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spk04: Welcome to the Crocs Incorporated second quarter 2022 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Corey Lynn, Vice President of Corporate Finance. Please go ahead.
spk07: Good morning, everyone. Thank you for joining us today for the Crocs second quarter 2022 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 crocs.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 safe harbor provisions of the federal securities laws. These statements include but are not limited to statements regarding the acquisition of Hey Dude and the benefits thereof, CROC strategy plans, objectives, expectations, financial or otherwise, and intentions, future financial results and growth potential, anticipated product portfolio, our ability to create and deliver shareholder value, and statements regarding potential impacts toward business related to the COVID-19 pandemic. These statements involve known and unknown risks, uncertainties, and other factors which may cause our actual results, performance, or achievements to be materially different from any future results, performances, or achievements expressed or implied by the forward-looking statements. CROCS is not obligated to update these forward-looking statements to reflect the impact of future events, except as required by applicable law. We caution you that all forward-looking statements are subject to risk and uncertainties described in the Risk Factors section of our Annual Report on Form 10-K and our subsequent filings with the SEC. Accordingly, actual results could differ materially from those described on this call. Please refer to the CROCS Annual Report on Form 10-K, as well as other documents filed with the SEC, for more information relating to these risk factors. Certain financial metrics that 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. Joining us on the call today are Andrew Reese, Chief Executive Officer, and Ann Millman, 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.
spk08: Thank you, Kari. Good morning, everyone. I'm pleased with our very strong second quarter results and the strength of our brands as we continue to navigate a dynamic consumer environment. Both of our brands are incredibly well positioned relative to the core consumer needs of comfort and value. We're very confident that we will continue to gain significant market share, resulting in industry-leading growth, profitability, and cash flow. I want to also thank all of our teams across the world for all of their hard work as they respond to the many opportunities in front of us. Looking at the second quarter of 2022, Anne will review our financial results in more detail shortly, but here are a few highlights. Consolidated revenues of $965 million, growing 56% on a constant currency basis. The Crocs brand had another great quarter, growing 19% constant currency, negatively impacted by Russia and the China COVID lockdown, which offset approximately three percentage points of growth. Hey Dude exceeded expectations, generating revenues of $232 million, an impressive growth, almost doubling compared to last year. In July, we launched a new brand campaign for Hey Dude that we think is compelling and introduces an updated brand identity. Adjusted operating margin on a consolidated basis remains best in class at 30%, despite currency, inflation, and supply headwinds. Adjusted diluted earnings per share increased $1.01 to $3.24. Finally, we're very proud that Crocs recently earned the number three spot on Forbes' list of America's best employers for women. We're particularly pleased with our Q2 results in the context of the overall market. While market data is not as complete and timely as we would like, based on a variety of sources, we believe that the footwear market in the U.S. shrank in the first half of 2022 and may have done a little better globally, but we believe it was a best flat. In the context of a flat to down market, during the first half, constant currency revenues for the Crocs brand grew by 20%. and consolidated revenues grew by 52 percent, driven by the acquisition of Haidu. As you can see, both Crocs Inc. and the Crocs brand are gaining significant market share. There are many macroeconomic and external headwinds, including currency, inflation, rising interest rates, weakening consumer sentiment in the U.S. and Europe, the war in Ukraine, and China's COVID strategy, making this future very difficult to predict. That said, we believe great brands need to continue to invest in innovation and engage their consumers, and great companies must plan prudently and become more agile. In the light of the current environment, we're very focused on managing the business prudently in order to maintain high levels of profitability and strong cash flow. During our call today, we will outline how Crocs, Inc. will continue to gain market share, both as a result of the growth momentum of Hey Dude and the growing consumer demand globally for the Crocs brand. Adud is one of the hottest brands in the U.S. football market today because of the consumer love of the brand and its products. We're investing rapidly in the capabilities that will allow us to sustain the growth potential of the brand. While we're not yet ready to outline the longer-term potential, we believe it is significant, and we'll easily achieve our short-term goal of a billion dollars in sales. Our strategy utilizes the proven playbook of investing in great product and digital and social marketing combined with a disciplined go-to-market and distribution strategy. This will result in robust U.S. growth from expanding wholesale distribution as well as strong digital growth. We're currently planning international growth beginning in 2023. And while small initially, we're confident in the growth potential given initial tests and the versatility of the Wally and Wendy silhouettes. The integration of Hey Dude is going well, including staffing many critical positions, as well as completing our brand work to help solidify the brand DNA and the consumer passion for the brand. We've recently unveiled an updated brand identity and positioning and will invest significantly in digital marketing through the back half of the year. The growth of the Hey Dude brand will continue to be very profitable, thanks to the simplicity of the product, the ability to drive supply chain efficiencies, and the SG&A leverage we gain from shared services across both brands. Turning to the Crocs brand, we will continue to gain market share because of our comfort positioning, molded DNA, strong marketing, and product innovation pipeline. We have developed deep connections with our consumers, and they love our brand as evidenced by our own brand metrics, and which continue to be very strong, as well as leading industry studies. When we combine the brand awareness and relevance with a very democratic price point, we believe that the brand is very well positioned to thrive when the consumer is looking for comfort and value. In addition, Crocs has significant penetration opportunities in key international markets, hence our focus on Asia. Our proven playbook is driving growth in South Korea, India, and Southeast Asia. and we're very encouraged by the green shoots we're seeing in China. We will continue to create brand pull with our powerful social and digital marketing and a pipeline of new products. We had numerous successful collaborations and licenses, ranging from a second drop of Salahi Bembry to Cinnamon Toast Crunch cereal to MCM in China and Lazy Oaf in Europe. One of our latest marketing innovations was our first ever virtual store experience in the metaverse. combining commerce and gamification with a Saweetie collaboration. From a product perspective, we expanded our sandal portfolio with a long-awaited Crush sandal, debut in the U.S. and top Asian markets. The Crush was recently featured in Vogue in an article entitled, These Ugly Chic Sandals Have Gotten Me the Most Compliments This Summer. Innovations such as the Crush sandal and dedicated marketing campaigns such as Summer of Crocs that featured five new sandal introductions are just two of the examples of how we're driving growth in the $30 billion sandal market. We were disappointed with our year-to-date sandal revenue decline of 13% constant currency as we over-edited the line to maximize throughput at the factories, and we had delays in newness, and which was also compounded by a poor sandal season in the U.S. Year-to-date, We do, however, see strong double-digit growth in our icon sandal franchise, and we expect sandals to improve in the back half with more newness and additional marketing. As a digital-first company, we also continue to engage our consumers in their preferred channel. In Q2, Kroc's brand digital sales grew by 21% constant currency, with balanced growth from new and repeat customers. All of these factors give us confidence in our ability for the cross-brand to continue to gain market share. In terms of managing the company prudently, we must remain agile to be responsive in a shifting consumer landscape. Let me outline some of those key steps. With uncertainty around the future macroeconomic environment and consumer behavior, we're planning for lower growth in the cross-brand in the short term. Our assumption is that consumer confidence in the U.S. and key European markets will continue to soften as the year progresses, as higher interest rates and high food and energy inflation slow consumption. For 2022, we expect Crocs brand revenues to grow approximately 14% to 17% constant currency, or 10% to 13%, including the negative impact of currency of approximately 400 basis points. This will allow us to prudently plan and manage our inventory and investments. Following strong performance in H1, we now expect 2022 revenues of between $850 and $890 million, which is nearly a billion dollars on a pro forma basis. We will continue to leverage SG&A and keep inventories lean. This will enable us to maintain strong marketing investment and constant consumer engagement, and will position us to continue our track record of delivering industry-leading profitability and cash flow generation. In summary, while we understand the consumer environment is very uncertain right now, Crocs owns two incredible brands that are perfectly positioned for this time, and we're managing the company to take significant market share. And we'll now review our second quarter financial results in more detail.
spk07: Thank you, Andrew, and good morning everyone. I'll begin with a short recap of our second quarter results. All revenue growth rates will be cited on a constant currency basis unless otherwise stated. For a reconciliation of the non-GAAP amounts mentioned to their equivalent GAAP amounts, please refer to our press release. As you've already heard, both brands performed well during the second quarter. Amidst many headwinds, we delivered strong revenue growth of 19.4% within the Crocs brand, taking our first half revenue growth to 20.3%. Heydood revenues continued to exceed our expectations and almost doubled from last year. Gross margins remained strong, particularly for the Crocs brand, despite freight and FX headwinds, while consolidated SG&A leverage led to another quarter of industry-leading adjusted operating margins of 30.1% and strong adjusted EPS growth. Second quarter consolidated revenues were $965 million, representing 55.6% growth over last year. The Crocs brand had a record-breaking quarter with revenues at an all-time high of $732 million, up 19.4% on top of 88.4% growth last year. The Crocs brand growth rate was negatively impacted by currency at 510 basis points in the quarter. Haydood revenues of $232 million, also a record, were up 96%. During the second quarter, the Crocs brand sold 32.4 million pairs of shoes, an increase of 11.4% over Q2 2021. The Crocs brand average selling price during Q2 was $22.39, a year-over-year increase of 2.5%, driven primarily by higher pricing and product mix, offset in part by channel mix and currency. Let's review a few Crocs brand highlights by region. In North America, second quarter revenues increased 7.8% to $423 million, on top of over 132.3% growth last year. This growth was driven by digital channels, including our own e-commerce, where we saw strong growth in traffic, evidencing strong consumer demand for the Crocs brand in North America. For the first half, North America revenues grew 12.5% amidst an approximately 3% decline in the U.S. wholesale footwear market, according to NPD. The Crocs brand in Asia generated second-quarter revenues of $149 million, or 27.6% growth. Strength in the region was led by India and Southeast Asia distributors, with revenues more than doubling versus last year. In Southeast Asia, distributor partners benefited from COVID reopening and the partial return of tourism to the region. This momentum was partially offset by softness in China due to COVID lockdowns. H1 results for Asia have been consistently strong for two years in a row, posting 25.5% growth this year on top of 24.3% growth last year. Crocs brand revenues for Amelia grew 48.4% to $160 million. Growth was particularly strong in the UK, Germany, and with our distributor partners. Similar to Asia, distributors are seeing strong demand and sell-through. Looking at the first half, Amelia grew 38% on top of 60% for the first half of last year. Turning to HeyDo, revenues exceeded expectations, contributing $232 million and growing 96% from pro forma 2021 revenues. We are excited to see the success of the brand during our first full quarter of ownership. and expect the new branding and implementation of the Crocs Playbook to fuel future growth. As a reminder, we will continue providing gross margin visibility by brand for the remainder of 2022. Beginning in 2023, gross margin will be reported on a consolidated basis only. Consolidated adjusted gross margins for the second quarter were down 660 basis points from last year to 55.2% due to increased air freight and logistics costs the addition of Hey Dude, channel mix, and currency. Adjusted gross margin excludes a $34 million inventory write-up in connection with the Hey Dude acquisition. At a brand level, adjusted gross margin for the Crocs brand was 57.9%, down 390 basis points, driven primarily by freight headwinds of 445 basis points, including a 340 basis point impact of incremental air freight and 105 basis points of currency, somewhat offset by increased prices and product mix. Hey Dude adjusted gross margin was 47.1%. Hey Dude experienced higher inbound freight rates versus prior year, and we have moved quickly to leverage Croft's inbound freight contracts, which we expect to result in gross margin improvement in the back half of the year. During the second quarter of 2022, we were able to leverage consolidated adjusted SG&A 610 basis points, improving to 25.1% of revenues versus 31.2% last year. Non-recurring SG&A expenses for second quarter were $8 million, including $6 million of hay-dewed integration costs. The 610 basis points of leverage was achieved while investing an additional $42 million versus prior year, primarily in marketing and talent. To support the long-term growth of both brands, we plan to continue leveraging SG&A while maintaining investment in the right areas to stay connected to our consumers. Our flexible SG&A base, coupled with our ability to leverage shared services of supply chain, IT, finance, HR, and legal across the brands allows us to remain agile. Our second quarter consolidated adjusted operating income of $291 million increased $94 million, or 47.9% from last year. including $76 million attributable to Hey Dude. Adjusted operating margin declined slightly to 30.1% from 30.7% last year, as gross margin headwinds were nearly offset by SG&A leverage. Adjusted operating margins would have been favorable to prior year, excluding currency. Our second quarter non-GAAP diluted earnings per share increased 45.3% to $3.24. Our liquidity position remained strong as we ended the second quarter with $187 million of cash and cash equivalents and $470 million of borrowing capacity on a revolving credit facility. Given strong cash flow generation in the second quarter, we repaid $110 million of debt during the quarter, reducing borrowing to $2.77 billion and net leverage to 2.6 times at the end of Q2. Our inventory balance at June 30, 2022, was $502 million, including $167 million for Hey Dude. Similar to the industry, our in-transit levels remain elevated as a result of longer transit times. While inventories were up $125 million in the Crocs brand, bear in mind that last year at this time, inventories were exceptionally lean. We also see elevated inventories in the U.S., due to the slowing of our U.S. growth rate relative to what we anticipated. Having traditionally targeted over a four times inventory turn, we are slightly below that today. However, excluding in-transit inventory, turns exceeded six times for both brands. Turning to the future, I would like to share our current outlook for 2022 and the third quarter. All numbers will be on a reported basis unless otherwise stated. Since our prior guidance, we have seen a strengthening U.S. dollar, ongoing shutdowns in China, and we are also anticipating a continued weakening in consumer confidence. As such, we are planning our own DTC more cautiously and are helping manage our inventory and our wholesale partners more tightly. Given those dynamics for 2022, we are lowering the Crofts brand revenue guidance to be approximately $2.6 billion. representing year-over-year growth of between 14% and 17% on a constant currency basis and 10% and 13% on a reported basis. We expect to grow in all regions with the strongest growth to occur in Amelia and Asia as the regions continue to experience high consumer demand and COVID reopenings. With respect to HeyDude, we continue to gain visibility and confidence in our supply chain. Thus, we are raising our expectations for the full year and now expect HADO revenues to be between $850 and $890 million on a reported basis, implying $940 to $980 million on a pro forma basis. This translates to consolidated revenues growing 47% to 52% to approximately $3.4 to $3.5 billion. We continue to expect that we will have best-in-class adjusted operating margins of approximately 26% to 27% for the full year implying adjusted operating income of approximately $880 to $945 million. The net effect of the revenue revisions is that expected adjusted diluted earnings per share will be between approximately $9.50 to $10.30. For the third quarter of 2022, we expect consolidated revenues to be between $915 and $955 million, representing $46 million to 53% growth from prior year. We expect cross-brand revenues to grow approximately 15% to 18% on a constant currency basis, or 9% to 12%, including the negative impact of currency of 600 basis points. We expect hedued revenues to be approximately $235 to $255 million. We expect adjusted operating margin to be between approximately 25% and 26%. As we manage through the shifting operating environment, our commitment to quickly pay down our debt remains unchanged, and we expect to be below two times growth leverage in the next 12 months, enabling us to repurchase shares should we choose to do so. In summary, as we navigate the mini headwinds, we plan to actively take market share, drive highly profitable growth, and reduce leverage. At this time, I'll turn the call back over to Andrew for his final thoughts.
spk08: Thank you, Anna. Through the remainder of 2022, the strength of our brands continues to position us perfectly to take significant market share during these uncertain times. Our thoughtful management will drive strong profitability and cash flow and create tremendous shareholder value over the long term. Operator, please open the call for questions.
spk04: Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Tom Nickick from Wedbush Securities. Please go ahead.
spk12: Hey, good morning. Thanks for taking my question. I just wanted to drill down a little bit on the slowdown that you're expecting for Crocs brand. I mean, it sounds like a pretty significant step down in Q4, kind of backing into something more like, you know, mid-single digit growth, mid-single digit to high single digit in Crocs and FX. I just want to make sure I kind of understand what's happening here. Like, is it a combination of of DTC and wholesale where you're assuming more conservative assumptions. It's something that, you know, you've been, you know, you've heard from the wholesale partners. I just kind of want to make sure I understand what exactly is happening in the North American market.
spk08: Yeah. Let me kind of give the sort of high level, Tom, and then I'll hand it over to Anne to give some more specifics. I think that, you know, the backdrop, as we talked about a little bit in our prepared remarks, is we're just anticipating that the consumer continues to soften through the remainder of the year, right? As we look at the consumer over the past several months, we've definitely seen very concrete signs that there's some softening. You know, I think we're very optimistic about back to school and feel good about that. But we anticipate as the, you know, as the drag of high interest rates, high inflation, and uncertainty continue to impact the consumer, that they will soften as the year goes on. So we're trying to be more prudent and build that into our expectations. By building that into our expectations, we can manage our inventory, we can manage our costs appropriately, so that we kind of orientate towards, you know, our number one priority of maintaining very high levels of profitability and strong cash flow. And Anne can give you kind of a little bit more to color on that as well.
spk07: Yeah, I think, Andrew, I think that's exactly right. When we were thinking about the full year, we've obviously absorbed several headwinds. So about $100 million of currency pressure, which is about 440 basis points. The shutdowns in China and Russia for the full year account for about 180 basis points. We tried to incorporate all of that into our full year from a Crocs perspective, as well as just readjusting where we think the consumer could go. For Q4, we wanted to make sure that we planned prudently so that we could also plan our inventory and cost structure around that.
spk08: Maybe I'll come back. On the flip side, we see very strong growth internationally. We don't see some of those same pressures in some of our international markets. And so we're excited about continued growth internationally. And then obviously, you know, we've only owned HeyDude for a relatively short period of time now, but it continues to perform extremely well above our expectations. And as we look forward, we, you know, as we talked about, we're gaining a little bit more confidence in security supply there. So we think there's more upside there, too.
spk12: If I could just quickly follow up, you know, you made a couple of references to managing, you know, cost structure. And despite a more conservative top line, you kind of maintained the margin rate outlook for the year. Can you just kind of talk a little bit about, you know, how you're able to kind of maintain the margin rate for the year despite, you know, some of these kind of mounting top line elements?
spk07: Yeah, I think we have a pretty flexible cost structure, and we've adjusted investments to be in line with where we think the top line is growing. And we're obviously still growing our business, strong double digits, so it's easy to kind of pull back a little bit and still invest in marketing, which we're still planning on doing at the same rate as we were previously, which is the Crocs brand approximately 8% for the year. So that allows us to kind of, you know, take advantage of that. Also, you know, gross margins underlying for the Crocs brand remain strong as well. We have air freight tapering off in the back half of the year. We do have some cost pressures coming in from a gross margin perspective, but we do lose the air freight headwind in the back half of the year as we spent $75 million of that air freight investment program. That's concluding in Q3, and we don't have – I think we only have about $15 million left.
spk08: And just as a point of strategy, you know, we believe that we maintain – we create the most future shareholder value by maintaining profitability. So we're not anxious to sacrifice profitability to drive less profitable growth.
spk12: Understood. Thanks very much, and best of luck at the Ryan Derby.
spk04: The next question comes from Jonathan Komp from Baird. Please go ahead.
spk01: Yeah, hi, thank you. Maybe just a follow-up as we think about the Crocs progression throughout the year. Could you maybe share a little more specifically on how you're planning, especially North America, for the fourth quarter? And then, you know, as you think of the Crocs brand holding on to the gains from the last couple of years, especially in the Americas, is your confidence in that outlook changed at all? I know you're still projecting a $5 billion long-term target, so I just want to hear how you're thinking about you know, any differently about the Crocs brand?
spk08: Yeah, great question, John. So, look, the Crocs brand is absolutely holding on to the gains that it achieved over the last couple of years. We're, you know, in the first half of the year, the Crocs brand grew about 20%. Globally, it grew in the U.S. marketplace, and the market was flat to down, right? So we're gaining share. We're continuing to gain share. And I think the guidance that we're providing, we anticipate, will also be strong share gain for the Crocs brand. So I think we're definitely holding on to the gains that we have been successful in acquiring for the last couple of years. As we look at the Crocs brand, I would say all of the brand metrics remain extremely strong. So our own internal brand studies give us great confidence that the brand continues to strengthen over what it has been. You can see that in organic search. And we also hear that from our wholesale partners as we discuss the brand and we discuss future strategies and how we're going to continue to gain share of shelf in our major wholesale partners, both here in the U.S. and in key international markets. DTC, if we look at DTC in the first half, particularly in the Americas, I know people are focused on the Americas, that grew 10% on a constant currency basis. So, again, significantly better than the market and growing over last year, which was an absolute record for the Crocs brand. I would say we continue to see very strong demand for the core clock that's driving a big part of our revenue growth, and that's particularly here in the U.S. and also internationally. So I think, you know, everything that we're seeing really supports long-term thesis. And even given, you know, I think what is a softer consumer environment today and we're anticipating over the near term, you know, we still have great confidence in our ability to hit the $5 billion Crocs brand growth target that we put out there by 2026. So...
spk07: If I could just add for the full year, we did guide that all of the regions would grow. So all of our crocs regions will grow for the full year.
spk01: Okay. And just to clarify, Ann, that's full year, not specifically to the fourth quarter?
spk07: Yeah, we didn't guide fourth quarter specifically.
spk01: Okay. Thank you. And then maybe, Andrew, one follow-up on Hey Dude. Obviously, the message has changed. pretty dramatically, even though you've only had it for one full quarter here with respect to the longer-term outlook. So I want to maybe just ask more specifically what you're seeing early on for that brand to give you much more confidence in the potential. And some of the early relationships you've engaged from wholesale partners, what are they seeing and what type of feedback are you getting? Thanks.
spk08: Yeah. So I think... Maybe I'll try and start at the top. As we did our consumer research in due diligence and as we speak more and more to the consumer over the last several months once we've owned the brand, we see a tremendous brand love from the consumers. The consumers absolutely love the brand. They're passionate about it. They talk to everybody about it. The viral component of the brand communication is extraordinary. We think that's due to what is a relatively unique product. It's lightweight, it's comfortable, it's easy on and off, it comes in, you know, hundreds if not thousands of different materials and flavors, so they can buy multiple pairs, So there's a tremendous brand and consumer connectivity. That has not been created by brilliant marketing in the past. It's just the product and them finding and loving the product. And so as we look at our plans, I think we were cautious initially because we were taking over a, you know, founder-led, very entrepreneurial company. It wasn't really clear to us. the degree to which we could get supply in the near term. I would say that has achieved, that's gone a lot better than we thought, and so we've been able to shore up that supply, manage the supply, and really satisfy a lot of short-term demand. So that was kind of our cautiousness in the short term. As we look to the longer term, and specifically receptivity from sort of major wholesale partners, we're seeing, I would say, exuberant enthusiasm from wholesale partners that are taking on the brand. We've shipped a substantive amount of product to a number of key partners so that they could be in business for back to school. And I think the comments that we're hearing are things along the line, it's the standout for our back to school. It's really performing above almost any other brand we have in our portfolio. So we're seeing very, very strong performance from that, which obviously then gives us confidence to plan, share a shelf in those partners and to plan our growth for the future. You know, we're not yet ready to talk about what we think that looks like. It's very early days. But I think, you know, you can be confident that we'll follow the playbook that we followed at Crocs. We'll build a strong and thoughtful domestic business here in the U.S., and we think we're pretty confident the brand has a lot of legs internationally as well. So we're pretty excited.
spk01: Great. Thanks again.
spk04: The next question comes from Abby Zivaneeks from Piper Sandler. Please go ahead.
spk06: Thank you for taking the question. Just on inventory, can you talk about the composition of the inventory and then how we should kind of think about the promotional cadence in the back half and how, you know, if that will have an impact on gross margin at all? And then are there any differences in product availability between Crocs and Hades? Thank you.
spk07: So I'll talk about the first part, and then I'll let Andrew talk about product availability. So inventories were up in the Crocs brand, but bear in mind that last year at this time, our inventories were exceptionally lean, especially in the Americas, where we see most of the increases today. So if you exclude the hay-dewed inventory, Croft's inventory was up about $125 million, about 60%. About 30% of the increase is due to in-transits, and then we have about another 30% due to inflation sitting in inventory resulting from the higher freight costs, the FOB and duties that are all sitting in that inventory. So while it is a little bit heavy, we do think that we'll get back to four turns, and we're working really hard to do that, including in-transits. If you exclude in transit now, we're still turning above six times. And then the remainder of the inventory of increase is really related to Hey Dude. And that turns very quickly, and that's very efficient, as that's mostly wholesale. A lot of it is pickup and then related to our e-comm business for Hey Dude.
spk08: Yeah. So, Avi, also embedded in your question what I think was sort of future promotional environment and availability differences between Adud and Crocs. So let me kind of hit on those. So, look, I think we've already seen the retail environment, particularly here in the U.S., become more promotional, certainly more promotional than it was last year. I still don't think it's back to sort of pre-pandemic levels. And as we said on our last call, we think it's important as a democratic brand, and both our brands are democratic, they reach a very broad base of consumers, we need to participate in those events. And you saw that on 4th of July, et cetera. And as we look through the back half of the year, we'll continue that strategy of participating in those key events. In terms of inventory availability, I think we have pretty strong availability on the crock side associated with our core products. And as you look across wholesale, e-com, e-tail, and our own stores, we are very much in stock and trading strongly on our core product. We're still lacking a little newness, particularly, I would say, within Sandals. So we have a strong pipeline of newness through the back half of this year as we catch up from the factory closures back end of last year. And I would say as we look to 23, we have a record cadence of newness for the Crocs brand in particular. So we think that's particularly important. On the Hey Dude side, the key issue for inventory availability is flow through, right? So we're getting strong shipments from our factories in Asia, and we're investing in our distribution capabilities to provide stronger flow through to our customers here in the U.S. and abroad.
spk06: Great. Thank you. Super helpful.
spk04: Thank you. The next question comes from Sam Poser from Williams Trading. Please go ahead.
spk11: Good morning. Thanks for taking my questions. I got a whole pile. So I'll start with gross margin. Can you give some color on the gross margin for Hey Dude in the quarter? And can you tell us sort of what the gross margin expectation is for the balance of the year or for the full year gross margin expectation? Are we looking at down 600 basis points or somewhere in that world?
spk07: Yeah, so let me start with the adjusted gross margins for the quarter were impacted by the addition of Hey Dude, which accounted for about 260 basis points of decline for the quarter. So from that, Hey Dude was impacted by two pieces. Impacted by heavy wholesale demand in Q2, shifting the channel mix from DTC to wholesale, as well as very high freight rates. So the inventory we were bringing in was the old shipping contracts for Hey Dude, which was at very high spot rates. We've now shifted them to our cropped freight rates, and that will significantly improve in the back half and into next year as we start landing inventory at our freight rates. So that's kind of the hey-do piece. We do believe those were an anomaly, and that bill strengthened it in the back half. And then the remainder, from a crock standpoint, the underlying margin, if you exclude freight, was actually up. So freight and FX were the biggest pressures on the crock side. And if you exclude those pieces, we were up. And, again, that includes the air freight associated with the air freight investment we made related to Vietnam. As you remember, that was $75 million. I think we said 15 to 18 left to spend in Q3. So that implies that back half margins will be higher than first half margins from a gross margin standpoint. And that would all be in company, you know, incorporated into our 26% to 27% operating margin guide for the full year, Sam.
spk11: So can you give us a gross margin percent for the full year?
spk07: I think we're just not going to guide that piece because we're already giving operating margin percent and EPS guidance.
spk11: Okay. All right. So secondly, Andrew, you hinted at the fact about newness. And the question is, Did you have a newness issue in clogs as well, like the delay of the crush clog and those platform clogs when the bay went away? You know, did you need more newness there? And, you know, how quickly is that being corrected if that's an issue?
spk08: Yes, that's a good question. Yes, units have definitely been a problem during the first half of this year. Having said, we did achieve 20% growth in crops during the first half of this year, but the cadence of our brand is such that we need to bring more news to the table. I would say it was most poignant in sandals, and that was particularly around the fashion sandals. We leaned heavily on our icon sandals, the classic slide, the classic flip, which were, frankly, easier to produce. And those have done really well. They're up strong double digits over prior trading, but we missed the fashion sandals. But, yes, we also lack some newness in the clog arena. I would say the crush, which you highlighted in your question, introduced, I would say, tentatively here in the U.S., Over the last couple of months, we don't have huge amounts of supply. You can see that this crush swamble is already sold out on e-com. And we are currently introducing into the major Asian markets. It's doing extremely well. So that formula of height is working very well. And as we look at the clog newness, we have new clogs in the back half of this year, and we have a number of significant new clog programs early next year.
spk11: Okay, and then does that mean – so in your guidance, and this is for both of you, and then I have one other one. Is the guidance given sort of the macro impact and the improvement of newness coming? Is this a discretion is the better part of valor guidance given the macro? Or, I mean, how much of this is the macro versus timing of product and so on and so forth?
spk08: Look, we just think, Sam, I think we were very clear in our prepared remarks. I would say primarily it's the macro, right? We believe the consumer environment, particularly in the U.S., will soften sequentially as we go through the year. And I think there's lots of evidence and lots of evidence. accomplished economists talking about that. And so we think it's prudent to plan for that. If we plan in that way, we can maintain our profitability and our cash flow, which is our primary requirement. We are very confident in the Crocs brand, where the Crocs brand sits, the fact that we will continue to gain share in that environment.
spk11: And then lastly, thank you. And then lastly, you said that you felt good about, you know, you felt positive about back to school. Can you tell us or give us some indication as to what you're seeing for back to school so far to give you that confidence and any color would be awesome?
spk08: Yeah, I'm not going to provide specific metrics, Sam, but I think what I would say is as we look across all of our channels, as we look across e-com, e-tail, our own stores and our wholesale customers, we feel like the consumer is out shopping for back to school. And we've also seen that in prior recessions, right? So the consumer generally prioritizes their children strongly during a constrained environment, and back to school we feel like is off to a good start. All right.
spk11: Well, thanks very much, and good luck. Thank you.
spk04: The next question comes from Jay Soleil from UBS. Please go ahead.
spk09: Great. Thank you so much. Andrew, I'm just wondering if you can elaborate a little bit further on your comments about Hey Dude. You know, given the brand is trending toward a billion dollars, you know, faster than probably the market expected, and that's sort of like the high bar that, you know, you originally said you made the deal. Have you thought about bigger picture what this brand could achieve in terms of growth, revenue growth? And at the same time, if you talk about the North America business a little bit, obviously there's a lot of new doors that seems like the brand has entered, whether it's like you there for Hey Dude at this point in North America, you know, relative to the number of doors that are in right now?
spk08: Yes. So let me take the second bit first, right? So what I would say is we have tentatively shifted New doors, right? So, yes, you can see how you do it in places you haven't seen it before, whether it be a, as you said, famous footwear, Rack Room Shoes, Academy, et cetera, some Dick's Sporting Goods, et cetera. We have shipped them what we have available. And that is by no means what we consider to be a full assortment or by no means penetrating all of their doors. So I would say the door expansion opportunity is very substantive for Hey Dude. Not only the door expansion, but the assortment in those doors. and the ability to turn quickly. So I think there's lots of runway there. We're taking orders for spring 23, and hopefully we'll be able to create much more compelling assortments for our major wholesale customers early in 23. It's really a little bit hand-to-mouth today. But I would say, as I said earlier, where we're present, the results are very good. They're pleasing to us, and I think the wholesale customers are very pleased. In terms of the longer term, it's just early days, Jay, right? As you said, we've achieved or are very close to achieving kind of the billion dollars number that we put out there. And really the reason put out there, we just wanted people to understand that this is a scale business. This is not a small business. And we just wanted people to understand that quickly because clearly when we bought the business, we heard from the analysts and investment community, they didn't understand what the brand was, and we wanted them to understand that this is a scale brand. So clearly we're just getting started. So I think the scale is much bigger than where it is today. But I think it will be kind of well into the next year before we talk about this more currently. We've got a lot of planning to do, got a lot of work to do before we're ready to talk about that.
spk09: Okay, got it. And maybe I can ask one more. Just on the Crocs brand, you know, in retrospect now, given that you're lapping a quarter, you know, you lapped a quarter in Q2 with lots of fiscal stimulus that probably drove a lot of growth in your DTC business. You know, how do you, how did you see the effect of that on the business in 21? And then what was the impact here in 22 and Q2 and DTC and sort of how do you see the business trending in a normalized growth rate? Like what's the, what's the outlook for DTC growth for Crocs brand in North America?
spk07: Yeah, I think, let me start on this one, Jay. I think, you know, we actually saw a lot of the stimulus more heavily weighted to Q1, in the Q1 beginning of Q2, I would say, from a stimulus perspective. I think we, you know, started to move through that pretty quickly, and I'm really happy with our 10%, you know, over 10% direct-to-consumer performance in Q2 in North America. we had really good retention rates. Our retention rate was up on our U.S. e-com. So it also speaks to the strength of North America and also that that wasn't just stimulus spending coming in from customers because they came back. So that, I would say, all leads to the fact that we have a really strong, sustainable, direct-to-consumer business in North America. And I don't think that's just stimulus-driven. As I said, I think we lap most of that in Q1. Yeah.
spk08: Yeah, the only thing is I'd add two things, Jay. When we comped up, we talked about comping up in the first half for our North American DTC business by 10%. So, you know, record performance in 21 driven by stimulus. We grew on that in 22, right? So we didn't shrink, we grew. The second thing I'd say, one of the bigger impacts that we're seeing is actually return of seasonality. And by this, I mean, I think in 21, The constraints, the availability constraints were so high, consumers bought... when available. And I think we're seeing in 22 and anticipating the future, we're going back to more kind of seasonal components. So they'll buy at the key promotion, key events, whether it be promotional events or holidays or travel or vacation. So we're seeing some shifts in the patterns of the business. And we're also planning for those to continue to revert to pre-pandemic patterns.
spk09: Got it. Okay. Super helpful. Thank you so much.
spk04: The next question comes from Jim Chartier from Monis, Crispy, and Heart. Please go ahead.
spk03: Good morning. Andrew, you kind of reiterated your expectation for your 2026 outlook for Crocs. A big part of that is the sandals business. I was wondering if you could talk about what kind of reinforces your confidence in that large sandal opportunity. What are you seeing in the performance today and then You mentioned a lot of innovation for next year. You know, what's the wholesale reception to that innovation for next year? And, you know, are wholesalers investing behind the SAML category for you for next year? Thanks.
spk08: Yeah. Thank you, Jim. So a couple of things. One is I would just start the question, start my answer, sorry, to the question. Look, we were disappointed in SAML performance during the first half of the year. We've definitely studied it. We feel like we understand what happened and really lack of newness. and lack of supply in some of our key style sandals really hurt us. As we look at the back half of the year, we do see newness accelerating. We do see that accelerating into 23. We've got very strong plans. And so that gives us confidence around reversing that trend of the decline that we saw in the first half. As we look forward, longer term and kind of more strategically, we also feel like we're seeing what we anticipated in this category, which is when times get tough, other brands are retrenching, right? So we do see other brands pulling back on their Sandals programs pretty substantially and some shifts in what the consumer is looking for within Sandals. And I think this was part of the thesis that we laid out. It's a big category. It's an unimportant category to some of the major players. And when times are tough, they're going to de-emphasize it. And we feel like we're seeing that. So we feel like there's a newness opportunity. There's a competitive opportunity. And I think the other thing is it wasn't a strong sandal season in the U.S. this year. You know, spring was a little slow in coming. And so we kind of saw some overall softness in the category. So we still feel very strongly about our opportunities within the Sandal arena.
spk03: Great. Thank you.
spk04: The next question comes from Laura Champagne from Loop Capital. Please go ahead.
spk05: Thanks for taking my question. It's on the Crocs brand. I mean, I understand that you're taking guidance down for back half growth just on a weaker macro. How does that impact your promotional and marketing strategy in the back half, given that you also have, I think, some product introductions you're excited about as well?
spk08: Yeah, that is super important. So, you know, we're taking our guidance down to reflect, I think, the macroeconomic environment and our desire to position ourselves strongly. We are protecting all of our marketing activity. So you will see Crocs brand marketing activity, you know, accelerate in the back half. We have a record... make up in terms of collaboration schedule. We're protecting all of our dollars and cents that we plan to spend on marketing, both in the U.S. market, but also, importantly, in our major international markets, including China. So we will continue to spend to support the introduction of all of those new products and to engage our consumers very proactively.
spk04: Got it. Thank you. The next question comes from Jim Duffy from Stiefel. Please go ahead.
spk02: Oh, good morning. Andrew, thanks for mentioning that Cox North America direct consumer growth 10% constant currency. Was that a second quarter number or is that for the first half of the year? First half. Yep. And I'm curious on the digital performance. Can you give us the North America direct consumer number for the second quarter? The digital channel has been challenging for many in North America, and if you could comment on the Cox brand digital performance in the second quarter as well, that would be helpful.
spk08: Yeah, I think we're not going to be disclosing those specific numbers, Jim, but I can tell you it grew, and we're very happy with the performance.
spk07: Yeah, our overall digital growth for the second quarter for the Cox brand was up 21% in constant currency. And for Q2 for the Crocs brand, we are up 7.5% from a DTC comp perspective. So, and that obviously, you know, the biggest kind of piece of that is the, you know, U.S. So you have to, you know, have to grow.
spk02: Yeah. Okay. And then I'm curious within the digital channel, what you're seeing between new and existing customers. Have you seen any fall off in recruitment of new customers or any fall off in contribution from existing customers, and this question is mostly geared toward North America, if you're willing to share.
spk07: Yeah, so from a North America standpoint, we saw actually retention up plus 30%, and we also saw acquisition up, so double data. So I wouldn't say that we've seen a fall off in either, and as Andrew talked about in prepared remarks, we actually see really nice growth, our e-comm growth growing because of both of those things.
spk02: Okay. Next question. The board does a very nice job of aligning incentives with strategic objectives. We won't get a view on this until the proxy, but can you give us an idea of some of the key metrics for management compensation in 2022, you know, where the board has you focused?
spk08: Yeah, I would say, look, you'll see it later, Jim, but our program for incentives and management compensation is very consistent to what it's been in the past. So it's focused on profitability. It's focused on growth. It's focused very strongly on cash flow, which I think is super important. And it does call out kind of specific growth strategies, whether they be digital, whether they be samples, whether they be Asia. So, but it's very consistent with what it is in the past. And we think it works extremely well. It gets the whole team here at Crocs focused on the most important aspects to drive shareholder value.
spk02: Okay. And then last one for me, I just wanted to ask on, hey, dude, Rick's been in his chair for a couple of quarters now. Can you give us just an update on the vision for positioning of Hey Dude, both from a branding standpoint and from a merchandising standpoint?
spk08: Yes. So you're starting to see a little bit of that, right? So in July, we launched a new brand identity, which is starting to get out there. We think that's been – well, we actually can see that's been extremely well received by the core consumer, and I think it's more consistent with where we want to take the brand. We're also doing some brand advertising for the first time in the – in the brand's history, and that's actually early days, but also performing extremely well. We're very happy with that. And I think Rick and his team, which we're building out rapidly, have started to develop product architecture that will probably be back half of 23 before you start to see some significant evolution in product architecture. And we will continue to develop consumer messaging and brand advertising that will start to play out earlier in 23. You know, we're really happy with how that's going, and I think it will be very, very strong.
spk02: Thank you.
spk04: The next question is from Mitch Kumetz from Seaport. Please go ahead.
spk10: Yeah, thanks for taking my questions. I guess I just have a few. Hopefully I can do this quickly. I know a year ago with HeyD, there were a lot of retailers that relied on products. So do you have any sense as to how much of the Your growth you're seeing there is kind of filling that pipeline. Is there catching up with where they want to be? And do you have any metrics on kind of wholesale sell-through to support kind of what's happening at retail with those partners? And then, again, I've got a couple others.
spk08: Yes. I think the best way of getting at the core of your question is wholesale sell-through. We get that from, you know, obviously our major partners. We don't get it from all of the smaller partners. But I think the retailers that do stock HeyDude would say sell-through is exceptional.
spk10: Okay. And then, Andrew, you referenced Spring 23 a couple times, I think, in some remarks. Do you have any sense as to kind of what the spring order book is looking like for the Crocs brand in the U.S. I'm wondering if it's going to be up or down. And then lastly, on margins, and you talked about kind of the hated pressure on gross margins, but I'm guessing that likely helped from an SG&A leverage standpoint. So is there any way you can kind of break out the operating margins by each brand? And that's it. Thanks.
spk08: Thanks, Mitch. So I'll let Ann talk about operating margins for each brand. But from an order book perspective, look, it's early days on that yet, but we also don't disclose order book ahead of time. We stopped doing that quite a long time ago. But, you know, we are selling in spring, summer 23, both here in the U.S. and globally, and we're pretty excited about a lot of the newness that we have to offer our customers.
spk07: Yeah, and then from an operating margin standpoint on each brand, remember these are unadjusted for HeyDude, so that includes a 35. This is going to include a $35 million inventory write-up in Q2 related to the acquisition. So HeyDude's operating margins were 17.9%. That's GAAP. Crocs was 35.7%, and then are consolidated, obviously, and that's a GAAP margin.
spk09: Okay, thank you.
spk07: And that'll be it.
spk04: This concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks.
spk08: I really appreciate everybody joining us today, and thank you for your continued interest in crops.
spk04: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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