Crocs, Inc. Q3 FY2024 Earnings Call

Good morning and thank you for joining us to discuss Crocs, Inc.’s third quarter results. With me today are Andrew Rees, Chief Executive Officer; and Susan Healy, Chief Financial Officer. Following their prepared remarks, we will open the call for your questions, which we ask that you limit to one per caller. 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. 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 reports on Form 10-Q and other reports filed with the SEC for more information on these risks and uncertainties. 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. All revenue growth rates will be cited on a constant currency basis unless otherwise stated. At this time, I’ll turn the call over to Andrew Rees, Crocs, Inc.’s Chief Executive Officer.

Thank you, Erinn, and good morning everyone. Thank you for joining us today. We reported third quarter results that exceeded our guidance in terms of sales and profitability on an enterprise basis. Consolidated enterprise revenues of $1.1 billion grew 2% from the prior year, led by 5% growth in DTC. By brand, the Crocs brand grew 8%, with international sales up 17% and North America up 2%. HEYDUDE revenues contracted 17%, slightly below our expectations. Adjusted diluted EPS of $3.60 a share increased 11%. Today, I will be covering the following topics. I will first share deeper insights into our third quarter results, along with what we are seeing from a broader consumer perspective. I will then elaborate on HEYDUDE’s strategic priorities and what gives me confidence around the brand’s longer-term growth prospects, touching on some of the early wins we are seeing in the business today. Finally, Susan will review our financial performance, our updated 2024 outlook, and our preliminary thoughts on 2025. Now, turning to third quarter insights, starting with the Crocs brand. The investments we are making in product and marketing enable us to win with consumers around the world. All three of our product pillars, clogs, sandals, and personalization, grew during the third quarter, led by our icon, the Classic Clog. In August, Footwear News named our Classic Clog one of the greatest shoes of all time. Embracing the personalization platform that our clog provides, we launched our 'Live Life Fully Loaded' campaign during the back-to-school season. This campaign created high consumer engagement in our stores and online, both for our Classic Clog as well as our Jibbitz business, as consumers were able to express their individuality. We are continuing to drive on our clog by introducing new silhouettes and building durable franchises. The Echo franchise, which has developed a breadth of products across clogs, sandals, boots, and sneakers, continues to attract a new, largely male explorer consumer to our brand. As we look into spring, we are excited to bring the Echo Wave, Molded Mule, and Echo Search to market. Both new innovations are priced under $100. Another example of how we have iterated on the clog is our in-motion franchise. We have seen successful results in our test of this franchise on our DTC channels ahead of a scaled rollout in 2025. This new innovation features our proprietary light ride foam footbed, along with our Free Feel technology. By applying the lessons learned from a quick-to-market DTC cozy slipper launch last year, we are able to scale the offering this fall across expanded colorways and with our wholesale partners at an incredible value of $49.99. Sell-out has been strong out of the gates and we are chasing replenishment. In addition to our core product, we brought many exciting partnerships to life during the quarter. These included a Bath & Body Works collection, featuring our Classic Clog and a cozy sandal, precluded with four mystery scent Jibbitz charms. We also introduced Batman and Squishmallow, and of course, our Crocs Times McDonald’s Happy Meal. As a natural extension of our first collaboration with McDonald’s, we designed and introduced the McDonald’s Times Crocs Happy Meal, with a curated assortment of 17 limited-edition Classic Clog key chains and a sticker pack for personalization. We launched the Happy Meals first in China and saw fantastic results. Within the first 48 hours, over 400,000 Crocs Happy Meals were sold, generating over 10 billion brand impressions. Since then, we have launched our Happy Meal in over 40 countries, driving significant brand momentum and excitement. Last week, we celebrated the 7th Annual Crocs Day on October 23, our very own fan-inspired holiday within the month of Croctober. With a much-awaited debut, we celebrated the release of Pet Crocs, available alongside matching classic line clogs, allowing dogs and dog parents to coordinate their looks in sync. Our Pet Crocs, designed in partnership with BARK, were available globally on our own dot-com and in select retail stores. The release was a huge success. Fan-inspired festivities did not stop there. This year, we released a Crocs costume in the form of a life-sized iconic Classic Clog fully loaded with Jibbitz charms. Just like your favorite pair of Crocs clogs, this costume is available in both left and right versions, making it a perfect opportunity to match with friends. In September, we achieved another step forward towards our circularity goals, with the launch of a limited-edition Keep It Going Classic Clog. The new clogs featured 25% post-consumer recycled content from the shoes collected through our 'All Crocs New Live' consumer take-back program, with the remaining construction of the shoe containing up to 25% bio-based Croslite material. Now for a review of the Crocs brand business by geography. The North American market performed well with revenue growth of 2% versus the prior year, driven by DTC. In North America, the consumer has reverted to pre-pandemic shopping patterns, focusing on need-driven purchases and concentrating spend around key shopping events and holidays. We saw a solid back-to-school season, but since Labor Day, we have seen consumer spending pull back. We anticipate the consumer environment being relatively muted in the U.S. until the Black Friday/Cyber Monday holiday period. Our overall international revenues grew 17% versus the prior year, supported by notable growth in Australia, China, France, and Germany. Our China business grew over 20%, on top of more than 90% growth last year, with approximately two-thirds of the growth driven by mono-brand partner stores. As we shared during our second quarter call, the industry was more promotional during the mid-season festival. It is clear that the Chinese consumer is being more conservative in their purchase behavior, and we have seen an even more pronounced pullback within key Tier 1 cities like Shanghai and Beijing. In light of the broader macro environment in China, we are taking a more cautious view for the rest of the year. Despite this backdrop, our brand continues to gain share in China, which we believe is a direct result of our accessible, authentic and personalizable brand positioning, serving as a meaningful competitive advantage. Turning to HEYDUDE, our third quarter results came in slightly below our guidance, with revenues declining 17%. Before I provide further detail on the quarter, I want to start by sharing the progress we have made towards building HEYDUDE into a consistent and profitable growth brand. In September of last year, we pivoted to prioritize brand health, cleaning up 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. Since then, we have elevated ASPs, closed over 50% of our accounts, improved inventory turns to 4x a year, and opened 29 premium outlet stores. In addition, we invested in talent across the brand while accelerating our market investments as we work towards driving higher awareness and relevance to generate brand heat. We strongly believe these are the right decisions to build a solid foundation for profitable growth at HEYDUDE. While we recognize HEYDUDE’s performance this year has not yet reflected these investments and actions, let me share a little bit more about what has given me confidence. As we spoke about last quarter, we sharpened our strategy to focus on three strategic imperatives: driving youth female culture and creating a HEYDUDE brand community, building the core of Wally and Wendy, and stabilizing and accelerating North America. Against these imperatives, we have seen the following green shoots. First, we believe youth female culture is a key driver of influence, brand connectivity, and a catalyst to build community. In August, we were thrilled to announce Sydney Sweeney as our global brand ambassador and our Director of Dudes. This partnership has generated the best-performing content HEYDUDE has seen to date, and we have plans to ignite further content with Sydney Sweeney. During the quarter, we launched TikTok Shop and saw an excellent response, attracting a new, younger consumer. In fact, on select launch days, our brand emerged as the number one global key account on TikTok Shop. Baidu’s number of TikTok followers surpassed Instagram in the quarter, further underscoring our opportunity to reach the younger audience. We were also named the official comfort shoe of Barstool Sports in time for our refreshed collegiate collection. Second, we are focused on our icons, the Wendy and Wally. Our three core offerings include stretched stocks, stretched canvas, and funk mama. During the quarter, we iterated on these core offerings through our collaboration engine, successfully introducing Beetlejuice and SpongeBob, to name a few. In October, we announced a long-term partnership with country music singer, Jelly Roll. Our initial collaboration with this famed artist featuring our Wally sold out in minutes. Since the launch, we’ve seen the product appear on secondary platforms for up to $6,000. As mentioned on our Q2 call, the company has new product inventions that are an extension of our Wendy and Wally DNA with added cushioning and height. In the third quarter, we began scaling this across selected global accounts. As we look beyond our core, we are seeing healthy signs of demand for our women’s Austin Lift and men’s pole silhouette, with plans to scale them in 2025. Third, we are hyper-focused on stabilizing the North American market to create a sustainable foundation from which to grow. We’ve streamlined our account base and are focusing on building relationships with our strategic retailers, similar to Crocs. We have improved our inventory position and ASPs across the board. In the third quarter, our digital ASPs were up 10% versus last year, and we noted improving weeks of supply across our key strategic accounts. Our premium outlet stores are performing in line with our expectations. While we are encouraged by these early positive indicators, HEYDUDE’s recent performance and the current operating environment signal it will take longer than we had initially planned for the business to turn the corner. We continue to have confidence about the long-term potential of the brand, and the green shoots we are seeing provide positive reinforcement around our opportunity. I am incredibly proud of the HEYDUDE team and the urgency with which they have executed against our sharpened strategy. I will now turn the call over to Susan to walk through our financials for the quarter.

Thank you, Andrew, and good morning everyone. Our third quarter results exceeded the high end of our enterprise guidance on both the top and bottom lines, supported by a combination of better underlying operating performance, a lower than expected tax rate, and a lower share count. For the Crocs Brand, revenues were $858 million, growing 8% from the prior year, and channel growth was balanced, with DTC and wholesale each up 8%. The growth was volume-driven, with units increasing 11% from last year to a total of 32.1 million pairs of shoes sold, while brand ASPs decreased 3% to $26.48. ASPs were below last year largely due to product mix and slight price erosion. North America revenues grew 2% from the previous year to $491 million. Growth was led by DTC, which was up 4%, while wholesale was down 2%. Underlying North American brick-and-mortar growth was up mid-single digits. International revenues were $367 million, growing 17% from the prior year, led by DTC growth of 18% and wholesale growth of 15%. In China, we saw growth in excess of 20% on top of last year’s more than 90% growth rate, while our direct European markets continued to show healthy growth in the quarter, led by Germany and France. Turning to HEYDUDE, revenues were $204 million, down 17% from last year. Wholesale revenues were down 23%, and DTC revenues were down 9%. While we anticipated wholesale declines in the third quarter, our guidance expected stabilization of DTC. To support the strategies Andrew outlined earlier, we changed our investment strategy regarding performance marketing, shifting investments towards brand marketing, which negatively impacted our digital performance. We believe we are making the right decisions for the long-term health of the brand, highlighted by the continued strengthening of our ASPs, which were up 4% to $30.94 in the quarter. Concurrently, volumes were lower with 7 million pairs of shoes sold, which was 21% below last year. Consolidated adjusted gross margin for the third quarter was 59.6%, up 220 basis points from last year. Crocs Brand adjusted gross margin was 62.5%, or 40 basis points higher than the prior year. The primary drivers of margin expansion were favorable product costs and select international price increases, offset in part by channel mix. HEYDUDE brand adjusted gross margin was 47.9%, or 510 basis points higher than the prior year, driven primarily by freight, favorable channel mix, and pricing. Overall, adjusted gross margin was below expectations as the channel mix benefit was not as favorable as expected, given softer-than-anticipated digital trends in the quarter. Our third quarter adjusted SG&A dollars increased 19% from the prior year. Our adjusted SG&A rate was 34.2%, up 510 basis points compared to the prior year, driven by continued investment in talent, marketing, digital, and retail to support long-term market share gains. Our third quarter adjusted operating margin was 25.4%, down 290 basis points from 28.3% in the previous year, driven by planned investments in SG&A. Third quarter adjusted diluted earnings per share increased 11% to $3.60. 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 during the quarter. Our inventory balance as of June 30 was $367 million, a decline of 6% since this time last year. Both of our brands achieved inventory turns above our goal of 4x on an annualized basis. Our liquidity position remains strong, consisting 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 in debt, reducing borrowings to approximately $1.4 million. Year-to-date, we have repaid $248 million in debt, and we ended the quarter at the lower end of our long-term net leverage target range of 1 to 1.5x. Enabled by our best-in-class free cash flow generation, we also completed $151 million in share buybacks during the quarter, repurchasing 1.1 million shares at an average price of approximately $135 per share. Year-to-date, we have completed $326 million in share buybacks, repurchasing 2.3 million shares. We currently have $549 million remaining on our share repurchase authorization. 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. Our full-year enterprise revenue growth is now approximately 3% versus the prior estimate of 3% to 5%, assuming currency rates as of September 30. For the Crocs brand, we are narrowing our revenue range from 7% to 9% growth to approximately 8%. For HEYDUDE, 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. 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 we continue to plan to remain up from the prior year across the enterprise. 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 to the high end of our prior range of $12.82 to $12.90. Consistent with our previous guidance policy, this range reflects future debt repayment but does not account for 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%. 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. 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 expect the Crocs brand to grow approximately 2%, along with double-digit international growth. Our fourth quarter international growth rate is expected to be below our year-to-date growth rate based on, one, a more cautious consumer in China; and, two, ongoing regulatory pressure in India, impacting our ability to meet demand. Turning to North America, we expect a slightly negative fourth quarter, which includes expectations of a more selective consumer as well as the timing of wholesale shipments between quarters. For the second half, North America is expected to be flat compared to the prior year, in line with our previous expectations. We anticipate Q4 DTC to remain positive. For HEYDUDE, we expect revenue to decline between 4% and 6% in the quarter, below the former implied range of low to mid-teens. The largest driver of our lower revenue outlook is tied to lower-than-expected sellouts on both digital and wholesale. Our assumptions around our non-comparative drivers, including our retail stores and our international distributor sell-ins, are aligned with our former forecast. Adjusted gross margins are expected to increase for the enterprise, with the Crocs brand experiencing slight growth, while HEYDUDE is expected to decline slightly versus the prior year. We expect adjusted SG&A spend to be in the high-teen range in Q4 and adjusted operating margin to be approximately 19.5%. Adjusted diluted earnings per share is anticipated to be between $2.20 and $2.28. While we are not yet guiding to 2025, I want to provide some preliminary insights for your models based on the visibility we have thus far. For Crocs, we expect revenue growth in 2025 to be led by international markets. As a reminder, we will be negatively impacted by the timing of Easter shifting back into Q2, which will significantly impact our North American region in the first quarter, along with lapping leap year. For HEYDUDE, next year is focused on brand stabilization. As Andrew shared, we are observing positive signs around brand acceptance from a broader group of consumers, but please note that financial results will lag the marketing momentum we are currently experiencing. With the visibility we have into 2025, we expect the first quarter to be sequentially down from the fourth quarter's wholesale size. In 2025, we plan to continue investing in talent, marketing, digital, and retail to create sustainable long-term growth, which will put incremental pressure on our EBIT margin rate compared to 2024. In closing, we are making near-term decisions that we believe are in the best long-term interest 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. I will now turn the call back over to Andrew for his final thoughts.

Thank you, Susan. Our company’s initiatives remain consistent, and we will focus on three primary levers to fuel durable long-term growth: first, ignite our items across both brands to drive awareness and global relevance for new and existing consumers; second, drive market share gains across our Tier-1 markets through strategic investment behind talent, marketing, digital, and retail; and third, attract new consumers to our brands by methodically diversifying our product range and usage occasions. At this time, we’ll open the call for questions.

The first question today comes from Jonathan Komp with Baird. Please go ahead.

Yes. Hi, good morning. Thank you. I’ll stick with one topic here. I want to ask about Crocs North America. Could you just give a little more detail? Susan, I know you mentioned a shift in Q4 on wholesale, but expectations for DTC to remain positive. Could you just remind us of some of the moving parts for DTC? And what’s driving the forecast? And then maybe a bigger picture question. As we look forward into 2025, what role will North America play in the total Crocs outlook for 2025? And what are some of the drivers that you see, Andrew?

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 take a picture.

Great. Thanks, Jon. When we think about North America, we are unchanged in 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. So by channel, fourth quarter DTC is expected to be positive, offset by wholesale, which is planned down as retailers took product earlier in Q3 than we planned. Overall, we’re mindful of current consumer shopping patterns and macro headwinds in Q4, and we’re taking a prudent approach.

Yes. So if we step back to the big picture, North America this year, based on all the guidance we provided for the fourth quarter, will grow about 2.5% for the year. The North American business is a well-managed, stable business. It’s highly profitable and cash generative. It generates the income and cash flow that we can use to fund our international growth for Crocs, and it also supports some of the investments we’re making in HEYDUDE. It’s balanced across channels, with a wholesale business, retail business, and a digital business. We’ve made some strategic shifts within digital, going more to third-party on our Amazon platform. We think that’s been highly productive, and we believe that will be attractive in the future. So, we believe our business is very well positioned to continue the role it's playing today. We are confident that in the short to longer term, we will be able to grow the business modestly, and it plays an important role in our overall portfolio.

Great. That’s helpful. Thank you.

Thank you.

Thank you. Good morning. Multipart question on HEYDUDE. First, you mentioned streamlining the account base for HEYDUDE. Can you elaborate on those distribution actions? And then I’m hoping you can speak to HEYDUDE brand operating profitability and your willingness to continue to invest against profitability to strive for brand inflection?

Okay, great. So from an account base perspective, we really talked about this almost a year ago now, where we cut off some of the smaller customers to really focus back on the large national strategic accounts, or alliance partners, where we want to make sure that we have adequate segmentation and differentiation, and we can grow with a broad base of accounts. We do keep some well-positioned or regional customers that we think are important to reach select consumers and also provide a broader consumer base and attractive points of distribution. That change happened about a year ago, and we feel really good with where we are from an account-based perspective. In terms of profitability, there are a couple of key drivers as we think about the future. One is gross margin. You’ve seen us start to elevate gross margins from a low in 2023 to substantial improvements in 2024. Based on some of the infrastructure investments and pricing decisions we’ve made that impacted gross margins in the past, we think long-term gross margins could reach around 50%. We’re not going to achieve that in the next couple of quarters, but that’s in the mid-term. We think that’s a very strong target for a brand. We are also investing substantially in SG&A. We’re investing aggressively in marketing. You saw a lot of the initiatives we discussed earlier. We’re investing to engage younger consumers and create broader brand awareness, while also preparing for our international growth. This indicates our supreme confidence in HEYDUDE’s long-term growth potential. We are ready to make these investments and confident they will pay off. The broader financial profile of Crocs, Inc. allows us to do this, and we believe these investments are prudent for our shareholders in the medium to long term.

Okay. Just to follow up on that, Andrew. In the context of valuing Crocs, Inc., many people are looking at the contribution of the Crocs brand profitability and trying to isolate that for valuation purposes. So, additional perspective on the HEYDUDE brand profitability would help people get to that assessment of the size of the different profit pools?

Yes. I would encourage our investors to consider the totality. Our total company is highly profitable and cash generative. When investing in the company, I would encourage people to look at the future potential of those cash flow streams and the optionality that provides us to continue deleveraging and reducing risk, while also returning cash to shareholders sustainably. I believe that's a strong investment profile.

And then with the outlook for HEYDUDE, have you at all tempered the SG&A investment plans?

I would say no, we haven’t. We are extremely confident in the mid- to long-term potential of HEYDUDE. We will continue to analyze each of the investments we’re making and feel they will provide a strong return.

Yes, great. Thank you very much. Andrew, you mentioned the back-to-school season being back to high levels while also noting that the lows are more pronounced. How do you operate in that environment? How do you think the retail channel partners are navigating, and do you think we are pulling forward some sales for the holiday? Lastly, how long does it take for the sell-through to normalize? Is there going to be a correction with your spring order book futures? Can you provide some insight?

Yes. You’ve probably heard others talk about this, and you’ll hear more when our retail partners report in the coming weeks. I do think consumers are returning to a more traditional shopping pattern, akin to pre-pandemic behaviors; they shop when they need things and focus on key events, whether they be holidays or promotions, and often require additional incentives to purchase. I think this trend has been re-emerging over the past year. We anticipate this into the fourth quarter. Our retail partners are highly sophisticated and are adapting quickly, as they have plenty of data to navigate this process efficiently. Regarding order books, we ensure they are in line with expected sell-out, and while some timing shifts have occurred, we’d usually have excess inventories in the market. For Crocs, we've been vigilant on this, while HEYDUDE has experienced excess inventories this year, but we've made good progress towards reducing that.

Great. Thank you very much and best of luck.

Thank you.

Thank you, guys. Good morning. Can you elaborate a bit more on your confidence in growing your Crocs North America direct-to-consumer business in the fourth quarter, based on your quarter-to-date performance? Regarding your Amazon business transitioning to a third-party model, can you explain the rationale behind that decision and how you view your Amazon business compared to your crocs.com performance? Thank you.

I would say that’s a challenging question, Chris. We feel good about our plans for Crocs North America DTC—our product line, holiday planning, backend logistics, etc.—but the results rely on everything performing well. We feel confident, and I think our stores, primarily premium outlet stores, alongside our e-commerce and marketplace segments, are set up for success. Everything hinges on execution, but we're prepared. On Amazon, we consider it a critical customer because it’s where many consumers start their shopping journeys. Engaging on such a crucial marketplace allows us to emphasize our brand and better control product distribution and pricing, creating a more appealing experience for consumers.

Thanks, Andrew. One quick follow-up on the operating margin outlook. I thought you stated it should be slightly lower next year. Could you elaborate on your plan to balance investment spending to grow both brands for the long term while maintaining an operating margin around the mid-20% range, close to your longer-term target of 26% plus?

Yes. We plan to continue investing as we see opportunities for revenue growth for both brands. As Andrew mentioned, we remain disciplined about return on investments. While we acknowledge that our spending will create incremental EBIT margin pressure, we still anticipate being above the 25% target for this year. We’ll share more guidance regarding 2025 in our fourth quarter call.

Yes. Big picture, Chris, we expect to maintain above 25% operating margins according to our current guidance. Our historical performance has seen extraordinary levels of profitability, and comparatively few players in the industry approach our margins, if anyone surpasses them. So, we are balancing the need to maintain high profitability and cash flow generation—which underpin our valuation—with substantial investments in attractive mid- to long-term growth opportunities.

Hi. Good morning. Two questions actually. The first is, can you talk about the change in the investment marketing strategy for HEYDUDE in the quarter, and what KPIs are you seeing? Secondly, can you clarify for Crocs North America whether you anticipate growth in the market for 2025?

The first question is critical, Bob, thanks for mentioning it. A key decision made in the third quarter was to reduce performance marketing for the HEYDUDE brand. Having observed our multi-year trajectory, we noted our performance marketing escalated, with marginal ROIs still positive but not meeting our expectations. We pivoted to increase marketing investment centered on brand and long-term growth potential, leading to a pullback in ad spend. This adjustment—funded through performance marketing dollars—has accounted for our third-quarter results falling slightly short for HEYDUDE. For the second question, yes, we expect to experience modest growth in North American Crocs for 2025, though the real value creation lies primarily in international growth, which has consistently been strong over the last two years.

Hi. Sorry about that. Thank you. Good morning. I was hoping you could expand on what you mentioned regarding Crocs’ international growth potential in 2025. Given the slowdown in China, how should we gauge the building blocks of growth next year? In which markets do you have the most confidence in supporting growth?

Yes. We’ve noticed a slowdown in China, but I want to emphasize that we continue to anticipate growth there. Our growth will not replicate the exponential rates we saw last year, but we still aim to achieve growth in China. A significant driver will be our mono-brand store openings in China, which have proven successful for our digital and selective retail businesses. By year-end, we’ll operate nearly 400 mono-brand stores. Additionally, I am optimistic about our business model in India despite recent regulatory challenges. Our direct market operations in UK, Germany, India, and Australia continue to show potential as we expand our footprint. Our key direct European markets are performing well, particularly Germany and France. Lastly, our success in Australia looks stable, while operations in South Korea remain promising. Japan, on the other hand, is a market we are carefully reassessing and aiming to focus on the Classic Clog and personalization there.

Thank you very much.

Thank you.

Good morning. Thank you for taking my questions. Regarding HEYDUDE, you express confidence, yet what led to this situation? What factors affected your trajectory? What steps are you taking, besides marketing and cleaning up, to drive sales? Your collaboration with partners is promising; however, the consumer response seems lacking. Can you break down what you can control?

Let me address your last point first. The measures we are taking are multifaceted. Firstly, our marketing focus has shifted to engage a broader range of consumers, enhancing brand acknowledgment and relevance while appealing to younger female consumers, who influence culture. Secondly, we're actively managing wholesale relations to diminish in-market inventories and ensure products are available at the right times. I believe we are moving positively but still have work ahead. Thirdly, we emphasize the importance of premium outlet stores, where we will have opened about 29 by the end of September and plan to add another 11 in Q4. These stores perform well and give consumers access to different collections, which enhances brand experience. Furthermore, we’ve commenced our operations across direct markets—UK, Germany, India, and Australia—and have received encouraging feedback, indicating positive momentum. Marketing is crucial, but we are also establishing the platforms to support future growth.

I previously mentioned this: at the end of fiscal '22, you shifted much product into the marketplace. How much overstated were previous year revenues? What starting point should be used for forecasting? Should you have approached growth more strategically? What decisions contributed to your current situation, in your estimation?

Indeed, we grew too quickly. When we purchased the brand, neither we nor our customers knew the potential. In retrospect, we shipped too much product during that period from late '22 into early '23. If you are inquiring about our decisions that turned out poorly, that was one of them. Additionally, our initial marketing initiatives were ineffective despite significant expenditure; they lacked adequate focus on the target audience and failed to generate the desired impact. Integrating the brand took longer than anticipated as we had to establish the necessary infrastructure—distribution channels, systems, processes—essentially starting from scratch. Despite these challenges, we've increased revenue from around $600 million at the time of purchase to nearly $900 million now. Although profitability has declined relative to earlier periods due to investments in the brand's growth, we view this as a temporary phase. We remain committed to the strategies we’ve shared.

Thank you so much. Andrew, could you expound on the Crocs brand's overall strategy for growth? Beyond modest growth in North America, how do you plan to expand? Are there opportunities to enhance brand awareness, innovative wholesale channels, or open new retail locations? What is your vision for growth in the near future?

In the short term, the major growth driver for Crocs is indeed the international segment. To highlight, our international market penetration is much lower relative to what we've seen in the U.S. As for North America, while the growth is limited, we see potential in the digital space, personalization, and our existing sanders. There remains untapped potential for broader product silhouettes. We are still testing new silhouettes, but we have the foundation in place for our brand.

Thank you for my question. Good morning. Can you discuss the overall profitability of the business, considering the investments at HEYDUDE? What measures do you have to maintain the consolidated level of performance, aiming for margins near your target?

Thank you for your question, Anna. It’s pivotal to stress our disciplined approach to investments. While we will continue to increase SG&A, we are also highly discerning about ensuring we make appropriate investments. As Andrew mentioned regarding HEYDUDE, if we see the need for adjustments, we adapt quickly. We dedicated 2024 as an investment year, and we expect slight increment to EBIT margin pressure. We believe our guidance above 25% this year captures that discipline.

Yes. Overall, we plan to maintain margins above 25% this year. Historically, our margins have remained high, which is competitive in the marketplace. It’s crucial to find a balance between maintaining profitability and cash flow with making substantial mid to long-term investments for growth.

This concludes our question-and-answer session. I would like to turn the conference back over to Andrew Rees, Chief Executive Officer, for any closing remarks.

I want to conclude by thanking everyone for their continued interest in our company. We appreciate you spending time with us today. Thank you.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.