Shares of Crocs, Inc. lost 11 percent of their value on Thursday after the cushy-shoe maker slightly lowered its sales and earnings guidance for the year. The company now expects sales for the Crocs brand to grow approximately 14 percent to 17 percent in 2022 or 10 percent to 13 percent on a currency-neutral basis.
Previously, revenue growth for the Crocs brand was projected to exceed 20 percent compared to 2021.
“With uncertainty around the future macroeconomic environment and consumer behavior, we are planning for lower growth in the Crocs Brand in the short-term,” said Andrew Rees, Crocs’ CEO, on the company’s second-quarter analyst call. “Our assumption is a consumer confidence in the U.S. and key European markets will continue to soften as the year progresses, as higher interest rates and high food and energy inflation slow consumption.”
At the same time, guidance for Hey Dude, acquired in February 2022, was raised to $850 million to $890 million, nearly a billion dollars on a proforma basis for the full year, following a strong first half. Previously, the company guided Hey Dude’s revenues for 2022 would be approximately $750 million to $800 million on a reported basis, implying $840 million to $890 million annually.
Crocs’ updated outlook calls for:
- Consolidated revenues to be approximately $3.395 billion to $3.505 billion, representing growth between 47 percent and 52 percent compared to 2021. Previously, guidance called for sales of approximately $3.5 billion;
- Gross margin to still include $75 million of air freight in 2022;
- Adjusted operating income of approximately $880 million to $945 million and adjusted operating margin remain roughly 26 percent to 27 percent, excluding non-GAAP adjustments primarily related to the Hey Dude acquisition and integration of $75 million in cost of sales and $55 million in SG&A; and
- Adjusted EPS was lowered to between $9.50 and $10.30 due to revenue revisions. Previously, guidance called for adjusted EPS between $10.05 and $10.65.
Shares of Crocs closed Thursday at $69.08, down $8.30, or 10.7 percent.
Despite a strong quarter for Crocs, the updated guidance came as sales and earnings were above guidance.
In the quarter ended June 30, earnings fell 49.7 percent to $160.3 million, or $2.58 a share, from $319 million, or $4.93, a year ago, primarily driven down by costs related to the integration of Heydude. On an adjusted basis, earnings rose 39.4 percent to $201.3 million, or $3.24, from $144.4 million, or $2.23, a year ago. Results came in well above Wall Street’s consensus estimate of $2.75.
Consolidated revenues of $964.6 million increased 50.5 percent, or 55.6 percent on a constant currency basis, compared to 2021. Crocs had guided sales to range between $918 and $957 million.
Gross margin declined to 51.6 percent from 61.7 percent, and adjusted gross margin slid to 55.2 percent from 61.8 percent in the same period last year. Adjusted gross margin excludes $35.1 million of costs, of which $34.3 million is a Hey Dude inventory fair value step-up related to the acquisition. Crocs Brand gross margin was 57.7 percent, 400 basis points lower than the prior year, driven primarily by 445 basis points of freight headwinds, including 340 basis points of air freight, and 105 basis points of currency, partially offset by increased prices and product mix.
SG&A expense of $249.8 million increased from $199.9 million in the same period last year, and SG&A, as a percent of revenues, improved to 25.9 percent from 31.2 percent in the prior year. Adjusted SG&A improved to 25.1 percent of revenues versus 31.2 percent for the same period last year. Adjusted SG&A excludes $7.5 million of costs, primarily related to the Hey Dude integration.
Income from operations increased 27.0 percent to $248.0 million, and the operating margin was 25.7 percent compared to 30.5 percent for the same period last year due to increased air freight and Hey Dude acquisition and integration expenses. Adjusted operating income rose 47.9 percent to $290.6 million, and the adjusted operating margin was 30.1 percent, well ahead of company guidance of approximately 26 percent. Incremental air freight costs negatively impacted adjusted operating margin by 240 basis points and currency affected by 80 basis points.
By brand, Crocs brand revenues of $732.2 million in the quarter increased 14.3 percent, or 19.4 percent on a constant-currency basis, as compared to 2021. The growth was impacted negatively by Russia and China lockdowns due to COVID, which offset approximately three percentage points of growth.
Wholesale revenues for the Crocs brand increased 27.7 percent, or 35.2 percent, on a constant-currency basis. DTC comparable sales increased 7.5 percent. Crocs Brand digital sales grew 16.8 percent, or 20.8 percent on a constant-currency basis, to represent 37.2 percent of Crocs brand revenues versus 36.4 percent in the prior year.
Hey Dude’s revenues were $232.4 million for the quarter, up 96 percent compared to 2021. Wholesale revenues were $162.5 million, and DTC revenues were $69.9 million. Hey Dude digital penetration was 31.5 percent of its revenues.
Rees said both the Crocs and Hey Dude brands outperformed what it estimated to be flat to down U.S. footwear market. He said, “Both Crocs, Inc. and the Crocs Brand are gaining significant market share.”
Rees said the integration of Hey Dude is “going well,” including making key hires and recently launching of a brand campaign that includes updated branding.
“Hey Dude is one of the hottest brands in the U.S. footwear market today because of the consumer love of the brand and its products,” said Rees. “We are investing rapidly in the capabilities that will allow us to sustain the brand’s growth potential. While we are not yet ready to outline the longer-term potential, we believe it is significant, and we will easily achieve a short-term goal of a billion dollars in sales.”
Rees said he expects Crocs to continue to gain market share because of its comfort positioning, molded DNA, strong marketing and product innovation pipeline.
“We have developed deep connections with our consumers, and they love our brand as evidenced by our brand metrics, which continue to be very strong as well as leading industry sales,” said Rees. “When we combine brand awareness and relevance with our democratic price point, the brand is well-positioned to thrive when the consumer is looking for comfort and value,” Rees continued.
Internationally, Crocs sees strong growth in South Korea, India and Southeast Asia, and the company is “very encouraged by the green shoots we are seeing in China.”
Successful collaborations and licenses, ranging from the second drop of Salehe Bembury to Cinnamon Toast Crunch Cereal to MCM in China and Lazy Oaf in Europe, continue to elevate the buzz around the brand.
From a product perspective, Crocs expanded its sandal portfolio with the Crush Sandal, which debuted in the U.S. and top Asian markets. “Innovations such as the Crush Sandal and dedicated marketing campaigns, such as Summer of Crocs that featured five new sandal introductions, are just two examples of how we are driving growth in the $30 billion sandal market,” said Rees.
Sandals, however, were a disappointment, down 13 percent year-to-date on a currency-neutral basis. Rees said Crocs “over-edited the line to maximize throughput at the factories,” which caused delays in bringing newness to market. The U.S. also had a “poor” sandal season. Rees added, “Year-to-date, we do see strong double-digit growth in our Icon Sandal franchise, and we expect sandals to improve in the back half with more newness and additional marketing.”
Inventories increased to $501.5 million as of June 30, 2022, compared to $213.5 million as of December 31, 2021 and $209.1 million as of June 30, 2021. This increase was driven primarily by the addition of Heydude and an increase in transit inventory for the Crocs Brand.
For the third quarter, Crocs expects:
- Consolidated revenues to be approximately $915 to $955 million, implying roughly 46 percent to 53 percent growth compared to third quarter 2021 revenues of $626 million; and
- An Adjusted operating margin of approximately 25 percent to 26 percent, including roughly a $15 million impact from air freight, excluding non-GAAP adjustments of $10 million in SG&A primarily related to the Hey Dude integration.
Photo courtesy Crocs