Crocs, Inc. Q2 FY2025 Earnings Call

Good morning, and welcome to the Crocs Second Quarter 2025 Earnings Conference Call. Please note that 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.

Good morning, and thank you for joining us to discuss Crocs, Inc. second quarter results. With me today are Andrew Rees, Chief Executive Officer; and Susan Healy, Chief Financial Officer. Following their prepared remarks, we will open the call for your questions, which we ask you to limit to one per caller. Before we begin, I would like to remind you that some of the information provided on this call is forward-looking and accordingly, is subject to the safe harbor provisions of the federal securities laws. 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 most recent annual report on Form 10-K, quarterly report 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. Chief Executive Officer.

Thank you, Erinn, and good morning, everyone. Thank you for joining us today. Our teams delivered a solid second quarter, fueled by top line growth and our highest ever quarterly gross profit, which drove strong free cash flow in the midst of what continues to be a volatile marketplace. I will start by highlighting the key metrics of the quarter and then discuss the strategic rationale behind the decisions we have made to drive profitability and support long-term brand health. And finally, we'll touch on deeper insights on our individual brands. At an enterprise level, second quarter revenues of $1.1 billion grew 3% to prior year. Crocs Brand revenues of $960 million grew 4% to prior year, led by 16% international growth. HEYDUDE revenues of $190 million, down 4% to prior year and an improvement from the first quarter. Enterprise adjusted gross margins of 61.7% gained 30 basis points to our prior year. Adjusted operating margin of approximately 27% supported adjusted diluted earnings per share of $4.23, a gain of 5% to prior year. Our strong margin profile fueled free cash flow of $269 million, enabling us to repurchase 1.3 million shares and repay $105 million of debt. Our net leverage ended the quarter at the lower end of our target range of 1x to 1.5x. To remind everyone, over the last decade, we have deployed $2.4 billion to buy back approximately 30% of our total shares outstanding. This, along with continued deleverage of our balance sheet, has been a consistent driver of EPS growth and shareholder returns. Turning now to the current operating environment. We see the U.S. consumer behaving cautiously around discretionary spending. They are faced with current and implied future price increases, which we think has the potential to be a further drag on an already choiceful consumer. Against this backdrop, our retail partners are acting more carefully and reducing their open-to-buy dollars in future seasons. As we have consistently said, we are not trying to manage our business quarter-to-quarter. We had a solid first half of the year with our brands fueling strong gross profit and cash flow. The current environment in the second half is concerning, and we see that clearly reflected in retail order books. We strongly believe this is a time to make bold decisions for the future to sustain and advance our durable cash flow model. As a result, we have chosen to amplify certain measures in the second half of the year to protect brand health and profitability. For the Crocs Brand, in addition to adjusting our forward receipts, we pulled back on promotional activity across the direct channels starting in May. While this has and will continue to impact our top line, we see this as an opportunity to drive margin dollars over time, support continued cash flow generation and tighten brand control. For the HEYDUDE Brand, we've accelerated our actions in the channel to support a clean and refreshed marketplace. This has resulted in us choosing to take back additional aged inventory and ensure more of our partners are reset with our current product lines. This will create further headwinds to sales volume over the next several quarters. From an expense perspective, we've already actioned $50 million of cost savings and are identifying further cost savings opportunities. As it relates to inventory, we've opted to plan our business conservatively. Proactively pulling back on receipts across both brands for the second half, primarily in the U.S. Without losing sight of the bigger picture, I want to remind everyone that over the last 3 years, we have made significant progress in diversifying our business, which will serve as a strong foundation to enable long-term sustainable growth. One, we've moved from 1 brand to a 2-brand enterprise, fortifying our leadership within the casual footwear segment. Two, we've diversified our clog offering and have 6 major franchises that make up the majority of our clogs business. In addition, we've developed strong sandals and personalization pillars that offer unique wearing occasions and enable self-expression. Three, we've accelerated our international growth business, which has grown from 38% of Crocs Brand sales in 2022 to 52% in the second quarter. Collectively, this diversification should fuel durable long-term growth for years to come. Now turning to performance by brand. For the Crocs Brand, all of our key product pillars, clogs, sandals and Jibbitz Charms grew in the second quarter. Clog iterations and emerging franchises drove growth within the clog category, including Echo, Bae, and InMotion. These results exemplify that when we deliver new innovation with clear storytelling through our marketing channels, the consumer responds with strong engagement. In Asia, clog personalization and hype continues to resonate well. Outside of clogs, sandals continue to yield strong results, providing new versatile wearing occasions for our consumer. During the quarter, we saw notable strength across our style franchises, which included the Brooklyn, Getaway and Miami. As we moved into the summer season, the Miami went viral on TikTok, and we were chasing demand. Our consumer is responding well to neutrals and new materialization, including glitter and patent finishes. As we look forward, the success of these 3 franchises is translating into shelf space gains and we're adding new collections such as a Soho sandal next spring. Within personalization, our Jibbitz Charms growth continues to be driven by distribution expansion in our international markets, improved in-store presentation, and success around elevated charms. We remain laser-focused on our digitally led social-first marketing playbook as this is a key ingredient in sustaining brand heat. In addition to bringing back franchise favorites like Cars, Pokémon and Minecraft partnerships were also standouts in the quarter. We furthered our connection to sport, growing our NIL athlete roster with first-round NFL Draft Picks, Jaxson Dart and Ashton Jeanty, who notably wore our Swarovski crystal-studded Crocs clogs on the red carpet. We continue to lean into social commerce as consumers more frequently start and end their shopping journeys on social platforms. During the quarter, Crocs remained the #1 footwear brand on TikTok Shop in the U.S. and we recently launched on this platform in the U.K., where results have been strong out of the gate. Our plan is to continue to expand social commerce and live streaming platforms globally, and we expect this to drive new growth opportunities. Turning to performance by region. Our growth in the quarter was led by our international business, which registered revenue growth of 16%, led by the direct-to-consumer channel. Our international business represented more than half of our Crocs Brand revenue mix this quarter. In China, we reported another quarter of strong revenue growth in excess of 30%. During the quarter, Crocs Brand outperformed during mid-season festival, placing Crocs among the leading women's footwear brands on both Tmall and Douyin. We're deepening our connections with consumers through our roster of locally relevant celebrities and KOLs, including brand ambassador and actress, Bai Lu and actor TJC. India saw a double-digit revenue growth in the quarter, with outsized consumer demand across our classic clog and sandal franchises. We welcomed Rashmika Mandanna as our first brand ambassador in India, and inaugural Instagram post garnered over 400 million views. Japan grew nicely during the quarter, and Western Europe continued to perform strongly, led by France and Germany. Our North American business was down 6% to prior year as we pulled back on discounting on our DTC channels, most notably on clogs. We continue to see sandals as a growth vehicle increasing double digits in the quarter as we further diversify our business. Last week, we held the grand opening of our newest retail concept in SoHo, New York. This store houses our largest personalization experience to date, with expanded and upgraded Jibbitz Charms opportunities. In addition to our mainline product, consumers can find New York exclusive products as well, as a dedicated assortment of elevated EXP product line with dynamic digital storytelling. Turning to the HEYDUDE Brand. We've been focused on 3 core pillars of our strategy. One, igniting the HEYDUDE community. Two, driving the core and adding more. And three, prioritizing brand health as we stabilize the North American market. First, we've continued to ignite the HEYDUDE community. Over the past 12 months, we've been focused on speaking to a new female consumer while not losing sight of our core consumer. The cumulative impact of our marketing efforts over this period have resulted in an increase in HEYDUDE awareness to 35% in North America. In addition to an uptick in awareness, we've also seen improvement in consideration and purchase intent. With these advancements, HEYDUDE is now poised to further engage our core consumer. In June, we launched our latest campaign HEYDUDE Country. This campaign is rooted in authenticity and plays into several of our brand affinities, including music, pre- and post-sport, and travel. We're excited about the future of this campaign and its broad appeal to our existing core consumer as well as new HEYDUDE fans, both him and her. Second, we're building the core and adding more. During the quarter, we iterated our icons, the Wally and the Wendy for color, materialization, and partnerships. In June, we leveraged our icon to release the HEYDUDE x Pabst Blue Ribbon collection which sold out on our own dot-com. We also partnered with Margaritaville to release a collaboration featuring our HEY2O collection, which speaks to the core HEYDUDE consumer. Lastly, we launched the Paul Pro, an elevated iteration of our best-selling Paul silhouette at an $80 price point. Against our third strategic pillar, we continue to prioritize brand health as we stabilize the North American market while laying the groundwork for future international growth. We were pleased by the continued growth of our direct-to-consumer channel, up 7% in the quarter. This was supported by our new store openings and strong performance on TikTok. While we are pleased with the strategic progress we have made against our 3 pillars, we have identified further opportunities to more rapidly reset our North America business. We have focused our efforts against 2 primary actions. One, we pulled back on bottom of the funnel performance marketing investment to enable a more profitable digital business. And two, we've initiated incremental returns and marked our allowances to our retailers to improve the health of our inventory in the marketplace. This will simultaneously elevate our brand presentation at wholesale. While these measures will have a meaningful impact on second half performance across both channels, we feel that they will stabilize the business more quickly. In closing, we believe the HEYDUDE Brand potential and its community are much greater than the size of the business today, and we're confident that the critical steps we are taking will fuel the potential in the future. I will now turn the call over to Susan to provide more detail around our second quarter financial performance and third quarter outlook.

Thank you, Andrew, and good morning, everyone. Our second quarter enterprise revenues of $1.1 billion were up 3% to prior year. Crocs Brand revenue of $960 million was up 4% to prior year. Growth was led by wholesale up 6%, while DTC was up 3%. North America revenues were down 6% to last year as we pulled back on discounting during the quarter. These actions, in part, drove DTC down 8%, while wholesale was down 4%. International revenue was up 16%, aided in part by timing shifts out of Q3 and into Q2 in select markets. China and India led the growth, while Japan and Western Europe also contributed strongly to these results. HEYDUDE Brand revenue of $190 million was down 4% to prior year, an improvement from the prior quarter. DTC was up 7%, driven by the contribution of new retail stores and our strong performance on TikTok Shop. Wholesale was down 13% in the quarter. Enterprise adjusted gross margins of 61.7% were up 30 basis points to prior year. Crocs Brand adjusted gross margin of 64.1% was approximately flat to prior year. HEYDUDE Brand adjusted gross margin of 50.2% was up 110 basis points to prior year, primarily due to distribution and logistics efficiencies. Adjusted SG&A dollars for the quarter increased 12% versus prior year. Adjusted SG&A rate was 34.7%, up 270 basis points compared to prior year, driven by incremental investments in talent, DTC, and marketing. This excludes the noncash impairment charge of $737 million on HEYDUDE's intangible assets. This impairment comes as a result of a longer-than-expected timeline to stabilize the HEYDUDE Brand and return it to growth, due in part to a weaker U.S. consumer and the disproportionate impact of tariffs on HEYDUDE product. Adjusted operating margin of 26.9% was down 240 basis points compared to prior year. Adjusted diluted earnings per share of $4.23 was up 5% to last year. Our non-GAAP effective tax rate was 17.7%, which reflects the tax impact of intra-entity transactions and excludes the impact of the HEYDUDE impairment. Our inventory balance as of June 30 was $405 million, up 7% to prior year, in part due to the elevated cost of inventory from tariffs. Enterprise inventory turns remained above our goal of 4x on an annualized basis. Our liquidity position remains strong, comprised of $201 million of cash and cash equivalents and $784 million of borrowing capacity on our revolver. During the quarter, we repurchased approximately 1.3 million shares of our common stock for a total of $133 million at an average cost of approximately $102 per share. In the first half of the year, we repurchased 1.9 million shares, or 3% of our outstanding shares. We had $1.1 billion remaining on our buyback authorization as of the end of Q2. We ended the quarter with total borrowings of $1.4 billion and net leverage at the lower end of our target range of 1x to 1.5x. Before I discuss our outlook, I want to briefly touch on tariffs. Last week, the U.S. extended the pause period on a series of incremental tariffs on countries in which we source our products. While we can't predict future tariff changes, we are planning our business at the current rates. The impact from these incremental rates equates to approximately $40 million in the second half of 2025 and approximately $90 million on an annual basis, based on our current sourcing mix. Now moving to our outlook. It continues to be difficult to fully project the financial implications of changing global trade policies as well as to predict how consumer sentiment and purchasing patterns will evolve. Therefore, we are not reinstating full year guidance at this time. However, we would like to provide some visibility for the third quarter. For Q3 we expect consolidated revenues to be in the range of down 9% to 11% at currency rates as of August 4. This revenue range is based on the visibility we have to orders from our wholesale partners, a reduction of discounts in our Crocs DTC channels, the pullback of performance marketing for HEYDUDE, the incremental cleanup actions we have elected to take for HEYDUDE as well as the potential range of outcomes against a weakening U.S. consumer backdrop. Within this range, we expect the Crocs Brand to be down mid-single digits, led by declines in North America, offset in part by growth in international. This includes our expectation that the second half wholesale environment will be challenging for both brands based on the visibility we have in our current order books. Adjusted operating margin is expected to be in a range of 18% to 19%, including an anticipated approximate 170-basis point impact from tariffs and deleverage on expenses tied to our reduced revenue outlook. We plan to continue to buy back stock and pay down debt while remaining within our target net leverage range of 1x to 1.5x. Based on the current environment, we are rapidly actioning additional cost-saving measures across the enterprise in Q3. I will now turn the call back over to Andrew for his final thoughts.

Thank you, Susan. While the current environment has created uncertainty for the industry and for our consumers, I'm confident that the increasingly diversified sources of growth we are developing and the strategic actions we are taking will position our brands for consistent and profitable long-term growth. At this time, we'll open the call for questions.

And our first question today will come from Jonathan Komp with Baird.

I want to start just by asking about Crocs North America and the outlook for Q3. I'm hoping you might be able to better isolate some of the unique factors impacting Q3 versus what might be lasting? And then as you look forward, especially into 2026, I know you've made some changes at the organization at the Chief Brand Officer level, Chief Strategy position. So just as you look forward beyond the next couple of quarters, could you give us more sense of the pipeline and the strategy in terms of reinvigorating the excitement for the brand?

Great. Thank you, John. I think as you look to the back half of the year for the Crocs Brand in North America, there's a number of things affecting the business. Some choices that we have made, which we think will be productive in the long term and also some market-related factors. Our consumer is an incredibly broad-based consumer. If you look at our demographics and who we sell to from the Crocs Brand, it's essentially the general population. So as you look at the general population, there is a portion of that consumer base which we think is ample evidence that they are super cautious. They're not purchasing, they're not even going to the stores, and we see traffic down. So we're certainly affected by that, and we see that flowing through into our back half in terms of really our wholesale business and a little bit of our outlet business where we see that lower end consumer. So we see our order books down and we see a trajectory for our wholesale business. That is unintended and not necessarily out of our control, but that is what it is. I think the second piece is our decision to pull back on discounting on the Crocs Brand in North America, in particular, and that is a fact that is an intentional decision we make. That's a revenue headwind, but a gross margin and ultimately an EBIT potential. We think that's important to do that because as we looked at the trajectory and the discounting over time, we saw it increasing, and we think that is detrimental to the long-term health of the brand. So that's really, I think, when you kind of look at the North American market. What I would say is, we've got consumer innovation coming into the market. We've seen a strong trajectory in the past in the summer season from our sandal business. We think that grows next year. We see new product innovation on clogs and sandals coming in the fourth quarter. We have, I think, significant product innovation on sandals in the first half of next year. And we're continuing to accentuate and grow our personalization business, both in Jibbitz and expanding that beyond Jibbitz into a broader personalization offer. I would also add that in Q2, we saw a strong international growth for the Crocs Brand and obviously, growth overall. And I think we've talked about repeatedly that we see international as a continued important growth driver for the brand. I think the other thing you referenced was some personnel changes to strengthen our management team. I think we feel really good about those. Terrence is getting settled as the Chief Brand Officer of both brands, I think, and driving the level of energy and creativity, which we're excited to see come to market. And we've strengthened our sort of growth and transformation with the addition of a Strategy and Growth Officer. So we feel great about the team. I think it's going to be a difficult period to navigate in the next half year for the Crocs Brand in North America, but we think we're doing the right things for the long-term potential of the brand.

Okay. Great. I appreciate all that color. Just two follow-ups, if I could. Do you think in some of your core family channels, are you losing share in the order book at all as larger competitors come back with an emphasis on the channel? And then just any more detail on protecting the profitability. I don't know if you were surprised by the magnitude of the revenue slowdown just given the size of the deleverage that you're implying for Q3, looks hard to see where you're seeing progress on protecting profitability just based on the Q3 outlook alone.

Got it. Yes, that makes sense. So, I think if you look at what you're referencing, we do see an athletic trend in the marketplace that many are aware of and have discussed. There is a clear movement of consumers returning to athletic styles. We recognize that this is a cyclical trend. With key athletic events on the horizon, we believe this trend will continue. Next year, we have the World Cup, and in a couple of years, the L.A. Olympics. Athletic brands are integrating innovations, as they typically do, which presents a bit of a challenge for us. However, I believe we can navigate this challenge over the long term, especially since our brand is well positioned in the pre- and post-sport categories. The athletic trend is creating some pressure on our open-to-buy, combined with the uncertainty of a broad consumer base. Regarding profitability protection, there are a few factors to consider. In Q3, tariffs contributed to a 170 basis points of deleverage, and this impact will persist into '26 and beyond. In our prepared remarks, Susan provided good clarification on this matter. I anticipate Q3 may represent a low point for our EBIT potential. We've already implemented $50 million in cost savings, some affecting both gross margin and SG&A. We are currently involved in an extensive effort to identify additional cost savings or reductions in SG&A for the remainder of the year.

And our next question will come from Chris Nardone with Bank of America.

So first, are you seeing anything in your Crocs international business that is implying a material step change for your back half outlook relative to the mid-teens growth in the most recent quarter? And then on your global Crocs direct business, is the slowdown that you're embedding in your 3Q guidance matching what you're seeing? Or are you baking in a scenario where sales continue to sequentially get worse throughout the rest of the quarter?

Let me address the international aspect first. I will get back to you regarding the direct-to-consumer question, as I'm not sure I fully understood it. From an international standpoint, there are always some fluctuations between quarters, especially regarding our distributor business, which is quite significant. However, we are optimistic about achieving a mid-teens growth trajectory for our international business in the long run. We noted in our prepared remarks that we experienced strong growth in China, particularly during a successful mid-season festival. India also showed impressive growth, representing a huge potential market. We saw good performance in Western Europe and a return to growth in Japan, which is exciting. Our international business is crucial to us and can drive growth. In the second quarter, international sales comprised the majority of our Crocs business, surpassing 50% of total sales compared to domestic. The variations between quarters will relate to our longer-term growth trajectory. As for the second part of your question, I'm not entirely clear on what you were asking.

Yes. I'm trying to understand whether the outlook for the third quarter is worsening. Since we're just over a month into the quarter, are you factoring in a potential decline as we progress, or is your guidance based solely on the current trends observed in the initial weeks of the quarter?

Yes. We're not expecting things to get progressively worse as the quarter goes on. We believe that the second half will be more challenging than the first half based on earlier points I mentioned. However, we are not forecasting a consistent decline from our July performance as we progress through the year. We acknowledge a level of caution, recognizing that consumer behavior can be quite unpredictable, especially in North America. We observe significant week-to-week fluctuations. While we have some caution in our outlook, we are not anticipating a downward trend month over month from this point.

Got it. That's very clear. And then just to sneak one more in just on margins. I just wanted to get a sense of how you're thinking about taking price for both brands and what's included in your margin guidance in terms of mitigation strategies around tariffs. It sounds like you're pulling back on promos and DTC, which is leading to lower volumes. So I'm just wondering if that's making you rethink whether you think you can take price across both brands.

Yes, I believe we can, in the medium term, lessen the impact of tariffs. This will stem from cost savings in our supply chain, which includes negotiations with factories, though that might not yield a significant amount. Additionally, we will focus on enhancing efficiency within our supply chain. We will also generate some revenue through pricing adjustments and reduce SG&A expenses by intensifying our efforts towards efficiency. Regarding pricing specifically, we have planned selective actions for HEYDUDE later this year. As you mentioned, we are achieving some net price gains from reducing discounts. We will announce price increases for Crocs in select styles and international markets where we see opportunities. Our approach to pricing will be strategic, as we do not believe it's feasible to increase all our prices substantially just to offset the tariffs. Given the market dynamics and the broad spectrum of our consumer base, that would not be realistic.

And our next question will come from Adrienne Yih with Barclays.

Andrew, I guess my question is, given the down 9% to 11%, how much of that is due to kind of the wholesale pullback? Is that a reaction to the front order book? Or is that more of a proactive management, given kind of everything that you know about what's happening and potentially with the consumer kind of demand environment? And how do you think about philosophically balancing that with the risk of losing shelf space in the marketplace?

The guidance reflects the current state of the order book for both brands. We do not expect any decline in the order book as it incorporates where we stand today. Additionally, it includes conservative expectations regarding returns or cancellations. We are being very careful in our outlook for the market over the next six months and how we believe consumers will respond. Regarding shelf space, in some wholesale distribution channels, we are losing shelf space compared to other brands, particularly athletic brands. We are actively working to increase shelf space with sandals, and we successfully gained some during the summer, expecting to secure more next year. However, a large portion of our clogs sales occurs through our direct-to-consumer channels, including retail stores and online platforms, where we believe we are maintaining market share.

Okay, great. Just to clarify, you mentioned that the guidance for Crocs indicates a decline of 9% to 11%, and if I understood correctly, that translates to a mid-single-digit decline. Does this mean that the performance trajectory for HEYDUDE is expected to decline significantly? Are you experiencing a greater pullback in wholesale and implementing more reset actions within the wholesale brand?

Yes. I believe the main factor contributing to the decline for HEYDUDE is the actions we have taken. The first is the significant reset of some inventory in wholesale, which will essentially take place in Q3. That's a considerable amount. The second factor is the reduction in marketing, specifically in our digital performance marketing channels, where we've noticed increases over several quarters but reached a point where the marginal profitability was not justifiable. We made the difficult decision to reset that. Therefore, these are the primary reasons for the decline. I wouldn't say the wholesale and order book trends are significantly worse than Crocs; they are just a little below, but those two factors are the most impactful.

Okay. And then two clarifying questions for Susan. When you say the current tariff environment, you mean the August 1, right? They put all that whole litany of kind of new numbers for all the different separate countries. Is that kind of the new $90 million annual growth unmitigated? And then secondarily, the inventory up 7%. How much of that is now due to the cost of tariffs?

Yes, regarding the first part of your question, that number is current. It reflects everything we had as of August, and it accounts for the 50% tariff on India. India is an important, though not the largest, source of our exports to the U.S. As for your second question about inventory, it is up by 7%. While we don't provide a detailed breakdown, a significant portion of that increase is due to the cost of the tariffs, which we include in our inventory and recognize as we sell the products.

And our next question will come from Anna Andreeva with Piper Sandler.

Just a follow-up on the pullback in promotional activity of Crocs in North America. Did you quantify that impact in the second quarter or how we should think about that for 3Q? And we still see Crocs around promotions around big events, whether it was Memorial Day or July 4 weekend. So just trying to understand how we should think about the magnitude of that pullback manifesting. And then secondly to Andrew, on the shelf space losses to athletics, just trying to understand athletic space has been strong for some time now. Why do you think your losses are accelerating now?

Got it. We haven't put a dollar figure on the impact of the pullback compared to the reduction in discounts. However, if you look at Q2, North America for Crocs was down nearly 6%. If we hadn't made that decision, the decline would have been slightly less. So, it had a significant effect. To answer your question, yes, we will continue to offer competitive discounts and promotional events during key occasions. However, we're being cautious about how deeply and broadly we execute these events and ensuring we don’t schedule major promotions too close together. This represents a considerable amount of revenue we are giving up in North America for the future health of the brand. Regarding the athletic trend, I’m not entirely in agreement. Some high-end athletic brands have been doing very well in North America for a while, but they are priced high and mainly targeting a more affluent consumer. The broader athletic trend, which affects the wider consumer base we cater to, has actually picked up speed. This is largely because major players have begun to embrace a more extensive distribution strategy.

And our next question will come from Jay Sole with UBS.

Andrew, can you just elaborate a little bit on what you're seeing in China? I think you talked about China was up over 30% versus last year. Talk about what's driving the strength and maybe the outlook that you have for China in the third quarter and beyond.

Yes. I believe that strong consumer engagement is driving our business in China. Overall, the consumer perspective in the China market is not particularly strong, with purchasing trends reflecting this weakness. However, we are successfully countering that trend, as we are generating significant brand interest for Crocs in China. This interest has been fueled by a range of social-first digital marketing strategies featuring prominent Chinese celebrities. Our digital business in China is substantial and has performed especially well during the mid-season festival. We are well-acquainted with operating during these festival periods and effectively maximizing our business. Additionally, we have greatly expanded our mono-brand stores through distribution partners in China, achieving significant store openings last year and this year. Our focus on personalization, including the use of Jibbitz and the ability to customize shoes, has been particularly successful in engaging consumers. This approach has also resonated with the broader Asian consumer base, as we see strong performance in the personalization segment across Southeast Asia, Korea, and Japan.

And our next question will come from Rick Patel with Raymond James.

Can you unpack the disparity in performance between HEYDUDE in direct-to-consumer versus wholesale? Direct-to-consumer has performed well now for 3 quarters in a row. So I guess what would you attribute the softer performance to at wholesale? And as we think about the wholesale channel, in particular, how long do you envision it will take to rightsize inventories so that sell-in and sell-through are in better alignment?

Yes, good question, Rick. Direct-to-consumer has done well, but there are new distribution points involved. There are two main reasons for this. We are continuing to open outlet stores for the HEYDUDE brand, and we are pleased with their performance and how they help introduce the brand to new consumers. Although awareness for HEYDUDE has improved to 35%, this is still relatively low compared to over 60% for the Crocs brand. We have made progress in raising awareness, but it remains low. The new distribution points through outlet stores contribute to DTC growth. Additionally, we are active on TikTok Shop, where Crocs is the leading footwear brand, and HEYDUDE is either second or third. This performance exceeds expectations given HEYDUDE's size in the U.S. market. Overall, the introduction of new distribution points is a significant factor in this growth.

And our next question will come from Aubrey Tianello with BNP Paribas.

I wanted to ask on HEYDUDE. I think it's been a few quarters now since you changed the approach to marketing going more top of funnel. How are you feeling about the benefits you're seeing from that? And then how are you thinking about investment in the brand going forward? And then any update on new leadership for HEYDUDE?

Yes. I will address your last question first. Currently, I am leading the HEYDUDE brand and I am enjoying the opportunity to work closely with the team. While we have not appointed a brand President for HEYDUDE yet, we have brought on some key team members, and I am very optimistic about our leadership strength for the HEYDUDE brand. They are managing challenging situations effectively and in a proactive manner for our future. Regarding our marketing strategy, we have noticed positive trends. We are continually investing in marketing and experimenting with various messages and approaches. Brand awareness for HEYDUDE has increased to 35%, which is a favorable trend. Our latest campaign, HEYDUDE Country, has been well received in the industry, particularly among our wholesale partners, and there is clear evidence it is resonating with consumers. We have also dedicated considerable effort to attract younger female consumers to the brand, which has been successful. Moving forward, we are reallocating more of our budget and focus to our core consumer to ensure we effectively resonate with them and maximize their purchasing potential. Overall, I believe we are taking the right steps. We plan to keep investing in the HEYDUDE brand, and we foresee a trajectory that will ultimately please both us and our shareholders over time.

Thanks. And if I could just sneak in a follow-up on capital allocation. In the first half, you're ahead of where you were last year in terms of share repurchases. Does that continue into the back half? Or is that different now with the new revenue trajectory?

Yes. So let me try to address that. Consistent with our past practice, we really don't commit ahead of time to our capital allocation, how we're going to allocate our free cash flow. But as you can see from what we did in the first half of the year, we really believe our stock is an excellent value and consistent with our 1x to 1.5x target range, we're going to continue to allocate free cash flow to buy back stock and pay down debt as we see the opportunities.

And our next question will come from Brooke Roach with Goldman Sachs.

Susan, I was hoping you could elaborate on the cost savings actions that you've taken, that you're planning on taking. What additional areas of opportunity have you identified outside of the SG&A savings in the $50 million that was previously discussed? And can you provide any color on the magnitude or timing of these savings for the second half and into '26?

Sure, Brooke. So when we talk about the $50 million of cost savings, these are things that we've already identified and taken action on for the year. We realized $15 million of that in Q2, and that was really balanced across SG&A and gross margin. And you can think about the remaining $35 million as being kind of evenly spread across Q3 and Q4 with a similar weighting on SG&A and gross margin. As we look to the further opportunities that Andrew mentioned, we're particularly focused on SG&A and steps that we can take to further simplify the business. We spoke a little bit about the marketing spend for HEYDUDE and being able to pull back on performance marketing, where we don't feel there's an adequate return. We're looking at our entire expense base with that lens to make sure that where we're investing the dollars are the ones where we're seeing the return for the long term.

And our next question will come from Ashley Owens with KeyBanc Capital Markets.

Maybe just to start on HEYDUDE, the further pressure on the wholesale channel, is the assumption that this will come as incremental margin headwinds on the brand through the balance of the year? And additionally, I know you mentioned pulling back on some of the inventory received domestically for the back half. So can you help us understand how this shapes the product cadence? You've been strong in newness in collaboration for several years now. But should we expect a pullback in some of these efforts in SKU count until conditions normalize? Or how are you thinking about balancing tighter buys with the need to maintain freshness?

Thank you, Ashley. These aspects are clearly interconnected. From a HEYDUDE perspective, we will experience some additional pressure on margins in the second half due to our current actions. The ongoing cleanup of wholesale inventory incurs costs, and this is a significant investment we're undertaking. Regarding inventory receipts, we are approaching our purchases carefully, focusing on units that we believe will meet future demand. We have heard from our wholesale partners that they plan to reduce their inventories, and if their performance is strong, they will pursue additional stock. However, we are not planning on significant restocking for any chase, as we believe that would pose unnecessary inventory risks at this time. With respect to SKU count and new product launches, we anticipate that the wholesale returns and inventory cleanup will help significantly refresh our offerings. In instances where we have done this, we have noticed positive improvements. Our goal is to ensure we present fresh inventory and new styles to our consumers at the point of sale. We are also seeing a promising trend with HEYDUDE's Stretch Sox, which we successfully refreshed at the beginning of this year. The efforts with wholesale and DTC inventory have been substantial, and we are very satisfied with the performance of Stretch Sox moving forward. The Paul franchise has also been successful, especially with the recent introduction of the Paul Pro, which features added cushioning and an improved footbed and is performing well. The HEY2O shoe, ideal for fishing or activities near water, has done exceptionally well over the summer. Additionally, our work segment for HEYDUDE, particularly the Comp Toe model, is showing strong performance too. The innovation in our products is thriving, and the reason for making a significant investment in refreshing our offerings is to bring more newness to a wider audience.

And our next question will come from Sam Poser with Williams Trading.

So Andrew, in your prepared remarks, you mentioned the weakness, uncertainty, and potential issues with the broad-based consumer, which I assume includes both Crocs and HEYDUDE?

Yes, I think what sets us apart is that we offer very accessible price points on both brands. This approach allows us to reach a particularly wide range of consumers. In contrast, other brands are performing much better in this market because they focus solely on high-end consumers. We believe that low-end consumers are the most sensitive to price increases, and they are often anxious and, in some cases, hesitant to leave their homes.

Let me ask you this. You mentioned how well you've been performing with sandals. Are you suggesting that you may not have the right product for a wide range of consumers? Is it possible that the products lack innovation, leading to decreased interest? You've noted improvements in athletic offerings, which might draw some attention away from your products. How much of this situation is related to general consumer trends versus the need to enhance your products for your customers?

Yes, we believe we are creating high-quality products for our consumers. As we assess the positioning of our brands, especially HEYDUDE, refreshing our product line and the offerings we provide to consumers is yielding positive results. The improvements we are implementing are strong. Regarding the Crocs business, we are seeing a favorable trend in new product launches. A significant portion of the growth we experienced in sandals during a successful season and the increase in market share in that category resulted from new styles that align with consumers' needs. We are confident that the sandal business will continue to grow into next year as we plan for the next season. The macroeconomic environment is an essential factor for our business, and we are observing its impact on our brands. In the latter half of this year, we are also making some tough decisions that, while impactful on the business, come with costs.

The question is what percentage of your Crocs business was made up of sandals this year and how does that compare to last year?

Yes, we usually reveal that at the end of the year. I can tell you that it has increased in penetration. We aim to provide visibility on that once a year. Last year, we reported a 13% penetration. It rose by double digits in the first half of the year, so it will continue to grow.

And ladies and gentlemen, this will conclude our question-and-answer session. I'd like to turn the conference back over to Andrew Rees for any closing remarks.

Thank you, everybody, for joining us today and your continued interest and support of our company. Thank you.

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect your lines at this time.