Crocs, Inc. (NASDAQ:CROX) Q1 2024 Earnings Call Transcript

Crocs, Inc. (NASDAQ:CROX) Q1 2024 Earnings Call Transcript May 7, 2024

Crocs, Inc. beats earnings expectations. Reported EPS is $2.5, expectations were $2.22. CROX isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, and welcome to the Crocs, Inc. First Quarter Earnings Call. All participants are in a listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Erinn Murphy, Vice President of Investor Relations and Strategy. Please go ahead.

Erinn Murphy : Good morning, and thank you for joining us to discuss Crocs Inc. First Quarter Results. With me today are Andrew Rees, Chief Executive Officer; and Anne Mehlman, Executive Vice President, Crocs Brand President, and 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. Before we begin, I would like to remind you that some of the information on this call is forward-looking and accordingly is subject to the Safe Harbor provisions of the federal securities laws. 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. 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. Certain financial metrics, as 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. 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. Chief Executive Officer.

Andrew Rees : Thank you, Erinn, and good morning, everyone. Thank you for joining us today. We reported very strong first quarter results, which well exceeded our guidance on both the top and bottom line. Revenue grew by 7% to prior year for the enterprise, led by outsized Crocs brand growth of 16%, and HEYDUDE brand also performed ahead of guidance. Adjusted growth margins of 56% improved 180 basis points versus prior year, And we grew our adjusted earnings per share by 16% to $3.02. Our growth strategy remains consistent. And we are focused on three primary initiatives from an enterprise perspective to fuel durable and consistent growth. One, ignite our icons across both brands to drive awareness and global relevance for new and existing consumers.

Two, drive market share gains across our Tier 1 markets through strategic investment behind talent, marketing, digital, and retail. And 3, attract new consumers to our brands through methodically diversifying our product range and usage occasions. Before I discuss more detail on the quarter, I want to start by saying how pleased I am to announce the hiring of Susan Healy as Executive Vice President and Chief Financial Officer. Susan is a seasoned financial professional and a Wall Street veteran with broad exposure to the consumer sector, including Ulta Beauty., where she served as the SVP of Finance for five years. Most recently, Susan served as a public company CFO for IAA, a global marketplace for automotive buyers and sellers. We have a deep finance bench and I’m excited about Susan’s leadership and expertise.

.: The democratic nature of our brand allows us to create a broad array of consumer moments that drive brand affinity and engagement through our partnership model. During the quarter, our success ranged from Toy Story and Hello Kitty to [Klott] (ph), a Chinese streetwear brand. Our Toy Story collection was one of the most successful licensing partnerships to date with a global offering available across select wholesale partners and our own DTC. In addition, we launched our second collaboration with Simone Rocha, a luxury brand. Our seven-style collection was priced between $175 and $225. It launched in 20 markets and sold out globally almost immediately. As we think about product, we continue to prioritize our three pillars, clogs, sandals, and personalization.

Growth in our first quarter was led by our classic clogs, and we are seeing both new and existing consumers come to the brand through our icons. Our kids’ business was another highlight, with double-digit growth in the quarter. We continue to create multi-product franchises that broaden [users’ occasions] (ph) for the consumer. Building on the success of our Echo franchise, we launched the Echo Storm, a fully molded sneaker. This launched in our DTC channels, as well as Foot Locker and JD Sports during the quarter and performed well. In fact, 59% of our Echo Storm purchases on our own.com were new consumers. Just in time for NBA All-Star weekend, we further expanded visibility of our Echo franchise through the Crocs NBA Slide. And players like Nikola Jokic to Steph Curry were spotted wearing them.

During the first quarter, we rolled out two new sandal franchises, the 2.0 version of our Classic Slide and 2-Strap and the Getaway. The Getaway leverages our newest proprietary material known as free-fill technology. Within this franchise, we’ve seen positive momentum with the strappy and the flips style and have found that these resonate with the broad consumer segment. For the year, we continue to expect sandals to grow in excess of our overall growth and increase in penetration. Our personalization vehicle, Jibbitz, grew double digits in the quarter, led by growth in Asia. We continue to see ample white space for personalization, and our strategy is focused around three pillars. Number one, driving higher penetration within digital and wholesale.

Two, continuing to create product freshness through our elevated Jibbitz, including metallic, texture, and [shimmering and free] (ph) speed-to-market. Moving on to distribution strategy, We are pleased by the broad-based strength across geography and particularly in several of our Tier 1 markets. The North America market was well ahead of expectations and took meaningful market share during the quarter. North America revenues grew 9% versus the prior year, supported by underlying strength in wholesale sell-out and better than expected trends in our DTC channels. International grew 24% versus prior year. And once again, we saw a triple-digit growth in China and Australia. Our direct markets in Western Europe were double digits led by growth in the UK, France, and Germany.

We continue to have significant opportunity in China and we remain bullish on our long-term growth prospects. During the quarter, we won our first-ever Super brand on Tmall and announced our two new brand ambassador for 2024 Liu Yuxin and [Junkai Wang] (ph), Liu Yuxin announcement came ahead of International Women’s Day and featured a classic Geo Clog. This campaign drove substantial reach and continue to create buzz with the [Domain] (ph) community. Junkai Wang played into our clog relevance with a robust campaign on Super brand A, generating 1 million views during a 1-hour live stream and drove Crocs to the Number One spot within the women’s footwear category on Tmall. Our corporate responsibility efforts continue to progress. We are expanding our all Crocs new life Consumer Takeback program to all Crocs stores in the U.S. This fall, we’re furthering our circularity commitment by repurposing materials from well-loved Crocs in the form of a new limited edition Classic Clog.

As it relates to the HEYDUDE brand, our focus for 2024 is on solidifying the business and establishing the Wally and Wendy as iconic franchises for the consumer. We have worked to maintain price integrity on digital, improved channel inventories and create more segmentation across wholesale partners. Our overall first quarter performance largely played out as we expected, we strengthened March, driving slight upside to our guided revenue range. That said, performance around Easter and into April has fallen short of expectations with sellout rates softening in wholesale. Based on the visibility we have quarter-to-date and given the choppy retail environment, we’re taking a more prudent approach around trends for the balance of the year. As we have discussed, our focus is on making sure we end the year with sell-in and sell-out trends converging, and we have better segmented inventory in the channel.

Before I discuss a few Q1 highlights, I’d like to touch on our recent leadership announcement. Several weeks ago, we announced a new brand President for HEYDUDE who we see as a strong leader for the next phase of growth for the brand. We are thrilled to be welcoming back Terence Reilly to our Crocs Inc. family. Terence started last week and brings with him a best-in-class reputation from brands, including Stanley and Crocs. In addition to providing global leadership perspectives, he has a proven track record of creating and executing ground building playbooks by leveraging iconic products, driving brand relevance and ultimately building communities. Now turning to Q1 highlights. HEYDUDE was the Number Eight preferred footwear brand in the Piper Sandler Taking Stock with Teens Survey this spring, consistent with this rank last year.

From a product perspective, we continue to establish our Wendy and Wally icons through color, graphic height, which proved successful during the quarter. In Q1, we expanded our collegiate program to five additional schools just in time for March Madness. We also launched the Big Lebowski an online exclusive, the unique collaboration so in process sellout with 80% of consumers need to brand. Our sneaker franchise gained a new addition with the Hudson for Him and the Hudson Lift for Her. We chose to introduce the new silhouettes in our own DTC channels and with an exclusive wholesale partner. We saw the Hudson Lift quickly become a hit for our younger female consumers who continue to choose height, while maintaining a brand promise of lightweight comfort.

From a distribution perspective, we opened six new outlet locations with the HEYDUDE brand. Overall performance is in-line with our expectations, and we plan to open it approximately at 30 outlets this year. On the wholesale side, we’re pleased with the work we have done to clean up our account base — our go-forward focus is around improved customer segmentation. Finally, we have introduced a brand to the U.K. and Germany, supported by dedicated digital sites, as well as placement with key wholesale partners in both markets during Q1. These launches were supported by key influencer and media events. While we’re starting to see the awareness of new brand internationally, our priority in 2024 is around improving the long-term health of the North American market, as we build our core offering and drive heat for the brand.

We have laid plans to continue to invest behind marketing, talent, digital and retail to further support our market share opportunity. While our near-term plans for HEYDUDE are taking longer to play out, our record Q1’s performance led by Crocs, showcases the diversification of our portfolio and enabled us to raise our earnings per share outlook for the year. We will continue to make offensive investments, fueled by strong gross margins to set ourselves up for long-term growth and durable market share gains. I will now turn the call over to Anne to walk through our financials for the quarter.

Anne Mehlman: Thank you, Andrew, and good morning, everyone. I am extremely pleased with our first quarter results which exceeded the high-end guidance across all metrics. We generated $939 million in consolidated revenues, growing almost 7% over last year, led by the Crocs Brand. For the quarter, adjusted gross margin gained 180 basis points to 56% and adjusted operating margin was 27.1%. Adjusted earnings per share of $3.02 came in well ahead of our guidance of $2.15 to $2.25. For the Crocs Brand, revenues were $744 million, growing 16% relative to prior year, driven by DTC growth of 19% and a wholesale growth of 14%. Brand ASPs were up 11% to $23.36 the brand sold 32 million pairs of shoes, an increase of 3% versus last year.

By geography, North America revenues were ahead of our expectations and gained market share, growing 9% versus the prior year to $383 million. Growth was led by DTC at 13% and wholesale was up 5%, driven by strong double-digit growth in brick and mortar. During the quarter, our North American wholesale partners opted to take product earlier than we had previously anticipated based on the strong solid performance of the Crocs Brand. International revenues of $361 million were up 24% from 2023, led by DTC growth of 37% and wholesale growth of 20%. As Andrew noted, Australia and China grew triple digits again this quarter. We saw strong double-digit growth in our direct markets in Western Europe with growth led by the U.K., France and Germany.

Turning to HEYDUDE. Revenues were $195 million ahead of our guidance but down 17% from last year. The brand sold 7 million pairs of shoes, a decrease of 21% from last year, as we last pipeline fill and focused on improving our full price selling. HEYDUDE average selling price was $27.68, up 5% from last year. Relative to Q4, our Q1 marketplace ASPs were up 10%, a continued tailwind from reduced price matching online. Wholesale revenues were down 20% from last year as we focused on continued inventory management in the channel. The DTC channel was down 11% as a result of prioritizing brand health through higher ASPs. Consolidated adjusted gross margin for the first quarter was 56%, up 180 basis points from last year. Crocs brand adjusted gross margin was 58.1% or 180 basis points higher than prior year.

During the quarter, the primary drivers of margin expansion were lower inbound freight and favorable product costs coupled with select price increases internationally and lower discounting. HEYDUDE brand adjusted gross margin came in at 47.8%, in-line with our expectations but 180 basis points below prior year, driven by investment in distribution and logistics partially offset by reduced rates. Our first quarter adjusted SG&A dollars increased 16% to prior year. Our SG&A rate was 28.8% and up 250 basis points compared to prior year, driven by continued investment in talent, marketing and DTC to support long-term market share gains. Our first quarter adjusted operating margin declined 80 basis points to 27.1% compared to 27.9% for the same period last year, but was favorable to our expectations on higher gross margins and favorable revenue, leveraging our cost base.

First quarter adjusted diluted earnings per share increased 16% to $3.02 and our non-GAAP tax rate was 17.2%. We ended the quarter with clean inventory on our balance sheet and in our channel. Our inventory balance on March 31, 2024, was $392 million, a decline of 18% against this time last year. We are pleased that both brands achieved inventory turns at our goal of 4 times. Our liquidity position remains strong, comprised of $159 million of cash and cash equivalents and $484 million of borrowing capacity on our revolver. As a reminder, Q1 is a high net working capital quarter, and we typically limit buyback and debt paydown activity as a result. We ended the quarter with total borrowings of $1.7 billion and remain with our net leverage target of 1 to 1.5 times.

In 2024, we intend to buy back stock and pay down debt, enabled by our best-in-class cash flow generation. Now turning to guidance. For Q2, we expect consolidated revenues to be up 1% to 3% at currency rates as of March 31, with the Crocs brand growing 7% to 9%, led almost entirely by international growth. As I mentioned earlier, several of our North American wholesale partners opted to take product earlier in Q1. We expect HEYDUDE revenue to be down between 19% to 17%, extrapolating the trends we are seeing quarter-to-date. We expect adjusted operating margin to be approximately 26.5% and adjusted diluted earnings per share of $3.40 to $3.55. For the full year 2024, we are raising our underlying earnings per share outlook supported by the strength in Q1.

We are maintaining our revenue outlook of growth between 3% and 5%, assuming quarter-end currency rates. For the Crocs Brand, we now expect revenues to grow between 7% and 9% from our prior expectation of 4% to 6% and with growth continuing to be led by international. For HEYDUDE, we expect revenues to contract down 10% to down 8%, below our former expectation of flat to slightly up. We expect HEYDUDE sales trends to improve each quarter and expect the sell-in and sell-through dynamic to normalize into Q4. As we discussed in our Q4 call, we expect wholesale to be negative for the year and DTC trends to be better than wholesale. As it relates to retail, we plan to open approximately 30 stores in 2024, six of which were opened during Q1. We expect gross margin to be up for 2024 versus 2023 at the enterprise level.

Based on the strength in Q1, we now expect Crocs Brand gross margin to be up for the year and continue to expect HEYDUDE gross margin to be up for the year. We plan to invest into brand accretive and strategic SG&A initiatives, resulting in consolidated adjusted operating margins for the year of approximately 25%. For full year 2024, we still expect our underlying non-GAAP tax rate, which approximates cash taxes paid to be approximately 18% and GAAP tax rate to be 21.5%. We are raising our non-GAAP diluted earnings per share to a range of $12.25 to $12.73 in 2024 from $12.05 to $12.50 previously. This range incorporates future debt repayment, but does not assume any impact from future share repurchases. Our annual capital expenditure guidance of $120 million to $130 million remains unchanged, and we continue to expect exceptional cash flow generation.

At this time, I’ll turn the call back over to Andrew for his final thoughts.

Andrew Rees: Thank you, Anne. We are pleased with our strong first quarter results and believe that our brands and strategies can and will continue to win. With the investments we have made in talent and marketing, I’m confident in driving long-term market share gains. At this time, we’ll open the call for questions.

Operator: We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Jonathan Komp with Baird. Please go ahead.

See also 40 Best Business Schools in the World for 2024 and 10 Best Performing Biotech ETFs in 2024.

Q&A Session

Jonathan Komp: Hi, good morning. Thank you. I’ll just ask maybe a two-part question. Andrew, if you could talk a little bit more about HEYDUDE, if you’ve been able to isolate some of the recent softness, maybe what’s related to the environment or background versus anything new brand specific? And how should we think about D2C trending within the new guidance for HEYDUDE here? And then just separately, Crocs North America, could you comment on what you’re seeing in the D2C performance and how you’re feeling about the pipeline looking forward there?

Andrew Rees: Great. Thank you, Jonathan. So yes, I think what I’d say on HEYDUDE is we had really — we had a good Q1. We came in slightly ahead of our expectations and the guidance we provided. It was solid. But what we’ve seen from Easter into April is really a softening of our wholesale sellout, which has made us nervous. I think part of that is maybe lack of promotion. We tried to be less promotional during the Easter period than we were the prior Easter. Easter early is also always tough. So I think we might have made some missteps relative to what we were going to do relative to the market. But we can see continued softness, and we are concerned about the robustness of the consumer market. So as we’ve talked about our goal for 2024 for HEYDUDE wholesale is to get sell-in and sell-out and balance to get our inventories down in the channel and make sure that we are driving a really healthy business for our wholesale partners.

So I think at this point, it’s prudent to take down our expectations and manage the business accordingly. I’ll let Anne hit on the DTC trends.

Anne Mehlman: Yes. And Jonathan, just to answer your specific question around retail contribution for HEYDUDE. So as we think about just the HEYDUDE guidance, just to give you a little bit more flavor there, so the building blocks for the year, right, we’re opening approximately 30 stores, and we expect that revenue contribution to build throughout the year. And then obviously, that’s supported by a strong pipeline of new products new product introduction. But at the highest level, we still expect wholesale to be down for the year and DTC to perform better than wholesale. And then when you kind of think through that in Q4 will be the strongest in terms of revenue growth because of that retail contribution. We will also lap easier wholesale comparisons, and then we will realize some selling ahead of select international markets.

So just as you’re thinking through your had kind of revenue trend for the year. And then on the Crocs side for DTC, we saw 13% growth from a DTC perspective in Q1, which in North America, which was definitely better than our expectations. That was really supported by really good product and continued pipeline of that. I feel great about the pipeline for product kind of coming out of Q1. We do expect Q2 to be more muted for North America growth as Q1 was supported by the Easter shift Andrew talked about as well as leap year, we had extra data.

Jonathan Komp: Great. And best of luck Anne in the new role.

Anne Mehlman: Thanks Jon.

Operator: The next question comes from Adrienne Yih with Barclays. Please go ahead.

Adrienne Yih: Good morning and congratulations on a nice start to the year. I guess my first question is on the forward order book. You talked about seeing sort of earlier deliveries or earlier shipments, that’s typically a channel that’s improving on visibility. And I get that it shifts from one place to the other. But generally speaking, is the quality of the conversation and everything that you are hearing about fall and beyond sort of starting to get more optimistic? And then my second follow-up is I can’t believe I’m asking this. But your inventory is down 18%, very, very clean. What would need to happen sort of as you’re looking at the channel and I know there’s a lot of consumer uncertainty for you to start kind of working that down 18% back to maybe a more normalized level? Or is it at a normalized level? Thank you.

Andrew Rees: Great. Thank you Adrienne. So what do I say for I think you are trying to get at what is the reason for the pull forward and how are our customers or how our big retailers are feeling about the back-end of the year. I think really, I probably answer that in two pieces. I think the reason for the pull-forward was they were seeing strong sell-through on the Crocs product. They’re not seeing strong sell through on all of their brands. So they wanted more product earlier. I think, they have probably underestimated kind of the Easter shift, and we are trying to pull stuff in earlier. So I think it’s a closer in assessment of the market than then kind of saying that we are off to a great season, and this is going to be a strong market for the rest of the year.

I think it’s really a sort of quarter-to-quarter adjustment. What I would say is from a — we feel great about our order books, our order books are definitely solid for both brands, and they support the underlying guidance that we provided. But I would not say that channel is super buoyant about the back end of the year yet. I think we are looking for more definitive signals.

Anne Mehlman: Yes. And the inventory question and welcome, by the way. But the inventory question is really related to — so the 18% down — we feel really good about inventory. We think that’s the right level because we’re at kind of 4 times — turns for both brands, which is where we target inventory turns. For the rest of the year, I don’t expect it to be down 18%. Q1 last year, we were still cleaning up some of our inventories on the HEYDUDE side. And then even on the craft side, we were still kind of just starting to see transit times return to normal. So I actually expect that to be much flatter year-over-year in Q2 and then moving throughout the year. So the best way to kind of look at it for us is to model about 4 times turns.

Adrienne Yih: Perfect, okay, thanks a lot – thanks very much. Best of luck.

Anne Mehlman: Thank you.

Operator: Next question comes from Jim Duffy with Stifel. Please go ahead.

Jim Duffy: Good morning. Thanks for taking my question. I have a question on Crocs and then one on HEYDUDE margins. starting on the Crocs brand, can you speak to the regions responsible for the more optimistic view on brand revenue and the factors behind the changes in Crocs margin assumptions?