Crocs, Inc.

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.

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.

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.