Crocs, Inc.

Ladies and gentlemen, thank you for standing by and welcome to Crocs Inc. Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Corey Lynn.

Good morning, everyone, and thank you for joining us today for the CROC's third quarter 2021 earnings call. Earlier this morning, we announced our latest quarterly results, and a copy of the press release may be found on our website at croc.com. We would like to remind you that some of the information provided on this call is forward-looking and accordingly is subject to the state's harbor provisions of the federal securities laws. Statements include, but are not limited to, statements regarding potential impacts to our business related to the COVID-19 pandemic. Crocs is not obligated to update these forward-looking statements to reflect the impact of future events. We caution you that all forward-looking statements are subject to risks and uncertainties described in the risk factor section of our annual report on Form 10-K. Accordingly, actual results could differ materially from those described on this call. Please refer to CROC's annual report on Form 10-K as well as other documents filed with the SEC for more information relating to these risk factors. Adjusted gross margin, income from operations, operating margin, and earnings per diluted common share are non-GAAP measures. A reconciliation of these amounts to their GAAP counterparts is contained in the press release we issued earlier this morning. Joining us on the call today are Andrew Reese, Chief Executive Officer, and Ann Melman, Executive Vice President and Chief Financial Officer. Following their prepared remarks, we will open the call for your questions.

At this time, I'll turn the call over to Andrew. Thank you, Kari, and good morning, everyone. As you saw from our release this morning, we achieved exceptional top-line growth and industry-leading profitability during Q3 of 2021. Our extraordinary performance, in spite of the ongoing COVID-19 pandemic and widespread supply chain disruptions, demonstrates the strength of the Crocs brand and product offering globally and reinforces the confidence we have in achieving our short- and long-term goals. Our team's ability to navigate these disruptions for the last two-plus years has been and continues to be a key ingredient across the success. Anne will review our financial results in more detail shortly, but here are a few highlights from the third quarter of 2021. We experienced board-based growth with total revenues up 73% versus prior year to $626 million and doubling from 2019. DTC grew 60% versus prior year and 90% versus 2019 to represent 51% of revenues. Digital sales grew 69%, achieving double-digit growth in all regions and representing 37% of total revenues. Adjusted operating income more than doubled in the quarter to $205 million versus $75 million in 2020, with adjusted operating margins expanding to an impressive 33%. Finally, we committed to becoming a net zero company by 2030 and began production of bio-based products that go on sale in 2022. Let's now turn our attention to the topic that I know is top of mind for many of you. The recent factory closures in Vietnam due to COVID-19 and broader global supply chain challenges facing all industries. We first want to recognize our factory partners for their extraordinary efforts in a difficult time and for protecting the health of their employees. We appreciate their ongoing partnership. Regarding the impact to the cross business, during the third quarter, some of our factories in Vietnam were closed for several weeks, and they began reopening earlier this month. As of today, most of our factories in Vietnam are operational, although they are in various stages of restarting. We expect the situation to remain fluid as the vaccination rates increase in the country. We are pursuing all of the actions you might expect to mitigate the impact of this temporary disruption. First, we assist shifting production capacity to other countries, including China, Indonesia, and Bosnia, where possible. We also have a unique advantage in that we can ramp factory production quickly due to the limited inputs and simple configuration of our products. Secondly, by prioritizing top-selling products and narrowing SKU counts, while still preserving newness, we're able to improve factory throughput. Thirdly, we're aggressively leveraging air freight to bring in units for 2022 spring-summer selling season. In the United States, we're planning to reduce our dependency on West Coast ports by adding East Coast trans-shipment capabilities to reach our major U.S. customers. In addition to maximizing supply, we're strategically allocating units. We will prioritize our most important channels, e-commerce, retail, and our major wholesale customers. As we all know, this situation is very fluid, but I have full confidence in the supply chain team and our factory partners to manage through this temporary disruption. Also, I want to emphasize that these disruptions will not distract from our long-term strategy, that we believe will propel the cross-brand to $5 billion plus over the next five years. Now let's turn back to the third quarter operating highlights. From a channel perspective, global DTC revenues, which include revenues from e-commerce and company-owned retail stores, grew by 60%. Wholesale, which includes brick and mortar, retail, and distributors, grew revenues 88% and 111% compared to 2019. Digital sales grew 69% and an impressive 129% versus 2019. All channels benefited from strong traffic, higher pricing, and fewer promotions. Execution against our product growth strategy is going well. Clark's sales were outstanding, increasing 91% from a strong 2020 to represent 82% of footwear revenues versus 72% last year. We continue to innovate and are excited about our first line product, which is on trend for holiday. Recent Clark collaborations with Balenciaga, Hidden Valley Ranch, and San Quentin China, amongst others, continue to excite fans and elevate the Clark's brand. We continue to raise awareness for sandals, including them in collaborations such as the one with Benefit Cosmetics that featured both a clog and a two-strap saddle. Sandals grew by 15% in the quarter and 31% year-to-date as we conclude the saddle season in many parts of the world. Sandals represented 13% of footwear sales for the quarter versus 19% last year due to the strength of clog growth. Jibbitz sales once again more than doubled for the quarter versus 2020. We continue to create excitement through a fresh assortment, including recent Jibbitz partnerships with social media personality, Brendan Rock, and legendary rock brand, Grateful Dead. Consumer demand for our products is high, and we remain confident in our growth trajectory. We're raising the low end of our four-year revenue guidance and now expect 2021 revenues to increase by between 62% and 65%. We're also raising our 2021 adjusted operating margin guidance from approximately 25% to approximately 28%, as we benefit from favorable gross margins, SG&A leverage, and the underlying strength of our brand. I'm pleased to share that our brand is extraordinarily healthy, and this is a testament to our product and marketing teams around the world who continue to innovate and raise the bar. In our 2021 Brand Strength Survey, which measures participants' views about the cross-brand globally, results were up double digits for each of our key metrics, brand desirability, brand relevance, and brand consideration. We've now averaged double-digit growth across these metrics for five consecutive years. Another indicator of brand strength is the Piper Sandler Fall 2021 Taking Stock with Teams Survey. where the cross-brand advanced in the all-team preferred footwear rankings to the number six spot, up from number nine last year and number 34 just five years ago. Supported by the help of our brand, wholesale bookings for the first half of 2022 have been exceptionally strong. However, given the supply constraints we've just discussed, We have limitations around how much demand we can fulfill for the first half of the year. Despite this temporary supply chain disruption, we're confident that we will be able to exceed 20% revenue growth for 2022. Before I turn the call over to Anne, I want to thank the entire Crocs organization. We're incredibly proud of the health of the Crocs brand and business. Our results and the confidence we have in our long-term vision are due to our dedicated and talented colleagues who bring the Crossbrand to life every day. I want to thank them for everything that they do. With that, Anne will now review our financial results in more detail.

Thank you, Andrew, and good morning, everyone. I'll begin with a short recap of our third quarter results. For a reconciliation of the non-GAAP amounts mentioned to their equivalent GAAP amounts, please refer to our press release. As you've already seen, we had an outstanding third quarter. We delivered broad-based revenue growth across all regions, channels, and product pillars. Growth margin expansion and SG&A leverage led to another quarter of best-in-class profitability and increased earnings per share. Third quarter revenues increased to $625.9 million, up 72.2% on a constant currency basis, compared to the third quarter of 2020, and up 100.1% compared to the third quarter of 2019. During the third quarter, we sold 25.4 million pairs of shoes, which represents an increase of 50.6% over last year and 60% versus the third quarter of 2019. The average selling price during Q3 was $24.42. a year-over-year increase of approximately 14.3%, driven by price increases, promotional strategy, and product mix. Now, let's shift our view to results by region, beginning with the Americas, where Q3 revenues of $455.9 million increased 94.8% against the prior year. DTC revenue growth in the region was up 78.3%, driven by higher traffic, conversions, and average transaction value. Third quarter digital penetration increased to 32.8% from 30.8% last year and rose significantly from 26.9% in 2019. Wholesale growth was 117.6% versus prior year and almost tripled versus 2019 as we continue to see strong sell-through with our best partners. In Asia, Q3 revenues were $83.6 million, representing an increase of 21.2% on a constant currency basis from last year. India posted triple-digit revenue growth versus last year, while China and South Korea both grew revenue double digits, offset by distributor sales in Southeast Asia and a conservative Japanese consumer. Digital revenues grew 11.3% versus prior year and 30.5% versus 2019. Digital penetration was 38.1% in the third quarter compared to 42.3% last year and 32.9% in 2019. EMEA revenues of $86.3 million increased 42.8% on a constant currency basis with growing brand heat upsetting global logistics disruptions. DTC revenues increased 22.1% with strength driven by higher traffic. Wholesale revenues grew 56.9%, fueled by strengths in all subsegments, details, distributors, and brick-and-mortar. Digital growth was a standout, growing 37% versus prior year and 85.9% compared to 2019. Digital penetration represents 56.9% of EMEA revenue this quarter versus 59.8% last year and 49.6% in Q3 2019. Adjusted gross margins for the third quarter were 64.2%, an improvement of 680 basis points from last year's 57.4%. This improvement was driven primarily by price increases and fewer promotions and discounts, offsetting higher freight costs associated with global logistics disruptions. Currency favorably impacted margins by approximately 65 basis points. During the third quarter, our adjusted SG&A improved 520 basis points to 31.4% of revenue versus 36.6% in last year's third quarter. The decrease in adjusted SG&A rate was achieved while investing approximately $60 million versus prior year, primarily in marketing and talent to support our strategic initiatives, digital, sandals, China, and innovation. We will continue to make investments to support the long-term trajectory of our business. third quarter, adjusted operating income more than doubled to $205.1 million versus $75.4 million last year, with robust operating profit growth in all regions. Adjusted operating margin rose from 20.8% last year to 32.8% this year, benefiting from growth margin expansion and SG&A leverage on strong sales growth. Third quarter non-GAAP diluted earnings per share increased to $2.47 from $0.94 in the same period last year. Our liquidity position and balance sheet continue to remain strong. We ended the third quarter with $436.6 million of cash and cash equivalents. and $686 million in borrowings, with an additional $500 million of borrowing capacity on a revolver. In August, we once again opportunistically took advantage of historically low interest rates, issuing $350 million and 4.125% senior unsecured notes due 2031 with share repurchase as the primary use of proceeds. Throughout the quarter, we repurchased approximately 1.1 million shares of our common stock in the open market for $150 million at an average price of $142.17. As previously announced, we will repurchase an additional $500 million of shares by the end of 2021 via an accelerated share repurchase for a total of $1 billion of share repurchases in 2021. Our shares outstanding as of October 14, 2021, were $58.8 million, including the partial impact of the ASR. Our inventory balance at September 30, 2021, was $212.5 million, up from $174.1 million in the third quarter last year. Inventory was lean throughout Q3, and we ended the quarter with higher-end transit inventory due to the global logistics challenges. Turning to the future, I would like to share our current outlook for the balance of 2021. As Andrew outlined earlier, the global supply chain remains volatile. For 2021, we are raising the low end of our revenue guidance, expecting revenues to grow approximately 62% to 65%. This implies a two-year growth rate of approximately 82% to 86% and a two-year compound annual growth rate of approximately 35% to 36%. We anticipate strong growth for fiscal 2021 in all regions and channels. However, fourth quarter revenues in EMEA will be disproportionately impacted by the Vietnam supply disruption, as much of the region's inventory is sourced there due to favorable duties. Today, our 2021 operating margins have benefited from our high growth margins and ability to leverage SG&A. As a result, we are raising our full year 2021 adjusted operating margin guidance by 300 basis points to be approximately 28%, which represents significant expansion from 18.9% in 2020. This margin guidance is below our 2021 year-to-date margin due to higher global logistics costs and continued investment in SG&A in the fourth quarter to support our future growth. Looking to 2022, as Andrew mentioned, we expect revenue growth in excess of 20% for the full year. We plan to invest approximately $75 million in air freight ahead of our 2022 spring-summer selling season. Despite elevated supply chain costs and significant investment to fuel our growth, we expect operating margins in 2022 to be comparable to full-year 2021 guidance, excluding the incremental air freight. We will resume our normal cadence of providing more detailed fiscal year guidance on our fourth quarter earnings call. In summary, we continue to deliver outstanding revenue growth and profitability while managing through supply disruptions, opportunistically strengthening our balance sheet, and investing in our future growth. At this time, I'll turn the call back over to Andrew for his final thoughts.

Thank you, Anne. With three quarters of the year behind us, we've achieved tremendous success, fueled by the strength of the Crocs brand and our superior execution. We're navigating the ongoing global supply chain disruption and have utmost confidence in our ability to deliver upon our short and long-term goals. There is no better team to navigate through this temporary disruption and lead Crocs to the next stage of our growth. Operator, please open the call for questions.

At this time, if you would like to ask a question, please press star, then the number one on your telephone keypad. Your first question comes from the line of Erin Murphy with Piper Sandler.

Great. Thank you. Good morning. Good to hear about the progress, Andrew, in Vietnam and just some of the mitigating factors you're taking on the supply chain. I guess first, could you just remind us how big is Vietnam for you today and where do you see your manufacturing mix evolving over the next 12 months? And then secondly, maybe kind of hone in a little bit more on the fourth quarter. How easy is it to get your product to market now? It sounds like Europe is going to be a little bit more challenged. And then is there a product that you're seeing stuck out on the West Coast ports right now? Are you needing to accelerate air freight specifically for holiday? Thanks.

Okay, Aaron, thank you very much. A lot of questions there, so perfect. So Vietnam is a significant portion of our manufacturing base. It was initially planned to be about 70% of our manufacturing base for 21. It will be a little less than that as we do the diversification we've talked about. We have nine factories that are spread between southern, mid and northern Vietnam. As we articulated in the prepared remarks, the factories are now largely open and in various states of reopening. One thing that we want from COVID, I think, is really important for people to understand. You know, our shoes are really simple, and so ramping up factories can be very, very quick. You know, think about the classic clog. It has three components, two of which are made on site. So you don't have a lot of external logistics to be able to get started, and so we think we're competent in terms of ramping manufacturing. We will continue to diversify our manufacturing base. I think Indonesia is our most immediate target. We have two factories in Indonesia that will be online by the end of the year, and they will ramp very quickly next year. We have a major production facility planned in India in a year or so. So we'll continue diversification, and during the shuffling of supply, we'll obviously move some manufacturing back to China in the short term. So, you know, our team is really good at this. We have great relationships with our factory partners, so we feel really confident where we are. You know, obviously the closure of the factories was disruptive, but I would also emphasize the date-temporary disruption. In terms of flow of goods for Q4, which I think was the second part of your question, it's difficult, right? So, yes, we definitely have products on ships outside of Long Beach. We have already diversified our inbound ports, so we'd already pushed products to northern ports on the west coast to east coast ports, et cetera. So we'd already done a good amount of that, and we think we have kind of a reasonable line of sight to everything that's going on. and I would say we've incorporated all of that into our guidance. You highlighted Europe. Europe is definitely more impacted because you may be aware that Vietnam is duty-free into Europe, so a lot of the production for Europe is coming out of Vietnam, so that's a little bit more impacted. We think that's a temporary impact. Our trajectories of bookings in EMEA are being extremely strong but will be impacted in Q4. And I think the last part of your question was about air freight. So we don't anticipate using significant air freight in Q4. Most of the product that we will sell in Q4 is already here or inbound. So there will be a little bit but not significant.

That is so helpful. Thank you, Andrew. And if I can just add one for Ann, on your outlook for next year, could you just maybe help us with the shaping of first half versus second half, just kind of marrying the comments of supply chain with the strong wholesale spring-summer 22 order book? Thank you. Sure. Hi, Erin. So our revenue for 2022, as we said, is going to be, you know, over 20%. So we're excited to be able to kind of provide that visibility a little bit earlier. I will say that there is a lot of variability right now in transit times per what Andrew just talked about with supply disruption, as well as the extended free time. So that makes quarter-to-quarter timing pretty difficult to anticipate this far out. Clearly, you know, the front half is impacted by supply constraints, but I will say our current plan is not significantly back half-weighted, and then we'll obviously give you more color on our full-year Q4 call. Excellent. Congratulations. Thanks, Sarah. Thanks.

Your next question comes from the line of Jonathan Kopp with Baird.

Hi, can you hear me? Sorry about that. Yeah. Okay, great. I wanted to ask about the ASP, the pricing component accelerated again in the fourth quarter. Could you maybe just touch on From a product perspective, what's driving that? I noticed the line clogs maybe had a higher pricing increase and a lot of the new product looks at like a premium price point. So you could maybe comment on the ASP drivers. And then as we think into 22, given the inflationary environment, how should we think about ASP given the unique input exposure you have?

Yeah, there's a couple of impacts on ASP. So it's a really good question. So the biggest impacts continue to be on ASP and kind of have been all year. We did take price increases, as you mentioned, took price increases on our line clog as well as our classic in the U.S. and other places. So, you know, that is an impact. So the mixed shift. to clogs that we talked about in prepared remarks, as well as that pricing, helped support ASP. And then also the pullback in promotions and discounts that we've seen broadly. Those are the biggest drivers from an ASP perspective. I would say, you know, on the slightly negative side is a little bit of mixed impact, which has been offset. Going into next year, from an inflationary perspective, we do anticipate some inflation flowing through, and we've seen that. We've been pretty proactive about taking price ahead of what we kind of anticipated from an inflationary environment. We do have some price increases that we took this year that will flow through into next year, and we're proactively looking at other measures and things that we can do to kind of offset any inflationary pressures.

Okay, that's really helpful. And maybe as a follow-up, just at a high level, thinking about gross margin next year, you highlighted the freight, the air freight, I think you said mostly ahead of spring, summer, so maybe that's mostly in the first quarter. But if you could give any more color to the timing of the air freight charges, and then from an underlying gross margin perspective, should we expect a significant weighting when we think about the full year 22 performance? Thanks.

Yeah, so from the air freight perspective, I would say that's really front half. I don't really want to break it down by quarter, but I do think it's both Q1 and Q2. So, again, we'll try to give you more visibility as we get a little closer. And then from an overall kind of margin profile, we didn't guide that specifically. As I just mentioned, we are seeing some inflation. This year it's been primarily around freight and wages. And what we see happening is that freight and wages in our distribution centers, that will continue through next year, as well as some of the resin impacts we expect to come on. However, that's incorporated in our overall, you know, 28% operating margin guidance, excluding that air freight. So as I just mentioned, we also have some price increases going through, and we're looking at other things. So we will, you know, try to give you, again, more color for next year on our normal cadence on our P4 call.

Okay, that's very helpful. Thanks again.

Your next question comes from the line of Laura Champagne with Luke Capital.

thanks for taking my question it's sort of a follow on on the last one can you comment more specifically about the cost increase of using the new more sustainable resin in your product and talk about whether you would have a concurrent price increase to the product or what your philosophy is around that and then secondly on the new formulation does that change the wear profile of the product at all

Okay, thank you, Laura. So let me take those in kind of reverse order. So the new formulation really uses a new ingredient, right? So it's the same ingredient, but the ingredients derived from a different source, a more sustainable source. So the wear profile, the look and feel, and the comfort of the product is completely unchanged, right? So the consumer would not notice the two products side by side, would not notice the difference between two products side by side. So I think that's one of the absolutely kind of fantastic parts about how we're approaching this. In terms of the cost increase, yeah, I think we articulated when we made this announcement that the biobased resin is more costly than the resin that we use today, but we're blending it in, right? So there is a blend of the biobased resin in essentially every product that we make. And so the cost increase for next year will be – the cost impact for next year, frankly, is minimal, right? As we look forward into the future, it will have more impact, but we're confident we can offset that through efficiency gains and or potential price increases in the future. But we do not intend to upcharge the consumer for the BioBrace product, and we will not be increasing prices to the consumer based on the increase in the BioBrace resin purely. We'll be looking at sort of the overall health of the brand.

Yes, thank you.

Your next question comes from the line of Sam Poser with Williams Trading.

Good morning. Thank you for taking my questions. I've got a few. I'll just read them off. One, you talked about the additional $75 million in air freight for next year. What is sort of the normal – can you give us some idea of what the normal air freight is and, you know, some – some more information there. Number two, what percent within Vietnam, how exposed of those nine factories, how many are in the south and what kind of production comes out of the south? And then notice in your stores, what is the change in the regular full price selling in your outlet this year versus past years and how much it appeared to me that you're seeing a lot more full-price selling in the outlets than I anticipated and wondered, you know, how that's impacting margins and how you see that going forward. And I probably have 10 more, but I'll just leave it at that.

Sure. So I'll start, Sam, with answering your first one. So our normal air freight is certainly less than $10 million. We don't tend to spend a lot of air freight. We actually spend a little bit more this year than we did last. And that will be between $8 and $10 million. That's kind of our normal run rate for this year.

Great. So Vietnam, yeah, look, the majority of the factories are in the south, Sam, as you'd expect with the concentration of production facilities down there. We're obviously not going to break out the size of each facility, but I would say the majority have been in the south. You know, the north and the mid factories have continued to operate through this whole period, although, you know, did see some disruption based on, you know, COVID cases and labor availability. You know, I think the only other piece of color I would say is as the factories in the south are reopening, we are seeing, you know, the labor coming back pretty effectively. So we're pretty confident about getting those facilities back online quickly. And then you asked about full-price selling in our stores. Absolutely. As you kind of looked at the selling season, especially through the summer, which obviously is a peak period for us, particularly in the outlets with all of the tourist traffic, Yeah, we were essentially a lot more full price than we were last year, so we did see a nice margin uptick in the stores. You can see that reflected in our overall margins have been extremely strong, and I think I articulated very clearly that that was due to reduced promotional activity, or one of the key components was reduced promotional activity, and in-store has been an important component of that.

And you anticipate that the Outlet stores will continue to run at a more regular price rate, which should be really, really good on your leverage of your rent and everything else compared to your full-price stores.

I would say yes. Look, I think we're heading into Q4, which is a more promotional period. There are some key periods in Q4, Black Friday, Cyber Monday, et cetera, when we feel like some promotional activity is required by the consumer, and it would be probably foolhardy not to participate in that to some degree. But I think depth and breadth will be less. for sure. And, yeah, we're not planning to return to, you know, a higher promotional cadence anytime soon. It's the demand for the brand far ahead of our ability to supply at this stage.

And then one last thing. When will your factories in South Vietnam, do you think, be at full capacity and, you know, relative, and where are they today? If you can give us some kind of color there.

Yeah, that's too hard to say, Sam. I mean, I think we're certainly going to see. We're anticipating that we see some on-again, off-again type of situation. We're not anticipating that they ramp up. Our baseline projections do not anticipate they ramp up to full production in a number of weeks and then stay there for the rest of eternity. We think this is going to be volatile. We've incorporated that into our expectations and into our guidance.

Thanks very much. Complete success.

Thank you. Your next question comes from the line of Susan Anderson with B. Riley.

I guess I wanted to ask about the boots for the fall, if there's any early reads on the boot offering that you have out there, particularly the personalizable ones.

Yeah, I would say boots is a very, very minor part of our strategy and product offering. You know, if we look at the fall, we're actually primarily focused on line classic or line product. That's where we really can deliver, I think, very strongly on kind of consumer expectations. That's where the volume of our business is. I would say line's been performing extremely well. We're very satisfied with the performance of our boots, but it's really a very minor part of what we do.

Great. And then I'm curious about just the gibbets growth in the quarter. I'm not sure if you mentioned that. And then also, how much more space did you gain for gibbets? Is that all at wholesale for the quarter?

Yeah, I think what we said is the gibbets doubled again in the quarter. I think if you remember back at our Invest Today presentation, we said it was 6% of our overall business. In terms of wholesale presentation, we continue to gain wholesale presentation for gibbets. I would say across the globe, in this country, in Western Europe, and also in Asia. So that is an important part of our growth in gibbets. I would also say that... You know, our online sales at Gibbets have shifted more from kind of singles to packs, which has also allowed us to accelerate growth in terms of digital sales at Gibbets, too.

Great. And then lastly, maybe if you could just talk about what you're expecting in terms of mix of wholesale to DTC. You know, it seems like wholesale is, like, reaccelerating now. I guess, you know, DTC is still growing, but do you expect that to shift back a little bit more to wholesale next year? Sure.

Yeah, thank you for the question. I think, you know, when we think about next year, as I mentioned, there's still a lot of unknown with just kind of the variability of transit times and all the things that we're laying out. As we talked about in prepared remarks, we're seeing really strong, you know, wholesale bookings as well as we're really confident in the consumer demand for our product. But I don't think we're ready to kind of give that breakout yet because it's still pretty early. So we're happy to provide, you know, more color commentary to get a little closer to the year next year.

Great. Okay. Thanks so much. Good luck with this holiday. Thank you.

Your next question comes from the line of Steve Murata with CL King.

Good morning, Andrew and Corey. And I have two questions for you. Could you please disassemble what the in transit inventory is in the third quarter of this year versus last year? And the follow up is, can you talk about price increases in the first half of 2022 on a like for like basis versus pricing in the first half of 21? Thank you. Sure.

So, yeah, in the quarter, you know, we grew revenue 73%, inventory grew 22%, and almost all of the growth was in transit. So, and that's really just a reflection of the extended transit times that we've experienced. I think we've managed it really well trying to keep, you know, our inventory, you know, really in stock, especially in our strategic channel, including our own e-commerce channel. And then switching over from a price increase first half 22 versus first half 21. So we did take the biggest kind of flow through that we've talked about is the price increase we took for wholesale that hasn't flowed through to the first half of 22 yet and will be flowing through. And then we also have some price increases we took internationally that will flow through in first half of 22. Okay.

I'll take the balance offline. Thank you. Thank you.

Your next question comes from the line of Jim Cartier with Montez Crespi.

Morning. Thanks for taking my question. For next year, how should we think about growth by product category and region? Should we still expect the clogs in Americas to grow faster than the overall, or should we start to see the shift towards Sandals and Asia start next year?

Yeah, thanks, Jim. As we look at next year, we still expect clog growth to be very strong. So we're still seeing, you know, tremendous growth in bookings in our clog business. I would say we're anticipating that the Americas will be strong, but we also think the international business will accelerate. And then we think sand growth will improve, hopefully, but it's – You know, that's kind of a smaller piece of the business. So, you know, if we think about our five-year plan in terms of growing our family business, we definitely think we're on track for our long-term trajectory and confident about the growth of that category. Great.

And then just on the store openings this year in Asia, you know, where have those stores been open? Have you started to open up any new stores in China? Thanks.

Yeah, that's a great question. The vast majority of the store openings in Asia have actually been in China, so split between some outlets that we took back in Beijing and then some full-price stores in some key cities in China.

Great. Thank you.

Your next question comes from the line of Jim Bessie with Stiefel.

Thanks, and good morning. I have a couple questions. I wanted to start just on customer activity in the D2C data file. Can you shape the composition of sales to existing customers versus customers that are new to the data file and maybe speak about growth of that data file?

Yeah, I mean, we don't break that out in a lot of detail, Jim. It's just not how we think we go to market. But what I can tell you, obviously we do analyze that information. What I can tell you is that the growth we're seeing in DTC is frankly from both. It's from new customers. and also increased and repeat purchasing from existing customers. As we look at the acquisition of those new customers, our underlying data file is growing extremely well. I would also add that some of our co-lab activity and some of the marketing activity we do allows us to capture consumers very effectively in terms of when they purchase are in a queue looking for a collab or they enter an auction. As you might have seen, we've moved some of our collabs to an auction type of process. That also is very effective in terms of increasing our consumer data files. So, you know, we feel very confident and optimistic about the consumer activities that we see both online and in-store.

Thanks for that. Andrew, I wanted to ask about wholesale orders. Clearly, retailers are very anxious to get more product for spring. I'm curious, the measures you have in place that will help you guard against the risk of over-inventory in the channel, will those be staged deliveries? Are you monitoring inventories in the channel? I recognize the orders are strong, but just talk about your thought process for managing through that as the year unfolds.

Yeah, I mean, I think we've talked about this a few times. I think we've really stepped up our brand health and inventory management activities. We work very closely with all of our major wholesale partners around what they're ordering, how much they're ordering, when they're ordering it. We monitor sell-throughs extremely closely, as you'd expect us to do. And some of our key products, frankly, are really on allocation across those partners. So we make sure we have the right product in the right place. So I'd say we're very much on top of that and do all of the things that you kind of frankly expect us to do to make sure that I think the biggest problem or the biggest thing that any brand has to be aware of is making sure that their inventory is fresh, inventory is turning in all the channels. And if you just look at our overall inventory efficiency and our turn rates, I think they're best in class.

Yeah, and Jim, just one thing to add there, as we talked about in prepared remarks, we do see a really strong wholesale order book for next year. We are not going to be able to fulfill all the demand that's in our wholesale order books, just given the non-production in the first half and the impact. So even though we're air freighting and we are projecting really strong growth for next year, we will still be constrained from a wholesale demand perspective.

Helpful. Thanks, Anne. And then I wanted to ask if you could provide a little more color on the components of gross margin improvement. You got 65 basis points from currency. How would you split the rest of the contributors to that gross margin improvement? And I'm particularly curious about the benefit to gross margin from Gibbett's mix. Any color you could provide there would be helpful. Thanks.

Yeah, the biggest overall benefit to gross margins really have to do with the pullback in promotions as well as price increases. So that's kind of the largest share. I would combine those two in a bucket. Jibbitz Mix is also a piece of it, but price increases and promotional strategy are the largest, followed by product mix and Jibbitz Share.

Great. Thank you. I'll leave it at that.

Your next question comes from the line of Jay Soul with UBS.

Great. Thank you so much, and thanks for taking my question. Andrew, I just want to maybe take a step back because your question has been about pricing and channels. If you think about it, 20%, exceeding 20% growth next year on top of this year where, you know, growth is going to be in the mid-60s at least. You know, how do you think about what gives you confidence to give an outlook for next year, you know, at this point here in October versus normally in February when you would do it? Obviously, the wholesale order book sounds really robust. But, you know, can you maybe just talk about what strategies you're using to drive growth on top of big growth and, you know, maybe which consumer groups are really, you know, you're targeting to, you know, increase the sales and just continue to increase brand relevance? Thank you.

Yeah. Excellent question. So if we step way back, I think what we're seeing is, you know, very strong brand trajectory, right? You know, we talked about that a little bit in prepared remarks. We wanted to, you know, brand relevance, consideration, et cetera. And we've seen double-digit increases in that sort of five years in a row, right? So as we look at our brand relevance and our brand trajectory, and that's frankly not just in the U.S. We're looking at that in all of our key countries. We're looking at it in Europe. We're looking at it China, Korea, Japan, et cetera. So we see continued acceleration of brand relevance, which allows us, I think, you know, a great deal of confidence that we can continue to scale the brand in many parts of the world, right? If you look at our recent success and our recent trajectory, it's been heavily driven by the United States. We've seen extraordinary growth here in the United States really for, you know, three years in a row now, despite the pandemic. As we look to the future and as we talked about in our investor day, we really see that growth accelerating outside of the United States. So in our EMEA business, we've seen very strong traction this year. We anticipate that continuing with a temporary disruptions. in Q4 of this year. And then we also see Asia as our biggest long-term potential with giant markets available to us in, firstly, China, but also Japan and Southeast Asia, which has essentially been closed down during this time period. So its brand trajectory, its growth opportunity around the world is kind of the two key factors. And that's what really underpins our, you know, $5 billion in the next five years in terms of our overall growth. Then I layer on top of that bookings. As we look at wholesale bookings as we book into the first half of next year, we're clearly seeing demand way beyond what we're able to supply, given some of the supply disruptions and just over the overall scaling of our supply chain. We think we can solve that over time, but we can't solve that in the short term. So I think that's what gives us the confidence to be able to give you the kind of 20% plus revenue growth into next year. The rate limiting factor for next year, frankly, is really supply. And then I think to one of the earlier questions, we do remain very vigilant and monitor closely the sell-through of that product. The last thing that we want to do is create some negative momentum for the brand by over-imagining any of our particular channels.

Got it. That's very helpful. Thank you, Andrew.

Your next question comes from the line of Jonathan Komp with Baird.

Thanks. Two quick follow-ups if there's time. One... Tacking on to the prior question and thinking back to the investor day and hitting $5 billion of revenue, your current ASP, I mean, that would require close to 200 million pairs a year. So just any broader context as we think about that five-year projection, how you get comfortable with those types of volumes?

Yeah, I mean, look, it does imply, and we talked about that explicitly, I think, at Invest Today. You know, we do see some, you know, ASP growth over that timeframe, but still the biggest driver of the growth will be pairs. And, you know, what I would say is if you just look at, you know, other brands and you look at the availability of production, it requires... forethought and planning and it requires anticipation but there is absolutely available capacity to be able to produce those kind of pairs and partners that are willing and able to and frankly make good money out of producing those pairs so they're anxious to support us and stand up new facilities. So we don't really have any huge concern about that. It's definitely something that we feel very confident we can deliver against.

Okay, and then, Ann, maybe one follow-up. I know at Investor Day you talked about roughly a flat gross margin over time looking against the 2021 level. It looks like gross margin obviously is trending higher, closer to 60% or a little above for 21 here. So is that sort of a new bar you think is sustainable going forward, or do you think over that five-year horizon you'll get back some gross margin, or how should we think about that?

Yeah, I think where we, you know, specifically talked about, too, for our investor days, that we're comfortable with the 26% adjusted operating margins over the long term and, you know, 26 or plus. And I think, you know, that's best in class. I think as far as the pieces, what we'll try to do is, you know, update you guys more on a full year on each of the initiatives and how that's playing in. So I would say that 26% operating margin guidance over the long term still stands. Obviously, next year we guided, you know, higher excluding the air freight of 28%.

Okay, fair enough. Thanks again. Thank you.

And at this time, there are no further questions. I will now turn the call back over to management for any closing remarks.

Just want to conclude by thanking everybody for their ongoing interest in our company, and thank you very much.

Thank you. That does conclude today's conference call. We thank you for participating. You may now disconnect.