Crocs, Inc. scraped its earnings and sales guidance for the year due to the continued underperformance of its recently acquired HeyDude brand. On an analyst call, Andrew Rees, Crocs’ CEO, admitted HeyDude has faced “several growing pains this past year” due to a mix of internal missteps and external pressures and forecasted the brand’s wholesale revenues in North America would remain negative through Q224.

“I want to take the time to share our learnings and our recent actions designed to bring the brand to a healthy pull market,” said Rees.

Rees noted that following the acquisition of HeyDude on February 17, 2022, Crocs accelerated the growth of the HeyDude brand by expanding it to Crocs’ strategic accounts.

“And we did it fast,” said Rees. “The intent of this decision was to build brand awareness and secure a shelf space with our most important retail partners. We have delivered on both of these goals.”

He noted that as evidenced in the company’s recent brand health tracker, aided awareness of the HeyDude brand in North America is now at 32 percent in Q3, up from 18 percent in Q1.

The CEO also pointed out earlier in the call that HeyDude was the No. 7 favorite footwear brand in Piper Sandler’s latest “Taking Stock With Teens” survey, reaching the highest share to date. In under-penetrated markets like the northeast, HeyDude’s mindshare almost tripled among the teen demographic.

Nonetheless, with the rapid expansion in HeyDude’s distribution, segmentation wasn’t optimized. Rees said, “We recognize the need to be better around driving effective segmentation alongside new product introductions to sustain this broader customer base.”

Rees also said HeyDude wound up with “more carryover inventory in our legacy customers than we had expected, which further diluted our offerings.”

In the first nine months of this year, progress has been made with HeyDude’s inventory ending down 41 percent from Q3 last year.

Rees also believes HeyDude’s North American marketplace management strategy stands to benefit going forward from several key hires over the past 12 months, including a GM of North America and a VP of global category and general management. He said, “We’re already seeing the benefits of the augmented team and believe this collective impact will build as we move throughout 2024.”

Part of the decline in HeyDude’s sales in the quarter reflects the brand’s initial shipments to a number of new wholesale accounts under Crocs’ ownership last year. The pipeline fill impacted Q3 by approximately $60 million with a $50 million headwind projected in Q4, unchanged from Crocs’ former outlook.

Externally, a change for HeyDude has been greater caution in ordering with at-once demand coming in lighter than previously expected. Rees said the cautious stance is hurting HeyDude as a newer brand than the more established Crocs brand.

Said Rees, “For the industry, the post-back-to-school wholesale market has been soft as consumers have pulled back and footfall has been down double digits. Our HeyDude brand, which has a limited history with retailers, has seen a more restricted open-to-buy as we look into the spring season. In sharp contrast, our spring order books for Crocs brands are strong for the first half of 2024, reflecting the ongoing momentum we see in the Crocs brand.”

Rees said HeyDude’s softness in part reflects a decision to stop price matching with the gray market goods that are selling on Amazon to support the brand’s pricing integrity.

“We know it’s the right decision for the brand going forward,” said Rees. “Already, we are seeing immediate positive impacts with ASP (average selling prices) up over $10 on Amazon and the pivot has been acknowledged by wholesale partners. While this will hinder sales growth in Q4, and possibly into the first half of next year, we believe this will set us up for a much cleaner marketplace as we move throughout 2024 as well as protect the brand.”

Rees said unauthorized inventory levels have improved versus June and gray market selling is expected to be “in a substantially better position” in the first half of 2024. Rees said, “While we are not guiding to 2024, we would expect HeyDude’s wholesale revenues in North America to remain negative through Q2 by in part to macro and in part due to a decision to pull back on promotional activity prioritizing brand health a marketplace management.”

Looking beyond 2023, strategies include developing an outlet business with five HeyDude outlet locations expected to open by the end of 2023. Rees said HeyDude will remain “laser-focused” on improving segmentation and differentiation with U.S. strategic wholesale partners, including strengthening its position within the family footwear channel, tapping growth in the sporting goods channel, and “elevating our approach with mall-based specialty.”

Rees added, “We also expect to start 2024 with a much cleaner account base having shuttered over 50 percent, or 600 accounts during the year. We have also pulled back on digital rights for accounts that fall outside of our strategic accounts.”

Internally, a few test markets are being explored in Europe with expansion into new international markets planned over the next two to three years. Said Rees, “We’ll use an approach that is consistent with our Crocs’ playbook, go direct to markets where we a direct for Crocs and utilize distribution partners in markets where we are indirectly as Crocs.”

“In summary,” added Rees, “our Crocs brand has never been stronger and we remain steadfast in executing a global long-term strategy. With HeyDude, we’ll focus on protecting profitability and elevating marketplace management even if that comes at the expense of near-term revenues, in an effort to support consistent profitable growth in the long term.”

Under its updated guidance,  consolidated revenue growth of the year is now expected to be approximately 10 percent to 11 percent compared to 2022, resulting in revenues of approximately $3,905 to $3,940 million. Previously, sales were expected to grow 12.5 percent to 14.5 percent, to approximately $4,000 million to $4,065 million;

Revenues for HeyDude are now expected to grow approximately 4 percent to 6 percent on a reported basis. On a pro-forma basis assuming Crocs had owned the brand at the start of 2022, HeyDude’s sales are expected to decline by approximately 4 percent to 6 percent.

Previously, HeyDude’s sales were expected to grow 14 percent to 18 percent on a reported basis and increase 3.5 percent to 7.5 percent on a pro-forma basis.

Revenues for the Crocs Brand for the year are still expected to grow approximately 12 percent to 13 percent on a reported basis. Adjusted EPS for the year is now expected between $11.55 and $11.85; previously, adjusted EPS was expected to be $11.83 and $12.22.

Crocs’ Q3 Results Top Expectations
The downward guidance revision came despite Crocs’ earnings and sales topping guidance, as double-digit revenue growth at the Crocs Brand was supported by healthy full-price selling that supports margins.

In the quarter ended September 30, Crocs’ overall revenues increased 6.2 percent to $1.05 billion, exceeding guidance in the range of the range of $1.013 billion to $1.034 billion. On a currency-neutral basis, sales rose 5.8 percent.

By channel, the gains were driven by DTC, where sales grew 17.8 percent on a reported basis or 17.7 percent on a constant-currency basis. Wholesale revenues fell 3.6 percent, or down 4.3 percent on a constant-currency basis.

Net earnings improved 4.5 percent to $177.0 million, or $2.72 a share. On an adjusted basis, EPS increased 9.4 percent to $3.25, ahead of guidance in the range of $3.07 to $3.15.

Gross margins improved 70 basis points to 55.6 percent. On an adjusted basis, the gross margin improved 230 basis points to 57.4 percent.

SG&A expenses increased 11.0 percent to $307.8 million climbing as a percent of revenues rose to 29.4 percent from 28.1 percent in the prior year.  On an adjusted basis, SG&A increased to 29.1 percent of revenues from 27.2 percent for the same period last year.

Income from operations increased 3.7 percent to $273.9 million. On an adjusted basis, operating earnings rose 7.8 percent to $295.9 million with adjusted operating margin improving 40 basis points to 28.3 percent.

Crocs Brand Sees 12 Percent Q3 Growth
Crocs Brand revenues of $798.8 million in the quarter increased 11.6 percent, or 11.1 percent on a constant-currency basis, as compared to 2022. By channel, DTC comparable sales for Crocs Brand advanced 15.3 percent while wholesale revenues grew 4.5 percent, or 3.6 percent on a constant-currency basis.

By region, the strongest growth for Crocs Brand was seen in Asia Pacific., up 26.5 percent, or 28.6 percent on a constant-currency basis, to $175.2 million. North America revenues of $480.7 million increased 8.0 percent, or 8.2 percent on a constant-currency basis. EMEALA revenues of $142.8 million increased 8.3 percent, or 2.7 percent on a constant-currency basis.

“We continue to see broad-based consumer love for the Crocs brand,” said Rees.

He noted that in Piper Sandler’s fall 2023 Taking Stock With Teens survey, Crocs was the number six favorite footwear brand among U.S. teens, registering a new record-high mind share, with balanced contribution across all genders.

“With respect to product innovation, our strategy to diversify our clog offering, grow sandals, and leverage personalization is working. We demonstrated double-digit growth in clogs with outsized momentum with our height-orientated offerings, including the Crush and Mega Crush styles,” said Rees. Crocs’ Echo franchise has developed into a “sizable business” across clogs and sandals.

In sandals, sales grew 6 percent for the Crocs brand on top of nearly 20 percent growth in 2022, and 35 percent growth on a trailing 12-month basis. Said Rees, “We had a solid back-to-school season for sandals in all three regions, with EMEALA as a standout region in the quarter. In fact, we were the number one sandal and flip-flop brand on Amazon U.K. during the month of August, growing 37 percent over last year. Globally, the Classic and Brooklyn remain our leading sandal franchises, followed by the Crush.”

For 2023, the company expects the Crocs brand’s sandal business to be approximately $400 million.

HeyDude’s Q3 Revenues Decline 8 Percent
HeyDude’s revenues during the third quarter decreased 8.3 percent to $246.9 million. DTC revenues increased 14.6 percent to $100.4 million. HeyDude’s wholesale revenues declined 19.4 percent to $146.5 million with the decline in part reflecting tough comparisons against the wholesale expansion last year, cautious at-once orders and the rationalization of non-strategic accounts.

Rees said despite HeyDude’s challenges, the company is pleased with the performance of the brand at strategic accounts during the back-to-school season. Strategic wholesale now represents 50 percent of HeyDude’s brand sales mix, up from 39 percent last year. In Q3, sellout at strategic accounts were up 28 percent year-over-year.

“From a product perspective, we are focused on new style introductions that create heat and drive new consumers to our brand while working down our carryover inventory,” said Rees. “During the back-to-school season, top-selling styles included core icons like the Wally Sox Micro in black alongside our updated icons like the Wendy Funk Mono in Electric Pink. We also saw continuous strength in our Sirocco Sneaker which rounded out our top-selling styles.”

Photo courtesy HeyDude