Q3 2024 Crocs Inc Earnings Call
Good day and welcome to the Crocs third quarter 2024 earnings Conference call.
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Speaker Change: I would now like to turn the conference over to Erinn Murphy.
Speaker Change: Your Vice President of Investor Relations and corporate strategy. Please go ahead.
Erinn Murphy: Good morning, and thank you for joining us to discuss the Crocs, Inc. Third quarter results with me today are Andrew Rees, Chief Executive Officer, and Susan Huey 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 Murphy: Before I 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.
Erinn Murphy: These statements include but are not limited to statements regarding our strategy plans objectives expectations and intentions, including our financial outlook.
Erinn Murphy: Involve known and unknown risks uncertainties and other factors.
Erinn Murphy: Cause our actual results performance or achievements to differ materially. Please refer to our quarterly reports on Form 10-Q, and other reports filed with the SEC for more information on these risks and uncertainties.
Erinn Murphy: Certain financial metrics that we refer to 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, all revenue growth rates will be decided on a constant currency basis, unless otherwise stated at that time.
Speaker Change: I'll turn the call over to Andrew Rees Crocs, Inc, Chief Executive Officer.
Andrew Rees: Thank you Erin and good morning, everyone. Thank you for joining us today.
Andrew Rees: We reported third quarter results that exceeded our guidance in terms of sales and profitability on an enterprise basis.
Andrew Rees: Consolidated enterprise revenues of $1 1 billion grew 2% to prior year led by 5% growth in DTC.
So hi, Bryan Krug, Bryan grew 8% with international up 17% and North America up 2%.
Andrew Rees: Hey, Dude revenues contracted 17% slightly below our expectations.
Andrew Rees: Adjusted diluted EPS of $3 60 per share increased 11%.
Andrew Rees: Today, I will be covering the following topics I'll push deeper insights into our third quarter results along with what we're seeing from a broader consumer perspective.
Andrew Rees: I will then elaborate on <unk> strategic priorities and what gives me confidence around the brands longer term growth prospects.
Andrew Rees: On some of the early wins, we're seeing in the business today.
Andrew Rees: Finally, Susan will review, our financial performance, our updated 2020 for outlook and our preliminary thoughts on 2025.
Andrew Rees: Now turning to third quarter insights starting with the Crocs brand.
Andrew Rees: The investments, we are making in product and marketing enabled us to win with consumers around the world.
Andrew Rees: All three of our product pillars, clogs sandals and personalization grew during the third quarter led by our icon the classic clog.
Andrew Rees: In August when you use named our classic clog what are the greatest shoes of all time.
Andrew Rees: Embracing the personalization platform, they're not clog provides we launched our live life fully loaded campaign during the back to school season.
Andrew Rees: This campaign created high consumer engagement in our stores and online both for our classic clog as well is that you have its business as consumers were able to fuel the love for self expression.
Andrew Rees: We're continuing to iterate on our club by introducing new silhouettes and building durable franchises.
Andrew Rees: The Echo franchise, which has developed a breath of products across clogs sandals boots sneakers continues to bring in new largely male explore consumer to our brand.
As we look into spring, we're excited to bring the echo wave of molded meal and echo searches market, both new innovations are priced under $100.
Andrew Rees: Another example of how we reiterated on the clock is are in motion franchise.
Andrew Rees: We have seen successful results in our tests of this franchise on our DTC channels ahead of a scaled rollout in 2025.
Andrew Rees: This new innovation features a proprietary light right phone foot, but along with our free field technology.
Andrew Rees: By applying the learnings from our quick to market D. T. C codes, you slipped the launch last year.
It would've scale the offering this fall across expanded color ways and with our wholesale partners at an incredible value of $49 99.
Andrew Rees: So a lot has been strong out of the gate and we're chasing replenishment.
Andrew Rees: In addition to our mainline product we bought many exciting partnerships to life during the quarter.
Andrew Rees: This included a Boston body Whats collection, featuring our classic clog and Cozy Sandal appreciable did with full midstream gib its charms we.
Andrew Rees: We also introduced Batman and Squish mellow and of course, a crux times Mcdonald's happy meal.
Andrew Rees: As a natural extension of our first collaboration with Mcdonald's, We designed and introduced a Mcdonald's times crux happy meal with a curated assortment of 70 limited edition classic clogs heat James on a sticker packs with personalization.
Andrew Rees: We launched the happy meal first in China, and so a fantastic results.
Andrew Rees: Within the first 48 hours over 400000 Crooks happy meals were sold generating over 10 billion brand impressions.
Andrew Rees: Since then we have launched our happy meal in over 40 countries driving significant brand momentum and heat.
Andrew Rees: Last week, we celebrated the seventh annual crop day on October 23rd our very own fan inspired holiday within the months of crop Tilda.
Andrew Rees: With our much awaited W. We celebrated the release of pet Crocs.
Andrew Rees: Available alongside matching classic line, clogs, allowing dogs and Doug parents to coordinate that looks in lockstep.
Andrew Rees: Our pet crocs designed in partnership with box, where available globally on our own dot com and in select retail stores.
Andrew Rees: The release was a huge success.
Ban inspired festivities did not stop there this year, we released the crux costume.
Andrew Rees: Which is in the form of a lifesize iconic classic clog fully loaded with Jupiter chance.
Andrew Rees: And just like your favorite pair of crops clogs. This call. She means available in both left and right versions.
Perfect pairing opportunity with friends.
Andrew Rees: In September we achieved another step forward towards our celerity goals with the launch of a limited edition keep it going classic clog.
Andrew Rees: The new clubs speech at 25% post consumer recycled content from the shoes collected through Oh, crocs and utilize consumer take back program.
Andrew Rees: With the remaining construction of the shoe containing up to 25% Biobased crosslight material.
Andrew Rees: Now for a review of the Crocs brand business by geography.
Andrew Rees: The North American market performed well with revenue growth of 2% versus the prior year led by D. T C.
Andrew Rees: In North America, the consumer has reverted to pre pandemic shopping patents shopping closer to need and concentrating spend around key shopping events on holidays.
Andrew Rees: We saw a solid back to school season, but since labor day, we've seen the consumer pull back.
Andrew Rees: We anticipate the consumer environment being relatively muted in the U S until Black Friday, cyber Monday holiday period.
Andrew Rees: Our overall international revenues grew 17% versus prior year supported by notable growth in Australia, China, France and Germany.
Andrew Rees: Our China business grew over 20% on top of more than 90% growth last year in the third quarter.
Andrew Rees: With approximately two thirds of the growth driven by mono brand partner stores.
Andrew Rees: As we shared during our second quarter call. The industry was more promotional during the mid season Festival.
Andrew Rees: It is clear that the Chinese consumer as being far more conservative in their purchase behavior and we've seen an even more pronounced pullback within key tier one cities like Shanghai and Beijing.
Andrew Rees: In light of the broader macro environment in China, we're taking a more cautious view for the rest of the year.
Andrew Rees: Despite this backdrop I'm, Brian continues to gain share in China, which we believe is a direct result of our accessible authentic and personalized blue brand positioning so I think as a meaningful competitive advantage.
Andrew Rees: So it's a hey dude.
Andrew Rees: Third quarter results came in slightly below our guidance with revenues declining 17%.
Andrew Rees: Before I provide further detail on the quarter I want to start by sharing the progress we've made towards building hey, dude into a consistent unprofitable growth brand.
Andrew Rees: In September of last year, we made a pivot to prioritize Brian health put enough channel inventory, while right sizing our account base and began building a fleet of premium outlet stores to showcase the best expression of our brand.
Andrew Rees: Since then we've elevated asp's shut in more than 50% of our accounts improved inventory turns to four times, a year and opened 29 premium outlet stores.
In addition, we invested in talent across the brand while accelerating our marketing investment as we work towards driving higher awareness and relevance to generate brand heat.
Andrew Rees: We firmly believe these are the right decisions to build a solid foundation for profitable growth that Hey, Dude.
Andrew Rees: While we recognize hey, Jude performance. This year has not yet reflected these investments and actions, let me share a little bit more about what is giving me confidence.
Andrew Rees: As we spoke about last quarter, we sharpened our strategy to focus on three strategic imperatives.
Andrew Rees: Driving use female culture, and creating a hey, dude buying community.
Andrew Rees: Building the call a wall in one day and adding more.
Then stabilize and accelerate North America.
Andrew Rees: Against these imperatives with seeing the following green shoots.
Andrew Rees: First we believe the female youth culture is a key driver of influence Brian connectivity and a catalyst to build community.
Andrew Rees: In August we were thrilled to announce Sydney Sweeney as a global brand ambassador and our director of dues.
Andrew Rees: This partnership has generated the best performing content <unk> seen to date and we have plans to ignite further constant with Sydney Sweeney.
During the quarter, we launched ticked up shop, and we've seen an excellent response.
Andrew Rees: Bringing a new younger consumer.
Andrew Rees: In fact on select launch days are Brian emerged as the number one global key account ontic tuck shop.
Andrew Rees: Hey, just number of kicked off followers surpassed Instagram in the quarter. So the underscoring our opportunity to reach a younger audience.
Andrew Rees: We were also named the official comfort shoe of Barstool sports and time for a refresh collegiate collection.
Andrew Rees: Second we are focused on our icons the windy and Wally.
Andrew Rees: Our three core offerings include stretched sucks stretched canvas sunk moma.
Andrew Rees: During the quarter, we reiterated on these core offerings through our collaboration engine.
Andrew Rees: Successfully introducing bill juice and Spongebob to name a few.
Andrew Rees: In October we announced a long term partnership with country music singer Jelly roll.
Andrew Rees: Our initial call off with this same dot has featured a Wally sweat which sold out in minutes.
Andrew Rees: Since the launch we've seen the product show up on the secondary platforms for up to $6000.
Andrew Rees: As we discussed in our Q2 call the comfort the new product innovation that is an extension of our Wendy and wallet DNA with added cushioning and hike.
Andrew Rees: In the third quarter, we began scaling this across select global accounts.
Andrew Rees: As we look beyond that call, we'll see very healthy demand signs in our women's Austin lift on our men's pull silhouette with plans to scale them in 2025.
Andrew Rees: Third we're hyper focused on stabilizing the north American market to drive a sustainable foundation from which to grow.
We've streamlined our account base and our focus on building relationships across our strategic retailers similar to that of crocs.
Andrew Rees: We have worked to improve our inventory position and channel and improve asps across digital.
Andrew Rees: In the third quarter of digital last fees were up 10% from last year, and we saw improving weeks of supply across our key strategic accounts.
Andrew Rees: Premium outlet stores are performing in line with our expectation.
Andrew Rees: While we are encouraged by these early positive indicators <unk> recent performance and the current operating environment, our signaling it will take longer than we had initially planned for the business has turned the corner.
Andrew Rees: We continue to have confidence about the long term potential of the brand and the green shoots we're seeing give us positive reinforcement around or opportunity.
Andrew Rees: I'm incredibly proud of the <unk> team and the urgency with which they've executed against our sharpened strategy.
Speaker Change: I will now turn the call over to Susan to walk through our financials for the quarter.
Susan Huey: Thank you Andrew and good morning, everyone. Our third quarter results exceeded the high end of our enterprise guidance on the top and bottom line supported by a combination of better underlying operating performance, a lower than expected tax rate and lower share count.
Susan Huey: For the Crocs brand revenues were $858 million growing 8% to prior year and channel growth was balanced with DTC and wholesale each growing 8%.
Susan Huey: The growth was volume driven with units, increasing 11% versus last year to a total of $32 1 million pairs of shoes sold well brand asps decreased 3% to $26 48 a M.
Susan Huey: Asps were below last year tied largely to product mix and slight price erosion.
Susan Huey: North America revenues grew 2% versus the prior year to $491 million growth was led by DTC, which was up 4% while wholesale was down 2%.
Susan Huey: Underlying north American brick and mortar growth was up mid single digits.
Susan Huey: International revenues of $367 million grew 17% versus prior year led by DTC growth of 18% and wholesale growth of 15%.
Susan Huey: In China, we saw growth in excess of 20% on top of last year's 90% plus growth rate, while our direct European markets continued to show healthy growth in the quarter led by Germany and France.
Turning to Hey, Dude revenues were $204 million down 17% from last year.
Susan Huey: Wholesale revenues were down 23% and DTC revenues were down 9%.
Susan Huey: While we did plan for wholesale declines in the third quarter, our guidance anticipated stabilization of DTC.
Susan Huey: To support the strategies, Andrew outlined earlier, we changed our investment strategy around performance marketing shifting investments towards brand marketing, which impacted our digital performance negatively.
We believe we are making the right decisions for the long term health of the brand highlighted by the continued strengthening of our Asp's.
Susan Huey: Our 4% to $30.94 in the quarter.
Susan Huey: Concurrently volumes were lower with 7 million pairs of shoes sold 21% below last year.
Susan Huey: Consolidated adjusted gross margin for the third quarter was 59, 6% up 220 basis points from last year.
Susan Huey: Crocs brand adjusted gross margin was 62, 5% or 40 basis points higher than prior year.
Susan Huey: Primary drivers of margin expansion were favorable product costs and select international price increases offset in part by channel mix.
Susan Huey: Hey, good brand adjusted gross margin was 47, 9% or 510 basis points higher than prior year, driven primarily by freight favorable channel mix and pricing.
Susan Huey: Overall, adjusted gross margin was below expectations.
Susan Huey: Channel mix benefit was not as favorable as expected given the softer than anticipated digital trends in the quarter.
Susan Huey: Our third quarter adjusted SG&A dollars increased 19% to prior year here.
Susan Huey: Our adjusted SG&A rate was 34, 2% up 510 basis points compared to prior year, driven by continued investment in talent marketing digital and retail to support long term market share gains.
Susan Huey: Our third quarter adjusted operating margin was 25, 4%.
Susan Huey: 290 basis points from 28, 3% in the prior year driven by planned investments in SG&A.
Susan Huey: Third quarter adjusted diluted earnings per share increased 11% to $3 60.
Susan Huey: Our non-GAAP effective tax rate was 12, 6%.
Our lower than expected tax rate was largely tied to cash tax savings from the refinancing of our intercompany debt that occurred in the quarter.
Susan Huey: Our inventory balance as of June 30th with $367 million, a decline of 6% versus this time last year.
Susan Huey: Both of our brands achieved inventory turns above our goal of four times on an annualized basis.
Susan Huey: Our liquidity position remains strong comprised of $186 million of cash and cash equivalents and $559 million of borrowing capacity on our revolver.
During the quarter, we repaid approximately $110 million of debt, reducing borrowings to approximately $1 $4 billion year to date, we have repaid $248 million of debt and we ended the quarter at the lower end of our long term net leverage target range of one to one five times.
Susan Huey: Yeah.
Susan Huey: Enabled by our best in class free cash flow generation. We also completed $151 million of share buybacks during the quarter repurchasing one 1 million shares at an average price of approximately $135 per share.
Susan Huey: Year to date, we have completed $326 million of share buybacks repurchasing two 3 million shares. We currently have $549 million remaining on our share repurchase authorization.
Susan Huey: Now turning to 2024 guidance based on our third quarter results and the visibility we have heading into the fourth quarter. We are adjusting our full year outlook.
Susan Huey: Our full year enterprise revenue growth is now approximately 3% versus 3% to 5% prior assuming currency rates as of September 30th.
Susan Huey: So the crocs brand, we are narrowing our revenue range from 7% to 9% growth to approximately 8%.
Susan Huey: Or hey, Dude, we are lowering our revenue range from down 8% to 10% to down approximately 14, 5% based on lower than previously assumed sellouts in both wholesale and digital.
Susan Huey: We are maintaining our guidance for consolidated adjusted operating margins of more than 25% for the year powered by our strong adjusted gross margins, which they continue to plant up to prior year across the enterprise.
Susan Huey: Resulting in part from our lower than expected annual tax rate and incremental share repurchases in the quarter. We are raising our 2024 adjusted diluted earnings per share from $12 45 to $12.90.
Susan Huey: To the high end of our prior range at $12 82 to $12 90.
Susan Huey: Consistent with our previous guidance policy. This range reflects future debt repayment, but does not assume any impact from future share repurchases.
We are now expecting an underlying non-GAAP effective tax rate, which approximates cash taxes paid to be approximately 16% and the GAAP effective tax rate to be approximately 21%.
Susan Huey: We are lowering our annual capital expenditures guidance from $100 million to $110 million to $90 million to $100 million tied to the cash timing of select operational projects.
Susan Huey: Turning to our guidance for Q4, we expect consolidated revenues to be in the range of flat to up slightly at currency rates as of September 30th we.
Susan Huey: We expect the crocs brand to grow approximately 2% led by double digit international growth.
Susan Huey: Fourth quarter International growth rate is below our year to date growth rate based on one or more cautious consumer in China and to ongoing regulatory pressure in India, which is impacting our ability to meet demand.
Susan Huey: Turning to North America, we expect a slightly negative fourth quarter, which includes our expectations of a more choice full consumer as well as the timing of wholesale shipments between quarters for the second half North America is expected to be flat to prior year in line with our previous expectations.
Susan Huey: We expect Q4 DTC to remain positive.
Susan Huey: For hated we expect revenue to be down between 4% and 6% in the quarter below the former implied range of up low to mid teens.
Susan Huey: The largest driver of our lower revenue outlook is tied to lower than expected sellouts on both digital and wholesale.
Susan Huey: Our assumptions around our non comp drivers, including our retail stores in our international distributor sell ins are in line with our former forecast.
Susan Huey: Adjusted gross margins are expected to be up for the enterprise with crocs brand up slightly and hated slightly down versus prior year.
Susan Huey: We expect adjusted SG&A spend to be in the high teen range in Q4, and adjusted operating margin to be approximately 19, 5%.
Susan Huey: Adjusted diluted earnings per share is expected to be between $2 20.
Susan Huey: To $2 28 tenants.
Susan Huey: Well, we are not guiding to 2025, yet I want to provide some preliminary shaping for your models based on the visibility we have thus far.
Susan Huey: For Crocs, we expect revenue growth in 2025 to be led by international.
Susan Huey: As a reminder, we will be negatively impacted by the timing of Easter moving back into Q2.
Susan Huey: This will have an outsized impact to our North America region in the first quarter. In addition to lapping leap year.
Speaker Change: Hey, Dude next year is about brand stabilization as Andrew shared we're seeing green shoots around the brand receptivity from a broadening group of consumers, but note that financial results will lag the marketing momentum. We're currently seeing.
Speaker Change: With the visibility we have into 2025, we expect the first quarter to be sequentially down from the fourth quarter tied to wholesale.
Speaker Change: In 2025, we plan to continue to invest behind talent marketing digital and retail in order to create sustainable long term growth, which will put incremental pressure on our EBIT margin rate versus 2024.
Speaker Change: Yeah.
In closing, we are making near term decisions that we believe are in the best long term interests of the company and our shareholders and we will continue to focus on what our company does best delivering growth with industry, leading margins that generate significant free cash flow.
Speaker Change: I will now turn the call back over to Andrew for his final thoughts.
Andrew Rees: Thank you Susan accompanies initiatives remain consistent and will focus on three primary levers to fuel durable long term growth.
Andrew Rees: One ignite our icons across both brands to drive awareness on global relevance for new and existing consumers.
Andrew Rees: To drive market share gains across our tier one markets through strategic investment behind talent marketing digital and retail.
Andrew Rees: Sorry, attract new consumers to our brands through methodically diversifying our product range and usage occasions.
Speaker Change: At this time, we'll open the call for questions.
Speaker Change: We will now begin the question and answer session.
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If at any time your question have been addressed and you would like to withdraw your question. Please press Star then two.
Speaker Change: We ask that you please limit yourself to one question.
Speaker Change: At this time, we will pause momentarily to assemble our roster.
Speaker Change: The first question today comes from Jonathan Komp with Baird. Please go ahead.
Jonathan Komp: Yeah, Hi, good morning, Thank you.
Jonathan Komp: I'll stick with the one topic here I wanted to ask you about crocs in North America.
Speaker Change: Can you just give a little more detail Susan I know you mentioned a shift in Q4 on wholesale but expectations for you to see them remain positive could you just remind us.
Speaker Change: Some of the moving parts for D C and Ryan what what's driving the forecast and then maybe a bigger picture question as we look forward into 2025.
Speaker Change: What role North America play and their total cross sell what for 2025 and what are some of the drivers that you see Andrew.
Andrew Rees: Great. So let's do it in that order, Jonathan Susan will kind of give you the mechanics around the remainder of this year and I'll touch on the bigger picture.
Susan Huey: Thanks, John.
When we think about North America, we are unchanged and our expectation that North America will be flat for the second half and we were really pleased with the underlying performance in the third quarter of the Crocs brand in North America, but for the full back half our expectations are unchanged.
Susan Huey: By channel fourth quarter D. C is expected to be positive offset by wholesale which is planned down as retailers took product earlier in Q3 than we planned and overall, we're mindful of current consumer shopping patterns as well as macro headwinds in the fourth quarter and we're taking a prudent approach.
Speaker Change: Yes, so if we step back to the big picture.
Speaker Change: So North America. This year based on all the guidance, we provided for the fourth quarter will grow about two 5% for the year and so what role does this play within our overall business. So the North American business as we look at it is a well managed stable business. It's highly profitable is cash generative and it really is obviously a large business.
Speaker Change: The absolute size of it so it generates the income the cash flow that we can use to fund one is the international growth for crops, but also some of the investments, we're making in hey Dude.
Speaker Change: It's balanced across channels. So we have a wholesale business we have a retail business. We have a digital business. We've made some strategic shifts over the past year within digital going more to three P. On our Amazon platform. We think that's been highly productive and we think that will be attractive in the future.
Speaker Change: And we kind of think about the business as really being very well positioned to continue the role that it's playing today, we're confident that over the short to the longer term, we will be able to grow the business modestly and and it plays a very important role in our overall portfolio.
Speaker Change: Right. That's helpful. Thank you.
Speaker Change: Thank you.
Speaker Change: The next question comes from Jim Duffy with Stifel. Please go ahead.
Jim Duffy: Thank you good morning.
Jim Duffy: Multi part question on Hey, Dude first you mentioned streamlining the account base for <unk> can you elaborate on those distribution actions and then I'm, hoping you can speak to Hey, Dude brand operating profitability and your willingness to continue to invest against profitability to strive for brand inflection.
Speaker Change: Okay, great. So so.
So from an account base perspective, we really talked about this for almost a year ago now.
Speaker Change: Where we cut off some of the smaller customers to really focus back on the large national strategic accounts, our alliance partners as we call them.
Speaker Change: Well, we wanted to make sure that we have adequate segmentation and differentiation and we can grow with a broad base of accounts we do.
Speaker Change: We do keep a lot of what we kind of kind of smaller most strategic well positioned or regional customers. We think are important in terms of reaching select consumers and also giving a broader consumer base.
Speaker Change: Some attractive points of distribution, so that that has happened.
Speaker Change: Almost a year ago at this point, so we feel really good with where we are from an account base perspective.
Speaker Change: In terms of profitability, there's a couple of key drivers there as.
Speaker Change: <unk>.
Speaker Change: In the medium to long term.
Okay.
Speaker Change: Just to follow up on that Andrew.
Speaker Change: Context, valuing Crocs, Inc. Many people are looking at the contribution of the Crocs brand profitability.
And trying to isolate that for valuation purposes.
Speaker Change: So some additional perspective on the Hey, Dude brand profitability would you know I think help people get to that.
Speaker Change: Estimate of the size of the different profit pools.
Speaker Change: Yeah, I mean, I guess I would encourage.
Speaker Change: Our investors to look at the totality right. So.
Speaker Change: Our total company is a highly profitable highly cash generative.
Speaker Change: And as you kind of think about investing in the company I would encourage people to look at the totality and look at the.
Speaker Change: The future potential of those cash flow streams and the Optionality that provides us to continue to deleverage and reduce risk within the company, but also return cash to shareholders.
Speaker Change: Sustainable basis, I think that's a pretty good investment profile.
Speaker Change: And then with the outlook for Hain you'd have you at all tempered the SG&A investment plans.
Speaker Change: I would say no we haven't.
Speaker Change: We are.
Speaker Change: We would I go back to what I said sort of in my first answer we're extremely confident around the mid to long term potential of the agent brand.
Speaker Change: And as we analyze each of the investments we're making.
Speaker Change: We feel that they will provide a very strong return.
Speaker Change: The next question comes from Adrienne <unk> with Barclays. Please go ahead.
Adrienne: Yeah. That's great. Thank you very much Andrew you had talked about sort of the back to school season being kind of back to the high the high to low or is there kind of a I guess a choppy background I'm wondering if you can sort of talk about how you operate in that environment. How do you think of retail channel partners.
Adrienne: Managing through that and if you think that we're pulling up some sales for holiday and then my last question is how long does it take for that so the sell through to work through itself.
Speaker Change: That you are having or have the spring order book Cynthia terrorists can you give us some color on that thank you very much.
Speaker Change: Yes.
Speaker Change: Yes, I suspect you know you've heard others talk about this and you probably as our retail partners report in a week or so months. So you'll hear a lot more about this but look I do think the consumers return to a more traditional shopping pattern, we would kind of say its going to pre pandemic, there, they're going to shop, when they need it they're going to shop.
Speaker Change: Key events, whether they'd be holidays or promotion.
Speaker Change: And in some cases, they need a little extra incentive to to transact. So I think that's what we were familiar with before we got into the sort of.
Speaker Change: Lack of supply oversupply components of the pandemic I think that back there.
Speaker Change: <unk> been getting back there over the last kind of year or so.
Speaker Change: We're anticipating that into the fourth quarter.
Speaker Change: And I think our retail partners certainly in this country are pretty adapt them into highly sophisticated day.
Speaker Change: Let's say this happen they they have probably more data than we do.
Speaker Change: To really understand that so I think that pretty adept in there.
Speaker Change: And they're transitioning pretty quickly and I think they'll do a good job.
Speaker Change: Dot com business and also our marketplace business.
Speaker Change: And so we feel really good about it and fingers crossed every single play out how do we think it's going to play out, but but there's obviously some uncertainty there.
Speaker Change: I would also say, we kind of try to planet prudently as well we've got backup plans are there.
Speaker Change: If things don't go 100% to our expectations.
Speaker Change: Big picture on Amazon I would say look Amazon a.
It's super important customer.
Speaker Change: A broad Democratic brand, we want to reach our consumers where they are they're clearly on Amazon. They start a lot of their shopping on Amazon their initial searches on Amazon when they are looking for a pair of crops, but also many other things.
And.
Speaker Change: From a from a participating on that very important marketplace. Both here in North America and other parts around the world.
Speaker Change: We think this is an opportunity for us to have more emphasis in our brand.
Speaker Change: A little bit better control of the products that we bring to market et cetera, and so we're like in the transition we think is productive.
Speaker Change: And I think the casinos enjoying it too.
Speaker Change: Thanks, Andrew.
Speaker Change: One quick follow up on the operating margin outlook I think you mentioned it should be a little bit lower next year. Just wanted to hear your rationale about balancing investment spend to grow both of these brands for the long term, but also trying to maintain an operating margin around the mid 20% range and close to your longer term, 26% plus target.
Speaker Change: Yes, so I can take that one.
That said, we're really planning on continuing to invest and we see revenue generally generating opportunities for both brands and we look as Andrew said, we're very disciplined about what we see the return on investment and when we see these opportunities. We're investing 2024 has been an investment year.
Speaker Change: We're very early in the planning process for next year, but we're going to continue to invest behind talent marketing digital and retail and as we said that's going to put incremental pressure on our EBIT margin rate versus 2024, and we will give you more guidance about 2025 on our fourth quarter call and I would say big picture Chris.
Speaker Change: Look I would say mid.
Speaker Change: Mid twenties, I think it will be above 25% according to our guidance for this year.
We've been significantly above that in recent years. These are extraordinary levels of profitability.
Speaker Change: If you look at our competitive base.
Speaker Change: There are very few players that come close nobody is above.
Speaker Change: So we've got a balanced maintaining high levels of profitability and cash flow generation, which obviously underpin our overall.
Speaker Change: Valuation.
Speaker Change: We're actually investing in.
Attractive mid to long term growth opportunities and we'll toggle backwards and forwards between us.
Thank you good luck.
Speaker Change: The next question comes from Bob <unk> with Guggenheim Securities. Please go ahead.
Speaker Change: Hi, Good morning, two questions actually the first one is can you talk about the change in the investment marketing strategy for heavy duty in the quarter and what Kpis you are seeing and the second question is can you just clarify for Crocs for North America do you expect growth in North America market for 2020.
Speaker Change: Hi.
Speaker Change: Okay two different questions. So the first one actually is a super important question, Bob glad you asked it.
Speaker Change: So.
One of the key decisions that we made in the third quarter as we pulled back on performance marketing for the hatred brand.
Speaker Change: As we've looked at the the sort.
Speaker Change: Theyre sort of multi year trajectory.
Speaker Change: Level of performance marketing had been creeping up.
Speaker Change: I would say the marginal rois, we're still positive, but they were not where we wanted them debate and we wanted to push more of our marketing investment into the brand and into the long term future of the brand and so we made a pretty distinct pullback in performance marketing. So that's at all.
Speaker Change:
Speaker Change: Google search all all of those kind of things that you can you can spend money on a short term basis, you can measure the returns.
Speaker Change: But if your marginal return gets to a level that you don't really feel comfortable with.
Speaker Change: We pulled back on that and then we use that money to fund Sydney Sweeney Jelly roll Barstool sports some of the kicked off activations that we've been doing starting up a tick tock shrunk.
Speaker Change: We think that will be much more attractive from a.
Speaker Change: Brand return on investment perspective over the long term that has had a short term impact and it's probably the biggest explanatory for our Miss in Q3 from a hey, Dude revenue perspective, and also the biggest six monitor for the reduction in the Q4 guide for Haydu. That's the biggest dollar change.
Speaker Change: And we think it's the right thing to do in the long term.
Speaker Change: And then your question on Crocs, I think was a clarification on North America and yes, we think we will grow modestly slightly for North America Crocs.
Speaker Change: In 2025 that is our current plan, but I would say the real value creator in the value driver for Crocs is international growth.
Speaker Change: Seen that come through for the last.
Speaker Change: Two years and we can see.
Speaker Change: I'm very confident that will continue into 2025.
Speaker Change: Thank you.
Speaker Change: The next question comes from Rick Patel with Raymond James. Please go ahead.
Speaker Change: Rick Your line is now open you may ask your question.
Rick Patel: Hi, sorry about that thank you and good morning, I was hoping you can expand upon what you just ended with.
Rick Patel: In terms of crops international growth potential in 2025, so given the slowdown that you're seeing in China that you expect to continue or how should we think about the building blocks of growth next year, and which market you have the most confidence in to do the heavy lifting.
Rick Patel: Yes.
Speaker Change: Yeah. So.
Speaker Change: Thank you Rick.
So what I would say is we've definitely seen a slowdown in China, but I would point out.
Speaker Change: We are still growing in China, and we still intend to grow in China next year right. So it's not the 80, 90% growth that we saw in 2003.
Speaker Change: We grew 20 plus percent growth in Q2, I'm, sorry, Q3 that we just reported but we do intend to continue to grow in China are really underpinned by a lot of the mono brand store openings that we've done in China.
Speaker Change: So we've grown our digital business successfully we've opened some select retail stores, we operate ourselves and we also work with a range of our brand partners, who opened mono brand stores I think we've opened.
Speaker Change: By the end of the year, we'll have close to 400 mono brand stores and we've opened in excess of 150.
Speaker Change: Stores year to date, obviously as those are grown opened through the year that will provide growth for next year as well as weak think our positioning in the marketplace are accessible price points personalization comfort et cetera is going to be a competitive positioning. So we will grow in China. In addition to China.
Speaker Change: We are confident around India, we have a I think a very attractive business model in India that has been impeded recently.
Speaker Change: With the Pis, so everybody knows what that is that's the Indian governments imposing some restrictions associated with you need to make your products in India, We will have production up and running for both crocs and hated in India next year. It started this year, but it will reach its.
Speaker Change: Reach enough supply to fund the market next year I'm still comforted by India, we talked quite a bit about how our key direct markets in western Europe continued to be successful, Germany, and France, we anticipate that continuing.
So those are some of the key drivers we've had great success in Australia for the last couple of years, we see that as probably a little bit more stable for the next couple of years, but that's obviously attractive business as is South Korea, I would say to be to be Frank Japan remains a work in progress.
We will focus on kind of resetting the business and focusing on the classic clog and personalization in that market with evidence that it's starting to get traction, but that obviously is a very big market with big long term potential. So I think there are plenty of growth growth engines to support or.
Speaker Change: Our international aspirations are from an <unk>.
Speaker Change: Thank you very much.
Speaker Change: Thank you.
Speaker Change: The next question comes from Sam Poser with Williams trading.
Speaker Change: Go ahead.
Sam Poser: Good morning, Thank you for taking my questions.
Sam Poser: Can we talk about hey, Dude and I mean I.
Sam Poser: Andrew you're you're you reiterate your confidence in it I guess my question is what.
Sam Poser: What how does this all evolves or and what what happened differently than what you thought was going to happen that.
Sam Poser: That was under your control that you have to fix and how long and what or what specifically other than switching marketing and cleaning up are you doing to.
Sam Poser: Just sort of.
Start driving sales again, it looks to me like you have some good stuff going on as far as you know partners and so on but.
Sam Poser: The consumers are responding.
Sam Poser: That's not.
Speaker Change: Let's take macro out of the picture, let's say, what's under your control.
Speaker Change: Okay.
Speaker Change: So let me start with the last part of your question. Then we can go back to the first part and you can kind of just clarify it.
Speaker Change: So the last part I think as Youre kind of getting at what are we doing why do we say why do we think that will.
Speaker Change: Help the situation if you like so.
So the things that we're doing a multi pronged right. So one is marketing, which you highlighted.
Speaker Change: So I think you know a pretty significant pivot.
In the marketing agenda to engage a broader set of consumers drive brand awareness drive brand relevance pivot towards a younger female culture female consumer which drives culture. In this country. Certainly you know we think culture in this country drives culture and residents in other countries around the world that is.
Speaker Change: Very very important and.
Speaker Change: I think you talked about that already mentioned that.
Speaker Change: Second is a I would say wholesale management.
Speaker Change: So that is reducing in market inventories working proactively with all of our alliance partners to make sure. They have the right product at the right time, they have adequate differentiation and I think we're making some good strides there, but there is still work to be done.
Speaker Change: So I think there is theres more work to be done, but we're doing the right things and they will they will pay off in the longer term number three is building I would say.
Speaker Change: Complementing channels of distribution premium outlet stores, we've opened a.
Speaker Change: China female so as I think about 29 year to date. So at the end of September we'll open another 11 in the fourth quarter. There are performing well that is a very attractive investment from our perspective and it allows the consumers that are in those centers to see the breadth of the brand.
Speaker Change: We see a much better balance in those environments between Huawei and Wendy between male and female. We also have a case business in those environments. So we think that's a very valuable consumer exposure mechanism.
Speaker Change: Third thing is laying the groundwork for international growth, we opened up Reed for direct markets two in the quarter. So as you might remember we're now present in the U K and Germany.
Speaker Change: India and Australia as direct markets. They are all small and when I say president indirect market that means we have wholesale distribution. We have a digital presence. We don't have any retail presence in those markets just too small at this stage.
Speaker Change: And but I would say.
Speaker Change: What we're seeing while the numbers are small and we had expected them to be small is a relatively positive reception from the schemas and that's a pretty diverse set of consumers from the UK to Germany to India to Australia.
Speaker Change: In addition, the international business in.
Speaker Change: Pain in Italy continues to perform well through a distributor and we have a range of incremental distributors that we will ship in Q4 and Q1 essentially their opening order so that'll be starting up the business. So I would say, it's the marketing, but it's building all the platforms that will enable future growth in the future.
Growth in the future Alright, and then let's come back to we'll be getting out at the beginning of your question.
Speaker Change: Well I mean.
Speaker Change: I wrote about this a long time ago at the end of fiscal 'twenty and calendar 'twenty two.
Speaker Change: 23 part of product into the marketplace. So I guess my question is is overstated, where the sales last year and what's the right starting point to think about.
Speaker Change: And how much of just.
Speaker Change: So filling shelf space.
Speaker Change: Back that sort of caused what happened now and move on.
Speaker Change: Should you have taken a more measured approach.
Speaker Change: And maybe you wouldn't be ahead of where you are today and what what decisions were made that.
Speaker Change: What decisions were made the Cosmo.
Speaker Change: N.
Speaker Change:
Speaker Change: I know you're confident but you know.
Speaker Change: Do you have a slower numbers on that.
Speaker Change: I don't know what next.
Speaker Change: We'll see what happens next year, but I just wanted to get a little more meat on the bone as to what happened that was in your control versus <unk>.
Speaker Change: Yeah, No I think yeah, I think so.
Speaker Change: I think you can kind of set up some of it.
Speaker Change: We definitely grew too fast right so out of the gate and bought the brand.
Speaker Change:
Speaker Change: Nobody knew how high was up we didn't know how high it was up and our customers didn't either right. So they.
Speaker Change: They were constantly out of stocking they wanted more product was shipped more product.
Speaker Change: And I think if you think about this sort of 'twenty two into 'twenty three time frame in retrospect, we absolutely ship too much products. So if you kind of asking what decisions. We've made that we're wrong that was wrong on that was wrong right.
Speaker Change: And then the other thing I think that we did not do.
Well is the initial marketing activities.
Speaker Change: Activities, where in fact, we spent money.
Speaker Change: But they were ineffective they were not sufficiently.
Speaker Change: <unk> they weren't focused at the right consumer.
Speaker Change: And they werent, creating the kind of residents and impact that we wanted I think the third thing is the are the process of integrating the brand and putting in place.
All of the infrastructure, whether that be dcs, whether that be our systems and capabilities because it can't work with very little of that we knew that but that took us time, but it took us a little bit longer than we'd hoped and that delayed some of the I would say offensive investments that we're now making around stores and international.
Speaker Change: So that's taken longer than we thought now that being said.
Speaker Change: You know we bought a business that was approximately $600 million in revenue.
Speaker Change: And it is now a high eight hundreds almost $900 million, sorry, sorry, 800 ish million dollars in revenue.
So it's substantially bigger.
Speaker Change: It is less profitable on an EBIT percentage perspective, because we've invested for what we think is the longer term growth potential but it has been profitable all along it's been accretive all along and has generated cash and we paid down the debt associated with the investment that will pay down a lot of the debt associated with the investment so it.
Speaker Change: It has not gone if that's what you're kind of trying to get as we would've hoped unexpected but that doesn't change our confidence around the future. The team that we have in place.
Speaker Change: Strategies and activities that we have deployed and a willingness to support those that team those strategies and activities. So.
Speaker Change: I want to make sure we're super clear about that that is what we're going to do and we're very confident that will be a positive outcome for for investors.
Speaker Change: The next question comes from Jay sole with UBS.
Speaker Change: Please go ahead.
Jay Sole: Great. Thank you so much Andrew if we could just talk about the crocs brand sort of big picture, obviously talking about a little bit of growth in North America next year, but beyond that whats the plan to drive growth I mean, do you see an opportunity to raise brand awareness or their new wholesale doors, you can get into I mean can you open up more maybe of your own stores in your direct consumer channel.
Jay Sole: Categories, you can get into our market share gains in existing categories. Just just tell us how growth should trend big picture and why maybe we will see growth accelerate beyond sort of.
Jay Sole: In North America beyond whatever rate you expect to get into 2025.
Andrew Rees: Yeah. That's a great question, Jay I would say look in the very short term instead of the one to two year time frame. The primary growth driver for Crocs will be the international business right I just wanted to make sure I reiterate that.
Andrew Rees: And that's a big and attractive business right, so and the underlying.
Andrew Rees: The strategic issue there is that our penetration in those large international markets. This is a fraction of what it is here in the U S. Okay, but that's not your question. Your question is what drives growth in North America.
Andrew Rees: Don't think there is a huge amount of distribution growth I think we are the places we want to be there are other places. We could go there are mass retailers that were not represented in I. Just don't think that's the right place for our brand as we want to continue to maintain a.
Andrew Rees: Democratic but elevated positioning for our brand.
Andrew Rees: So I don't think we're going to go that we do think there is continued digital growth and development as a consumer goes more and more digital we do think there was growth in personalization. We think this growth in sandals, we had a nice sandal growth here in North America. In 2004, we think that continues into 'twenty five and has long range potential and we do see it doesn't offer.
Andrew Rees: Attunity for us to play in a broader set of.
Andrew Rees: I would say silhouette, so wearing occasions and you have seen US experiment. There we will continue to experiment there, but I wouldn't say, we're today have a slam dunk winner in that arena, but we think we can get there all the time so for the sort of 12 to 24 months timeframe, we're really thinking.
Speaker Change: North America or is that cash cow funding that international growth, while we can continue to to.
Speaker Change: Two experiments and engage our consumers and incremental growth opportunities from a silhouette and product perspective.
Speaker Change: Got it that's very helpful. Andrew Thank you.
Speaker Change: Thank you.
Speaker Change: The next question comes from Anna <unk> with Piper Sandler. Please go ahead.
Speaker Change: Oh, great. Thanks, so much and good morning, everyone.
Speaker Change: Wanted to follow up just on the overall profitability of the business given investments at Hey, Dude.
Speaker Change: You guys talk about what guardrails you have in place at the consolidated level to offset some of these investments Andrew I think you mentioned, 25% is the right level for the business are there additional opportunity at the crops side of thing either with pricing or maybe Opex management as we think about next year. Thanks, so much.
Speaker Change: Thanks for the question Anna This is Susan.
Susan Huey: One thing I think it's really important to emphasize here is how disciplined we are about our investments and then we've mentioned increasing our SG&A, which we continue to plan to do into next year, but there's a lot you've mentioned guardrails and kpis, there's a lot of scrutiny around making sure we're making the right investments.
Speaker Change: And as Andrew indicated talking about Hey, Dave when we find that we need to pivot, we do that pretty rapidly and pretty nimbly as we did with the marketing investment on an hated pivoting from performance to brand when we saw a better opportunity there.
Speaker Change: So we're super disciplined about it but when we had when we said we're equally the 'twenty 'twenty four as an investment year.
Speaker Change: And 2025 will continue to be an investment year.
Speaker Change: That would be create incremental EBIT margin pressure, so that 25% guidance that Andrew reiterated whereas for this year and next year, we would expect people know that.
Okay I appreciate it and best of luck.
Speaker Change: This concludes our question and answer session I would like to turn the conference back over to Andrew Lee Chief Executive Officer for any closing remarks.
Andrew Lee: I just want to conclude by thanking everybody for their continued interest in our company with <expletive> and spending time with us today. Thank you.
Speaker Change: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Yeah.
Speaker Change: [music].