EXEC: Crocs Hikes Guidance On Hey Dude’s Outperformance

Crocs, Inc. raised its guidance for earnings and sales for the year as the Crocs brand’s first-quarter results came in slightly ahead of guidance and Hey Dude’s came in well ahead with strong momentum behind the recently-acquired brand.

“Within our overall company results, the Crocs brand performed very strongly across all regions and channels,” said Andrew Rees, CEO, on a conference call with analysts. “While we have only owned Hey Dude for six weeks during the quarter, we are rapidly assimilating it into the company, and it’s very clear that demand for the brand is exceptional, and we’re confident in a robust growth runway.”

In the quarter ended March 31, revenues of $660.1 million increased 43.5 percent on a reported basis and 46.7 percent on a constant-currency basis, as compared to 2021. When it reported fourth-quarter results on February 16, Crocs projected sales for the first quarter in the range of $605 million to $630 million, implying approximately 31 percent to 37 percent growth.

Crocs brand revenues of $545.2 million increased 18.5 percent on a reported basis, or 21.7 percent on a constant currency basis. Results topped guidance in the range of $520 million to $535 million, which had implied organic growth of approximately 13 percent to 16 percent.

Wholesale revenues for the Crocs brand increased 18.7 percent, or 22.9 percent on a constant-currency basis. DTC revenues increased 18.2 percent, or 19.7 percent on a constant-currency basis. Crocs brand digital sales grew 20.3 percent, or 23.5 percent on a constant-currency basis, to represent 32.8 percent of Crocs brand revenues versus 32.3 percent in the prior year.

Breaking out regional performance for the Crocs brand, revenues in North America reached $319.5 million, up 19.5 percent on both a reported and on a constant-currency basis. Asia Pacific revenues of $95.8 million increased 16.0 percent, or 22.1 percent on a constant currency basis. Europe, Middle East, Africa, and Latin America (EMEALA) revenues of $129.9 million increased 17.9 percent, or 26.8 percent on a constant-currency basis.

Hey Dude revenues were $114.9 million for the period, easily topping guidance calling for revenues in the range of $85 million to $95 million. Hey Dude digital penetration was 25.9 percent.

Rees noted that on a Pro-forma basis, Q1 revenues for Hey Dude were $205 million, up 81 percent. Rees added, “The Hey Dude integration is proceeding well and is on track. Adjusted operating margins on a consolidated basis, including Crocs and Hey Dude, was best-in-class to 27 percent.”

Including both the Crocs brand and Hey Dude, DTC revenues jumped 34.6 percent to $229.0 million and grew 36.1 percent on a constant-currency basis. Wholesale revenues surged 48.7 percent to $431.2 million and gained 52.9 percent on a constant-currency basis.

Gross margins for the company eroded 580 basis points to 49.2 percent. Crocs brand gross margin decreased 60 basis points to 54.4 percent, driven by $24.6 million, or 450 basis points, of incremental air freight costs, mostly offset by higher average selling prices. Adjusted gross margin of 53.9 percent fell 130 basis points. Adjusted gross margin excludes $30.9 million of costs, including a $27.9 million Hey Dude inventory fair value adjustment and a $1.8 million Russia inventory reserve.

SG&A expenses increased 60.5 percent to $206.2 million and grew as a percent of sales to 31.2 percent from 27.9 percent in the prior year. Adjusted SG&A improved to 27.3 percent of revenues versus 27.9 percent for the same period last year.

Adjusted SG&A excludes $25.9 million of costs, including $20.6 million of Hey Dude acquisition-related expenses and $5.3 million of bad debt associated with its pause in Russia. Non-GAAP adjustments also include an additional $40 million of non-cash costs in cost of sales, primarily related to the write-up of Hey Dude inventory costs to fair market value at the close of the acquisition.

Operating income declined 4.8 percent to $118.7 million from $124.7 million for the same period last year, due to increased air freight and acquisition expenses, and the operating margin decreased to 18.0 percent from 27.1 percent.

Adjusted operating income rose 39.6 percent to $175.5 million and the adjusted operating margin improved to 26.6 percent from 27.3 percent for the same period last year. Adjusted operating margin was projected to be approximately 22 percent, including a roughly $30 million impact from air freight.

Net earnings declined 26.1 percent to $72.8 million, or $1.19 a share, from $98.4 million, or $1.47, a year ago. On an adjusted basis, earnings rose 25.7 percent to $125.0 million, or $2.05 a share, from $99.5 million, or $1.49, a year ago.

Highlighting brand performance, Rees cited the 20 percent DTC growth as a sign of strength in demand for the Crocs brand. He also noted that Crocs jumped up two spots in the Piper Sandler Spring Teen Survey to become the No. 6 preferred footwear brand among teens.

“We continue to drive Crocs brand relevance and consideration through many activations,” said Rees. “We made waves at the Grammys when Justin Bieber wore a hard Crocs sandal created in collaboration with luxury fashion house, Balenciaga, and Quest Love wore a Polex clog from a partnership with renowned footwear designer Salehe Bembury. In China, we introduced fashion and entertainment icon, Nana, as China’s newest Crocs ambassador, leveraging her creativity and ingenuity. We continue to run many innovative digital marketing campaigns.”

For its Karol G collaboration, a custom playlist with Spotify was curated and helped drive 1.4 million visits to the Crocs’ website during the campaign. The Karol G Instagram announcement also became the second most-liked post in Crocs’ social history.

To drive sandals sales among athletes, Crocs teamed up with Slam magazine to create a content series highlighting how four global basketball stars incorporate Crocs into their off-court looks. Crocs also ranked in the top five most popular brands in the NBA 2K video game series.

Crocs’ Valentine’s Day collaboration with Sweethearts Candy to create its classic sweetheart fur clog drove 200,000 unique visitors to its website, and the novelty Crocs were a topic of conversation on the Late Late Show between host James Gordon and guest Nicki Minaj.

On product, the Crocs Cozzzy sandal debuted in a digital-first launch on the Crocs app. Crocs also had a “very promising start” to its newly launched Literide 360 franchise that features enhanced breathability and comfort as well as a higher price point than its original Literide franchise. Rees said, “From a channel perspective, we achieved strong growth in both DTC and wholesale as revenues benefited from higher pricing, favorable product mix and lower promotional levels as compared to last year.”

The Hey Dude acquisition closed on February 17 and sales came in ahead of expectations.

“Demand was incredible, both in wholesale and digital, fueling 81 percent pro forma growth for the quarter. Underlying momentum is exceptional for Heydude,” said Rees. “The brand ranked ninth in the Piper Sandler Spring 2022 survey, cracking the top 10 for the second consecutive survey, and remains particularly strong in the Midwest and South. To drive future growth, we’re focused on building out the brand platform for Heydude. You will begin to see some of this work in the marketplace later this year. By investing in talent, marketing and digital, we look forward to taking this highly successful brand that consumers love and growing into a $1 billion-plus brand across the U.S. and high potential international markets.”

Rees said the Hey Dude acquisition is proceeding on plan. The CEO said, “As we mentioned, during our fourth-quarter conference call, we’ve hired many of the key leadership positions. We’re integrating the shared service functions, including HR, finance, legal and supply chain, with the integration on track and results already exceeding expectations. We look forward to continued success of this high growth, highly profitable brand.”

Companywide, inventories increased to $407.6 million as of March 31 compared to $213.5 million as of December 31 and $196.5 million as of March 31, 2021. This increase was driven primarily by the addition of the Hey Dude brand and an increase in transit inventory for the Crocs brand.

For the current year, Crocs now expects:

• Consolidated revenues to be approximately $3.5 billion, representing growth between 52 percent and 55 percent compared to 2021. Previously, sales were estimated between $3.37 billion and $3.4 billion, representing growth between 47 and 48 percent.
• Revenue growth for the Crocs brand, excluding Hey Dude, to exceed 20 percent compared to 2021, in line with prior guidance.
• Revenues for the Hey Dude brand to be approximately $750 million to $800 million on a reported basis, implying $840 million to $890 million, including the period of time prior to the closing of the acquisition, well above the prior forecast calling for revenues in the range of $620 million to $670 million on a reported basis and $700 million to $750 million for the full year on a proforma basis.
• Gross margin to include an incremental $75 million of air freight in the first half of 2022, in line with prior guidance.
• Adjusted operating margin to be approximately 26 percent to 27 percent. Previously, Crocs expected the operating margin to be approximately 26 percent.
• Non-GAAP adjustments of $75 million of non-cash costs in cost of sales, primarily related to the write-up of Hey Dude inventory costs to fair market value at the close of the acquisition, and an additional $60 million in SG&A costs, in line with prior guidance.
• GAAP tax rate of approximately 25 percent and Non-GAAP effective tax rate of approximately 22 percent, in line with prior guidance.
• Adjusted diluted earnings per share of $10.05 to $10.65, up from prior guidance in the range of $9.70 to $10.25.
• Capital expenditures of approximately $170 million to $200 million, primarily for supply chain investments to support growth, in line with prior guidance.
• Gross leverage to be below 2.0x by mid-year 2023 following strong earnings and cash flow expectations for 2022.

For the second quarter, Crocs expects:

• Consolidated revenues to be approximately $918 millioiin to $957 million, implying approximately 43 percent to 49 percent growth.
• Crocs brand revenue growth to be approximately 17 percent to 20 percent on a constant-currency basis, and 12 percent to 15 percent on a reported basis, which implies revenues of approximately $718 miillion to $737 million on a reported basis. The impact to the prior year of pausing Russia is approximately $20 million.
• Hey Dude brand revenues of approximately $200 million to $220 million.
• Adjusted operating margin of approximately 26 percent, including an estimated $50 million impact from air freight.
• Non-GAAP adjustments of an additional $45 million of non-cash costs in cost of sales, primarily related to the write-up of Hey Dude inventory costs to fair market value at the close of the acquisition, and $20 million in SG&A costs.

Photo courtesy Hey Dude