Crocs Inc. lifted its sales and earnings guidance for the year after witnessing a better-than-expected performance by the Crocs brand in the first quarter. However, the company’s shares are trading down about 16 percent in afternoon trading Thursday as investors appear still spooked by the sales slowdown expected for the rest of the year as well as lower-than-expected sales in the first quarter at HeyDude.

In the first quarter, revenues jumped 33.9 percent to $884.2 million, easily topping the company’s guidance in the range of $838 million to $858 million and Wall Street’s consensus estimate of $856 million.

For the second quarter, revenue growth is expected to slow to approximately 6 percent to 9 percent year over year. Adjusted operating margin of approximately 26.0 percent; and adjusted diluted earnings per share of $2.83 to $2.98.

On a call with analysts, Anne Mehlman CFO, said the slower growth rate reflects tough comparisons against strong Q2 wholesale growth rate in 2022, related to the Vietnam shutdowns in the prior year that shifted orders from the first to the second quarter.

Andrew Rees, the CEO, also said Crocs remains cautious relative to consumer confidence in Western markets and anticipates declining traffic patterns throughout the year. He added, “We think those compares probably get harder as the year goes on. We do anticipate consumer softening as the year goes on. I think we saw a little bit of softening as quarter one went along. So, we’re not necessarily baking the same performance we had in Q1 into the rest of our year. I think that’s only prudent.”

Overall, Crocs now expects consolidated revenue growth to now be 11 percent to 14 percent for the year, up from 10 percent to 13 percent under its previous guidance, due to a strong performance in the first quarter for the Crocs brand.

Adjusted diluted earnings per share are now between $11.17 and $11.73, up from a range of $11.00 to $11.31.

Revenues for the Crocs brand are now expected to expand 7 percent to 9 percent on a reported basis. Previously, Crocs brand revenues were projected to grow 6 percent to 8 percent on a reported basis and 9 percent to 11 percent in constant currencies.

Revenues for the Hey Dude brand, which was acquired on February 17, 2022,  are still expected to grow mid-20 percent on a reported basis. Sales in the first quarter of $235 million came in below analysts’ consensus estimates of $254 million. Sales were also only up 15 percent on a proforma basis, down from 36.6 percent in the 2022 fourth quarter and despite HeyDude securing significantly expanded distribution since the acquisition.

Rees noted that approximately half of HeyDude’s wholesale business now comes from the Crocs brand’s strategic accounts.

Asked about HeyDude’s slower growth rate,  Rees said Crocs remains “super confident” about reaching HeyDude’s mid-20s growth guide for the year, citing moves to broaden distribution and increase brand awareness through marketing investments.

However, he said HeyDude’s logistic capabilities, including distribution center inefficiencies, have continued to be “constrained,” as cited on previous quarterly calls and that’s weighing on growth. Rees said, “We are making significant investments to relieve those constraints, but they won’t come online until the back end of the year and probably won’t have an effect until next year.”

Also expected to impact HeyDude’s growth rates in the current year is the brand adding between 400-to-600 national doors in the second and third quarter of 2022 which will present challenges anniversarying in the current year, noted Rees.

HeyDude also recently exited some smaller accounts that will impact growth to a minimal degree. Rees said, “It’s a very small amount of money, but it does mean that we focus all of our time and attention on our big leadership accounts, which we think will do a much better job supporting and elevating the brand.”

Crocs’ share weakness may also reflect some profit-taking as shares were trading as low as $46 in June 2022.  At the close of market Wednesday, shares of Crocs were down $23.46, or 15.9 percent, to $124.46.

Despite the guidance concerns, Crocs delivered another strong quarter, led by the Crocs brand.

Crocs Brand Currency-Neutral Revenues Climb 22 Percent
Crocs brand revenues jumped 19.0 percent, or 21.6 percent on a constant currency basis, in the first quarter to $648.8 million. Crocs brand sold 30.7 million pairs of shoes, up 19.7 percent over last year. The average selling price during the quarter of $21, up 2.1 percent on a constant currency basis, driven by fewer discounts in Asia and improved pricing in EMEALA.

The clog continued to exhibit double-digit growth for the Crocs brand in the quarter. Overall, clogs penetration for the company was just over half of total revenues with HeyDude accounting for 27 percent of revenues and Crocs brand sandals, approximately 12 percent.

Crocs brand sandals increased 65 percent in Q1 with growth in all regions while Jibbitz grew strong double-digits from last year.

Rees said Crocs brand’s clog’s growth benefited from efforts to diversify the clogged silhouette. He said, “The Echo franchise, which we launched last year, focused on a more male-centric buy but also inclusive of her, has been an early global success. We are driving strong awareness with our typical marketing playbook. We have also innovated with height across many of our styles, such as a Mega Crush and the Classic platform flip and slide. Styles with height resonate particularly well in Asia and help fuel our success in that region.”

Rees said the sandal growth was robust in all regions and was highest in EMEALA, where sandal penetration was also the greatest. Crocs brand’s sandal portfolio is more “well diversified this year,” with Vietnam factory closures in 2021 affecting newness in the year-ago period.

Rees said, “In our Classic franchise, the two straps on the slide continued to be top-selling styles in addition to the newer introduction of the Classic Cozy. New introductions in the Brooklyn franchise including the Buckle and The Flip, as well as the new Mega Crush and Crush sandals, the all-terrain sandal, and the Echo Slide, are also performing above expectations. We are also testing dozens of new styles this year and we will leverage our test of learn and speed capabilities to expand their opportunities in the future.”

By region for the Crocs brand, first quarter revenues in North America increased 10.3 percent to $351 million. DTC comparable sales grew 12 percent on top of 18 percent comparable sales growth in the first quarter of 2022. Wholesale revenues increased by 6 percent. Mehlman said the wholesale increase is “evidence that sell-in and sell-out are beginning to normalize, as we had anticipated to occur during the first half.”

International was again the largest growth driver for the Crocs brand in Q1, benefiting from investments to accelerate growth in Asia and the EMEALA. Crocs brand international revenues grew 31.8 percent, or 37.7 percent on a constant-currency basis, and represented 46 percent of the brand’s revenues in the quarter.

Crocs brand revenues for EMEALA were $157 million, growing 25.1 percent with broad-based growth. Momentum has been building in several important markets with Q1 revenues increasing strong double digits driven by the UK, France and Germany.

Crocs brand revenues in Asia grew 54.8 percent to $140 million with growth broad-based across countries and channels. China and Australia led the growth with revenues growing in excess of 110 percent, while Southeast Asia markets and South Korea also had “exceptional growth,” said Mehlman.

Rees said the company is “particularly encouraged” by the performance in China, where Crocs brand revenues were up over 110 percent in constant currencies. He said, “The Crush Clog was the only footwear brand to win the 2022 best new products launch award by Tmall. The Crocs brand had the best Q1 growth on Tmall in China, amongst leading footwear and apparel brands. Outside of China, we’re pleased with the brand momentum throughout the region, including India, South Korea and Australia.”

HeyDude’s Pro-Forma Revenues Climb 15 Percent
HeyDude’s revenues were $235 million, increasing 106 percent compared to the partial period in Q1 2022 and 15 percent on a proforma basis. The DTC channel, which is predominantly e-commerce, led the growth with revenues increasing 141.1 percent versus last year. Digital penetration increased by 420 basis points to 30.1 percent.

“We’re incredibly pleased with the first year of the acquisition,” said Rees. “The financial contribution of HeyDude exceeded our expectations with brand revenues of nearly $1 billion, EPS accretion and significant debt pay down in the first year. The foundation is strong as we enter our second year with the brand.”

He said HeyDude has already achieved top-five casual brand status in North American family footwear accounts such as Rack Room and Famous Footwear. From a product perspective, HeyDude introduced several new styles with several recent introductions in the casual sneaker category. Rees said, “The Karin for women and the newly introduced Sirocco are top-selling styles on heydude.com, and we have early signs of success for the Cody, Conway and Sunapee.”

The initial expansion of HeyDude into international regions is “on track” reaching a few markets direct in the UK, Germany and the Netherlands and others through distributors. The brand is following a similar international expansion approach as the Crocs brand.

On integration, HeyDude is implementing ERP and building a new distribution center in Las Vegas which are both expected to be completed towards the end of the year. Said Rees, “Both are significant investments required to support the growth of a billion-dollar-plus brand. We’re excited about the progress we have made and the bright future for the HeyDude brand.”

Crocs Q1 EPS Tops Guidance
Gross margin in the quarter was 53.9 percent in the first quarter compared to 49.2 percent, and adjusted gross margin was 54.2 percent compared to 53.9 percent in the same period last year, respectively. Favorability and freight rates were partly offset by higher product costs, higher end-of-season clearance, and the addition of HeyDude, currency negatively impacted consolidated gross margins by approximately 85 basis points. End-of-season clearance was more normalized this year, as last year’s inventory was extremely lean following the Vietnam shutdown.

SG&A expense as a percent of revenues improved to 27.3 percent from 31.2 percent in the prior year. Adjusted SG&A improved to 26.3 percent of revenues versus 27.3 percent for the same period last year. Adjusted SG&A excludes $8.8 million of costs, primarily related to discontinued technology projects and final HeyDude integration expenses.

Adjusted income from operations rose 40.8 percent to $247.0 million. EPS was $2.39, about double compared to $1.19 for the same period last year. Adjusted EPS increased 27.3 percent to $2.61 compared to 2022, exceeding guidance between $2.06 and $2.19 and Wall Street’s consensus target of $2.15.

Photo courtesy Crocs/HeyDude