Crocs, Inc. (NASDAQ:CROX) Q1 2024 Earnings Call Transcript May 7, 2024
Crocs, Inc. beats earnings expectations. Reported EPS is $2.5, expectations were $2.22. CROX isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, and welcome to the Crocs, Inc. First Quarter Earnings Call. All participants are in a listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Erinn Murphy, Vice President of Investor Relations and Strategy. Please go ahead.
Erinn Murphy : Good morning, and thank you for joining us to discuss Crocs Inc. First Quarter Results. With me today are Andrew Rees, Chief Executive Officer; and Anne Mehlman, Executive Vice President, Crocs Brand President, and Chief Financial Officer. Following their prepared remarks we will open the call for your questions, which we ask that you limit to one per caller. Before we begin, I would like to remind you that some of the information on this call is forward-looking and accordingly is subject to the Safe Harbor provisions of the federal securities laws. These statements include, but are not limited to statements regarding our strategy, plans, objectives, expectations, and intentions, including our financial outlook.
These statements involve known and unknown risks, uncertainties, and other factors, which may cause our actual results, performance, or achievements to differ materially. Please refer to our quarterly report on Form 10-Q and other reports filed with the SEC for more information on these risks and uncertainties. Certain financial metrics, as we refer to as adjusted or non-GAAP, are non-GAAP measures. A reconciliation of these amounts to their GAAP counterparts is contained in the press release we issued earlier this morning. All revenue growth rates will be cited on a constant currency basis unless otherwise stated. At this time, I’ll turn the call over to Andrew Rees, Crocs Inc. Chief Executive Officer.
Andrew Rees : Thank you, Erinn, and good morning, everyone. Thank you for joining us today. We reported very strong first quarter results, which well exceeded our guidance on both the top and bottom line. Revenue grew by 7% to prior year for the enterprise, led by outsized Crocs brand growth of 16%, and HEYDUDE brand also performed ahead of guidance. Adjusted growth margins of 56% improved 180 basis points versus prior year, And we grew our adjusted earnings per share by 16% to $3.02. Our growth strategy remains consistent. And we are focused on three primary initiatives from an enterprise perspective to fuel durable and consistent growth. One, ignite our icons across both brands to drive awareness and global relevance for new and existing consumers.
Two, drive market share gains across our Tier 1 markets through strategic investment behind talent, marketing, digital, and retail. And 3, attract new consumers to our brands through methodically diversifying our product range and usage occasions. Before I discuss more detail on the quarter, I want to start by saying how pleased I am to announce the hiring of Susan Healy as Executive Vice President and Chief Financial Officer. Susan is a seasoned financial professional and a Wall Street veteran with broad exposure to the consumer sector, including Ulta Beauty., where she served as the SVP of Finance for five years. Most recently, Susan served as a public company CFO for IAA, a global marketplace for automotive buyers and sellers. We have a deep finance bench and I’m excited about Susan’s leadership and expertise.
.: The democratic nature of our brand allows us to create a broad array of consumer moments that drive brand affinity and engagement through our partnership model. During the quarter, our success ranged from Toy Story and Hello Kitty to [Klott] (ph), a Chinese streetwear brand. Our Toy Story collection was one of the most successful licensing partnerships to date with a global offering available across select wholesale partners and our own DTC. In addition, we launched our second collaboration with Simone Rocha, a luxury brand. Our seven-style collection was priced between $175 and $225. It launched in 20 markets and sold out globally almost immediately. As we think about product, we continue to prioritize our three pillars, clogs, sandals, and personalization.
Growth in our first quarter was led by our classic clogs, and we are seeing both new and existing consumers come to the brand through our icons. Our kids’ business was another highlight, with double-digit growth in the quarter. We continue to create multi-product franchises that broaden [users’ occasions] (ph) for the consumer. Building on the success of our Echo franchise, we launched the Echo Storm, a fully molded sneaker. This launched in our DTC channels, as well as Foot Locker and JD Sports during the quarter and performed well. In fact, 59% of our Echo Storm purchases on our own.com were new consumers. Just in time for NBA All-Star weekend, we further expanded visibility of our Echo franchise through the Crocs NBA Slide. And players like Nikola Jokic to Steph Curry were spotted wearing them.
During the first quarter, we rolled out two new sandal franchises, the 2.0 version of our Classic Slide and 2-Strap and the Getaway. The Getaway leverages our newest proprietary material known as free-fill technology. Within this franchise, we’ve seen positive momentum with the strappy and the flips style and have found that these resonate with the broad consumer segment. For the year, we continue to expect sandals to grow in excess of our overall growth and increase in penetration. Our personalization vehicle, Jibbitz, grew double digits in the quarter, led by growth in Asia. We continue to see ample white space for personalization, and our strategy is focused around three pillars. Number one, driving higher penetration within digital and wholesale.
Two, continuing to create product freshness through our elevated Jibbitz, including metallic, texture, and [shimmering and free] (ph) speed-to-market. Moving on to distribution strategy, We are pleased by the broad-based strength across geography and particularly in several of our Tier 1 markets. The North America market was well ahead of expectations and took meaningful market share during the quarter. North America revenues grew 9% versus the prior year, supported by underlying strength in wholesale sell-out and better than expected trends in our DTC channels. International grew 24% versus prior year. And once again, we saw a triple-digit growth in China and Australia. Our direct markets in Western Europe were double digits led by growth in the UK, France, and Germany.
We continue to have significant opportunity in China and we remain bullish on our long-term growth prospects. During the quarter, we won our first-ever Super brand on Tmall and announced our two new brand ambassador for 2024 Liu Yuxin and [Junkai Wang] (ph), Liu Yuxin announcement came ahead of International Women’s Day and featured a classic Geo Clog. This campaign drove substantial reach and continue to create buzz with the [Domain] (ph) community. Junkai Wang played into our clog relevance with a robust campaign on Super brand A, generating 1 million views during a 1-hour live stream and drove Crocs to the Number One spot within the women’s footwear category on Tmall. Our corporate responsibility efforts continue to progress. We are expanding our all Crocs new life Consumer Takeback program to all Crocs stores in the U.S. This fall, we’re furthering our circularity commitment by repurposing materials from well-loved Crocs in the form of a new limited edition Classic Clog.
As it relates to the HEYDUDE brand, our focus for 2024 is on solidifying the business and establishing the Wally and Wendy as iconic franchises for the consumer. We have worked to maintain price integrity on digital, improved channel inventories and create more segmentation across wholesale partners. Our overall first quarter performance largely played out as we expected, we strengthened March, driving slight upside to our guided revenue range. That said, performance around Easter and into April has fallen short of expectations with sellout rates softening in wholesale. Based on the visibility we have quarter-to-date and given the choppy retail environment, we’re taking a more prudent approach around trends for the balance of the year. As we have discussed, our focus is on making sure we end the year with sell-in and sell-out trends converging, and we have better segmented inventory in the channel.
Before I discuss a few Q1 highlights, I’d like to touch on our recent leadership announcement. Several weeks ago, we announced a new brand President for HEYDUDE who we see as a strong leader for the next phase of growth for the brand. We are thrilled to be welcoming back Terence Reilly to our Crocs Inc. family. Terence started last week and brings with him a best-in-class reputation from brands, including Stanley and Crocs. In addition to providing global leadership perspectives, he has a proven track record of creating and executing ground building playbooks by leveraging iconic products, driving brand relevance and ultimately building communities. Now turning to Q1 highlights. HEYDUDE was the Number Eight preferred footwear brand in the Piper Sandler Taking Stock with Teens Survey this spring, consistent with this rank last year.
From a product perspective, we continue to establish our Wendy and Wally icons through color, graphic height, which proved successful during the quarter. In Q1, we expanded our collegiate program to five additional schools just in time for March Madness. We also launched the Big Lebowski an online exclusive, the unique collaboration so in process sellout with 80% of consumers need to brand. Our sneaker franchise gained a new addition with the Hudson for Him and the Hudson Lift for Her. We chose to introduce the new silhouettes in our own DTC channels and with an exclusive wholesale partner. We saw the Hudson Lift quickly become a hit for our younger female consumers who continue to choose height, while maintaining a brand promise of lightweight comfort.
From a distribution perspective, we opened six new outlet locations with the HEYDUDE brand. Overall performance is in-line with our expectations, and we plan to open it approximately at 30 outlets this year. On the wholesale side, we’re pleased with the work we have done to clean up our account base — our go-forward focus is around improved customer segmentation. Finally, we have introduced a brand to the U.K. and Germany, supported by dedicated digital sites, as well as placement with key wholesale partners in both markets during Q1. These launches were supported by key influencer and media events. While we’re starting to see the awareness of new brand internationally, our priority in 2024 is around improving the long-term health of the North American market, as we build our core offering and drive heat for the brand.
We have laid plans to continue to invest behind marketing, talent, digital and retail to further support our market share opportunity. While our near-term plans for HEYDUDE are taking longer to play out, our record Q1’s performance led by Crocs, showcases the diversification of our portfolio and enabled us to raise our earnings per share outlook for the year. We will continue to make offensive investments, fueled by strong gross margins to set ourselves up for long-term growth and durable market share gains. I will now turn the call over to Anne to walk through our financials for the quarter.
Anne Mehlman: Thank you, Andrew, and good morning, everyone. I am extremely pleased with our first quarter results which exceeded the high-end guidance across all metrics. We generated $939 million in consolidated revenues, growing almost 7% over last year, led by the Crocs Brand. For the quarter, adjusted gross margin gained 180 basis points to 56% and adjusted operating margin was 27.1%. Adjusted earnings per share of $3.02 came in well ahead of our guidance of $2.15 to $2.25. For the Crocs Brand, revenues were $744 million, growing 16% relative to prior year, driven by DTC growth of 19% and a wholesale growth of 14%. Brand ASPs were up 11% to $23.36 the brand sold 32 million pairs of shoes, an increase of 3% versus last year.
By geography, North America revenues were ahead of our expectations and gained market share, growing 9% versus the prior year to $383 million. Growth was led by DTC at 13% and wholesale was up 5%, driven by strong double-digit growth in brick and mortar. During the quarter, our North American wholesale partners opted to take product earlier than we had previously anticipated based on the strong solid performance of the Crocs Brand. International revenues of $361 million were up 24% from 2023, led by DTC growth of 37% and wholesale growth of 20%. As Andrew noted, Australia and China grew triple digits again this quarter. We saw strong double-digit growth in our direct markets in Western Europe with growth led by the U.K., France and Germany.
Turning to HEYDUDE. Revenues were $195 million ahead of our guidance but down 17% from last year. The brand sold 7 million pairs of shoes, a decrease of 21% from last year, as we last pipeline fill and focused on improving our full price selling. HEYDUDE average selling price was $27.68, up 5% from last year. Relative to Q4, our Q1 marketplace ASPs were up 10%, a continued tailwind from reduced price matching online. Wholesale revenues were down 20% from last year as we focused on continued inventory management in the channel. The DTC channel was down 11% as a result of prioritizing brand health through higher ASPs. Consolidated adjusted gross margin for the first quarter was 56%, up 180 basis points from last year. Crocs brand adjusted gross margin was 58.1% or 180 basis points higher than prior year.
During the quarter, the primary drivers of margin expansion were lower inbound freight and favorable product costs coupled with select price increases internationally and lower discounting. HEYDUDE brand adjusted gross margin came in at 47.8%, in-line with our expectations but 180 basis points below prior year, driven by investment in distribution and logistics partially offset by reduced rates. Our first quarter adjusted SG&A dollars increased 16% to prior year. Our SG&A rate was 28.8% and up 250 basis points compared to prior year, driven by continued investment in talent, marketing and DTC to support long-term market share gains. Our first quarter adjusted operating margin declined 80 basis points to 27.1% compared to 27.9% for the same period last year, but was favorable to our expectations on higher gross margins and favorable revenue, leveraging our cost base.
First quarter adjusted diluted earnings per share increased 16% to $3.02 and our non-GAAP tax rate was 17.2%. We ended the quarter with clean inventory on our balance sheet and in our channel. Our inventory balance on March 31, 2024, was $392 million, a decline of 18% against this time last year. We are pleased that both brands achieved inventory turns at our goal of 4 times. Our liquidity position remains strong, comprised of $159 million of cash and cash equivalents and $484 million of borrowing capacity on our revolver. As a reminder, Q1 is a high net working capital quarter, and we typically limit buyback and debt paydown activity as a result. We ended the quarter with total borrowings of $1.7 billion and remain with our net leverage target of 1 to 1.5 times.
In 2024, we intend to buy back stock and pay down debt, enabled by our best-in-class cash flow generation. Now turning to guidance. For Q2, we expect consolidated revenues to be up 1% to 3% at currency rates as of March 31, with the Crocs brand growing 7% to 9%, led almost entirely by international growth. As I mentioned earlier, several of our North American wholesale partners opted to take product earlier in Q1. We expect HEYDUDE revenue to be down between 19% to 17%, extrapolating the trends we are seeing quarter-to-date. We expect adjusted operating margin to be approximately 26.5% and adjusted diluted earnings per share of $3.40 to $3.55. For the full year 2024, we are raising our underlying earnings per share outlook supported by the strength in Q1.
We are maintaining our revenue outlook of growth between 3% and 5%, assuming quarter-end currency rates. For the Crocs Brand, we now expect revenues to grow between 7% and 9% from our prior expectation of 4% to 6% and with growth continuing to be led by international. For HEYDUDE, we expect revenues to contract down 10% to down 8%, below our former expectation of flat to slightly up. We expect HEYDUDE sales trends to improve each quarter and expect the sell-in and sell-through dynamic to normalize into Q4. As we discussed in our Q4 call, we expect wholesale to be negative for the year and DTC trends to be better than wholesale. As it relates to retail, we plan to open approximately 30 stores in 2024, six of which were opened during Q1. We expect gross margin to be up for 2024 versus 2023 at the enterprise level.
Based on the strength in Q1, we now expect Crocs Brand gross margin to be up for the year and continue to expect HEYDUDE gross margin to be up for the year. We plan to invest into brand accretive and strategic SG&A initiatives, resulting in consolidated adjusted operating margins for the year of approximately 25%. For full year 2024, we still expect our underlying non-GAAP tax rate, which approximates cash taxes paid to be approximately 18% and GAAP tax rate to be 21.5%. We are raising our non-GAAP diluted earnings per share to a range of $12.25 to $12.73 in 2024 from $12.05 to $12.50 previously. This range incorporates future debt repayment, but does not assume any impact from future share repurchases. Our annual capital expenditure guidance of $120 million to $130 million remains unchanged, and we continue to expect exceptional cash flow generation.
At this time, I’ll turn the call back over to Andrew for his final thoughts.
Andrew Rees: Thank you, Anne. We are pleased with our strong first quarter results and believe that our brands and strategies can and will continue to win. With the investments we have made in talent and marketing, I’m confident in driving long-term market share gains. At this time, we’ll open the call for questions.
Operator: We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Jonathan Komp with Baird. Please go ahead.
See also
40 Best Business Schools in the World for 2024 and
10 Best Performing Biotech ETFs in 2024.
To continue reading the Q&A session, please click here.
