Earnings Call Transcript - CROX Q1 2024

Operator, Operator

Good day, and welcome to the Crocs Inc. First Quarter Earnings Call. Please note this event is being recorded. I would now like to turn the conference over to Erinn Murphy, Vice President of Investor Relations and Strategy. Please go ahead.

Erinn Murphy, Vice President of Investor Relations and Strategy

Good morning, and thank you for joining us to discuss Crocs, Inc. first quarter results. With me today are Andrew Rees, Chief Executive Officer; and Anne Mehlman, Executive Vice President and Chief Financial Officer. Following their prepared remarks, we will open the call for your questions, which we ask that you limit to 1 per caller. Before we begin, I would like to remind you that some of the information on this call is forward-looking and is subject to the safe harbor provisions of the federal securities laws. These statements include, but are not limited to, statements regarding our strategy, plans, objectives, expectations and intentions, including our financial outlook. These statements involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance or achievements to differ materially. Please refer to our quarterly report on Form 10-Q and other reports filed with the SEC for more information on these risks and uncertainties. Certain financial metrics, as we refer to as adjusted or non-GAAP are non-GAAP measures. A reconciliation of these amounts to their GAAP counterparts is contained in the press release we issued earlier this morning. All revenue growth rates will be cited on a constant currency basis unless otherwise stated. At this time, I'll turn the call over to Andrew Rees, Crocs, Inc. Chief Executive Officer.

Andrew Rees, CEO

Thank you, Erinn, and good morning, everyone. Thank you for joining us today. We reported very strong first quarter results, which well exceeded our guidance on both the top and bottom line. Revenue grew by 7% to prior year for the enterprise, led by outsized Crocs brand growth of 16% and HEYDUDE brand also performed ahead of guidance. Adjusted gross margins of 56% improved 180 basis points versus prior year, and we grew our adjusted earnings per share by 16% to $3.02. Our growth strategy remains consistent, and we are focused on three primary initiatives from an enterprise perspective to fuel durable and consistent growth. One, ignite our icons across both brands to drive awareness and global relevance for new and existing consumers; two, drive market share gains across our Tier 1 markets through strategic investments behind talent, marketing, digital and retail; and three, attract new consumers to our brands through methodically diversifying our product range and usage occasions. Before I discuss more detail on the quarter, I want to start by saying how pleased I am to announce the hiring of Susan Healy as Executive Vice President and Chief Financial Officer. Susan is a seasoned financial professional and a Wall Street veteran with broad exposure to the consumer sector, including Ulta Beauty, where she served as the SVP of Finance for five years. Most recently, Susan served as a public company CFO for IAA, a global marketplace for automotive buyers and sellers. We have a deep finance bench, and I'm excited about Susan's leadership and expertise. I look forward to working with her and for the investment community to get to know her in the coming months. Starting with the Crocs brand, our socially led digital-first marketing playbook continues to win with consumers across the world. And the first quarter was no exception. In the U.S., we ranked in the top 10 footwear brands in the Piper Sandler Taking Stock with Teens Spring Survey, taking the #7 spot and maintaining our mindshare year-over-year. This marks over four years of being a top 10 brand for the U.S. teen consumer. The democratic nature of our brand allows us to create a broad array of consumer moments that drive brand affinity and engagement through our partnership model. During the quarter, our successful range included Toy Story and Hello Kitty to Clog, a Chinese streetwear brand. Our Toy Story Collection was one of the most successful licensing partnerships to date with a global offering available across select wholesale partners and our own direct-to-consumer. In addition, we launched our second collaboration with Simone Rocha, a luxury brand. Our 7-Style collection was priced between $175 and $225. It launched in 20 markets and sold out globally almost immediately. As we think about product, we continue to prioritize our three pillars: clogs, sandals and personalization. Growth in our first quarter was led by our classic clogs and we are seeing both new and existing consumers come to the brand through our icons. Our Kids business was another highlight with double-digit growth in the quarter. We continue to create multi-product franchises that broaden usage occasions for the consumer. Building on the success of our Echo Franchise, we launched the Echo Storm, a fully molded sneaker. This launched in our direct-to-consumer channel as well as through Foot Locker and JD Sports during the quarter and performed well. In fact, 59% of our Echo Storm purchases on our own dot-com were from new consumers. Just in time for NBA All Star weekend, we further expanded the visibility of our Echo Franchise through the Crocs NBA slide with players like Nikola Jokic and Steph Curry spotted wearing them. During the first quarter, we rolled out two new sandal franchises, the 2.0 version of our Classic Slide and Two Trap and the Getaway. The Getaway leverages our newest proprietary material known as free-fill technology. Within this franchise, we have seen positive momentum with the strappy and the flip styles and have found that these resonate with a broad consumer segment. For the year, we continue to expect sandals to grow in excess of our overall growth and increase in penetration. Our personalization vehicle Jibbitz grew double digits in the quarter, led by growth in Asia. We continue to see ample white space for personalization and our strategy is focused around three pillars: number one, driving higher penetration within digital and wholesale; two, continuing to create product freshness through our elevated Jibbitz, including metallic, texture and sparkling designs, and three, free speed to market. Moving on to our distribution strategy, we are pleased by the broad-based strength across geography, particularly in several of our Tier 1 markets. The North American market was well ahead of expectations and took meaningful market share during the quarter. North America revenues grew 9% versus the prior year, supported by underlying strength in wholesale sellout and better-than-expected trends in our direct-to-consumer channels. International revenues grew 24% versus prior year, and once again, we saw triple-digit growth in China and Australia. Our direct markets in Western Europe grew double digits, led by growth in the U.K., France and Germany. We continue to have significant opportunity in China, and we remain bullish on our long-term growth prospects. During the quarter, we won our first-ever Super Brand Day on Tmall and announced our two new brand ambassadors for 2024. Liu Yuxin's announcement came ahead of International Women's Day and featured a classic Geo Clog. This campaign drove substantial reach and continued to create buzz within the digital community. Our new ambassador played into our Clog relevance with a robust campaign on Super Brand Day, generating 1 million views during a one-hour live stream and drove Crocs to the #1 spot within the women's footwear category on Tmall. Our corporate responsibility efforts continue to progress. We are expanding our Old Crocs New Life consumer takeback program to all Crocs stores in the U.S. This fall, we're furthering our circularity commitment by repurposing materials from well-loved Crocs in the form of a new limited edition Classic Clog. As for the HEYDUDE brand, our focus for 2024 is on solidifying the business and establishing the Wally and Wendy as iconic franchises for the consumer. We have worked to maintain price integrity on digital, improved channel inventories and created more segmentation across wholesale partners. Our overall first quarter performance largely played out as we expected, strengthening in March and driving slight upside to our guided revenue range. That said, performance around Easter and into April has fallen short of expectations with sellout rates softening in wholesale. Based on the visibility we have quarter-to-date and given the choppy retail environment, we're taking a more prudent approach around trends for the balance of the year. As we have discussed, our focus is on ensuring we end the year with sell-in and sellout trends converging, and we have better segmented inventory in the channel. Before I discuss a few Q1 highlights, I'd like to touch on our recent leadership announcement. Several weeks ago, we announced a new brand President for HEYDUDE, whom we see as a strong leader for the next phase of growth for the brand. We are thrilled to be welcoming back Terence Reilly to our Crocs Inc. family. Terence started last week and brings with him a best-in-class reputation from brands including Stanley and Crocs. In addition to providing global leadership perspectives, he has a proven track record of creating and executing strong building playbooks by leveraging iconic products, driving brand relevance and ultimately building communities. Now turning to Q1 highlights. HEYDUDE was the #8 preferred footwear brand in the Piper Sandler Taking Stock with Teen Survey this spring, consistent with this rank last year. From a product perspective, we continue to establish our Wendy and Wally icons through color, graphic, height, which proved successful during the quarter. In Q1, we expanded our collegiate program to five additional schools just in time for March Madness. We also launched the Big Lebowski, an online exclusive, a unique collaboration that sold out with 80% of consumers needing to buy from the brand. Our sneaker franchise gained a new addition with the Hudson for Him and Hudson Lift for Her. We chose to introduce the new silhouettes in our own direct-to-consumer channels and with an exclusive wholesale partner. We saw the Hudson Lift quickly become a hit with our younger female consumers who continue to choose height while maintaining a brand promise of lightweight comfort. From a distribution perspective, we opened six new outlet locations with the HEYDUDE brand. Overall performance is in line with our expectations, and we plan to open approximately 30 outlets this year. On the wholesale side, we're pleased with the work we have done to clean up our account base. Our go-forward focus is around improved customer segmentation. Finally, we introduced the brand to the U.K. and Germany, supported by dedicated digital sites as well as placement with key wholesale partners in both markets during Q1. These launches were supported by key influencer and media events. While we're starting to see the awareness of the brand internationally, our priority in 2024 is around improving the long-term health of the North American market, as we build our core offering and drive heat for the brand. We have laid plans to continue to invest in marketing, talent, digital and retail to further support our market share opportunity. While our near-term plans for HEYDUDE are taking longer to play out, our record Q1 performance led by Crocs showcases the diversification of our portfolio and enabled us to raise our earnings per share outlook for the year. We will continue to make substantial investments fueled by strong gross margins to set ourselves up for long-term growth and durable market share gains. I will now turn the call over to Anne to walk through our financials for the quarter.

Anne Mehlman, CFO

Thank you, Andrew, and good morning, everyone. I am extremely pleased with our first quarter results, which exceeded the high-end guidance across all metrics. We generated $939 million in consolidated revenues growing almost 7% over last year, led by the Crocs brand. For the quarter, adjusted gross margin gained 180 basis points to 56% and adjusted operating margin was 27.1%. Adjusted earnings per share of $3.02 came in well ahead of our guidance of $2.15 to $2.25. For the Crocs brand, revenues were $744 million, growing 16% relative to prior year, driven by direct-to-consumer growth of 19% and wholesale growth of 14%. Brand average selling prices increased by 11% to $23.36. The brand sold 32 million pairs of shoes, an increase of 3% versus last year. By geography, North America revenues were ahead of our expectations and gained market share, growing 9% versus the prior year to $383 million. Growth was led by direct-to-consumer at 13% and wholesale was up 5%, driven by strong double-digit growth in brick-and-mortar. During the quarter, our North American wholesale partners opted to take product earlier than we had previously anticipated based on the solid performance of the Crocs brand. International revenues of about $361 million were up 24% from 2023, led by direct-to-consumer growth of 37% and wholesale growth of 20%. As Andrew noted, Australia and China grew triple digits again this quarter. We saw strong double-digit growth in our direct markets in Western Europe with growth led by the U.K., France and Germany. Turning to HEYDUDE, revenues were $195 million, ahead of our guidance but down 17% from last year. The brand sold 7 million pairs of shoes, a decrease of 21% from last year, as we cleaned up pipeline inventories and focused on improving our full-price selling. HEYDUDE's average selling price was $27.68, up 5% from last year. Relative to Q4, our Q1 marketplace average selling prices were up 10%, a continued tailwind from reduced price matching online. Wholesale revenues were down 20% from last year as we focused on continued inventory management in the channel. The direct-to-consumer channel was down 11% as a result of prioritizing brand health through higher average selling prices. Consolidated adjusted gross margin for the first quarter was 56%, up 180 basis points from last year. Crocs brand adjusted gross margin was 58.1%, or 180 basis points higher than the prior year. During the quarter, the primary drivers of margin expansion were lower inbound freight and favorable product costs, coupled with select price increases internationally and lower discounting. HEYDUDE brand adjusted gross margin came in at 47.8%, in line with our expectations but 180 basis points below prior year, driven by investment in distribution and logistics, partially offset by reduced rates. Our first quarter adjusted selling, general and administrative expenses increased 16% versus prior year. Our SG&A rate was 28.8% and up 250 basis points compared to prior year, driven by continued investment in talent, marketing and direct-to-consumer to support long-term market share gains. Our first quarter adjusted operating margin declined 80 basis points to 27.1% compared to 27.9% for the same period last year but was favorable to our expectations on higher gross margins and favorable revenue, leveraging our cost base. First quarter adjusted diluted earnings per share increased 16% to $3.02, and our non-GAAP tax rate was 17.2%. We ended the quarter with clean inventory on our balance sheet and in our channel. Our inventory balance on March 31, 2024, was $392 million, a decline of 18% against this time last year. We are pleased that both brands achieved inventory turns at our goal of 4x. Our liquidity position remains strong, comprising $159 million of cash and cash equivalents and $484 million of borrowing capacity on our revolver. As a reminder, Q1 is a high net working capital quarter, and we typically limit buyback and debt paydown activity. As a result, we ended the quarter with total borrowings of $1.7 billion and remain within our net leverage target of 1 to 1.5x. In 2024, we intend to buy back stock and pay down debt, enabled by our best-in-class cash flow generation. Now turning to guidance, for Q2, we expect consolidated revenues to be up 1% to 3% at currency rates as of March 31, with the Crocs brand growing 7% to 9%, but almost entirely driven by international growth. As I mentioned earlier, several of our North American wholesale partners opted to take product earlier in Q1. We expect HEYDUDE revenue to be down between 19% to 17%, extrapolating the trends we are seeing quarter-to-date. We expect adjusted operating margin to be approximately 26.5% and adjusted diluted earnings per share of $3.40 to $3.55. For the full year 2024, we are raising our underlying earnings per share outlook supported by the strength in Q1. We are maintaining our revenue outlook of growth between 3% and 5%, assuming quarter-end currency rates. For the Crocs brand, we now expect revenues to grow between 7% and 9% from our prior expectation of 4% to 6% and with growth continuing to be led by international. For HEYDUDE, we expect revenues to contract down 10% to 8%, below our former expectation of flat to slightly up. We expect HEYDUDE sales trends to improve each quarter and expect the sell-in and sell-through dynamic to normalize into Q4. As we discussed in our Q4 call, we expect wholesale to be negative for the year and direct-to-consumer trends to be better than wholesale. As it relates to retail, we plan to open approximately 30 stores in 2024, 6 of which were opened during Q1. We expect gross margin to be up for 2024 versus 2023 at the enterprise level. Based on the strength in Q1, we now expect Crocs brand gross margin to be up for the year and continue to expect HEYDUDE gross margin to be up for the year. We plan to invest in brand-accretive and strategic selling, general and administrative initiatives, resulting in consolidated adjusted operating margins for the year of approximately 25%. For the full year 2024, we still expect our underlying non-GAAP tax rate, which approximates cash taxes paid, to be approximately 18% and the GAAP tax rate to be 21.5%. We are raising our non-GAAP diluted earnings per share to a range of $12.25 to $12.73 in 2024 from $12.05 to $12.50 previously. This range incorporates future debt repayment but does not assume any impact from future share repurchases. Our annual capital expenditure guidance of $120 million to $130 million remains unchanged, and we continue to expect exceptional cash flow generation. At this time, I'll turn the call back over to Andrew for his final thoughts.

Andrew Rees, CEO

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

Operator, Operator

The first question comes from Jonathan Komp with Baird.

Jonathan Komp, Analyst

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

Andrew Rees, CEO

Great. Thank you, Jonathan. So yes, what I'd say on HEYDUDE is we came in slightly ahead of our expectations and the guidance we provided. It was solid. But what we've seen from Easter into April is really a softening of our wholesale sellout, which has made us nervous. I think part of that is maybe a lack of promotion. We tried to be less promotional during the Easter period than we were during the prior Easter. Easter being earlier is also always tough, so I think we might have made some missteps relative to what we were going to do concerning the market. We can see continued softness, and we are concerned about the robustness of the consumer market. As we've talked about our goal for 2024 for HEYDUDE wholesale is to get sell-in and sell-out balanced to get our inventories down in the channel and make sure that we're driving a really healthy business for our wholesale partners. So at this point, it's prudent to take down our expectations and manage the business accordingly. I'll let Anne hit on the DTC trends.

Anne Mehlman, CFO

Yes. And Jonathan, just to answer your specific question around retail contribution for HEYDUDE. So as we think about just the HEYDUDE guidance, just to give you a little bit more flavor there, we are opening approximately 30 stores, and we expect that revenue contribution to build throughout the year. Obviously, that's supported by a strong pipeline of new products and new product introduction. But at the highest level, we still expect wholesale to be down for the year but DTC to perform better than wholesale. And when you think through that, Q4 will be the strongest in terms of revenue growth due to that retail contribution. We will also have easier year-over-year wholesale comparisons, and then we will realize some selling ahead of select international markets. So just as you're thinking through your HEYDUDE revenue trend for the year. And then on the Crocs side for DTC, we saw 13% growth from a DTC perspective in Q1, which in North America, which was definitely better than our expectations. That was really supported by strong product and continued pipeline of that. I feel great about the pipeline for product coming out of Q1. We expect Q2 to be more muted for North America growth as Q1 was supported by the Easter shift Andrew talked about as well as leap year, so we had an extra day there.

Jonathan Komp, Analyst

Great. And best of luck Anne in the new role.

Anne Mehlman, CFO

Thanks, Jon.

Operator, Operator

The next question comes from Adrienne Yih with Barclays.

Adrienne Yih-Tennant, Analyst

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

Andrew Rees, CEO

Great. Adrienne, to answer your question regarding the reason for the pull forward and how our big retailers are feeling about the back end of the year: I think the pull forward was largely driven by the strong sell-through on the Crocs product. While they are not seeing strong sell-through on every brand, they wanted more product earlier. I think they have probably underestimated the Easter shift and were trying to bring in additional products sooner. So, it’s a closer assessment of the market rather than an indication that we are off to the races, and this is going to be a strong market for the rest of the year. It is more indicative of quarterly adjustments. I would say that we feel solid about our order books, with both brands' orders supporting the guidance we've provided. However, the channel isn’t unequivocally buoyant about the back end of the year yet, and we’re looking for more definitive signals.

Anne Mehlman, CFO

Yes, and for the inventory question, we feel good about our 18% decline. We believe that's the right level because we're at about 4x turns for both brands, which is where we target our inventory turns. For the rest of the year, I don't expect more significant fluctuations—like I said, we are targeting 4x turns.

Operator, Operator

Next question comes from Jim Duffy with Stifel.

Jim Duffy, Analyst

I have a question on Crocs and then one on HEYDUDE margins. Starting on the Crocs brand, can you speak to the regions responsible for the more optimistic view on brand revenue and the factors behind the changes in Crocs margin assumptions?

Anne Mehlman, CFO

Jim, so on the Crocs revenue assumptions, we had a better Q1 than anticipated, especially on the North America side. As we move into Q2, we have good visibility into our order books, and DTC trends are looking favorable. We're really seeing our international markets do very well, as we discussed for China and Australia, but also some strength in Europe. This support led to the revenue raise. Regarding the gross margin side, we have seen better full-price selling supporting our overall gross margin. We have also observed some relief on input cost pressures for the Crocs side, which is helping our costs. These factors support our higher gross margin assumptions.

Jim Duffy, Analyst

Got it. And can you speak to HEYDUDE margin revenue for 2024? Does the lower revenue come with incremental margin pressure? Or is there some place where you have savings as an offset? And then, Anne, the GAAP charges for the HEYDUDE ERP implementation is new. Can you talk about that effort, the timing, the rationale and so forth?

Anne Mehlman, CFO

Sure. Regarding margin, we're not anticipating incremental pressure from HEYDUDE's lower revenues. The margin is playing out according to our pricing promotional strategy, and our channel mix is largely where we anticipated. The reduction in revenue stems from wholesale and our DTC revenues are higher margin than wholesale. So, we don't foresee a margin reduction. We believe our margin guidance for HEYDUDE is sound. As for the ERP implementation, it includes the opening of the new HEYDUDE Las Vegas warehouse for distribution and technological enhancements that are now live. This will enhance operational efficiency for HEYDUDE. Along with that, we have also incurred an impairment related to the technology implementation.

Operator, Operator

The next question comes from Christopher Nardone with Bank of America.

Christopher Nardone, Analyst

For HEYDUDE, do you mind just clarifying if your Q2 guidance reflects the trend you're seeing quarter-to-date? Or if there's an improvement embedded in the guidance? Then as a follow-up longer term, I recognize Terence just took over the President's role last week. But do you envision major strategic shifts in how you'll run the brand? And if so, can you elaborate on maybe some of his early plans?

Anne Mehlman, CFO

Yes. So let me talk through HEYDUDE guidance. It reflects the current trends we are seeing, so we are not anticipating any improvement for Q2 at this time.

Andrew Rees, CEO

Great. Thank you, Anne. So Terence has been on board for about a week and a half. So it's not fair for him to articulate a new strategy yet. However, I would say we do not anticipate dramatic strategy shifts. We believe it’s all about Wally and Wendy, our iconic franchises. We think they are incredibly relevant to a broad set of consumers. What we need to do is better engage the consumer and make the HEYDUDE brand and its franchises relevant to more consumers, similar to the strategy we've pursued for Crocs. So we don’t foresee major strategic shifts from product, marketing or distribution channel perspectives.

Christopher Nardone, Analyst

Okay. Got it. And then just as a quick follow-up. Can you just talk about your confidence in the gray market issues on Amazon abating by midyear, which was your prior message? Any change to that?

Andrew Rees, CEO

We are still seeing a headwind from the gray market for HEYDUDE on Amazon. We anticipate that will continue through the first half of the year, and that headwind is embedded in the guidance we have provided.

Operator, Operator

The next question comes from Laura Champine with Loop Capital.

Laura Champine, Analyst

I'd like to drill down into what's happening with the HEYDUDE Direct business. I think you mentioned a shift to more full-price selling. I'm wondering what happened with units in that business? And I'm also wondering how long you would expect that business to be pressured by a shift in your ASP goals?

Andrew Rees, CEO

Yes, you're right, Laura. As we've raised prices in our HEYDUDE Direct business, which is mostly on Amazon, where we're a third-party seller for HEYDUDE, we have seen a drop in units. We expected that. Overall, this has been productive for the brand and has improved our margins, but we have indeed seen a drop in unit sales. As we introduce new products and our marketing ramps up for HEYDUDE, there is evidence that this will mitigate over time.

Laura Champine, Analyst

Got it. And is an improvement in the direct business implied in your full-year guidance for HEYDUDE or not?

Anne Mehlman, CFO

So I would say, we’ve stated that our full-year guidance indicates that our direct business, which includes our Marketplace, our own dot-com, as well as our retail business, will outperform our wholesale business this year. That is included in our full-year guidance.

Operator, Operator

Next question comes from Rick Patel with Raymond James.

Rick Patel, Analyst

Guidance for operating margins was maintained at 25% for the year despite plans for the first half to shake out a little bit ahead of that. Can you just provide color on what you think could weigh on margins as we think about the back half in terms of perhaps the timing of investments or SG&A deleverage just given your updated sales guidance for the next few quarters?

Anne Mehlman, CFO

Yes. I’m pleased with our operating margins, which well outperformed in Q1. We’re maintaining approximately 25%, but that implies a slightly higher number if you look at our EPS guidance. I'm confident in the factors supporting that—including high gross margins enabling us to invest in our business. We anticipate significant investments ahead, but I feel very confident maintaining that approximately 25% operating margin.

Rick Patel, Analyst

And can you also talk about what's implied in guidance for the Crocs brand as we think about ASPs versus units going forward? I'm just curious how we should extrapolate the very strong performance in Q1.

Anne Mehlman, CFO

Yes. I think from a Crocs brand perspective, we don't guide based on that. We saw nice unit and ASP growth in Q1. We don't have any more planned price increases currently for this year. We had a little bit of international price increases flow through in Q1 and those will go through to Q2. However, we expect those to stabilize a bit in Q3 and Q4. So I feel confident in the guidance we’ve provided.

Operator, Operator

The next question comes from Jim Chartier with Monness, Crespi, Hardt.

Jim Chartier, Analyst

I was wondering if you could talk about HEYDUDE performance on your own e-commerce site versus the marketplace business, if there's any meaningful difference between the two? And, if so, what drove the divergence?

Andrew Rees, CEO

Yes. We don't break that out, but just to provide some color: We're able to introduce new products more quickly on our own dot-com, compared to the Marketplace. We focus on limited drops on our site and have had various successful campaigns, like the recent collaboration with HEYDUDE. Our own dot-com has been performing better than the marketplace, and we anticipate that trend will continue.

Jim Chartier, Analyst

Great. And I think you mentioned for the fourth quarter could benefit HEYDUDE from sell-in ahead of some international markets. Are those just the U.K. and Germany? Or are there additional markets you’re planning for next year?

Anne Mehlman, CFO

Yes. That's a great question. We do have select distributors that we sell to and that we will be engaging with. The U.K. and Germany are direct markets for us, so that's really a comment around distributor revenue for HEYDUDE.

Operator, Operator

The next question comes from Mitchel Kummetz with Seaport Research.

Mitchel Kummetz, Analyst

On HEYDUDE, is it fair to say that you've taken expectations down for both DTC and wholesale, but more so on the wholesale side?

Anne Mehlman, CFO

Yes, Mitch, that's correct. Wholesale has definitely been the biggest gap between our original expectations and the performance we saw in March and April. I will say for Q3, we expect HEYDUDE overall revenue to be down year-over-year, which is a significant change driven largely by negative wholesale. We do expect sequential improvement against Q2, but anticipate that negative wholesale in Q3. That's a fair assumption. There are three main factors driving that change: easier wholesale comparisons in the back half from a sell-in perspective; the retail contribution that will build; and starting to gradually realize sell-in ahead of select international market launches. Those are the three big pieces driving that change.

Operator, Operator

The next question comes from Sam Poser with Williams Trading.

Samuel Poser, Analyst

Andrew, I've got a question. You said regarding the change in the guidance on HEYDUDE that you were concerned about the robustness of the consumer. Can you discuss that in relation to both HEYDUDE and Crocs?

Andrew Rees, CEO

Yes. If we look at the industry data for the footwear market, it is clearly down, I would say, mid- to high single digits in the first quarter of the year, and we see that trend continuing week-on-week. While some brands are performing better than the market, Crocs is one of those doing well. Conversely, HEYDUDE is not currently exceeding market performance. The underlying market reflects that consumers are spending less money on footwear.

Samuel Poser, Analyst

They are investing more in the products they truly enjoy. My question is, what steps do you need to take? What was different from what you expected with the HEYDUDE brand? How can you address that, especially since you're able to do so with the Crocs brand?

Andrew Rees, CEO

Exactly. It’s about product and marketing. We are optimistic about our pipeline of new product introductions for HEYDUDE. However, some of these new products are unproven as of now. The new derivatives primarily focus on the Wally and Wendy brands. We need to improve our marketing efforts to drive brand relevance, making the HEYDUDE brand relevant to a broader consumer base.

Operator, Operator

The next question comes from Tom Nikic with Wedbush.

Tom Nikic, Analyst

I wanted to ask about the outlet flows that you're opening. How are those stores being sorted? Is it mostly clearance and liquidation product? Is it specially made for the channel? Is the product being sold there any different than what you're selling in the wholesale channel? I just love to hear how you're thinking about merchandising.

Andrew Rees, CEO

Yes. Great question, Tom. We currently have 11 outlet stores opened, including six opened in the first quarter and five opened last year. The format is similar to other footwear brands. The front of the store includes full-size runs. The consumer can find products they want in the sizes they need. The full-size runs include a mix of newer products, sometimes even current products, and slightly older products of high quality. The back of the store typically offers clearance products, allowing us to liquidate old inventory at higher prices. This strategy educates customers about the HEYDUDE brand while offering value. We're pleased with how the outlet strategy has been working, and we’re seeing opportunities in both HEYDUDE's core markets as well as more nascent markets.

Operator, Operator

And the next question comes from Jay Sole with UBS.

Jay Sole, Analyst

Andrew, can you elaborate a little bit on the performance of Crocs in China? Triple-digit growth is powerful. If I'm correct, I believe it's kind of low seasonality quarter in China. Was there something related to timing that could have boosted that number? And how are you thinking about spring? Do you think you can maintain very strong growth through the peak spring and summer seasons? If you can tell us about that, that would be super helpful.

Andrew Rees, CEO

Yes, that’s a great question. The first quarter is not our strongest quarter in China, you're right. It’s more of a counter-seasonal quarter that does build through the period. However, we called out winning a Super Brand Day on Tmall this Q1. For those unfamiliar, that’s a process through which we bid to get selected. We were chosen due to our brand heat and showcased prominently during that time. We believe we can maintain a strong growth rate in China through Q2 and the remainder of the year, supported by our growing digital presence and consumer following, in addition to incremental store openings planned with franchise partners.

Operator, Operator

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

Andrew Rees, CEO

Thank you very much, everybody, for joining us and your interest in our brand. I just want to highlight that this is Anne's last earnings call. With the announcement of Susan Healy joining us on June 3, Anne will be moving to her full-time role as Crocs Brand President. I want to thank Anne for all her incredible contributions over the last six years. So thank you, Anne.

Anne Mehlman, CFO

Thank you.

Operator, Operator

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