Okay, we're ready to get started here. Welcome, everyone. Thanks for joining. I'm John Komp, Airds Analyst, covering the active lifestyle sector. Very pleased to be joined by Crocs and CFO Patrick Reagan. Welcome.

Great. Thanks, John.

Crocs, as many of you I'm sure know, is a company that generates roughly $4 billion of annual revenue from the iconic Crocs brand as well as Hey Dude. The company has been focused on improving marketplace health and really leaning into product and marketing and beginning to show the fruits of those efforts, especially in the direct-to-consumer channel. Patrick is EVP and CFO, joined Crocs last September. Came from Shark Ninja and had a long career before that at Nike. That's right. Welcome again, Patrick. I want to start off and really talk about the actions the company has taken. started the second half of 2025 to really reduce inventory risk and start to position the company for product and marketing that's now heading in the d2c channel so maybe just lay out the you know the current landscape for the company sure and and we'll go from there yeah yeah so um first of all john thanks thanks for inviting me in and nice to see everybody um let me start with, in response to your question, the second half of last year was a really important time

in the period of our company in terms of setting us up for future growth. And so for those of you who might not be as familiar with the story, we were at a point in time where we had a little bit too much inventory in the marketplace. And we had to take some short-term painful decisions to make sure that we positioned ourselves for longer-term future growth. And we did that with the focus of knowing that as a product-driven company, that we had quite a bit of new innovation coming in the first part of 2026 for both of our brands. And so that kind of level set us in terms of what we needed to do as we turned into 2026. So as we've come into this year, What we've been positioning ourselves to do is, number one, being very aware of what's happening from a more macro standpoint. There's pressure on the consumer, although we feel good about our positioning within the consumer space from a pricing standpoint and a price-to-value perspective on our product. We also knew that coming in, our industry footwear is one that's very, very competitive. And so our focus on product, product and innovation always needs to be front and center in terms of what we do. So those actions from last year, that really kind of paved the way to what we're seeing happen in the marketplace in this year. and what we're focused on is really you know from a growth driving standpoint you know really a couple things number one is you know we as a company you know we're known for our our classic clog so if you close your eyes and somebody says think of crocs you're going to you're going to view you know that classic clog 13 hole which is really our icon um and for us what we're focused on is you know a couple of things in terms of diverse diversification number one is within the clogs category which is a growing category globally we're diversifying within that space we're the market leader by pretty significant margin we drive the innovation we drive taste in that space and so you know we're really kind of driving you know continued innovation there and that's one of the reasons why it was so important for us to get the marketplace in a good good spot as we turned out at 25 and in 26 the second component is um you know from a diversification product wise outside of the clog business you know we're really focused on you know areas like for example sandals where for the last couple years uh we've been developing our sandals programs and we're now starting to get to a place where we've got real scale in that so So as we go through 2026, we're going to be at a point where we're roughly about a half a billion dollar sandal business across both brands globally. And from a footwear perspective, there's not a lot of companies that have half a billion dollars in sales overall. So really from a size and scale standpoint, the innovation that's going on from a product perspective in that space has really been helping to drive growth.

So, you know, Jonathan, back to your original question, you know, kind of where we're going, where we're positioned, you know, as we turn from 25 into 26, it's really been, you know, and is continuing to be driven by focused on innovation on behalf of the consumer. that's a great uh way to kick it off and i know we'll talk more about international too because i know you're excited on the international side but maybe sticking with the theme of u.s and the core crocs business maybe just expand a little further you know some of the changes from a marketing perspective and then if you're willing to share you know some examples of the product that's working and you know presumably that's in your d2c channel here to start yeah um so

So a great question, it is, as we think about who we are as a company, number one, at our core, we're a product company, right? As I mentioned, we're very focused on innovation across both brands for our consumer, and we feel like we're really well positioned with some of the products we're bringing to market. We continue to invest in innovation, it's a priority for us, however, and this is back to your question, John, is, you know, it doesn't do us much good to bring that great new product, innovative product to market if we're not telling those marketing stories effectively. And so what we're doing, and this has been some really exciting work, is, you know, we've been on what I would call the cutting edge in terms of digital and social marketing, particularly through some of our marketplace channels uh as we've been you know bringing new product to the market and reinforcing who we are is a is a brand and so you know you can think about this is um you know some of the work that we're investing in marketplaces like tick tock shop and some of the other social selling platforms we've been the number one selling footwear brand on tick tock shop for two years you know i get the question like are you going remain there i'm like no somebody you know nike or audi or somebody's going to come by and just volume wise be bigger but you know from an agility standpoint you know we're learning and we're learning quickly in terms of how to uh engage in and communicate with that consumer so that's been you know a lot of focus that we've been putting on we've also uh towards uh the the second half of last year we pulled back quite a bit on our performance marketing spend and investment and you know for those of you that are familiar with how that works that's you know what we call lower end of the funnel it's expensive way to you know drive revenue and we've kind of repositioned that into telling more of our product stories and more of our brand stories and so you know that's all happened with you know a key leadership change that we had in the business is we've brought Terrence Riley back, I think roughly about two years ago, initially running Hey Dude. But if you're familiar with Terrence and some of his work, you may not be, but probably many of you have got a very expensive Stanley coffee cup or beverage holder, and Terrence was really the mastermind of bringing that to life. And he worked with Crocs before, he's now back, we're happy to have him, and he's really driving some very focused and very cutting-edge marketing stories to help us with product.

Maybe to go a little further on the channel performance in North America, Q1 highlighted a pretty big divergence. Crocs, direct-to-consumer, positive. Wholesale, still negative. Just talk about the dynamics across the channels and how that's embedded looking forward as Yeah.

So I think as we came into the year, and again, kind of going back to some of the moves that we made in the second half to make sure inventory was right within the marketplaces, part of what we were really trying to do is make sure that we were positioned well for 26. and as it relates to the channels of distributions that we have knowing that we are leading through innovation and new product it was our expectation and this is what is actually happening that we would see the acceleration from a consumer standpoint first through our digital and social channels within our D2C business than within our direct-to-consumer stores. And we knew that that kind of ecosystem of direct-to-consumer was going to lead in terms of growth. That's what we saw in Q1. That's what we're seeing, or that's what we expect to see as we continue to go through the year. And we knew that the wholesale channel was going to lag because that's just kind of how the marketplace works. That's not to say that our wholesale partners are not important. They are critically important to us. We aim and we leverage our wholesale partners to make sure that we've got our product, both Crocs and Hey Dude, available to our consumers without friction in terms of having to find us. And so wholesale plays an exceptionally important place in how we get that product to consumer. But we knew that that was going to be a couple season lag in terms of wholesale partners investing in some of that newness. And we also knew that what we would start to see if we indeed had green shoots in that space was that we would see our at once business, which is wholesalers being able to make specific kind of smaller orders that would take off before some of the bigger buy investments that they would have. And that's exactly what we've seen.

That's great. Very encouraging. Maybe shifting to international since it's around half of your business. I know you're excited. The momentum looks good. D2C was very strong in Q1. So highlight some of what gets you excited about the growth in international.

Yeah, I mean, I don't know if it's super well-known that half of Kroc's revenue globally comes from international. And so we've got the beginnings of a very strong footprint internationally. And so for me, what's exciting is a couple things. One, the team has done a really good job in terms of planting the seeds of international growth, which I think is from a business model standpoint in some of the more developed markets say like a France, Germany, UK we've gone in owning our business in some of the lesser developed markets maybe think Southeast Asia, Latin America we go in through a distributor model where we partner with a local distributor that knows the market a little bit better but in all those marketplaces is we're still in very much a nascent place of marketplace development. Just a nice little data point for you all is, China is our second largest international market, but it accounts for just 4% of our global sales. So there's a lot of people in China, there's a lot of feet. Our product plays really well to that consumer. The price is really well positioned in terms of where we are from a consumer standpoint. And so, you know, we've got a lot of runway internationally with both brands. You know, Crocs is a little bit further advanced in terms of establishing some of those beachheads and kind of leading with product. But Hey Dude was actually a company that was founded in Italy. You know, to date we have, I think, roughly about $60, $50, $60 million in, you know, of sales internationally for hey dude so we don't really have a presence yet but you know you can see where that is you know going to be you know strategically a a step to come and so you know john coming back to your your question i mean i'm super excited about uh the international side of our business we'll see a lot of growth coming from there in in the uh you know both immediate in in you know kind of midterm that's great why don't we talk a little bit more about hey dude Coming in last fall, your view of the brand, the leadership changes, the state of the business.

You've also seen D2C inflect positively there, so maybe a rundown of where Hey Dude stands. Sure, yeah.

I mean, from a Hey Dude standpoint, I think, again, for those of you maybe not familiar, acquisition that was made three years, I think three years ago, maybe four years ago. and you know like a lot of acquisitions there's some some growing pains and so you're kind of straight on after the acquisition some some really strong growth and now we're in a position where we're kind of right sizing you know some of that inventory that's in the marketplace and so I think there's some learnings around that but overall when we look at HeyDude you know a couple things you know, I'd like to be top of mind. Number one, if we think about, you know, Heydude relative to Crocs, Heydude has got a much, much larger total addressable market or TAM in terms of consumer. And so that gives us, you know, continued confidence that there is, you know, a business, a sizable business there. Number two is that Heydude, even though we're in the middle of kind of a marketplace adjustment is it's a $700 million footwear brand. And again, similar to my example on sandals, there's not a lot of $700 million brands. So we're already at scale. And we're at scale in a profitable way. Hey Dude's been profitable from day one and continues to be profitable for Crux. And then third, I think And where we are right now is, as John alluded to, there's been a few leadership changes. We've brought in a gentleman by the name of Rupert Campbell, a long-term Adidas executive that's driven Adi from a growth perspective in a number of areas around the world, a true inspirational operational leader in terms of marketplace and marketplace management. and he's taken the reins and is driving. Also making key investments in that team from a product standpoint, product innovation standpoint, merchandising standpoint. So really kind of building out the core of that leadership team. And then the third is within the Crocs Hey Dude, shared service ecosystem, we're really pulling the supply chains for those respective brands more closely together number one to gain you know efficiencies in in reference to kind of time and speed to market but with that also comes you know significant amount of cost savings and efficiency that help us from a bottom line standpoint just to follow up on the financial implications for a hey dude turnaround uh the brand's still declining in revenue but So you got less of a decline after the first quarter, and I believe you're embedding growth at some point in the second half.

So just confidence, getting that brand back to growth, and I won't put you on the spot, but there's some viral elements out there for HeyDude today. Could any of that help?

Sure, sure. Yeah, so the plan has been kind of a sequential improvement from the back half of last year into the second half of this year. And so what we've been messaging to investors is that we want the investment community to kind of take stock in that we're doing what we said we're going to do. And with HeyDude and with some of the stories in Crocs as well, we are doing what we said we're going to do. And so if you look at this quenchal improvement from a revenue perspective for HeyDude, we're on a multi-quarter improvement. And with that, that gives us the confidence in the second half that as we guided expectations for the year, we made a clear statement that we would return to growth for HeyDude in the second half of the year. That's on track. The data points and the proof points are out there, and we continue to feel exceptionally confident with that. I think John's kind of teasing me a little bit here on the virality. We had some, you know, fun controversy in Hey Dude over the last, you know, maybe week or so, where, you know, our shoes got banned from the, you know, I don't know if it was an international hacky sack tournament, but for those of you who've got, you know, kids of a certain age, you know, hacky sack is back in a big way, and, you know, there's, you know, some tournaments going on, and apparently some of our shoes are designed in a way that give an unfair advantage. We didn't design them like that, that's just kind of an outcome. But we're seizing on the moment in a way that Crocs Inc. is really good at seizing on viral moments and it's making a fun kind of play in terms of being banned from hacky sack tournaments. So we're just having a little bit of fun with it. But it's all really pointed at kind of keeping the brand top of mind for our consumers. So it's been a little bit of fun over the last week or so.

I can only imagine the ideas that Terrence is formulating for some of the potential there. Maybe spending a minute on the 2026 guidance. I mean, your guidance raised after the first quarter stood out in light of uncertainty with the Middle East and freight and tariffs and health of the consumer. So just talk about the visibility you have for 2026, the key assumptions and the confidence to raise the guidance after the first quarter.

Yeah, I mean, you're right to say there's a lot going on from a macro standpoint right now. And we fully contemplated all of that in terms of our guide. And so for the folks that maybe not as familiar with the story, you know, some of the headwinds we see in that space are one, you know, obviously with the Iranian conflict, we had our distributor stores in the Mideast, many of them shut down, some of them, you know, partially operating. And so, you know, we've constrained the flow of inventory into those markets. So that has a direct impact, but that was fully contemplated in terms of the guidance that we raised. You know, the second component of that is like, you know, most all other companies, you know, we're seeing some headwinds from a distribution logistics perspective in terms of fuel prices, both outbound, inbound. Those aren't super significant. We don't expect them to be super significant from a 2026 standpoint, but we're monitoring it. But this, for me, it falls under the work that we have to do. The world isn't getting any less dynamic or less chaotic. You know, these shocks to the system seem to be coming, you know, they used to come like once every three or four years, then, you know, once every couple of years. Now it seems like they happen, you know, every couple of months, if not weeks. But you know, from a management team standpoint, you know, we pull that responsibility close to ourselves. You know, we view that as, you know, the things that we've got to solve and not really kind of you know pine on oh woe is us you know we've got another headwind we just got to go out and solve it and so that's kind of how we position our ourselves um from uh you know from a resiliency and an agility standpoint and you know we're really confident that you know as we continue to go we don't go forward we don't know what the next thing is going to be but we know there's going to be the next thing and we'll respond to it um sticking with with margin a bit i get asked often and how Crocs' gross margins are so high.

So maybe you could start there about some of the structural gross margin drivers and then really for 2026, you've embedded slight operating margin expansion. So include some discussion around, you know, the cost structural changes you've made and how that's flowing through.

Yeah, you know, for us, our profitability, which is really kind of best in class from a pure set standpoint, it all starts with product. and, you know, our kind of our price-to-value equation with our consumer. And so, you know, with that and how we're able to engineer, produce at scale our product, we're in a position that, you know, we've got really healthy product margins. And so it kind of all starts there. And so, you know, you heard me earlier in, you know, kind of our time together talk about the importance of product innovation. you know first important to innovate on behalf of the consumer but it's also you know equally as important for us to innovate profitably on behalf of the consumer and so we're always obsessing what that price of value equation looks like and then how that relates to our product profitability and so you know starts starts there then as we you know look down and through the the pnl there's really three areas that we prioritize from an investment standpoint that we protect and so those are one product innovation you know I've hit that pretty hard so I won't go deeper into there the second is marketing we talked about that a little bit earlier it doesn't do us any good to you know tell or develop great product without telling the stories we've got to educate the consumer in terms of what we're what we're bringing into the marketplace so very focused on that and then the third is you know continuing to invest in our supply chain and so those three areas the ones that really get that outsized investment and then as we look at across the rest of the p l that's what we try and are very very successful driving efficiencies to to keep you know our operating margins uh in a in a very healthy space and then you see that you know, translate into, obviously, our cash flow generation, which is best in class.

And, you know, to follow up, I know you took out some costs at the start of the year. Just talk about how those are flowing through, how that impacts your ability to leverage, you know, at moderate top-line growth here.

Yeah. So, you know, really, you know, two cost savings initiatives. One, well, both kicked off in 2025, initial $50 million earlier in 2025, and then a second $100 million exercise that was later in 2025 and continues in 2026. And really what it's focused on is just being a leaner, more efficient crux. Some of that will, number one, all of that's been identified and actioned. So that's like, check the box. the uh hello um the second component of that is that uh we'll drop some of that to the bottom line um we'll reinvest some of that in the business and you know we're also looking for additional opportunities um you know to to you know continue to reinvest and so you know it's just a you know it's another example of you know being able to you know quickly and nimbly you know adapt to um bring a little bit more efficiency into our P&L without sacrificing and actually prioritizing the investment that we make in product innovation, marketing, and supply chain.

Not to say one of the better topics for last, but in the last few minutes, maybe talk about the cash generation, the capital allocation strategy. You're at the lower end of your target net leverage ratio. So how much cash are you going to generate here and what are you going to do with it?

Yeah, so we've got a very powerful cash generation machine, and it starts really with the profitability of our products. This is an area that I don't feel like we get enough credit from an investor standpoint. We're trying to communicate this more effectively, but I think what's happened over the years is, you know, for the last few years, a lot of our cash generation has gone to pay down the debt associated with the HeyDude acquisition. And so it was kind of like cash that was being deployed, but, you know, obviously, you know, in a way that wasn't really returning value to shareholders at that point in time. We're now in, you know, what I call kind of the Goldilocks zone of our leverage. We don't have too much. We don't have too little. I I feel really good about where we are as a consumer company with the level of leverage we have. We're at the lower end of our target of one to 1.5 times. So feel great there. And so what we've been able to do over the last six, 12 months or so is aim the power of that cash generation to truly returning value to shareholders through buybacks. And so over the course of the last year, We bought back roughly about 10% of our outstanding shares. We are positioned to be aggressive in the space in 2026. We don't formally guide our buyback program, but we've been aggressively in the space post-Q1. And so it's something that is looking at our stock and personally believing it's a buy and that we're undervalued. We'll continue to be in the space.

Couldn't think of a better way to end. Patrick, thank you. I think we covered a lot of ground, and I appreciate you being here today. Patrick will be with us over in the Aster Suite for a few minutes afterward for a breakout session. If you could all join me in thanking Crocs, Abby, and Patrick.