Earnings Call Transcript
Crocs, Inc. (CROX)
Earnings Call Transcript - CROX Q3 2025
Operator, Operator
Good morning, and welcome to the Crocs, Inc. Third Quarter 2025 Earnings Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Erinn Murphy, Senior Vice President of Investor Relations and Strategy. Please go ahead.
Erinn Murphy, Senior VP of Investor Relations and Strategy
Good morning, and thank you for joining us to discuss Crocs Inc. third quarter results. With me today are Andrew Rees, Chief Executive Officer; and Patraic Reagan, 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 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.
Andrew Rees, CEO
Thank you, Erinn, and good morning, everyone. Thank you for joining us today. Before we discuss the quarter, I would like to start by welcoming our Chief Financial Officer, Patraic Reagan, to his first Crocs Inc. earnings call. Our third quarter performance was driven by managing both of our brands in a disciplined fashion, streamlining our cost structure and controlling our inventory in the marketplace. We delivered very strong profitability and cash flow, which enabled us to repurchase 2.4 million of our outstanding shares and pay down $63 million of debt. These are fundamental levers of our value creation model. While our results came in ahead of our expectations, I acknowledge that this performance is not up to the standards that we expect for ourselves. We are working to regain momentum in the marketplace, and our teams have already begun executing against our strategies. With this in mind, I would like to begin the call today by elaborating on the progress we have made on our strategic pillars for both Crocs and HEYDUDE and the speed at which we are driving further simplicity and cost reductions across our enterprise. Patraic will then provide a more detailed overview of our financial results and outlook. Starting with the Crocs Brand. As we communicated last quarter, we elected to take 2 strategic actions to protect the long-term brand health. First, we pulled back on the breadth and depth of promotional activity across our digital channels in North America. This promotional pullback has had the greatest impact on our Classic Clog business as we work harder to protect our icon. Second, we continue to reduce receipts into the wholesale channel to better match supply to demand and ultimately drive a demand-led model. While these actions are impacting near-term sales, we expect them to enable a foundation for future growth. Further, we have seen a net positive benefit to our gross profit dollars in North America as a result of our pullback on promotions. Our return to growth in North America will be based on greater product innovation, diversification within clogs, growth within sandals and new categories. We are carefully managing our Classic Clog franchise with the desired outcome of creating clearer segmentation while leaning into innovation within new clog and sandal introductions. While improving the trajectory of North America is a top priority, we are making good progress against our 5 strategic pillars for the Crocs Brand. First, we will continue to drive brand relevance through clog iterations and innovation. During the quarter, we introduced the crafted clog starting at $60. This new franchise incorporates a non-molded comfortable upper with a Jibbitable back strap as we put personalization in the forefront of our design. We featured Lola Tung, the actress of the hit show, The Summer I Turned Pretty, to bring this to market. Following our initial sell-up on TikTok Shop, we have seen strong consumer response in all channels. We're also focused on scaling existing clog franchises, including Croc Brand and Echo. Within the Echo franchise, we launched the Echo RO during the quarter and saw immediate success. Looking to 2026, we will expand our crafted franchise with new materializations, launch a new and improved Croc Brand, which is already an established fan favorite in our portfolio and introduce Echo 2.0 clog. We expect product diversification within our clog pillar to enable greater channel segmentation and drive long-term growth in our clog franchise. Second, we're focused on diversifying outside of clogs through new category expansion. Our sandals pillar outperformed the broader portfolio and took market share in this quarter with strong full price performance across our style franchise, including Brooklyn, Getaway and Miami. Retailers have continued to chase these key styles beyond the back-to-school season. As we look into 2026, these franchises paired with the reintroduction of an updated personalizable 2-strap sandal underscores our opportunity to gain further market share in this category. We are also excited with the response we have received around our new cozy franchise, the Unfurgettable, which we launched in partnership with actress Millie Bobby Brown. This style has already seen a very positive response on TikTok, resonating particularly well with the Gen Z female consumer. The Unfurgettable, along with broader newness in our cozy assortment has catalyzed our line business so far this season. Third, we will fuel consumer engagement with disruptive digital and social marketing. During the quarter, we launched a multiyear agreement with the NFL, which featured our classic and classic line clogs as well as Jibbitz. This release exceeded our expectations with particularly strong sell-through across the board, leading to multiple restocks. Other highlights in the quarter included a disruptive launch with Krispy Kreme and our newest release on Roblox. In the quarter, we launched a Pan-Asian Monsoon campaign, "Your Crocs, Your Splash." This campaign positions a Classic Clog as the footwear of choice for the rainy season and stars 2 prominent actors from South Korea and India. The campaign video generated approximately 575 million views across Instagram and YouTube. These partnerships are prime examples of how our brand excites, inspires and connects with a wide range of consumers across the globe. Fourth, we'll continue to create compelling consumer experiences across distribution. Year-to-date, we've accelerated our first-mover advantage in social commerce. We remain the #1 footwear brand on TikTok Shop in the U.S. and the growing adoption of this platform is gaining momentum with younger consumers. This month, we created further disruption in the market by live streaming both of our brands on TikTok Shop and our own dot-com throughout the month of October. Through this initiative, we have seen an uptick in our followers and influx of new consumers. In fact, Crocs was the first fashion brand to live stream 24/7 for an entire month across TikTok and dot-com. We're continuing to expand this partnership and have launched TikTok Shop in the U.K., Germany and Brazil. Fifth, we see significant opportunity to capture greater share across our international markets, many of which are still in their infancy of growth. In the third quarter, we saw broad-based strength across our Tier 1 international markets. China delivered revenue growth across all channels and was up mid-20% to prior year, outperforming the overall market handily. During the quarter, we launched a unique POP MART, China's SKULLPANDA collaboration, which included a Douyin live stream on POP MART'S page and was a smash hit in China. In addition to China, we saw strong growth in Japan and across all of our key markets in Western Europe. In summary, our priorities are clear: driving product innovation in clogs and sandals, staying agile and consumer-focused while sharpening segmentation and accelerating international growth where penetration opportunities remain. Turning now to HEYDUDE. We delivered third quarter results that came in ahead of expectations. We are encouraged by the progress we're making in stabilizing the brand in North America to return to profitable growth. Let me share more about the actions we have taken and what gives me confidence in our ability to reestablish brand growth. First, we're focused on building a community. Our recently refreshed consumer insights work underscores that we have a passionate group of brand fans, ones that identify as laid-back and no-fuss, but clearly seek the comfortable and lightweight products we have to offer. We launched our HEYDUDE Country campaign in June, which plays to our brand's affinities, including music, travel and pre and post sport and is centered around this laid-back, no-fuss consumer. Relatedly, we are encouraged to see the brands return to the top 10 preferred footwear brands among males in the Piper Sandler Taking Stock With Teens survey this fall. Second, our product direction is clear. We're building the core and thoughtfully adding more. Within our Wally and Wendy franchise, we launched the Stretch Sox and its performance has already surpassed legacy socks on a like-for-like basis. In 2026, we will launch Stretch Jersey, a sweatshirt for your feet, and retailer response to this product has been very strong as it appeals to both her and him. Outside of the core, we are seeing continued traction of our Paul franchise, which plays into the dress casual sneaker space, and we're solidly building on our slipper success again this holiday. Earlier this month, we launched our third collaboration with Jelly Roll, featuring the fan favorite Bradley Boot in 2 colorways. The initial launch on TikTok Shop drove the largest single day for HEYDUDE on the platform to date. We see this collaboration as serving to halo, our broader boot offering as we move into the holiday. Third, we're focused on continuing to clean up channel inventory in the North America marketplace. During the third quarter, we accelerated returns and markdown allowances to our retailers to improve inventory health while elevating our brand presentation at wholesale. The nature of these clean-up actions has had an impact on revenue in the third quarter through vendor returns, and we're planning for continued markdown support in the fourth quarter. These actions have been effective in cleaning up the channel and establishing a foundation for future growth. On an enterprise basis, we're working to quickly rightsize our cost base. As we shared on our last call, we've already taken action on $50 million of gross cost savings this year and have since identified another $100 million of gross cost savings across the business to simplify the organization. While Patraic will go into more detail shortly, we expect these cost savings to generate greater flexibility across the P&L, enabling future investment to drive growth for our brands. At this time, I will turn the call over to Patraic to provide more detail around our third quarter financial performance and our fourth quarter outlook.
Patraic Reagan, CFO
Thank you, Andrew, and good morning, everyone. Before I review the quarter, I'd like to say how grateful and excited I am to have the opportunity to serve as Chief Financial Officer of Crocs, Inc. This is a company I've long admired professionally and as a consumer, one whose profitable growth has been built on an enduring cultural icon. For Crocs and HEYDUDE, I see strong potential both domestically and globally, and I look forward to working with our talented teams across the world to further drive the company's strategic and financial goals. Now let's get into our results. Our third quarter revenue of approximately $1 billion was down 7% to prior year. Crocs Brand revenue of $836 million was down 3% to prior year, with wholesale down 8% and DTC up 1%. North American revenues were down 9% to last year as we continue to intentionally pull back on discounting within our digital channels during the quarter. This was partially offset by strong digital marketplace performance. These actions, in part resulted in DTC down 8%, while wholesale was down 11%. International revenue was up 4% to prior year, driven by direct-to-consumer, which was up 23%. DTC performance continues to reflect broad-based strength across both digital and retail. International wholesale was down 7% based on timing shifts we communicated last quarter. Within our Tier 1 international markets, we saw broad-based strength led by China and Japan, while Western Europe also drove strong results across the U.K., Germany and France. Now turning to HEYDUDE brand. Revenue of $160 million was down 22% to prior year, but ahead of our expectations. DTC was better than planned, down 1% to prior year. This was driven by the addition of new retail stores and strong digital marketplace performance, most notably on TikTok Shop, offset by the planned reduction in performance marketing spend as we work to enhance profitability, albeit with negative revenue impacts. Wholesale was down 39%, reflecting the previously communicated wholesale cleanup actions we took in the quarter. As a result of these actions, we started to see an improvement in wholesale sellouts, which are now in line with our inventory levels. This is an important data point as we position HEYDUDE for a return to growth. Moving back to Crocs Inc. Enterprise adjusted gross margin of 58.5% was down 110 basis points to prior year, including a 230 basis point headwind from tariffs. The tariff impact in the quarter was 60 basis points higher than we previously anticipated based on higher receipts and country mix. Excluding tariffs, our adjusted gross margin would have been up, reflecting lower negotiated product costs, higher ASPs for both brands and brand mix. Crocs brand adjusted gross margin of 61.8% was down 70 basis points to prior year, driven by tariff headwinds. HEYDUDE brand adjusted gross margin of 42.3% was down 560 basis points to prior year, driven by tariff headwinds and fixed cost to leverage, which was partially offset by higher ASPs. Importantly, the third quarter represents the ninth consecutive quarter of ASP increases for HEYDUDE. Adjusted SG&A rate was 37.7%, up 350 basis points compared to prior year. Adjusted SG&A dollars increased 3% to prior year, a notable improvement from the 15% SG&A increase in the first half of the year. This was driven by investments in talent, DTC and marketing, significantly offset by cost savings under the $50 million initiative that we announced earlier this year. Taken together, adjusted operating margin of 20.8% came in ahead of our guidance of 18% to 19%, but was down 460 basis points compared to prior year. Adjusted diluted earnings per share of $2.92 was down 19% to last year, and our non-GAAP effective tax rate was 16.9%. Moving on to inventory. At the end of Q3, our inventory balance was $397 million, up 8% to prior year, including the impact of higher tariffs and product mix. Importantly, inventory units were down low single digits to prior year. Our enterprise inventory turns were above our goal of 4x on an annualized basis as we proactively managed our inventory receipts. Our liquidity position remains strong, comprised of $154 million of cash and cash equivalents and nearly $850 million of borrowing capacity on our revolver. Our strong profitability and free cash flow enable us to return value to shareholders through buybacks and debt paydown. During the quarter, we repurchased 2.4 million shares of our common stock for a total of $203 million at an average cost of approximately $83 per share. This represented approximately 4% of our float. Year-to-date, we have repurchased 4.3 million shares of our common stock for a total of approximately $400 million. We ended the quarter with $927 million remaining on our buyback authorization. Total borrowings at quarter end of $1.3 billion included the paydown of $63 million of debt during the third quarter. Our net leverage ended the quarter at the lower end of our targeted range of 1 to 1.5x. Now turning to our fourth quarter outlook. For Q4, we expect revenues to be down approximately 8% in currency rates as of October 27. Within this, we expect the Crocs brand to be down approximately 3% with acceleration in our international business from a mid-single digit in Q3 to a low double-digit rate in Q4. North America revenue is expected to be down low double digits to prior year, reflecting a wider range of outcomes, including our view of a choiceful consumer, a highly competitive holiday season and lower inventory receipts in the wholesale channel. For HEYDUDE, we expect revenue to be down in the mid-20s range, including the impact of reducing performance marketing spend in the DTC channel and the investments we are making in wholesale marketplace cleanup. We expect adjusted operating margin to be approximately 15.5%. This excludes approximately $10 million related to cost reduction initiatives we referenced earlier. Our adjusted operating margin embeds gross margins down approximately 300 basis points, driven almost entirely by tariff headwinds. In addition, our adjusted SG&A dollars are expected to be below that of prior year as we continue to see the positive impact of our cost savings. Adjusted diluted earnings per share is expected to be in the range of $1.82 to $1.92. For the year, our capital expenditures are expected to be in the range of $70 million to $75 million. While it is too early to provide 2026 guidance, I do want to provide more context on how we are thinking about further cost savings. As Andrew mentioned, we are already benefiting from the previously actioned $50 million of gross cost savings in 2025. In addition, we have identified $100 million of incremental gross cost savings that we expect to benefit 2026. These savings include simplifying our organizational structure, deliberately reducing spend in non-critical areas and further optimizing our supply chain. It is too premature to share how much of these savings we will choose to flow to the bottom line. However, we are committed to managing our adjusted SG&A base to ensure we drive operating leverage in 2026 while creating greater flexibility across the P&L. To conclude, we have already taken several strategic and tactical actions to improve the momentum of our brands. We have also taken steps to provide flexibility in our cost structure, and we are intently focused on driving consistent profitable growth in the future. At this time, we will now turn the call back over to the operator to begin the question-and-answer portion of our call.
Operator, Operator
The first question comes from Jonathan Komp with Baird.
Jonathan Komp, Analyst
I want to ask first about the incremental cost savings initiatives. It looks like you're obviously preserving margin here, but are there structural deficiencies in the organization you're also trying to address when you look at the structure of the organization? And as you think about 2026 and the comment around driving operating leverage, could you achieve leverage in a scenario where revenue still is down in the first half and maybe not significantly growing for the year?
Andrew Rees, CEO
Thank you, Jonathan. I'll start by addressing your question, and Patraic can add anything I miss. Regarding cost savings, we are exploring several areas. First, we have gained significant advantages from efficiencies we've implemented in our supply chain. Over the past few years, we have invested heavily in this area, and we are now starting to benefit from those efficiencies. Additionally, we have fully integrated our HEYDUDE and Crocs supply chains, which has provided us with substantial benefits. Second, we've been strategic about restructuring key components of our business, which has allowed us to streamline our go-to-market approach. We believe this will enhance our speed and efficiency while also reducing costs. We've also thoroughly examined our expenditures on vendors and outside services, consolidating where possible. We are incorporating AI and various technological advancements to improve our efficiency and effectiveness. Regarding your last question, we plan to reinvest some of these savings into vital areas such as product innovation, which we believe will stimulate growth. We are confident that we can achieve operating leverage in 2026. Even if revenue dips a bit in a particular quarter, we are optimistic about reaching operating leverage over the year.
Patraic Reagan, CFO
Yes. Jon, just a couple of things to add from my perspective. What I would say is that our language in the prepared remarks was really intentional. So what we're trying to do is drive flexibility as we turn into 2026. And I think what's been great to see in terms of the response of the organization is that we've really been able to turn very quickly and efficiently into identifying some of the areas that we're going to provide that flexibility in. And just to reiterate what Andrew said towards the end is we're clear that we need to protect product innovation and brand marketing, right? It does us no good to just cut costs through the P&L at the expense of what is the core of our business. So what we'll do as we go through this is continue to look at all areas of the organization, but product and innovation and communication to our consumers through brand is an area that we're going to ring-fence.
Jonathan Komp, Analyst
That's really helpful. If I could sneak in one more. Can I just ask, Andrew, is portfolio management the consideration in your capital allocation strategy? And I ask in the context of coming up on the 4-year anniversary of owning HEYDUDE and still seeing significant challenges here?
Andrew Rees, CEO
Thank you, Jon. At this point, we believe HEYDUDE is a strong brand, particularly in the U.S. casual footwear market. We acknowledge the challenges we've faced in managing this brand over the past few years. However, we are committed to doing the right work and making the right decisions, and we are confident in its future direction. Our focus is on returning it to profitability, cleaning up the marketplace, and making strategic choices regarding promotions and our investment in digital marketing. We have revamped the management team, and I have strong confidence in their capabilities to lead us forward. Therefore, we are not considering any changes to our portfolio right now, and we believe we can return HEYDUDE to a healthy level of profitability and growth in the future.
Operator, Operator
The next question is from Chris Nardone from Bank of America.
Christopher Nardone, Analyst
So just on Crocs North America, can you help identify some of the actions you're taking to help drive some improved results in this portion of the business? And in particular, it would be really great if you can elaborate on both your pipeline of new product and also how you think about the ramifications of potentially losing some of your core customers given your pullback on promotions?
Andrew Rees, CEO
Thank you, Chris. Our main focus is to return the North American Crocs business to growth. It's important to note that some of the recent sales declines are due to strategic choices we've made, such as reducing digital discounting and wholesale sell-in. These decisions are aimed at positioning us for future growth without damaging our brand or core franchise. We recognize that the North American consumer market is divided; some consumers are affluent and purchasing Crocs and other high-end brands, while a significant number are financially cautious, affecting their spending habits. Our future expectations reflect this reality. In response to your question, our primary initiatives include focusing on clog innovation and maintaining brand relevance. We are introducing several important product categories, such as crafted, Echo, and reintroducing Croc Brand, which will enhance our clog platform and enable better segmentation with our wholesale partners. We also aim to diversify into new silhouettes and categories. Our sandal season in 2025 was strong, and we have a robust product pipeline for 2026, with confidence in continued sandal growth and personalization. We're currently in the peak of slipper season, and we have an impressive assortment of slippers across our brands. Additionally, we are enhancing our social and digital engagement, leading the TikTok space for Crocs and following closely for HEYDUDE. Recently, we launched a continuous live streaming initiative for our brands that ran 24/7 throughout October, meeting our objectives and helping us understand the shift from traditional to social shopping. Overall, we are implementing a comprehensive strategy to achieve growth for Crocs in North America, and we are optimistic about our ability to do so soon.
Operator, Operator
The next question is from Tom Nikic with Needham.
Tom Nikic, Analyst
I want to ask about the marketplace cleanup for HEYDUDE. I know there was quite a bit of action that happened in Q3. Should we assume that there's kind of more marketplace cleanup that has to happen in Q4? And would you think that by year-end this year, you'd be relatively clean and that we wouldn't see as much in 2026?
Andrew Rees, CEO
Yes. Good. I'm glad you asked about this, Tom. So this is important. In Q3, we invested actually a considerable amount of money in terms of the marketplace cleanup. That was primarily return. So we took back aged and slow selling product from some of our large wholesale partners, and it was a substantial amount. We felt this was important to reset how the brand looks at wholesale. There is more in Q4 which is already embedded in the guidance that we provided. And that is primarily discount, that is discount support where we're looking to complete some of the cleanup activity. The majority of it will be done during 2025. I think there's some ongoing inventory health management that will happen in '26, but it will be far less impactful than we have seen in the last 2 quarters. And in fact, we've been doing this for some period of time. What I would say is as we look at the impacts of these investments we've made, I think we're quietly encouraged that sell-through is improving based on a reduction of aged inventory in the marketplace, a stronger presentation of HEYDUDE and a stronger presentation of new and current product. We particularly called out Stretch Sox. This was a franchise that we introduced earlier this year. And as the year has gone on, as our partners are more fully set on Stretch Sox and the socks product that was the precursor has sold down and has illuminated, we're really, really happy with the sell-throughs of that franchise, and it's really core and backbone franchise for the brand.
Patraic Reagan, CFO
Yes. And Tom, just maybe 2 quick things that I would add is that, as you can see from prepared remarks, we highlighted that the sell-in and inventory levels are in much better line for HEYDUDE. So that's a very encouraging sign. And then secondly, we called out that for the ninth consecutive quarter, ASPs have increased with the HEYDUDE brand, which is also a key metric to watch as we continue to pivot the brand to return to growth.
Tom Nikic, Analyst
Very helpful. And Patraic, welcome aboard and looking forward to working with you.
Operator, Operator
The next question is from Adrienne Yih with Barclays.
Adrienne Yih-Tennant, Analyst
Andrew, I wanted to ask about sort of some of the choicefulness that you might be seeing in the fourth quarter. We've heard from other discretionary companies generally that there's been a little bit of a weakness in the 25- to 35-year-old cohort. Back-to-school generally has been very strong and then a little bit of an exit kind of weakness coming out of the quarter. So if you can talk to that. And then Patraic, welcome aboard. A quick question on the end of quarter inventory. The spread looks like it's about 10% between dollars and units. So that seems like it's reflective of maybe the April tariff. How should we think about end of quarter inventory entering the new year? Did that then express kind of the August tariff? And how should we think about early spring, the pass-through on the gross margin?
Andrew Rees, CEO
Okay. There’s a lot to unpack, Adrienne. Let me respond in the order you asked. I’ll discuss the consumer, and then Patraic can provide some insights on inventory. Essentially, we see that the consumer is becoming more cautious about spending. This trend isn't necessarily age-related but more tied to socioeconomic status. We're noticing this particularly in our mid- to lower channels, where there's less foot traffic in stores. Consumers are not visiting stores as frequently because they have less disposable or flexible income. As a result, they're being more selective about their purchases, making fewer trips, and shopping more out of necessity. We expect this trend to continue into the fourth quarter when, traditionally, even consumers who are feeling constrained tend to loosen their spending a bit for the holidays they celebrate, although they will still shop more based on immediate needs. Overall, I would say the lower-end consumer is being more deliberate and cautious with their spending, focusing more closely on what they truly need.
Patraic Reagan, CFO
Yes. And Adrienne, thank you for asking the question about inventory. First of all, I'd start off by saying that how we manage inventory here, matching demand to supply is really a strength of the organization. And frankly, it's a competitive advantage in terms of the speed in which we can evaluate and react to consumer demand in both good times and bad. You're right, as you call out, the spread, that's directionally correct. And what you can think about is that optically, with inventory up roughly about 8% as we closed the Q3, that was almost entirely on a dollar basis driven by the impact of tariffs. What you really see is in terms of our diligence of managing inventory is on the unit side where we're actually down low single digits. So we feel really good about where we are from an inventory position as we ended Q3. We'll continue to exercise that muscle. Honestly, as we are in Q4, we're aggressively managing inventory. Like I said, it is a core competency of what we do. So we feel like as we turn into Q4, we'll continue to manage inventory from a unit standpoint similar to what we saw in Q3. And then in 2026, too early to comment really on '26, but I think you can take our history as an indicator in terms of how tightly we will continue to manage inventory and at the same time, making sure that we're serving our consumers across the globe.
Operator, Operator
The next question is from Peter McGoldrick with Stifel.
Peter McGoldrick, Analyst
Welcome, Patraic. I'm interested in the market share in the under $100 assortment. I was curious if you could talk more about the current positioning of both of your brands and then any competitive dynamics that may be playing out as the consumer feels prices going directionally higher across the marketplace.
Andrew Rees, CEO
Yes, I can discuss that directionally. We can't provide exact numbers regarding market share. The strength of both of our brands lies in their broad appeal; they cater to a wide range of consumers. Both brands offer great value and also attract consumers who view them as aspirational. Most of our products are priced under $100. For example, the Classic Clog is priced at around $50, and most of our HEYDUDE products fall between $60 and $70. This pricing gives consumers excellent value. We've noticed that some competitive brands at higher price points have been quick to raise their prices to offset tariff impacts. We observe much less price elevation at the levels we compete in, keeping the segment under $100 relatively competitive. Additionally, we've seen major athletic brands returning to these price points and expanding their distribution in the mid-range of the market.
Operator, Operator
The next question is from Rick Patel with Raymond James.
Rakesh Patel, Analyst
Congrats on the new role, Patraic. We have questions on the North America wholesale channel. First, any color on the spring wholesale order book and how that's shaping up? And second, can you point to any product or innovation wins that would give you particular confidence in being able to reinvigorate the wholesale channel as you look out to 2026?
Andrew Rees, CEO
Are you looking for both brands, Rick? Or are you primarily focused on Crocs?
Rakesh Patel, Analyst
Primarily on the Crocs Brand.
Andrew Rees, CEO
We do not share specific details about the order book. However, I can provide some insights. In regard to the North American Crocs wholesale order book, we have observed two main trends. Firstly, our retailers are being cautious in their planning. They are not seeing growth in customer traffic and do not anticipate significant growth in the near term, likely not planning for considerable growth until early 2026. As we discussed previously, athletic wear is gaining some market share, leading to a reallocation of budgets. This is creating pressure that we are managing carefully. Consequently, we expect a continued decline in our wholesale sell-in for Crocs in North America, which is reflected in our guidance for Q4. Now, regarding product innovation to address these challenges, we have a strong 2026 lineup for clogs. We just launched Crafted, a clog with a soft material upper, differing from the current market versions with canvas uppers. We are also introducing vegan leather suede versions soon. This franchise has promise, as it makes the Classic Clog, which has a molded footbed, more appealing and accessible to a wider audience. Our Unfurgettable product, known for its exaggerated design, along with other lined products, are performing well, and we are optimistic about their success. Next year, we plan to reintroduce the Croc Brand, which is highly rated with around 200,000 4- and 5-star reviews on Amazon. We had minimized focus on Croc Brand previously to concentrate on classic models, but we believe this reintroduction has strong long-term potential. Additionally, we will introduce the new Echo 2.0 later next year, and it's important to note that sandals significantly contributed to our growth in 2025. We have plans for new products and improvements in our key sandal franchises for 2026.
Patraic Reagan, CFO
Yes. And Rick, just one final comment for me as we close this one out is we talked quite a bit about the wholesale channel, Andrew alluded to that and went into some great detail. I would say that we are seeing DTC accelerate as we go from Q3 to Q4. So we take that as a great sign in terms of how our products and our innovation pipeline are resonating with our consumers. So I don't want to drive past what's happening in the DTC channels.
Operator, Operator
The next question is from Jay Sole with UBS.
Jay Sole, Analyst
Andrew, I want to ask about some of the actions you took on Crocs Brand in Q3, specifically with pulling back on promotions. Did you do that across the entire quarter? Or was there a moment during the quarter where you went back to promotions, whether it's peak back-to-school season just compete? And then maybe, Patraic, just on the Q3 gross margin, was there a tariff impact on the gross margin in Q3? If so, what was it? And then I think to the 300 basis points you talked about for Q4, is there any mitigation that's a part of that? Or basically, how much of the gross tariff costs are you absorbing?
Andrew Rees, CEO
Yes. I'll be quick and then Patraic can get into your tariff question. So from a North American digital promotional pullback, that was across the entire quarter, right? And it didn't go to 0, obviously, but we did both have many more days that were non-promotional and also the depth of the promotions that we run were typically substantially less than we had run previously. So it was across the entire quarter.
Patraic Reagan, CFO
Yes. To address the question about tariffs, it's been impressive to see the actions within Crocs aimed at mitigating these impacts. The organization has been proactive in identifying ways to reduce the effects of tariffs. In the third quarter, we faced about 230 basis points of tariff challenges, but we implemented several mitigating strategies, such as negotiating with our vendors and optimizing input costs in our supply chain, which helped lessen the impact. Looking ahead to the fourth quarter, the challenges will be primarily due to tariffs. While we will continue to implement mitigating measures, their effectiveness may be somewhat reduced, particularly given the competitive selling environment we anticipate in Q4.
Operator, Operator
The next question is from Brooke Roach with Goldman Sachs.
Brooke Roach, Analyst
I was hoping to follow up on Jay's question about tariff mitigation and just get your latest thoughts on pricing as you look to offset some of these tariffs, particularly given the stronger AUR results you've recently materialized. What are your plans for pricing as you move into next year? And then as a follow-up, Patraic, can you provide a little bit of color on how you see that tariff headwind directionally shaping into the first half of next year versus the 300 bps of gross margin pressure that you're forecasting for the fourth quarter?
Andrew Rees, CEO
Thank you, Brooke. When we consider pricing, we don't base it solely on costs but rather on market conditions. We have frequently discussed this in the past. Our pricing strategy takes into account the strength and trajectory of our brand as well as the competitive landscape in the various markets where we operate globally. Recently, in the latter half of 2025, we have implemented selective price increases for key products in certain markets around the world, with plans for additional increases in the early part of 2026. However, we are currently not considering price increases for our core Classic Clog in North America, as we believe it is competitively priced and that market segment is particularly price sensitive. Overall, we have a robust pricing strategy that is both precise and adaptable.
Patraic Reagan, CFO
Yes. And Brooke, just building on Andrew's comments. So the nature of pricing here at Crocs is very dynamic and quite a bit of muscle built in that space. So we feel really good about how we're kind of pricing from a value standpoint to our consumers' price to value standpoint. As we turn into 2026, obviously, we're not providing any sort of guidance at this point in time. That will come in the next call. But directionally, what I can say is the large impact in tariffs for us and really any other consumer brand or footwear brand that's operating in the countries we operate in is most felt in the second half of this year. And so what you can directionally think about is that we'll continue to feel some of that pressure as we get into the first half of 2026.
Operator, Operator
The next question is from Aubrey Tianello with BNP Paribas.
Aubrey Tianello, Analyst
I wanted to ask on stores and if you can give us an update on the store growth strategy for both brands, but especially Crocs, where there's been a pickup in store openings over the course of this year. How should we be thinking about store growth going forward?
Andrew Rees, CEO
Yes. That's a great question, Aubrey. Glad you asked it. So starting with Crocs, there has been a bit of a pickup in store openings. A lot of that is driven out of our European store base, right? So we've very successfully opened a number of stores in Europe. Those are almost all outlet stores in the U.K. and France principally. And I would have to say they are performing incredibly. So we're super happy about that. Also some store openings in Asia and a small number here in North America. So as you probably know, our store base is incredibly profitable, very high sales per square foot, high margins and a very good strong flow-through. The other thing I would also highlight for those of you in New York is we did open our SoHo store earlier this year. It's performing very, very well indeed, super happy with it. And it's also, I would say, the pinnacle presentation of the brand. And you may have seen on social media that we were live streaming from that store during October. Terence Reilley, our Chief Brand Officer, did an amazing job live streaming from the store and also featuring some celebrities, including Jaxson Dart. So it's been a great investment for us.
Patraic Reagan, CFO
Yes. I would like to emphasize Andrew's comments regarding the profitability of the Crocs stores, both in the U.S. and internationally, which is truly impressive. This can be seen in our financials. One aspect we haven't focused on much during the Q&A is our ability to generate free cash flow, which is a core strength of our financial model. Our stores play a significant role in this, producing a substantial amount of cash. This allows us to reinvest in the business and return capital to our shareholders.
Operator, Operator
The next question is from Anna Andreeva with Piper Sandler.
Anna Andreeva, Analyst
Welcome to Patraic. We had a question about $100 million in savings. Can you provide insight on how we should view the timing of those savings as we move through '26? Should we expect them to scale throughout the year or be more evenly distributed? Additionally, what amount of savings should we anticipate for the fourth quarter? As a follow-up, Patraic, you mentioned that North America DTC at Crocs has accelerated so far this quarter, which is impressive given the reduced promotions. I understand that Crocs is significant for the business. Did you implement any different strategies this year? Is this primarily driven by TikTok? Any additional information you can share on that? Also, what is your guidance for North America DTC at Crocs for the fourth quarter?
Patraic Reagan, CFO
Yes. So Anna, let me address the cost savings first, and then we can talk about the second part of your question. First of all, the $100 million figure is a gross amount. By gross, I mean we have identified $100 million in savings throughout our entire cost structure, including cost of goods and SG&A. We have done this primarily to ensure we're operating as efficiently as possible. Additionally, it gives us the flexibility to make decisions as we approach 2026. Those decisions could involve applying those savings to our profits or investing in high-growth areas we want to pursue. I won't provide a specific quarterly cadence at this time since it's too early for that. We will share more details during the Q4 call as we move into 2026. Andrew will address the second part of the question.
Andrew Rees, CEO
Yes. So just a point of clarification. We did not say that DTC accelerated during Q3, right? So we actually don't comment on trajectory within the quarter. But what we did say is we believe that DTC in North America will be stronger in Q4 than it was in Q3.
Operator, Operator
This concludes our question-and-answer session. I would like to turn the conference back over to Andrew Rees, Chief Executive Officer, for any closing remarks.
Andrew Rees, CEO
I just want to say thank you, everybody, for joining us today and your continued interest in Crocs Inc., and we look forward to continuing to speak to you in the future. Thank you.
Operator, Operator
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.