Crocs, Inc. reported that revenues passed the billion-dollar mark in the second quarter to $1.07 billion, an increase of 11.2 percent from the same period last year, or 12.0 percent on a constant-currency basis. Direct-to-Consumer (DTC) revenues, which include retail and e-commerce, grew 26.0 percent, or 27.2 percent on a constant-currency basis. Wholesale revenues grew 0.2 percent compared to 2022, or 0.8 percent on a constant-currency basis.
The arrows were all pointing in the right direction until company management mentioned on a conference call with analysts that they were reducing the back half and full-year revenue expectations for the HeyDude brand. That news was credit with sending CROX shares down nearly 15 percent on Thursday.
Crocs brand revenues were reported at $833.0 million for the quarter, growing 13.8 percent (+14.9 percent constant-currency) versus the prior-year quarter, driven by strong DTC growth of 26.8 percent. DTC comp store sales increased 19.5 percent.
The brand reportedly sold 33 million pairs of shoes in Q2, an increase of 1.8 percent. The Crocs brand average selling price during Q2 was $25, which was up 12.8 percent on a constant-currency basis, driven by price increases and fewer DTC promotions internationally.
Wholesale revenues increased 3.8 percent, or 4.6 percent on a constant-currency basis.
Within the Crocs brand clogs sales grew double digits and were said to continue to generating demand with newer products such as Echo Crush and Dylan. Sandals, a category the company called “an important growth pillar for the future” increased 34 percent in the second quarter, with growth in all regions to represent 16 percent of Crocs brand sales in the period.
On a conference call with analysts, company CEO Andrew Rees said sandals posted 40 percent growth on a trailing 12-month basis. He said growth was robust in all regions, driven by their diversified sample offerings, new product introductions and robust marketing calendar.
“As we have shared, this category is an important growth initiative Crox allowing us to expand into the adjacent $30 billion global sandals category, where we believe our molded technologies, accessible price points, strong go-to-market, will allow us to compete effectively in a relatively fragmented market,” expressed Rees.
The company said Jibbitz continues to create excitement and engagement with consumers around the world, growing 13 percent from last year with strong growth internationally.
In North America, second quarter revenues increased 12.5 percent to $475 million and first half revenues increased 11.5 percent. The company said the brand gained significant market share in a declining U.S. footwear market. The North America DTC channel for the Crocs brand, which the company said is an indicator of underlying consumer demand, was said to be a key growth driver with DTC comparable sales up 12.9 percent. Wholesale revenues were also said to be robust, increasing 5.5 percent for the quarter, despite a more challenging wholesale environment.
Asia Pacific delivered significant growth as the company said it executes on its long-term growth plan to ignite the brand in the region. The region grew 39 percent to $198 million in the quarter, with broad-based growth aCrocs countries and channels. China and Australia reportedly led the growth, with revenues increasing over triple digits, while South Korea and Southeast Asia also had strong double-digit growth.
Crocs brand revenues for EMEA were $160 million, a decline of 1.4 percent from the second quarter of 2022. Second quarter last year benefited from a $40 million revenue shift out of Q1 following the Vietnam factory shutdowns. Strong growth in direct markets including the U.K. and France, as well as outstanding DTC comp growth of 38.6 percent, was reportedly offset by a decline in distributors.
In connection with the newly implemented Marketplace Management Program in the quarter, the company terminated its relationship with a significant distributor servicing Africa. This was not anticipated going into the quarter, and CROX terminated the relationship after finding evidence of product diversion to the grey market outside of their approved territories. This impacted revenue by $8 million in Q2 and will impact second half revenues by $21 million. Still, the company expects EMEA revenue growth to reaccelerate in the back half of the year.
HeyDude brand revenues increased 3.0 percent year-over-year to $239.4 million in Q2. DTC revenues increased 29.7 percent to $90.6 million. Wholesale revenues declined 8.4 percent to $148.8 million following pipeline fill in the same period last year.
Turning to HeyDude, Q2 revenues were $239.4 million, an increase of 2.9 percent from Q2 last year. During Q2, the brand sold $8.3 million pairs of shoes, an increase of 3.6 percent versus second quarter 2022. HeyDude average selling price during Q2 was $28.88, or 0.6 percent lower than prior-year period due to price pressure from grey market selling on Amazon. The DTC channel, which is predominantly e-commerce for HeyDude, led the growth, with revenues increasing 29.7 percent versus Q2 last year. Digital sales increased 36.6 percent and digital penetration increased 1,000 basis points to 41.8 percent. Rees said underlying consumer demand for the HeyDude brand is incredibly healthy.
Consolidated gross margin was 57.9 percent of sales in Q2, compared to 51.6 percent in the prior-year comp quarter. Adjusted gross margin improved 290 basis points to 58.1 percent of sales compared to 55.2 percent in the same period last year, driven by favorability in ocean freight rates and the absence of air freight that was partially offset by higher overhead and fulfillment costs associated with the HeyDude distribution network. Currency fluctuation negatively impacted consolidated gross margins by approximately 50 basis points.
Adjusted gross margin for the Crocs brand was 62 percent, or 410 basis points higher than the prior-year quarter. Reduced air freight of approximately 380 basis points combined with lower inbound freight rates, higher prices internationally and channel mix were said to be partially offset by product mix. Currency negatively impacted margins by 80 basis points.
HeyDude adjusted gross margin was 47.1 percent, flat with the year-ago quarter. The company said it continues to see a reduction in inbound freight rates. This has apparently been offset by additional inventory, storage and network costs.
Consolidated adjusted SG&A represented 27.8 percent of revenues in the second quarter, 270 basis points higher than last year’s Q2 as the company invested more in marketing and talent for both brands to support their growth trajectory and annualized additional investments for HeyDude.
Income from operations increased 28.4 percent to $318.5 million and operating margin improved to 29.7 percent, compared to 25.7 percent for the same period last year, due to higher gross margin and significantly less Heydude acquisition expenses. Adjusted income from operations rose 11.7 percent to $324.6 million and adjusted operating margin improved 20 basis points to 30.3 percent of sales.
Diluted EPS increased 31.4 percent to $3.39 per share, as compared to $2.58 per share for the same period last year. Adjusted diluted earnings per share increased 10.8 percent to $3.59 a share compared to the 2022 quarter.
The company said “continued strong free cash flow generation” enabled it to repay approximately $300 million of debt in the first half, reducing borrowing to $2 billion. At the end of Q2 adjusted gross leverage was 1.8 times achieving the company’s mid-year leverage goal and net leverage was approximately 1.7 times as CROX ended the second quarter with $166 million of cash and cash equivalents.
The inventory balance at quarter-end was $436 million, a decline of 13 percent versus last year’s comp quarter-end. Crocs brand inventory was $307 million, down 8.4 percent to prior year, and HeyDude inventory was $130 million, a decrease of 22.3 percent to prior year. Inventory turns continue to improve and the company is apparently pleased with the health of its inventory.
Looking ahead, company CFO Anne Mehlman reported that the company now expects revenue growth of 12.5 percent to 14.5 percent on a reported basis compared to 2022, up from prior guidance of 11 percent to 14 percent growth and resulting in full year revenues of approximately $4 billion. She said they are focused on best in class profitability and are raising their adjusted operating margin to be approximately 27.5 percent for the full year.
We are confident in our ability to deliver higher operating margins as gross margins have outperformed and we have been able to closely manage SG&A while investing for future growth,” Mehlman said.
Mehlman also shared that the company is also raising its adjusted diluted earnings per share outlook to be between approximately $11.83 to $12.22, up from the prior guidance of $11.17 to $11.73.
“From a brand perspective, we are raising our expectations for the Crocs brand and now expect to grow 12 percent to 13 percent on a reported basis, up from 7 percent to 9 percent previously with Asia expected to deliver the highest growth and DTC outperformance expected to continue,” she said.
Then came the bad news.
Rees said the company was lowering its revenue outlook for HeyDude based on their back half expectations.
“As we outlined in June, there is $220 million of non-comparable sales last year due to the rapid expansion to major U.S. strategic customers and the discontinuation of relationships with some smaller customers,” he said. “Since then, while our wholesale partners are very pleased with the performance of HeyDude and a number have called us out in their recent earnings, many are cautious in terms of future bookings based on their overall market outlook and lack of historical data on HeyDude’s performance.”
He also said they anticipate constrained distribution capabilities, particularly related to at-once orders in the back half of the year due to ERP and warehouse transitions.
“Even with this lowered near-term revenue outlook, the HeyDude brand is acquiring new customers and is gaining penetration in strategic accounts and on the coasts,” he shared. “We remain incredibly optimistic about the long-term potential of the brand on a global basis.”
Photo courtesy Heydude
