Crocs, Inc. shares fell $26.5, or 19.2 percent, to $111.58 on Tuesday, October 29 after the footwear company reported third-quarter results that topped analyst estimates but also tempered its full-year sales guidance as the turnaround at HeyDude falls behind schedule. The Crocs brand is also facing slower growth in North America and China.

Crocs now expects to report annual revenue growth of around 3 percent versus the prior year in 2024, at the bottom end of its previously forecast of between 3 percent to 5 percent.

Sales at its HeyDude division, which Crocs, Inc. acquired in February 2022 are now seen falling by approximately 14.5 percent, compared to an earlier estimate calling for a decline of 8 percent to 10 percent.

Sales for its flagship Crocs brand are still expected to grow approximately 7 percent to 9 percent. However, Crocs, Inc. management warned that the Crocs brand will see flattish growth in the fourth quarter, citing signs of a slowdown in North America and China.

FY EPS Guidance Raised

On the positive side, adjusted EPS for the year are now seen in the range of $12.82 to $12.90, at the high end of prior guidance of $12.45 to $12.90. The better EPS outlook comes as Crocs, Inc. reported earnings on an adjusted basis improved 6.8 percent to $214.0 million, or $3.60 a share, well ahead of Wall Street’s consensus estimate of $3.13.

Including non-recurring charges related non-IT system impairments related to related to and the amortization of intellectual property, reported net income was $199.8 million, or $3.36 a share, compared to $177.0 million, or $2.87, a year ago.

Companywide revenues in the quarter grew 1.6 percent to $1.06 million, topping expectations of $1.05 billion.

At the Crocs brand, revenues in the third quarter increased 7.4 percent to $858 million, or 7.9 percent on a currency-neutral (c-n) basis. By channel for the Crocs brand, DTC revenues increased 7.7 percent (+8.0 percent c-n) to $463 million while wholesale gained 7.1 percent (+7.8 percent c-n) to $396 million.

HeyDude’s revenues slumped 17.4 percent to $204 million with DTC revenues down 9.3 percent to $91 million and wholesale revenues tumbling 22.9 percent to $113 million.

On an analyst conference call Tuesday, Andrew Rees, CEO, Croc, Inc., said HeyDude’s sales came in slightly below expectations. HeyDude was expected to show a decline in wholesale revenues, but guidance anticipated stabilization at the DTC level. HeyDude also shifted its investment strategy around performance marketing, shifting investments towards brand marketing, which impacted its digital performance negatively.

Rees said that while HeyDude is seeing some “green shoots” indicating it can get back to a healthy growth trajectory, but the brand’s “recent performance and the current operating environment are signaling it will take longer than we had initially planned for the business to turn the corner.”

HeyDude’s Missteps

Asked by an analyst about the longstanding challenges since acquiring the brand in February 2022, Rees admitted that the brand “definitely grew too fast” and “we absolutely shipped too much products” although HeyDude was facing out-of-stock issues at the time of the acquisition. He said, “We didn’t know how high was up and our customers didn’t either.”

Second, he said HeyDude’s initial marketing approach wasn’t “ineffective.” He elaborated, “They weren’t focused on the right consumer, and they weren’t creating the kind of resonance and impact that we wanted.”

Third, Rees said the integration process, including setting up distribution centers, took longer than expected to delay “offensive investments” HeyDude is only recently pursuing, including opening up outlet stores and pursuing international growth.

The CEO said the company has still been able to grow the business from $600 million in annual sales to about $800 million. While operating margins are lower, they reflect brand-building investments that Crocs, Inc. believes will pay off. Rees said, “So, it has not gone…as we would have hoped and expected, but that doesn’t change our confidence around the future, the team that we have in place, the strategies and activities that we have deployed and our willingness to support that team, those strategies and activities.”

As far as current changes to revive growth, HeyDude is working on improving its positioning around youth female culture that Rees believes “is a key driver of influence, brand connectivity and a catalyst to build community.” As part of that effort, actress Sydney Sweeney was recently signed as HeyDude’s global brand ambassador, and the brand launched on TikTok Shop.

HeyDude is also emphasizing its best-known styles, Wally and Wendy, with three core offerings including Stretch Sox, Stretch canvas and Funk Mono. Rees said, “During the quarter, we iterated on these core offerings through our collaboration engine, successfully introducing Beetlejuice and SpongeBob to name a few.” HeyDude also announced a long-term partnership with Jelly Roll with an initial collaboration with the country music singer featured the Wally model selling out in minutes.

Since a restructuring was announced last September, HeyDude has further exited more than 50 percent of its accounts to clean up distribution while building relationships across its larger strategic retailers, similar to the approach utilized by the Crocs brand. Rees said HeyDude has worked to improve its inventory position with inventory turns improving to four times a year. HeyDude further opened 29 outlet stores and they’re reportedly performing in line with expectations.

In a sign that Croc, Inc. is taking the correct steps in supporting the long-term health of HeyDude, Rees noted that the brand is continuing to strengthen ASPs (average selling prices), which were up 4 percent to $30.94 in the quarter. At the same time, volumes were lower with 7 million pairs of shoes sold, 21 percent below last year.

Rees concluded on HeyDude, “We continue to have confidence about the long-term potential of the brand and the green shoots we are seeing give us positive reinforcement around our opportunity. I am incredibly proud of the HeyDude team and the urgency with which they have executed against our sharpened strategy.”

Crocs Brand Seeing Softening Sales in North America and China

The Crocs brand performed slightly ahead of expectations in the quarter. The 7.9 percent currency-neutral growth was volume-driven, with units increasing 11 percent versus last year to a total of 32.1 million pairs of shoes sold, while brand ASPs decreased 3 percent to $26.48. ASPs were below last year tied largely to product mix and slight price erosion.

By region, North America revenues for Crocs brand grew 2 percent versus the prior year to $491 million. Growth was led by DTC, which was up 4 percent, while wholesale was down 2 percent. Underlying North American brick-and-mortar growth was up mid-single digits.

Rees said, “In North America, the consumer has reverted to pre-pandemic shopping patterns dropping closer to need and concentrating spend around key shopping events and holidays. We saw a solid back-to-school season, but since Labor Day, we have seen the consumer pull back. We anticipate the consumer environment being relatively muted in the U.S. until Black Friday/Cyber Monday holiday period.”

International revenues for the Crocs brand were $367 million in Q3, growing 17 percent versus the prior-year period, led by DTC growth of 18 percent and wholesale growth of 15 percent. Direct European markets continued to show healthy growth in the quarter, led by Germany and France. Notable growth was also seen in Australia while sales in China grew in excess of 20 percent on top of last year’s 90 percent plus growth rate. Two-thirds of the growth in China was driven by mono-brand partner stores.

Rees said on China, “As we shared during our second quarter call, the industry was more promotional during the mid-season festival. It is clear that the Chinese consumer is being far more conservative in their purchase behavior, and we have seen an even more pronounced pullback within key Tier 1 cities like Shanghai and Beijing. In light of the broader macro environment in China, we are taking a more cautious view for the rest of the year. Despite this backdrop, our brand continues to gain share in China, which we believe is a direct result of our accessible, authentic and personalizable brand positioning, serving as a meaningful competitive advantage.”

Outlook

Looking to the fourth quarter, Crocs, Inc. expects consolidated revenues to be in the range of flat to up slightly.

The Crocs brand is projected to grow approximately 2 percent compared to fourth quarter 2023. The fourth quarter international growth rate is expected to be below its year-to-date growth rate based due to a more cautious consumer in China and ongoing regulatory pressure in India. In North America, sales for the Crocs brand are expected to be slightly negative in the fourth quarter, which includes expectations of “a more choiceful consumer as well as the timing of wholesale shipments between quarters,” said CFO Susan Healy. For the second half, North America for the Crocs brand is expected to be flat to prior year, in line with previous expectations. Q4 DTC is projected to remain positive.

HeyDude’s revenue is expected to be down between 4 percent and 6 percent in the fourth quarter, below the former implied range of up low- to mid-teens. The largest driver of the lower revenue outlook is tied to lower-than-expected sellouts on both digital and wholesale.

Adjusted gross margins are expected to be up for the enterprise, with the Crocs brand up slightly and HeyDude slightly down versus prior year. Adjusted diluted EPS is expected to be between $2.20 to $2.28, which compares to $2.58 a year ago.

Image courtesy HeyDude/Crocs, Inc.