in our P&L will be phasing out as we go through the back half of the show. The next question comes from Chris Nardone of Bank of America. Thanks, guys. Good morning.
Speaker Change: continues to be a really important global partner, our perspective associated with
Christopher Michael Nardone: So regarding your Crocs brand international business, can you discuss where you're seeing some of the momentum and what countries are driving the biggest impact on your back half growth expectations? Then, quickly on Hey Dude International, could you also remind us what percentage of your business this year will come from outside of the US? And then Andrew, what gives you confidence that you can avoid some of the gray market issues that have impacted the brand previously with this newer international rollout? Thank you. Hopefully, that will give you everything you need, Chris.
Speaker Change: Thanks, guys. Good morning.
Speaker Change: Then quickly on HeyDude International, if you could also remind us what percentage of your business this year will come from outside of the U.S. And then Andrew, what gives you confidence that you can avoid some of the gray market issues that impacted the brand previously with this newer international rollout? Thank you.
Speaker Change: All right, so three questions there, right? So international for Crocs, right? So obviously, that is a key driver of our growth, has been for the past...
Erinn Murphy: Unknown Executive, Erinn Murphy
Erinn Murphy: Unknown Executive, Erinn Murphy
Speaker Change: The key markets that have been driving growth are China is our number one and probably our greatest long-term potential and we've made substantial investments to enable that growth. Australia has been also a very strong driver of growth. We called that out a couple of times. I think in the prepared remarks we referenced China's up 70 percent.
Speaker Change: During the quarter two, which is on triple digit growth last year, we continue to expect strong growth in China, but we are also calling out the fact that the Chinese consumer is clearly more conservative than they have been in the past. We think our brand is well positioned against that.
Speaker Change: In terms of other important markets, I would say some of our key Western European direct markets, the UK, Germany, etc., have also performed well, yielding strong double-digit growth. And if you look longer term, we're also super excited about our potential.
Speaker Change: But I think, and I've talked about it before, what I would say is our model internationally is essentially going to be mirror Crocs. So we're going to be direct where Crocs is direct, and we're going to use distributors where Crocs uses distributors.
Speaker Change: In terms of where we put...
Speaker Change: So those are direct markets, and that means that we're opening e-commerce, we're selling wholesale, and we're participating in the market directly, leveraging our Crocs team. The second thing we've done is we've initiated
Tom Nikic: The next question comes from Tom Nikic of Wedbush. Please go ahead. Hey, good morning, everyone.
Speaker Change: Hopefully that gives you everything you need, Chris.
Speaker Change: The next question comes from Tom Nikic of Wedbush.
Andrew Rees: Thanks for taking my question. Obviously, Terrence is very familiar with the enterprise overall. Can you just talk a little bit about what, you know, I guess what Terrence can bring to the table for the Hey Dude brand, like how he can help rejuvenate and reinvigorate the brand and, essentially, like what part he'll play and, you know, 90 days at this point, but we're thrilled to have him back.
Tom Nikic: I want to ask on the Hey Dude side, you know, I know obviously it's got a new brand president, you know, parents.
Speaker Change: Unknown Speaker ... who ...
Andrew Rees: We all loved working with him when he was here initially, and we're all very impressed by the trajectory he was able to drive at Stanley, where he was for a period of time while he was not with us. So we're thrilled to have him back.
Speaker Change: We all loved working with him when he was here initially, and we're all very, you know, impressed by the...
Andrew Rees: I would also emphasize he's leading what we believe is a strong management team within our Hadoop business. So we think we've got all of the pieces in place. And in terms of what he's able to do, he's driving really, I think, three or four key things.
Andrew Rees: One is definitely sharpening the brand's focus on their icon, the Wendy and the Wally. Hence driving investment focus, energy, and innovation into the Wendy and the Wally. He is focusing our attention on North America, which is obviously the biggest market. But if we can leverage brand heat in North America around the world, it also gives us opportunities internationally. And he's really shifting the marketing energy and the focus to the female consumer. If we can drive, you know, we believe the younger female consumer drives youth culture.
Andrew Rees: If we can engage and energize a female, younger female consumer, we know that's going to spread passion for the brand to a much broader range of consumers and drive the brand overall. And I would say, lastly, we're also arming you with significant firepower, right? You know, embedded in our guidance for the back half is an increase in our marketing investment that's substantial. So we will support Terrence and the innovation he's able to bring to the brand and really be able to drive that in the future. The next question comes from Sam Poser of Williams Trading. Please, go ahead, on North American Guidance for the Crocs brand for the back half of the year. I got it.
Speaker Change: Please go ahead.
Speaker Change: What's going on there? Number two, can you just talk about
Samuel Marc Poser: Okay, three questions. Number one, we have been present on Walmart.com for several years now. And the, you know, our philosophy is unchanged on this, which is that we believe our brand, particularly the Crocs brand, which is a highly democratic brand, should be represented where the consumer is shopping. Walmart.com is the second largest marketplace in the US market relative to Amazon, as Slipkart is in India.
Speaker Change: Got it. Okay, three questions, right? Number one, we have been...
Andrew Rees: So we think those are important platforms for the brand to be represented on. But obviously, the product needs to be appropriately segmented relative to the consumer that's shopping on those marketplaces. So hopefully, that kind of answers that question.
Speaker Change: present on walmart.com for several years now.
Speaker Change: And the, you know, our philosophy is unchanged on this, which is...
Andrew Rees: In terms of promotional activity, what are you getting at this time? What are you trying to elucidate? I'm just asking, you know, really; it's more about US guidance.
Samuel Marc Poser: But I mean, are you seeing, you talk about a weaker consumer. So I'm wondering if, if you need to get, if you're anticipating needing to get more promotional, or, you know, I'm just wondering how you're looking at the marketplace. And then how do you look?
Speaker Change: Well, I'm just asking, you know, really, it's more about the U.S. guidance, but I mean, are you seeing...
Speaker Change: I would say. And certainly more promotional than it was coming out of the pandemic. I would say it's kind of returning from my perspective to what it was pre-pandemic, which is, you know, key promotional periods are super important. And the marketplace gets pretty down and dirty during those key promotional periods.
Speaker Change: As we've talked about...
Speaker Change: I'm not sure, at this point, we're anticipating an increasing trajectory of promotions in the back half. That is not the reason for the...
Samuel Marc Poser: How do you look towards Crocs? And, hey, dude, responding to that? Please go ahead.
Speaker Change: The next question comes from Laura Champine of Loop. Please go ahead.
Laura Allyson Champine: Thanks for taking my question. It's really about the long-term prospects for Hey Dude with kind of a short-term kicker of when do you think your new leadership there should be able to make a material impact on the growth trajectory of Hey Dude, but also, how has your experience with Hey Dude over the last nine months, call it, influenced your thoughts on the long-term growth potential of the program? Yeah, great question, Laura.
Andrew Rees: So, what I would say is we are extremely bullish on the long-term perspective or projections for HeyDude and as bullish as we were when we bought the brand. Obviously, over the last several months, it has not performed as we had hoped it would, particularly here in the US marketplace. And I think we've talked at some length about some of the things that I think we did wrong associated with that.
Speaker Change: We, you know, obviously over the last several months, it has not performed as we had hoped it would, particularly here in the U.S. marketplace.
Andrew Rees: That does not change our long-term perspective on the brand. We think the value proposition that the brand brings to the table, a lightweight, comfortable, easy-on and off product that is extremely compelling to the consumer that we can make in many different colors, fabrications, flavors, etc., with a really effective consumer engagement strategy and marketing strategy, we think has a lot of potential for today's consumers. And really, everything we continue to kind of learn about the brand and the innovation we can bring to certain areas of the product line is reinforcing that.
Erinn Murphy: Unknown Executive, Erinn Murphy
Andrew Rees: So, I would also note that despite the brand not meeting our current ambition, it does make an extremely solid contribution to our overall financial picture in terms of revenues, margin, and profitability, but it is not reaching our ambition for the brand. And I think we're very confident in the team we have in place, and the strategy we have in place that we will be able to reach full ambition for the brand. So, I think, in a nutshell, we're as confident and as enthusiastic about the brand as we were when we bought it. The next question comes from Ashley Owens of KeyBank Capital Markets. Hello Ashley,
Speaker Change: The next question comes from Ashley Owens of KeyBank Capital Markets.
Ashley Owens: So at the enterprise level, we expect gross margins to be up for the year end and for the second half, but not at the same rate as the first half, basically due to the harder comparisons. So if we kind of look at it brand by brand, for Crocs, we expect it to be up slightly year over year, as we start to anniversary some bigger freight gains from last year. And on the heated side, we're expecting Q3 margin to fully recover when we compare it to two years ago. The next question comes from Mitch Kummetz of C.P.R. Um, yeah, thanks, Mitch.
Erinn Murphy: Basically due to the harder compares.
Erinn Murphy: The next question comes from Mitch Kometz of Seaports. Please go ahead.
Mitchel John Kummetz: I think, look, we don't comment consistently on future order books. But I would say, look, we're, you know, we're satisfied with, obviously, as you, as you're well aware, we're outselling spring 25 currently. Retailers, as you would expect, are, as you would expect, buying somewhat cautiously, given that the current trajectory of the business and what they see for the remainder of the year. That's really As we look at our Crocs order book, domestically and globally, and the strength of our spring 25 line, which we're happy with where it's at. And we'll, you know, we'll obviously get into 25.
Speaker Change: But I would say...
Speaker Change: Look, we're, you know, we're satisfied with, you know, obviously, as you, as you're well aware, we're outselling, you know, Spring 25 currently.
Speaker Change: I would say...
Speaker Change: Given that the current trajectory of the business and what they see for the remainder of the year. That's really a domestic comment As we look at our Crocs order book domestically and globally and the strength of our spring 25 line We're happy with where it's at and we'll
Andrew Rees: And we'll tell you more about that in the future. From a HeyDo perspective, you know, we're excited about the line that we're bringing to the table in spring 25. And we're getting a lot of positive feedback on some of the innovation that's embedded within our product strategy. And we're planning to support that with, you know, really compelling marketing to drive consumer engagement. And on the specifics about the orders that we shipped earlier last year in Q3, we don't break that out specifically, but that is definitely embedded in our guidance of being down 14. Please go ahead.
Speaker Change: We're excited about the line that we're bringing to the table in Spring 25, and we're getting a lot of positive feedback against some of the innovation that's embedded within our product strategy, and we plan to support that with really compelling marketing and drive consumer engagement.
Speaker Change: And on the specifics about the orders that we shipped earlier last year in Q3, we don't break that out specifically, but that is definitely embedded in our guidance of being down 14 to 16.
Erinn Murphy: Our next question comes from Jay Sole of UBS.
Unknown Executive: Great, thank you. Andrew, I'm just wondering if you can elaborate a little bit on the China business. You made a few comments, but, you know, China for Crocs' brand being up 70% on top of triple digit growth last year. Can you talk about your progress in that market? You know, where you're pleased, maybe where there's more opportunity, and what kind of growth do you expect going forward?
Andrew Rees: Yeah, I think we're really, you know, we talked a lot about it over the last 18 months. Yeah, we're really excited by the trajectory that we're seeing in China. At the heart of it is that we've driven, you know, brand relevance; we've made the Crocs brand, and particularly the clog and personalization of the clog, relevant to the Chinese consumer. We've done that mostly through, I would say, digital and social marketing, and we've really established a very strong platform in the Chinese market.
Erinn Murphy: Yeah.
Speaker Change: I think we're really, you know, we talked a lot about it over the last 18 months. You know, we're really excited by the trajectory that we're seeing in China. At the heart of it is we've driven, you know, brand relevance. We've made the Crocs brand and particularly the clog and personalization of the clog relevant to the Chinese consumer.
Erinn Murphy: We've done that mostly through, I would say, digital and social marketing, and we've really established a very strong platform in the Chinese market.
Andrew Rees: That's driven strong growth across our channels, right? That's driven strong growth, very strong growth, and triple-digit growth last year, and 70% in Q2, as you highlighted in your question, across channels. So that's been both digital, so it's Tmall, Doyon, and all the other digital platforms.
Erinn Murphy: across our channels, right, that's driven strong growth.
Speaker Change: Very strong growth, I mean triple digit growth last year and 70% in Q2 as you highlighted in your question.
Erinn Murphy: So that's been both digital, so it's Tmall, Doyon, and all the other digital platforms.
Andrew Rees: It's what we book as wholesale, which is to franchise partners that then sell through monobranded stores. So those monobranded stores are seeing comp store gains. Those franchise partners are also opening more stores, so that's been driving wholesale growth. And we've had some modest incremental growth in our retail fleets, where we're focusing on both what we call energy stores in the major metropolitan areas, China, sorry, Shanghai and Beijing, and a couple of other tier one cities, and also tier one outlets, which we think are also important in the Chinese market. So growth across all channels.
Erinn Murphy: It's what we book as wholesale, which is to franchise partners that then sell through monobranded stores.
Erinn Murphy: So those monobranded stores are seeing comp store gains. Those franchise partners are also opening more stores.
Erinn Murphy: So that's been driving the wholesale growth, and we've had some modest incremental growth in our retail fleets, where we're focusing on both what we call energy stores in the major metropolitan areas, Shanghai and Beijing, and a couple of other tier one cities.
Andrew Rees: As we look forward, while we're not quantifying any kind of future growth expectations, our next question comes from Jim Duffy of Stiefel. Please go ahead. Okay. All right.
Erinn Murphy: Our anticipation is we will see sustained growth over multiple years in the Chinese market. We're still very much underpenetrated relative to the size of the market. And we think that growth will come across all channels.
Andrew Rees: In the next two to three years, we're not anticipating a lot of business below two tier cities. We want to really keep the quality of our business high and focused on the, you know, higher demographic portion of the market.
Erinn Murphy: Our next question comes from Jim Duffy of Stiefel.
Speaker Change: Please go ahead.
Andrew Rees: So, I'm going to hit on sandals and sneakers, and then Susan can hit on capital allocations. So, from a sandal perspective, you know, we've been happy with our sandal performance during Q2. We saw, I think, some strengthening relative to Q1. That's driven by some kind of fashion-oriented sandals. So, we made introductions of a couple of new collections that have been performing well. The Getaway, which is a comfort fashion sandal, and the Miami, which is more of a fashion sneaker.
Speaker Change: We've been happy with our sandal performance during Q2, we saw, I think, some strengthening relative to the Q1, that's been driven by some kind of a fashion-orientated sandals, so we made introductions of a couple of new collections that have been performing well. The Getaway, which is a comfort fashion sandal, and the Miami, which is more of a fashion sandal, those have been performing well, and we've been kind of chasing some inventory. We've also driven some innovation into the Brooklyn, which has been a long-standing franchise that's a wedge or elevated fashion sandal. We've introduced a couple of new models in there that have been performing well, including a personalized sandal where the consumer can add charm.
Andrew Rees: Those have been performing well, and we've been kind of chasing some inventory. We've also driven some innovation into the Brooklyn, which has been a long-standing franchise that's a wedge or elevated fashion sandal. We've introduced a couple of new models that have been performing well, including a personalized sandal where the consumer can add charms to the sandal to really dress it up. So, we think that's been performing well in our penetrated markets or our key tier one markets. And we're confident that sandals will continue to drive a long-term growth trajectory for the brand. The sneaker-oriented product is really all about testing and experimentation.
Andrew Rees: We did introduce Juniper with Salehi Bembery during the quarter. We highlighted that in prepared remarks. It's small, very, very small, but it's really the sort of pinnacle offering.
Andrew Rees: And we continue to experiment and test a whole range of sneaker-orientated silhouettes. That's a longer-term strategy, but it's important that we continue to innovate in that arena. Now, Jim, you asked about debt paydown and share buyback. I mean, the short answer is we like both.
Speaker Change: and we continue to experiment and test a whole range of kind of sneaker orientated silhouettes. You know that's that's a longer term strategy but it's important that we continue to innovate in that arena.
Susan L. Healy: And we're planning to do both in the back half of the year. You know, we're fortunate to have a business with a very strong cash flow. And we're also within our net leverage target range of one to one and a half times. So that gives us the flexibility to deploy capital both ways. And in answer to your question, you know, no change at this point to that target. We really like where we are from a cash flow and liquidity standpoint. Our next question is a follow-up from Baird. Please go ahead. Hi, thank you. Just one more follow up. I wanted to ask a bigger picture question around the philosophy of SG&A investments.
Operator: And obviously, this year is, This concludes our question and answer session. Look, I just want to say thanks. The Ultimate Parody Site! BF-WATCH TV 2021, The Bulletproof Executive 2013
Speaker Change: Yes, so Jim you asked about debt pay down and share buyback. I mean the short answer is we like both
Speaker Change: Our next question is a follow-up from Baird.
Speaker Change: Please go ahead.
Speaker Change: Hi, thank you. Just one more follow-up. I wanted to ask a bigger picture question around the philosophy for the SG&A investments, and obviously this year is
Speaker Change: In terms of philosophy going forward, I think there will be periods of time when we choose to invest in SG&A, both variable in SG&A, because most of our marketing is variable and can be turned on and off at any point in time, and where we will make investments in talent and people and infrastructure and capabilities that we think will be important for the future. The intent of those investments is to support and assure a long-term growth. We're trying to build a company and a brand that has long-term growth potential and can continue to grow for many years to come.
Speaker Change: So I would say there will be periods of time when we distort an SG&A, there will be periods of time when we leverage SG&A, and that's kind of how we think about it from a long-term philosophy perspective.
Speaker Change: Okay, this concludes our question and answer session.
Speaker Change: Okay, sorry, jumped the gun a little bit there. Thanks everybody for their thoughtful questions and thank you everybody for joining us today and their interest in our company. So we appreciate it.
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Speaker Change: www.mercierfilms.ca