Earnings Call Transcript - CROX Q2 2023

Operator, Operator

Good day, and welcome to the Crocs' Second Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Cori Lin. Please go ahead, Cori.

Cori Lin, Investor Relations

Good morning, everyone, and thank you for joining us today for the Crocs Inc. Second Quarter 2023 Earnings Call. Earlier this morning, we announced our latest quarterly results and a copy of the press release may be found on our website at crocs.com. We would like to remind you that some of the information provided on this call is forward-looking and accordingly is subject to the Safe Harbor provisions of the Federal Securities Laws. These statements include, but are not limited to, statements regarding our supply chain challenges, cost inflation, the acquisition of HEYDUDE and the benefits thereof, Crocs' strategy, plans, objectives, expectations, financial or otherwise and intentions, future financial results and growth potential, anticipated product portfolio, our ability to create and deliver shareholder value and statements regarding potential impacts to our business related to the COVID-19 pandemic. These statements involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. Crocs is not obligated to update these forward-looking statements to reflect the impact of future events, except as required by applicable law. We caution you that all forward-looking statements are subject to risks and uncertainties described in the Risk Factors section of our annual report on Form 10-K and our subsequent filings with the SEC. Accordingly, actual results could differ materially from those described on this call. Please refer to the Crocs Annual Report on Form 10-K as well as other documents filed with the SEC for more information relating to these risk factors. Certain financial metrics that we refer to as adjusted or non-GAAP are non-GAAP measures. A reconciliation of these amounts to their GAAP counterparts is contained in the press release we issued earlier this morning. Joining us on the call today are Andrew Rees, Chief Executive Officer; and Anne Mehlman, Executive Vice President and Chief Financial Officer. Following their prepared remarks, we will open the call for your questions. At this time, I'll turn the call over to Andrew.

Andrew Rees, CEO

Thank you, Cori, and good morning, everyone. I'm incredibly pleased with our second quarter results. We delivered record quarterly revenues of over $1 billion. The growth in our brands continues to perform extremely strongly as evidenced by 26% direct-to-consumer revenue growth. We gained appreciable market share and once again delivered industry-leading profitability with 30% operating margins. I will review our financial results in more detail shortly, but here are a few highlights from the second quarter. Revenues were $1 billion, up 12% on a constant currency basis. Crocs revenues grew 15% constant currency, fueled by Asia increasing 39%. Global DTC comparable sales rose 20%. The Crocs brand continues to gain market share in North America with revenues up 13% driven by sandals and new product introductions. HEYDUDE brand revenues were $239 million with exceptional DTC growth of 30% and digital growth of 37% constant currency. Adjusted diluted earnings per share increased 11% to $3.59 per share. Gross leverage ended at 1.8, and net leverage was 1.7 times at quarter end, allowing us to repurchase $50 million of shares in July. Finally, Crocs, Inc. was named to the Time 100 Most Influential Companies for 2023. In summary, we had an excellent quarter, and our teams globally remained focused on driving brand health, market share gains, and profitable growth in the back half of the year. I would now like to provide updates for each of our brands. The Crocs brand delivered strong revenue growth since 2018, as we built both clog and brand relevance across the globe. This past quarter, our product and marketing efforts continue to deliver newness and excitement to the Crocs brand, while simultaneously reaching new consumers who may not have considered our brand in the past. Regarding product innovation, we're diversifying our clog offering and growing sandals. We've seen significant success with a number of new clog introductions, including the Crush, Mega Crush, and more recently, the Siren. In addition, our recent launch of Dylan, a more elevated and fashion-forward clog, is very encouraging. The Echo continues to outperform our initial expectations, and personalization continues to draw global relevance for the Classic. Turning to sandals, as we have shared, this category is an important growth initiative for Crocs, allowing us to expand into the adjacent $30 billion global sandal category, where we believe our molded technologies, accessible price points, and strong go-to-market, will allow us to compete effectively in a relatively fragmented market. Overall, we're excited by our sandal performance, where revenues grew 34% compared to Q2 last year and 40% growth on a trailing 12-month basis. Growth was robust in all regions, driven by our diversified sandal offerings, new product introductions, and a robust marketing calendar. The Classic and Brooklyn continue to be our leading sandal franchises. In addition, more recent introductions like Mellow and Crush have been extremely successful and are also top-selling styles. We will continue to drive sandal awareness and customer acquisition with activations, such as the new Pollock slide with Salehi Bembrick. Overall, we're pleased with the sandal trajectory and very confident that sandal revenues will exceed $400 million this year. From a collaboration perspective, we announced plans for a two-year partnership with Salehi Bembrick, who will serve as Creative Director of the Crocs Times Pollex Pod to introduce innovative new styles. This quarter, we introduced the Pollex slide, which sold out instantly and created a halo effect for our sandal offerings globally. More recently, we partnered with rapper Lil Nas X to showcase our height collection, such as Siren and Crush. During Paris Fashion Week, we took over the famed Mercy pop-up space. Other marketing highlights from the quarter include our Mellow slide with Taco Bell, a clog collaboration with Parisian running brand Satisfy, and a slide-close partnership with Korean food brand Otoji. Finally, this month, our Barbie collection, featuring clogs, sandals, and Jibbitz, quickly sold out ahead of the blockbuster movie launch last weekend. Asia is another important long-term growth driver for the Crocs brand, as the brand is currently underpenetrated relative to here in the US. In Q2, Asia revenues grew by 39% on a constant currency basis, growth was again broad-based, with strong brand momentum throughout the region, including China, Australia, South Korea, and Southeast Asia. We're particularly encouraged by another exceptional quarter of growth in China, with Q2 revenues increasing over 100% ahead of our expectations; a clear sign of the potential within this market. The leadership team and I had the opportunity to visit China in June for the first time in three years, and it was wonderful to see how much the brand had grown. We met with our partners and suppliers and visited many stores. We have been deploying the same strategy we’ve used globally, including influencers, collaborations, and personalization. We partnered with local celebrities to style collaborations and products in their own authentic way. The Crocs brand's rising popularity in China has created a passionate following. In summary, we're incredibly excited by the Crocs brand momentum in China and are even more confident about its potential in the second-largest footwear market in the world. Now to HEYDUDE. We're incredibly pleased with exceptional DTC growth of 30% and constant currency digital growth of 37%. Our marketing innovation is driving new customer acquisition and growing awareness on the coasts. Our ecommerce data demonstrates that Q2 revenues on both the East and West Coast increased by 45% compared to last year. New product introductions, which range from new colors to new silhouettes, are generating excitement. Our Americana styles were top sellers ahead of Memorial Day and Fourth of July holidays amongst men, women, and kids. As a demonstration of our test and learn approach, this year our Americana collection featured over 20 patterns and colors, building on the early success we saw last year. The new Wally and Wendy Funk and Wash Canvas styles have performed strongly in both DTC and wholesale, and our efforts to expand the brand beyond the iconic Wally and Wendy silhouettes are off to a great start. We're in the process of getting them back in stock. On the marketing front, we focused on enhancing brand awareness. We launched our first-ever HEYDUDE collaboration this quarter with outdoor lifestyle brand Mossy Oak, and we saw great sell-through. We've also started to seed our back-to-campus collection on social channels and look forward to launching this collection featuring colleges from the Southeastern Conference or SEC in September. Finally, with respect to wholesale revenues, we estimate our aggregate consumer takeaway for the brand across all channels to be up approximately 27% during Q2 of 2023, based on over 80% increase in our strategic alliance accounts, shrinkage in our non-strategic wholesale accounts, and 30% DTC growth. Retail Traction Service data indicates that HEYDUDE rose from number 15 in Fashion Footwear brand in Q2 of last year to number eight this year based on US sales. While many of our wholesale partners are pleased with HEYDUDE's performance, several are also being cautious regarding future bookings because of their overall market outlook. However, we remain incredibly optimistic about the long-term potential of the brand globally.

Anne Mehlman, CFO

Thank you, Andrew, and good morning, everyone. I'll begin with a short recap of our second quarter results. All revenue growth rates will be cited on a constant currency basis unless otherwise stated. We had an excellent second quarter with over $1 billion in consolidated revenues, representing 12% year-on-year growth. We delivered another quarter of industry-leading profitability with adjusted gross margin of 58.1%, adjusted operating margin of 30.3%, and adjusted diluted EPS growth of 10.8%. During the second quarter, Crocs brand revenues were $833 million, growing 14.9% from the prior year and driven by strong DTC growth of 26.8%. The Crocs brand sold 33 million pairs of shoes, an increase of 1.8%. The brand's average selling price during Q2 was $25, which was up 12.8% on a constant currency basis, driven by price increases and fewer promotions internationally. The Crocs brand's sandals increased 34% in Q2, representing 16% of Crocs brand sales, and Jibbitz grew 13% from last year with strong growth internationally. Our second quarter consolidated adjusted operating income was $325 million, increasing by 11.7% from the prior year. Our second quarter non-GAAP diluted earnings per share increased 10.8% to $3.59. Our continued strong free cash flow generation enabled us to repay approximately $300 million of debt in the first half, reducing borrowing to $2 billion.

Andrew Rees, CEO

Now as we look towards the remainder of the year for HEYDUDE, we're lowering our outlook for revenues. We anticipate constrained distribution capabilities, particularly related to at once in the back half of the year due to ERP and warehouse transitions. Even with this lowered near-term revenue outlook, HEYDUDE is acquiring new customers and gaining penetration in strategic accounts. We're confident about the long-term growth potential of the brand globally. Overall, our digital-first approach is working and driving strong growth globally.

Anne Mehlman, CFO

We are raising our expectations for the Crocs brand and expect it to grow by 12% to 13% on a reported basis, increased from a prior estimate of 7% to 9%, with Asia expected to deliver the highest growth. For HEYDUDE, we are lowering our full-year growth outlook to approximately 14% to 18% revenue growth on a reported basis. On a two-year basis, particularly in view of our recent growth, we remain excited about HEYDUDE's long-term growth potential.

Jonathan Komp, Analyst

Hi. Good morning. I want to start just by asking a little more detail about your outlook for HEYDUDE. Could you give a little more color on what you're expecting for the third quarter?

Andrew Rees, CEO

Great. Thank you, Jonathan. As we look at the back half of the year, we are reducing our expectations for HEYDUDE primarily related to wholesale. I've highlighted before that a key reason is the cautious behavior of our wholesale partners regarding booking. Also, we're seeing some inventory management challenges as we transition our warehouse, which is affecting our at once capabilities. We're confident in the long-term, but are managing our expectations for the near term.

Anne Mehlman, CFO

For Q3, we do expect HEYDUDE to see a decrease, primarily from wholesale. However, we expect direct-to-consumer to continue to grow, and the Crocs brand will continue to expand as well.

Abbie Zvejnieks, Analyst

Hi. Yeah, thanks for taking my question. Can you comment on any differences that you're seeing from your wholesale partner behavior between Crocs and HEYDUDE in the U.S.?

Andrew Rees, CEO

A lot of it can be attributed to the newness of the HEYDUDE brand, which lacks the history that Crocs has. However, we're seeing strong sell-out for HEYDUDE, indicating good consumer demand, but it's difficult to predict future performance without a solid historical track record.

Laura Champine, Analyst

Thanks for taking my question. Can I hear your thoughts on potential pricing strategies as you work through the gray market issue on Amazon?

Andrew Rees, CEO

We are working hard to close down the gray market on Amazon and further refine our wholesale strategy. We've emphasized a strict policy to ensure our brand integrity and manage how and where our products are sold. In closing, I want to thank everyone for their interest in our performance. We've seen outstanding results this quarter and will continue to focus on our long-term strategic goals.

Operator, Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Andrew Reese for any closing remarks. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.