Crocs, Inc. (NASDAQ:CROX) Q3 2023 Earnings Call Transcript

Crocs, Inc. (NASDAQ:CROX) Q3 2023 Earnings Call Transcript November 2, 2023

Crocs, Inc. beats earnings expectations. Reported EPS is $3.25, expectations were $3.09.

Operator: Welcome to the Crocs, Incorporated Third Quarter 2023 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] 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. Please go ahead.

Erinn Murphy: Good morning, everyone, and thank you for joining us today for the Crocs Inc. Third Quarter 2023 Earnings Call. Earlier this morning, we announced our latest quarterly results, and a copy of the press release and our slide presentation may be found on our Web site at crocs.com. We would like to remind you that some of the information provided on this call is forward-looking and accordingly is subject to the Safe Harbor provisions of the Federal Securities Laws. These statements include, but are not limited to, statements regarding our supply chain challenges, cost inflation, the acquisition of HEYDUDE and the benefits [thereof] (ph), Crocs’ strategy, plans, objectives, expectations, financial or otherwise, and intentions, future financial results and growth potential, anticipated product portfolio, and our ability to create and deliver shareholder value.

These statements involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. Crocs is not obligated to update these forward-looking statements to reflect the impact of future events, except as required by applicable law. We caution you that all forward-looking statements are subject to risks and uncertainties described in the Risk Factors section of our annual report on Form 10-K and our subsequent filings with the SEC. Accordingly, actual results could differ materially from those described on this call. Please refer to Crocs’ Annual Report on Form 10-K as well as other documents filed with the SEC for more information regarding these risk factors.

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. Joining us on the call today are Andrew Rees, Chief Executive Officer; and Anne Mehlman, Executive Vice President and Chief Financial Officer. Following their prepared remarks, we will open the call for your questions. At this time, I will turn the call over to Andrew.

Andrew Rees: Thank you, Erinn, and good morning, everyone. Let me start by welcoming Erinn Murphy, our new SVP of Investor Relations and Corporate Strategy, and by thanking Cori Lin as she transitions to a new role within Crocs and for her dedication to leading Investor Relations over the past three years. We delivered strong third quarter results, with quarterly revenues over $1 billion, exceeding the high end of guidance, led by double-digit growth in the Crocs brand, partially offset by high single-digit decline in the HEYDUDE brand. I’m pleased by our team’s agility as we continue to operate in an increasingly challenging macro environment. We drove strong 18% direct-to-consumer revenue growth at the enterprise level, and once again delivered industry-leading margins with 28% adjusted operating margins.

Anne will review our financial results in more detail shortly, but here are a few highlights from the third quarter. Revenues of over $1 billion grew 6% on a constant currency basis. Adjusted diluted EPS increased 9% to $3.25 per share. Inventory on an enterprise basis was down 24% year-over-year. By brand, Crocs’ brand revenues grew 11% constant currency fueled by Asia revenues increasing 29%, North America revenues up 8%, and global DTC comparable sales up 15% with strong full-price selling. HEYDUDE brand revenues were $247 million, with DTC growth of 15% offset by declines in wholesale. During the quarter, we took decisive action around HEYDUDE to maintain price integrity and elevate our marketplace management strategy to ensure long-term brand health.

I will elaborate on our strategy in a moment. I want to start my comments today with our views on the macroeconomic backdrop and the health of the consumer. We are operating with greater uncertainty than we started the year, with persistent inflation, higher interest rates, the resumption of student loan payments in the United States, and escalating geopolitical tensions across the globe. Despite this, our consumer has been relatively resilient, and continues to show up during key shopping events, such as back-to-school, which was strong for both brands. In September, trends softened across the footwear industry, and we are seeing consumers pull back in-between peak shopping events. Against this backdrop, we’re focused on making the right decisions for the health of our brands, keeping a tight control of inventory, and investing behind initiatives to support profitable long-term growth.

We believe we are well-positioned in the current economic backdrop, and see our value-orientated price points as a durable competitive advantage. Moving into our brand highlights, let’s begin with the Crocs brand. We continue to see broad-based consumer love for the Crocs brand. In Piper Sandler’s fall 2023 Taking Stock With Teens survey, Crocs was the number six favorite footwear brand among U.S. teens, registering a new record-high mind share, with balanced contribution across all genders. With respect to product innovation, our strategy to diversify our clog offering, grow sandals, and leverage personalization is working. We demonstrated double-digit growth in clogs with outsized momentum with our height-orientated offerings, including the Crush and Mega Crush styles.

As we look at our broader assortment, I want to call out the Echo franchise, which has developed into a sizable business across clogs and sandals. We September, we introduced the Echo boot, which is off to a good start. Turning to sandals, in Q3, sandals’ revenues grew 6% on top of nearly 20% growth in 2022, and the 35% growth on a trailing 12-month basis. We had a solid back-to-school season for sandals in all three regions, with EMEALA as a standout region in the quarter. In fact, we were the number one sandal and flip-flop brand on Amazon U.K. during the month of August, growing 37% over last year. Globally, the Classic and Brooklyn remain our leading sandal franchises, followed by the Crush. This quarter, we proactively destocked our Classic sandals as we prepare to re-launch a new version of this franchise in 2024.

In Q4, we’ll also test the Getaway, our newest sandal innovation. The Getaway is built around our newest proprietary material innovation, known as Free Feel Technology, and will initially come to market with four styles. For 2023, we expect our sandal business to be approximately $400 million. From a marketing perspective, Q3 had some of our biggest wins to date. In July, our Barbie collaboration, which featured clogs, sandals, and Jibbitz sold out quickly ahead of the blockbuster movie launch, and we restocked the collection twice during the quarter. It was our number one licensed property in the quarter. In August, we dropped our fourth Lightning McQueen adult clog, with a very strong unveil on TikTok, garnering approximately 38 million views, our best-performing TikTok ever.

Finally, in September, we launched Shrek globally online and with select retail partners. This launch gathered over 300 million global media impressions, and helped land Crocs as the number three on Hypebeast rankings. These partnerships, among several others, brought new consumers to our brand and to our social channels. In fact, we crossed the two million follower mark on Instagram in September, and recently crossed the two million follower mark on TikTok. In October, we celebrated our biggest Croctober yet, with a fan-inspired Crocs Classic cowboy boot generating significant buzz, garnering 6.2 billion global media impressions through the month-long celebration, with the boot almost completely selling out globally in a few days. At $120 per pair, this was our highest price point Croctober shoe to date, and gives us confidence in the permission our band has with consumers.

Asia is another important long-term growth driver for the Crocs brand, as the brand is currently under-penetrated relative to the U.S. In Q3, Asia revenues grew by 29% in constant currency. Growth was again broad-based, with strong brand momentum across the region. We’ve continued to invest in talent in the region. During Q3, we welcomed Carol Chen, our new SVP and General Manager of APAC, who joined us following a 22-year career at Nike. Drilling down into China, we had another exceptional quarter of growth while Q3 revenues increased over 90% in constant currency ahead of our expectations. Crocs rising popularity in China has created a passionate following with a hashtag known as Dòng mén or crocs followers. We now have close to 60 million Dòng mén hashtags on Red, up from approximately 40 million at the end of Q2.

In the quarter, we had a particularly successful Big Brand Day campaign, which leveraged the introduction of the Siren silhouette, a Tmall first launch. Revenue during this campaign bested our internal targets handily, driven by a traffic and record-high average order value which underscored our strategy to drive quality business through new product introductions. Finally on the sustainability front, Crocs is taking steps to further its circularity ambitions. With the recent launch of our new Retail Takeback Program piloting this week in 45 of our U.S. retail stores, we are inviting consumers to give all Crocs new life by dropping Crocs in any condition in collection bins at participating stores. Through this effort, Crocs is working to keep shoes on feet for those who need them and keep shoes out of landfills.

Turning to HEYDUDE, I remain confident in the brand health metrics that underscore how beloved this brand is with consumers. This fall, HEYDUDE was the number 7 favorite footwear brand in The Piper Sandler Taking Stock With Teens survey, taking the highest share we’ve seen to-date. In under-penetrated markets like the northeast, mind share almost tripled among the teen demographic. Despite a tough footwear backdrop, we are pleased with the performance of our strategic accounts during the back-to-school season. Strategic wholesale now represents 50% of our brand sales mix, up from 39% last year. In Q3, sellout from our strategic accounts was up 28% year-over-year offset by the rationalization of non-strategic accounts. From a product perspective, we are focused on new style introductions that create heat and drive new consumers to our brand while working down our carryover inventory.

During the back-to-school season, top-selling styles included core icons like the Wally Sox Micro in black alongside our updated icons like the Wendy Funk Mono in electric Pink. We also saw continuous strength in our Sirocco Sneaker which rounded out our top-selling styles. In the third quarter, we dropped our second Montreal collaboration with sell-through rates of greater than 60%, attracting an influx of younger consumers to our buyer file. In September, there was tremendous excitement around our first ever collegiate collection which featured 12 schools alongside several NIL athletes who will act as brand ambassadors. We had strong consumer feedback as several schools sold out of the collection in the first five days. In August, we entered long-term partnership with Dude Perfect, a content group that is known for its humor and iconic trick shots.

Dude Perfect has amassed a powerful social community with approximately 90 million followers across YouTube, TikTok, and Instagram, and believes in coming together in good times, a brand ethos consistent with HEYDUDE. Leveraging our consumer insights that over 50% of our buyers give HEYDUDEs as gifts, Dude Perfect will be the face of a happy holidudes holiday programming. As I reflect on where we are as a brand, I remain as confident in the long-term opportunities as I was when we acquired HEYDUDE. We believe that the brand’s versatility, the products easy on- and off-nature, iconic silhouettes, and the permissions into new categories and regions remain unparalleled. That said, I acknowledge that there has been several growing pains this past year.

Some of our own doing and others tied to the macro backdrop. I want to take the time to share our learnings and our recent actions designed to bring the brand to a healthy pool market. In 2022, we accelerated growth within our strategic accounts. And, we did it fast. The intent of this decision was to build brand awareness and secure a shelf space with our most important retail partners. We have delivered on both of these goals. As evidenced in our recent brand health tracker aided awareness of HEYDUDE brand in North America is now at 32% in Q3, up from 18% in Q1. That said, we recognize the need to be better around driving effective segmentation alongside new product introductions to sustain this broader customer base. There was also more carryover inventory in our legacy customers than we had expected, which further diluted our offerings.

Year-to-date, we have made considerable progress in cleaning up our inventory and are pleased that our HEYDUDE inventory ended down 41% from Q3 last year. We have also made several key hires over the past 12 months to fortify our efforts in North American marketplace management including hiring a GM of North America, VP of global category and general management, and other talents in product design, wholesale sales, and consumer insights. We’re already seeing the benefits of the augmented team and believe this collective impact will build as we move throughout 2024. As we have talked about on our previous calls, we are anniversarying last year’s pipeline fill, which impacted Q3 by approximately $60 million. And we expect it be approximately $50 million headwind in Q4, unchanged from our former outlook.

What has changed since we last updated you in July, retailers are more cautious around our HEYDUDE brand and out ones demand was lighter than we previously expected. For the industry, post back-to-school wholesale market has been soft as consumers have pulled back and footfall has been down double digits. Our HEYDUDE brand, which has limited history with retailers, has seen a more restricted open to buy as we look into the spring season. In sharp contrast, our spring order books for Crocs brands are strong for the first-half of 2024, reflecting the ongoing momentum we see in the Crocs brand. Taking the environment aside, we made an important pivot to our digital pricing strategy in September. Specifically, we made a decision to stop price matching with the gray market goods that are selling on Amazon, forfeiting near-term sales to prioritize long-term market health.

We know it’s the right decision for the brand going forward. Already, we are seeing immediate positive impacts with ASP up over $10 on Amazon and the pivot has been acknowledged by a wholesale partners. While this will hinder sales growth in Q4, and possibly into the first-half of next year, we believe this will set us up for a much cleaner marketplace as we move throughout 2024 as well as protect the brand. Unauthorized inventory levels have improved versus where they were in June and based on our current visibility, we expect Gray market goods to be in a substantially better position in the first-half of 2024. While we are not guiding to 2024, we would expect HEYDUDE wholesale revenues in North America to remain negative through Q2 by in part to macro and impart you to a decision to pull macro promotional activity prioritizing brand health a marketplace management.

Beyond this year, I would like to provide some of the building blocks and how I thinking about HEYDUDE’s growth agenda. First, we’re adopting an omnichannel approach to drive engagement and meet consumers where they shop. In addition to strengthening our digital capabilities and staying disciplined with strategic wholesale partners, we’ll explore brand of creative opportunities. To that end, were in the early days of developing an outlet retail strategy for the HEYDUDE brand, leveraging Crocs successful retail playbook. We’ve opened our first outlet locations and expect to have five locations by the end of the year. Second, we’re remaining a laser focus on winning with a US strategic wholesale partners to improve segmentation and differentiation.

In 2024, we’ll focus on strengthening a family channel partners further tapping into the Sporting Goods channel where we have ample whitespace and elevating our approach with multi-specialty. We also expect to start 2024 with a much cleaner account base having shot at over 50% was 600 accounts during the year. We have also pullback on digital rights for accounts that fall outside of our strategic accounts. Third, International, we have set up a few test markets in Europe, and laying the groundwork to expand in new international markets in the next two to three years. Well, we use an approach that is consistent with our Crocs playbook, go direct to markets where we a direct for Crocs and utilize distribution partners in markets where we are indirectly as Crocs.

In summary, our Crocs brand has never been stronger and we remain steadfast on executing a global long-term strategy. With HEYDUDE, we focus on protecting profitability and elevating market place management even if that comes at the expense of near-term revenues, in an effort to support consistent profitable growth on the long term. I will now turn the call over to Anne for review our third quarter financial results in more details.

Anne Mehlman: Thank you, Andrew, and good morning, everyone. I will begin with a short recap of our third quarter results. All revenue growth rates will be sighted on cons and currency basis and less otherwise stated. For reconciliation of the Non-GAAP amounts mentioned to their equivalent GAAP amounts, please refer to this morning’s press release. We had a strong third quarter with over a billion dollars in consolidated revenue representing approximately 6% growth year over year. We delivered another quarter of industry leading margins with adjusted gross margin a 57.4%, adjusted operating margin 28.3%, an adjusted diluted EPS growth of 9%. Our portfolio is diversified from a brand channel and geography perspective. On a trailing 12 months basis and in Q3 Crocs brand revenues were 75% of total revenues and HEYDUDE brand revenues were 25%.

Channel mix was well-balanced with wholesale revenues representing 53% of TTM revenue and DTC at 40%. Finally, approximately 33% of total TTM revenues and 40% of Crocs brand TTM revenues were from international market. During the third quarter, Crocs brand revenues were $799 million growing 11% relative to prior year and driven by strong DTC growth with 18.4%. The brand sold 29 million pairs of shoes, a decrease of 4% from last year. The unit declined came almost entirely from our EMEALA region tied to the corrective actions we took last quarter to curtail a significant African distributor that we believe was diverting goods to the US Gray market. The Crocs brand average selling price during Q3 was $27.25 which was up 15% on a constant currency basis driven by product mix, fewer DTC promotion, international price increases, and channel mix.

Within the Crocs brands, Crocs grew double digits and continued to generate demand with newer products such as Echo, Mega Crush and Height in Asia. Kids is also developing into a solid category for the brand and took significant share during the back-to-school season, representing approximately 20% of footwear revenues. Sandals increased 6% in Q3. As Andrew mentioned, sandal growth was lighter in Q3 as we destocked the classic franchise ahead of relaunching an updated line in 2024. Finally, Jibbitz continues to create excitement and engagement with consumers around the world, growing 15 percent from last year, with growth across all three regions, but particularly strong in Asia. Now, let’s discuss a few Crocs brand highlights by region. In North America, third quarter revenues increased 8% to $481 million.

We gained significant market share in a declining U.S. footwear market. North America DTC comparable sales were up 10.2%. Wholesale revenues decreased 1% as double-digit brick-and-mortar wholesale growth was offset by declines to Amazon as we evolve our distribution model on Amazon. This shift negatively impacted unit growth and positively impacted ASP growth in our North America region. As we look into 2024, we are pleased with the strength of our spring order book for North America wholesale. Crocs brand Q3 revenues in Asia grew 29% to $175 million, and growth was broad-based across countries and channels. Australia led the growth with revenues increasing triple digits, and China grew over 90% versus last year. South Korea and Southeast Asia each saw strong double-digit growth rates in the quarter.

Crocs brand revenues for Amelia were $143 million, up 3% from the third quarter of 2022. This quarter, we saw robust double-digit growth in the U.K. and France. This strength was somewhat offset by Germany, which weakened during the quarter against a tough economic backdrop. As previously mentioned, we terminated a relationship with a significant distributor servicing Africa in Q2. In Q3, we saw an $8 million revenue headwind from this corrective action, and we expect to see a $13 million headwind in Q4, bringing the year to a cumulative $29 million revenue headwind. Turning to HEYDUDE, Q3 revenues were $247 million, a decrease of 9% from last year. During Q3, the brand sold 8.3 million pairs of shoes, a decrease of 11% over last year. HEYDUDE average selling price during Q3 was $29.68, a 3% higher than prior year.

Its channel mix into DTC and product mix in wholesale was partially offset by double-digit pricing declines on e-commerce. As a reminder, our average selling price is a basic average and not adjusted for channel dynamics. Wholesale revenues were down 20% from Q3 last year, as we continue to let pipeline fill, and as lower consumer footfall led to retailers seeking a more conservative approach to at-once orders. The DTC channel, which is predominantly e-commerce, led the growth with revenues increasing 15% from last year. Consolidated adjusted growth margins for the third quarter were 57.4%, increasing 230 basis points from last year, driven by favorability in ocean freight rates and the absence of air freight, as well as lower promotional activity in the Crocs Brand.

These were both partially offset by higher overhead and fulfillment costs associated with our HEYDUDE distribution network inefficiency. Turning to the brands, adjusted gross margin for the Crocs Brand was 62.1%, or 460 basis points higher than prior year. Key drivers of this improvement include 340 basis points from lower freight, fewer year-over-year promotions, partially offset by product mix. HEYDUDE adjusted gross margins were 42.8%, down 600 basis points from prior year. Approximately 500 basis points of margin headwind came from higher levels of discounting in our digital channels. Distribution and logistics inefficiencies also remain headwinds. Offsetting these headwinds, we saw lower inbound freight in the quarter. During the third quarter, consolidated adjusted SG&A represented 29.1% of revenues, which is 190 basis points higher than last year, as we invested more in talent and marketing for both brands to support our growth trajectory, and we annualized additional investment for HEYDUDE.

Our third quarter consolidated adjusted operating income was $296 million, an increase to prior year by 8%, and consolidated adjusted operating margins increased 40 basis points, remaining best in class at 28.3%. Our third quarter non-GAAP diluted earnings per share increased 9% to $3.25. Our continued strong free cash flow generation enabled us to repay approximately $90 million of debt in Q3, reducing borrowings to approximately $2 billion. At the end of Q3, our gross leverage was approximately 1.7 times, as we ended the third quarter with $127 million of cash and cash equivalents. During Q3, we resumed our share purchase activity and completed $150 million of share buybacks, repurchasing 1.4 million shares at an average price of $107.85.

We currently have $900 million remaining on our share repurchase authorization. We will continue to balance debt repayment and share repurchases and remains committed to our long-term net leverage target of 1 to 1.5 times. Our inventory balance at September 30, 2023, was $390 million, a decline of 24% to last year. Crocs Brand inventory was $279 million, down 14% to prior year, and HEYDUDE inventory was $111 million, a decrease of 41% to prior year. Inventory turns continue to improve, and we are very pleased with the health of our inventory. As we look forward, I would like to share our current outlook for the fourth quarter and full fiscal 2023. All numbers will be on a reported basis, unless otherwise stated. While we are very pleased by our consolidated results in the first nine months of the year and the standout performance of our Crocs Brand, we recognize our HEYDUDE performance has fallen short of expectations.

As Andrew mentioned, we took actions during Q3 to prioritize longer-term marketplace health. As such, we are reducing our expectations for Q4 in the full-year. For fiscal 2023, we now expect consolidated Crocs Inc. revenue growth to be 10% to 11% compared to 2022, down from the prior range of 12.5% to 14.5% growth and resulting in full-year revenues of approximately $3.905 to $3.940 billion. From a brand perspective, our expectations for the Crocs Brand remain unchanged at 12% to 13% revenue growth, despite a tougher FX headwind than we previously projected. For HEYDUDE, we are lowering our full-year revenue outlook to up approximately 4% to 6% on a reported basis, down from our prior range of 14% to 18% growth. This translates to a contraction of 4% to 6% on the 2022 pro forma revenues of $986 million.

As always, we are focused on best-in-class profitability. We continue to expect our consolidated growth margins to be greater than 55.5% led by the Crocs brand. Given the confidence we have in our brand’s long term, we are making a conscious effort to continue to invest across the enterprise, and we now expect full-year adjusted operating margins of approximately 27%. Our adjusted diluted earnings per share outlook moves to $11.55 to $11.85, down from our prior guidance range of $11.83 to $12.22. For Q4, we expect consolidated revenues to be between $903 million and $938 million, implying a contraction of 1% to 4% from last year. Within the brands, we expect Crocs to grow 4% to 7%, and HEYDUDE to be down 20% to 25%. We expect Q4 adjusted operating margin to be approximately 21% and adjusted diluted earnings per share of $2.05 to $2.35.

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

Andrew Rees: Thank you, Anne. As we look forward, our focus remains squarely on sustaining brand health, investing behind market share gains, and supporting durable revenue and profit growth. I remain confident in our brands, our leadership, and a significant opportunity ahead of us to take share in the casual footwear market. At this time, we’ll open the call for questions.

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Q&A Session

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

Jonathan Komp: Hi, thank you. Good morning. I want to ask first on HEYDUDE. Maybe, Anne, if you could clarify the fourth quarter outlook, just broad expectations for the two channels. And for your strategic accounts and wholesale, are you losing shelf space or what should we make of the reported revenue trend there? And then maybe, Andrew, more broadly for 2024, I want to get your thoughts, I know when you bought the brand you talked about revenue north of $1 billion for 2024. Is that still a realistic possibility or has been pushed out a while? And when you think about the factors to drive sell-throughs, how do you rank orders or the biggest opportunities in the next year?

Andrew Rees: Yes, okay, let me talk about Q4 shelf space. Anne will then give you some updates on the channel expectations for HEYDUDE, and then I’ll come back and talk about ’24. So, from a Q4 perspective, we don’t believe we’re losing shelf space. In fact, we’re not losing shelf space in our strategic accounts. We have ample evidence for that. We’re taking down our sell-in expectations to allow us to lower in-channel inventories. We’re doing that in a number of ways; one, proactive cancellation of prior orders so that there’s less inventory flowing into the channel. We’re also supporting our wholesale partners with some inventory cleanup that includes, so both returns and also some markdown funding so they can clean their inventories in the fourth quarter of this year. The strategic accounts in the Q3 were up 28% in terms of their sellout. And we think they will continue to grow in terms of sellout and the brand will gain share in the fourth quarter.

Anne Mehlman: And then, Jon, for your question on clarifying HEYDUDE growth, so our full-year HEYDUDE guidance on a reported basis is 4% to 6%, on a pro forma basis it’s to shrink 4% to 6%. So, that implies that our Q4 growth for HEYDUDE, our Q4 would be negative 20 to negative 25. It’s the revenue guide. And then when you think about channels, that’s, as we talked about, it’s still — that implies negative wholesale. And then we expect DTC to be slightly better than that.

Andrew Rees: And then from a ’24 perspective, last part of your question, Jon, yes, I think we’re very confident the brand will be north of $1 billion in 2024. We do anticipate that wholesale sales, which is obviously predominantly North America, will be down in the first part of the year. But we’re confident that DTC will be up and, overall, would drive growth for the full-year.

Jonathan Komp: Okay. And is it possible, Andrew, just your thinking today, I know it’s early, but in terms of the biggest contributors to the sell-through, whether it’s some of the distribution capacity, new products, new geographies, how are you thinking about the biggest drivers as they line up sitting here today?

Andrew Rees: Yes, so I think there’s a few things going on. One is, I think, account rationalization. So, as we think off sellout, sellout at our strategic accounts has been strong, as we highlighted the 28% growth in Q3, and I think we published the growth rates that we’ve seen in prior quarters. So, the strategic accounts, HEYDUDE is performing well with those accounts. We have rationalized a significant number of non-strategic accounts or legacy accounts about 50%, we closed over 600 doors by the time we get to the end of the year. We’ve also rationalized the digital selling for the non-strategic accounts. There was a very long list of accounts that historically had the rights to sell digitally. They have all been revoked apart from our core strategic accounts.

So, we’re doing the hard work to get a significant reset for the brand in the North America marketplace with our wholesale partners. We do anticipate our wholesale partners to plan their overall business pretty conservatively in this consumer environment, both through the fourth quarter of this year and in the first part of next year. And I think we also are very focused on driving improved product differentiation and segmentation across our wholesale partners, with both new product introductions. I think we feel very confident about the pipeline of new products that we have. And you’ve seen us start to ramp up the licensing and collaboration engine that we use on Crocs in HEYDUDE, you’ve seen a couple of those, we talked about it in our prepared remarks, and that will accelerate through the back-half of this year into next year.

Jonathan Komp: Okay, that’s very helpful. And then just one, and if I could on the fourth quarter operating margin target, could you just tell me there, are you embedding any change in promotional activity for the Crocs brand in the gross margin there? And G&A, are you changing the expectations at all for the slightly more challenging top line environment here? Thanks again.

Anne Mehlman: Yes, so a couple of things. I would say we’re really pleased, overall, with our Crocs gross margins. And we reaffirmed our gross margin guidance for the year. So, we actually think, from a promotional standpoint, year-over-year promotions, we’re planning flat to last year. We’ll participate in normal promotional periods, but we don’t see or anticipate any big change. And then from an SG&A standpoint, we do think it’s really important to invest for the future and not try to manage one quarter from a profitability standpoint. So, we do expect to continue invest SG&A, and that’s how you get to the overall profitability guidance.

Operator: Our next question comes from Jim Duffy from Stifel. Please go ahead.

Jim Duffy: Well, thank you. Good morning. Wanted to ask a few questions on HEYDUDE, I guess, Andrew, I’ll ask you the Monday morning quarterback, the HEYDUDE business, some, you’ve built a lot of awareness to the brand, generated a lot of cash, successfully paid down a lot of debt from the HEYDUDE deal. If you had to do it over again, what would you have done differently, and maybe would that give us some context for the extent of the marketplace challenge and maybe size to the spring order declines to give us context for that impact? Thanks.

Andrew Rees: Yes, I think that’s a question, it’s well-framed, Jim. As we look at the brand, we’ve grown it over 60% from a top line perspective since we’ve owned it. We’ve generated over, approximately, $472 million of EBIT since we’ve owned, it’s had strong cash flow, and it’s been accretive from day one. So, I think while there are some short-term challenges, it’s been a great addition to our portfolio. In terms of the challenges, I think we’ve really focused on three key areas. One is getting stronger control of in-market inventory. And I think the rationale here, so the Monday morning quarterback perspective, we sold in a lot of inventory in 2022 into the market. We wanted to penetrate the broad-based national accounts very quickly.