Crocs, Inc’s results for the fourth quarter and year came in even better than a favorable pre-announcement issued in early January. On an analyst call, CEO Andrew Rees called out sandals and international as key growth drivers for the Crocs brand in the current year while also expecting Heydude to build on its ramped-up wholesale partner expansion in the U.S.

Shares of Crocs closed Thursday at $131.20, up $5.53, or 4.4 percent, in over-the-counter trading

“These results underscore the high consumer demand globally for the Crocs brand, the growing momentum of the Heydude brand and our ability to consistently deliver strong profitability while investing for the future,” said Rees on the quarter call. “Looking forward to 2023, we expect another year of robust revenue growth, top-tier margins and significant cash flow generation.”

In the quarter ended December 31, revenues climbed 61.1 percent (+64.8 percent currency-neutral), to $945.2 million, topping Wall Street’s consensus estimate of $939.26 million.

Crocs in early January said it expected sales in the quarter to expand approximately 60 percent compared to 2021.

Earnings declined 11.1 percent to $137.7 million, or $2.20 a share, with the decline due to a year-ago tax benefit. Adjusted EPS advanced 23.3 percent to $2.65, topping Wall Street’s consensus estimate of $2.26.

Crocs Brand Q4 Sales Expand 17 Percent Currency-Neutral
At the Crocs brand, sales in the quarter grew 13.5 percent (17.2 percent currency-neutral) to $666.0 million.

During the quarter, the Crocs brand sold 27 million pairs of shoes, an increase of 20.8 percent over last year. The average selling price was $23.95, a decline of 6.8 percent (3.6 percent currency-neutral) as a slight decline in North America associated with higher DTC (direct-to-consumer) promotions offset currency-neutral average selling prices (ASP) increases internationally.

Anne Mehlman, EVP and CFO, noted, “Importantly, while the North American markets became more promotional in the second half of the year, and helped rightsize channel inventories to a healthy level, the Crocs brand was still less promotional in the fourth quarter and for the full year than pre pandemic.”

From a product perspective for the fourth quarter, sales increased 9 percent in clogs, 53 percent in sandals and 13 percent in its Jibbitz add-on charms business. Clogs accounted for 70 percent of the brand’s revenues in the quarter; sandals, 10 percent; and Jibbitz, 8 percent.

By region for the Crocs brand, North America sales were $457 million, up 0.3 percent from 2021 as strong DTC growth of 18 percent largely offset by 25 percent decline in wholesale. DTC comps increased 13 percent on top of 53 percent growth in the fourth quarter of 2021. The wholesale decline reflected continued efforts to proactively manage market health that has included exiting less-desirable accounts.

Mehlman added, “Brick and mortar channel inventory in North America is very healthy, with on-hand inventory levels down double digits versus the prior year.”

Internationally, Asia revenues for the Crocs brand in the fourth quarter were $91 million, up 74.8 percent on a currency-neutral basis from last year with growth across all channels and all key focus markets. South Korea and India continue to outperform with strong double-digit growth. China grew 38 percent for the quarter following 34 percent growth in Q3

In Europe, Middle East, Africa, and Latin America (EMEALA), sales surged 75.6 percent to $118.3 million despite exiting direct Russia operations. Mehlman stated, “Momentum has been building over the last two years and resulted in broad-based growth in our direct and distributor markets.”

For the year, revenues for Crocs brand increased 14.9 percent (19.4 percent currency-neutral), to $2,659.1 million. Wholesale revenues increased 17.3 percent (23.4 percent currency-neutral), and DTC revenues rose 12.5 percent (15.3 percent currency-neutral). By region, currency-neutral sales improved 6.0 in North America, 47 percent in Asia Pacific, and 46.8 percent in EMEALA. For the full year, clogs accounted for 77 percent of Crocs brand revenues; sandals, 12 percent; and Jibbitz, 8 percent.

Heydude Q4 Sales Expand 36.6 Percent
Heydude’s revenues were $279 million, up 36.6 percent on a pro-forma basis. The brand was acquired on February 17, 2022. Digital sales were particularly strong during holiday selling and represented 51.6 percent of brand sales in the quarter. Mehlman said, “We remain confident in the potential of the brand and look forward to sharing our growth strategies and plans in the future.”

In companywide, direct-to-consumer (DTC), which includes retail and e-commerce, revenues grew 61.2 percent and wholesale revenues grew 61.1 percent.

From a channel perspective across both brands, consolidated digital business, which combines the company’s owned websites, third-party marketplaces, and e-tailers (which are reported in the wholesale channel), grew 80 percent on top of 41 percent growth in Q4 of 2021. Digital penetration for the quarter was 45.1 percent, up from 40.3 percent last year and 34.2 percent in 2019. Mehlman said, “Our digital growth benefited from product newness, refined user experience and additional marketing activities that drove strong traffic.”

Gross margins in the quarter were 53.3 percent, down approximately 1000 basis points from last year. About half of the decline was due to the addition of Heydude.

The Crocs brand’s adjusted gross margin was 56.1 percent or 760 basis points lower than the prior year. The year-ago period’s margins were boosted by pricing actions taken ahead of inflation and an overall lack of promotions in the marketplace. The decline in adjusted gross margin is attributable to approximately 340 basis points of promotions, 180 basis points of inflationary costs, 180 basis points of higher freight and inventory handling costs, and 70 basis points from currency headwinds.

Heydude’s gross margin in the quarter was 46.4 percent as the positive channel mix was offset by the continued effect of legacy freight contract costs, higher inventory storage costs tied to ongoing upgrades of the brand’s distribution center capabilities, and holiday promotional activity.

SG&A expenses was lowered 690 basis points to 29.2 percent of sales primarily due to leverage of shared services across both brands. Adjusted SG&A improved 780 basis points to 27.3 percent of revenues. Adjusted SG&A excludes costs related to the shutdown of Russia’s direct operations and the Heydude acquisition and integration.

Full-Year Revenues Expand 54 Percent
For the year, revenues reached $3.6 billion, increasing 53.7 percent (58.2 percent currency-neutral). In its guidance update on January 10, Crocs said it expected sales for the year of $3.55 billion, up approximately 53 percent compared to 2021 and above its previous guidance of approximately 49 percent to 52 percent growth.

Crocs brand revenues in the year increased 14.9 percent (19.4 percent currency neutral), to $2,659.1 million.

Heydude brand revenues exceeded initial expectations and reached nearly a billion dollars on a pro-forma basis while delivering over $275 million in adjusted operating income. Heydude’s reported revenues were $895.9 million for the period following the acquisition closing.

Adjusted operating margin was 27.7 percent compared to 30.1 percent last year due to lower gross margins but topped guidance calling for non-GAAP operating margin of approximately 27 percent. Adjusted diluted earnings per share increased 31.3 percent to $677.3 million, or $10.92.

Crocs reiterated its outlook for 2023 given in its January update that called for sales to increase in the range of 10 percent to 13 percent, resulting in full-year revenues of approximately $3.9 billion to $4.0 billion.

Revenues for the Crocs brand are projected to grow 6 percent to 8 percent (9 percent to 11 percent in constant currency) while Heydude is expected to grow mid-20 percent on a reported basis.

Adjusted operating margin is expected to be approximately 26.0 percent while adjusted EPS is projected in the range of $11.00 to $11.31.

For the first quarter, revenues are expected to grow approximately 27 percent to 30 percent, adjusted operating margin to land in the range of 24 percent to 25 percent (vs. 26.6 percent last year) and adjusted EPS to arrive between $2.06 to $2.19 (versus $2.05 last year.)

2023 Growth Drivers
Rees said growth in the current year is expected to be led by sandals and international for the Crocs brand and increased U.S. market penetration for Heydude.

Expanding on those opportunities, Rees said sandals enable the Crocs brand to extend into an “adjacent $30 billion global sandal category where we believe our molded technologies, accessible price points, and the strong go-to-market will allow us to compete effectively in a relatively fragmented market. The category also provides an additional entry point to the Crocs brand for consumers who may not choose to engage with the clog.”

He said the company is confident that the Crocs sandals will resonate with consumers as the category is already a $310 million business for the brand.

In 2022, sandal sales for the Crocs brand were down in the first half due to a lack of newness tied to the Vietnam factory shutdowns in 2021. The second half saw sandal sales grow 31 percent with a good response to the Crush, Mello, Echo and other new styles, supported by sandal-specific marketing.

“Were incredibly confident in sandal growth in 2023 given planned newness, a significant increase in marketing allocated to sandals, and the strong Crocs brand trajectory in important sandal markets such as India and Southeast Asia. With respect to newness in our Style category, we’re planning additional heights and new uppers in our popular Brooklyn franchise. In our Street/Sport category, we continue to use innovative technology in our Mello franchise and we’ll launch a new flip during the year. With the new product introductions, marketing investments, and regional brand momentum, we expect sandals to be our fastest-growing product category in 2023, reaching approximately $400 million in sales.”

Some highlights in the strong international growth last year included 38 percent constant-currency growth in the EMEALA region, led by 105 percent growth in the U.K. In Asia, South Korea grew over 30 percent constant currency, despite having an already high level of penetration. India vaulted 91 percent in constant currencies. China is expected to grow approximately 30 percent in 2023 as the country continues to reopen following pandemic-related lockdowns.

Rees said the Crocs brand is using the same strategy in foreign markets that has driven success in the U.S. market. Said Rees, “We have now seen eight consecutive quarters of strong double-digit growth outside of North America. We anticipate even greater growth as the Crocs brand has approximately one-third the penetration internationally than it has here in the U.S.”

Rees overall said the Crocs brand’s growth will be supported in 2023 by record marketing spend of over $200 million with a digital-led focus, record new product introductions and “a strong pipeline of more than 60 global brand partnerships across a healthy mix of celebrities, mega brands and licenses, of which 25 percent will be regionally led.”

Regarding Heydude, Rees said the brand’s integration is on track with recent accomplishments including updating the brand’s identity and clarifying its purpose and meaning. Over 150 hires have been made to better position the brand for growth and $60 million was spent on marketing in the second half of 2022, which on an annualized basis was almost four times the amount spent in 2021.

“We’ve also seen great initial results exceeding our expectations,” said Rees, noting that brand revenues in 2022 grew 70 percent on a pro-forma basis, driven by wholesale partner expansion in the U.S.  DTC revenues were approximately 36 percent of sales.

Said Rees, ‘While we have more to do, we’re incredibly excited about our results thus far, the potential for the Heydude brand and the value this acquisition would generate for shareholders.”

Photo courtesy Crocs