Crocs, Inc.

Welcome to the Crocs Incorporated Third Quarter 2023 Earnings Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the 10th key followed by 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on your telephone keypad. To withdraw your question, please press star then 2. Please note this event is being recorded. I would now like to turn the conference over to Erin Murphy, Senior Vice President of Investor Relations and Corporate Strategy. Please go ahead.

Good morning, everyone, and thank you for joining us today for the Crocs, Inc. Third Quarter 2023 Earnings Call. Earlier this morning, we announced our latest quarterly results, and a copy of the press release and our slide presentation 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 our supply chain challenges, cost inflation, the acquisition of Hey Dude, the benefits therefore, crop strategies, plans, objectives, expectations, financial or otherwise, and intentions, future financial results and growth potential, anticipated product portfolio, and our ability to create and deliver shareholder value. 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 statement. 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 risks 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 CROC's annual report on Form 10-K as well as other documents filed with the SEC for more information regarding 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 Rees, 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 will turn the call over to Andrew.

Andrew Rees Thank you, Erin, and good morning, everyone. Let me start by welcoming Erin Murphy, our new SVP of Investor Relations and Corporate Strategy. and by thanking Cori Lynn as she transitions to a new role within Crocs and for her dedication to leading investor relations over the past three years. We delivered strong third quarter results with quarterly revenues over $1 billion, exceeding the high end of guidance, led by double-digit growth in the Crocs brand, partially offset by high single-digit decline in the Haydood brand. I'm pleased by our team's agility as we continue to operate in an increasingly challenging macro environment. We drove strong 18 percent direct-to-consumer revenue growth at the enterprise level, and once again delivered industry-leading margins with 28 percent adjusted operating margins. And we'll review our financial results in more detail shortly, but here are a few highlights from the third quarter. Revenues of over a billion dollars grew 6% on a constant currency basis. Adjusted diluted EPS increased 9% to $3.25 per share. Inventory on an enterprise basis was down 24% year-over-year. By brand, cross-brand revenues grew 11% constant currency, fueled by Asia revenues increasing 29%, North America revenues up 8%, and global DTC comparable sales up 15% with strong full-price selling. Hey Dude brand revenues were $247 million with DTC growth of 15% offset by declines in wholesale. During the quarter, we took decisive action around Hey Dude to maintain price integrity and elevate our marketplace management strategy to ensure long-term brand health. I will elaborate on our strategy in a moment. I want to start my comments today with our views on the macroeconomic backdrop and the health of the consumer. We are operating with greater uncertainty than we started the year with persistent inflation, higher interest rates, the resumption of student loan payments in the United States, and escalating geopolitical tensions across the globe. Despite this, our consumer has been relatively resilient and continues to show up during key shopping events such as Back to School, which was strong for both brands. In September, trends softened across the footwear industry, and we're seeing consumers pull back in between peak shopping events. Against this backdrop, we're focused on making the right decisions for the health of our brands, keeping a tight control of inventory, and investing behind initiatives to support profitable long-term growth. We believe we are well positioned in the current economic backdrop and see our value-orientated price points as a durable competitive advantage. Moving on to our brand highlights, let's begin with the Crocs brand. We continue to see broad-based consumer love for the Crocs brand. In Piper Sandler's Fall 2023 Taking Stock with Teens survey, Crocs was the number six favorite footwear brand among U.S. teens. registering a new record-high mindshare with balanced contribution across all genders. With respect to product innovation, our strategy to diversify our clog offering, grow sandals, and leverage personalization is working. We demonstrated double-digit growth in clogs with outsized momentum with our height-orientated offerings, including the Crush and Mega Crush styles. As we look at our broader assortment, I want to call out the Echo franchise, which has developed into a sizable business across clogs and sandals. In September, we introduced the Echo Boot, which is off to a good start. Turning to sandals, in Q3, sandals revenues grew 6% on top of nearly 20% growth in 2022 and a 35% growth on a trailing 12-month basis. We had a solid back-to-school season for sandals in all three regions, with Amelia as a standout region in the quarter. In fact, we were the number one sandal and flip-flop brand on Amazon UK during the month of August, growing 37% over last year. Globally, the classic and Brooklyn remain our leading sandal franchises, followed by the crash. This quarter, we proactively destocked our classic sandals as we prepared to relaunch a new version of this franchise in 2024. In Q4, we'll also test the getaway. our newest sandal innovation. The getaway is built around our newest proprietary material innovation known as free-fill technology and will initially come to market with four styles. For 2023, we expect our sandal business to be approximately 400 million. From a marketing perspective, Q3 has some of our biggest wins to date. In July, our Barbie collaboration, which featured clogs, sandals, and gibbets, sold out quickly ahead of the blockbuster movie launch, and we restocked the collection twice during the quarter. It was our number one licensed property in the quarter. In August, we dropped our fourth Lightning McQueen adult clog with a very strong unveil on TikTok, garnering approximately 38 million views, our best performing TikTok ever. Finally, in September, we launched Shrek globally online and with select retail partners. This launch gathered over 300 million global media impressions and helped land Crocs as the number three on Hypebeast rankings. These partnerships, among several others, drove new consumers to our brand and to our social channels. In fact, we crossed the 2 million follower mark on Instagram in September and recently crossed the 2 million follower mark on TikTok. In October, we celebrated our biggest Crocktober yet with a fan-inspired Crocs classic cowboy boot generating significant buzz, garnering 6.2 billion global media impressions through the month-long celebration, with the boot almost completely selling out globally in a few days. At $120 per pair, this was our highest price point Crocktober shoe to date and gives us confidence in the permission our brand has with consumers. Asia is another important long-term growth driver for the Cross brand, as the brand is currently under-penetrated relative to the U.S. In Q3, Asia revenues grew by 29% in constant currency. Growth was again broad-based with strong brand momentum across the region. We've continued to invest in talent in the region. During Q3, we welcomed Carol Chen, our new SVP and General Manager of APAC, who joined us following a 22-year career at Nike. Thrilling down into China, we had another exceptional quarter of growth, where Q3 revenues increased over 90 percent in constant currency, ahead of our expectations. Croc's rising popularity in China has created a passionate following with a hashtag known as Dongmen, or clogs followers. We now have close to 60 million Dongmen hashtags on red, up from approximately 40 million at the end of Q2. In the quarter, we had a particularly successful Big Brand Day campaign, which leveraged the introduction of the Siren Silhouette, a Tmall first launch. Revenue during this campaign bested our internal targets handily, driven by our traffic and record high average order value, which underscored our strategy to drive quality business through new product introductions. Finally, on the sustainability front, Crocs is taking steps to further its circularity ambitions. With the recent launch of our new Retail Take Back program, piloting this week in 45 of our U.S. retail stores, we're inviting consumers to give all Crocs new life by dropping Crocs in any condition in collection bins at participating stores. Through this effort, Crocs is working to keep shoes on feet for those who need them and keep shoes out of landfills. Turning to Hey Do. I remain confident in the brand health metrics that underscore how beloved this brand is with consumers. This fall, Hey Dude was the number seven favorite footwear brand in the Piper Sandler Taking Stock with Teens survey, taking the highest share we have seen to date. In under-penetrated markets like the Northeast, mine share almost tripled among the teen demographic. Despite a tough footwear backdrop, we're pleased with the performance of our strategic accounts during the back-to-school season. Strategic wholesale now represents 50% of our brand sales mix, up from 39% last year. In Q3, sellout from our strategic accounts was up 28% year over year, offset by the rationalization of our non-strategic accounts. From a product perspective, we'll focus on new style introductions that create heat and drive new consumers to our brand, while working down our carryover inventory. During the back-to-school season, top-selling styles included core icons like the Wally Socks Micro in black, alongside our updated icons like the Wendy Funk Mono in electric pink. We also saw continued strength in our Sirocco sneaker, which rounded out our top-selling styles. In the third quarter, we dropped our second Mossy Oak collaboration with sell-through rates of greater than 60 percent, attracting an influx of younger consumers to our buyer file. In September, there was tremendous excitement around our first-ever collegiate collection, which featured 12 schools alongside several NIL athletes who will act as brand ambassadors. We had strong consumer feedback as several schools sold out of the collection in the first five days. In August, we aimed a long-term partnership with Dude Perfect, a content group that is known for its humor and iconic trick shots. Dude Perfect has amassed a powerful social community with approximately 90 million followers across YouTube, TikTok, and Instagram, and believes in coming together in good times, a brand ethos consistent with Hey Dude. Leveraging our consumer insights that over 50% of our buyers give Hey Dudes as gifts, Dude Perfect will be the face of our Happy Holla Dudes holiday programming. As I reflect on where we are as a brand, I remain as confident in the long-term opportunities as I was when we inquired Hey Dude. We believe that the brand's versatility, the product's easy on and off nature, iconic silhouettes, and the permission to expand it to new categories and regions remains unparalleled. That said, I acknowledge that there have been several growing pains this past year, some of our undoing and others tied to the macro backdrop. I want to take the time to share our learnings and our recent actions designed to bring the brand to a healthy pull market. In 2022, we accelerated growth within our strategic accounts, and we did it fast. The intent of this decision was to build brand awareness and secure self-space with our most important retail partners. We've delivered on both of these goals. As evidenced in our recent brand health tracker, Aided awareness of the HeyDude brand in North America is now at 32% in Q3, up from 18% in Q1. That said, we recognize the need to be better around driving effective segmentation alongside new product introductions to sustain this broader customer base. There was also more carryover inventory in our legacy customers than we had expected, which further diluted our offerings. Year-to-date, we've made considerable progress in cleaning up our inventory and are pleased that our hated inventory ended down 41% from Q3 last year. We've also made several key hires over the past 12 months to fortify our efforts in North American marketplace management, including hiring a GM of North America, VP of global category and channel management, and other talents in product design, wholesale sales, and consumer insights. We're already seeing the benefits of the augmented team and believe this collective impact will build as we move throughout 2024. As we've talked about on our previous calls, we are anniversarying last year's pipeline fill, which impacted Q3 by approximately $60 million, and we expect to be approximately $50 million headwind in Q4, unchanged from our former outlook. What has changed since we last updated you in July Retailers are more cautious around our HeyDude brand, and at once demand was lighter than we previously expected. For the industry, post-back-to-school wholesale market has been soft, as consumers have pulled back and football has been down double digits. Our HeyDude brand, which has limited history with retailers, has seen a more restricted open-to-buy as we look into the spring season. In sharp contrast, our spring order book for Crocs brand are strong for the first half of 2024, reflecting the ongoing momentum we see in the Crocs brand. Taking the environment aside, we made an important pivot to our digital pricing strategy in September. Specifically, we made the decision to stop price matching with the gray market goods that are selling on Amazon, forfeiting near-term sales to prioritize long-term market health. we know it's the right decision for the brand going forward. Already we are seeing immediate positive impacts with ASP up over $10 on Amazon, and the pivot has been acknowledged by our wholesale partners. While this will hinder sales growth in Q4 and possibly into the first half of next year, we believe this will set us up for a much cleaner marketplace as we move throughout 2024, as well as protect the brand. Unauthorized inventory levels have improved versus where they were in June, And based on our current visibility, we expect gray market goods to be in a substantially better position in the first half of 2024. While we are not guiding to 2024, we would expect hey-do wholesale revenues in North America to remain negative through Q2, tied in part to macro and in part due to our decision to pull back on promotional activity prioritizing brand health and marketplace management. Beyond this year, I would like to provide some of the building blocks on how we're thinking about HeyDude's growth agenda. First, we're adopting an omnichannel approach to drive engagement and meet consumers where they shop. In addition to strengthening our digital capabilities and staying disciplined with our strategic wholesale partners, we'll explore brand accretive opportunities. To that end, we're in the early days of developing an outlet retail strategy for the HeyDude brand. leveraging Croc's successful retail playbook. We've opened our first outlet locations and expect to have five locations by the end of the year. Second, we're remaining laser-focused on winning with our U.S. strategic wholesale partners through improved segmentation and differentiation. In 2024, we'll focus on strengthening our family channel partners further tapping into the sporting goods channel where we have ample white space and elevating our approach with more base specialty. We also expect to start 2024 with a much cleaner account base, having shuttered over 50% or 600 accounts during the year. We have also pulled back on digital rights for accounts that fall outside of our strategic accounts. Third, international. We have set up a few test markets in Europe and are laying the groundwork to expand in new international markets in the next two to three years. We will use an approach that is consistent with our Crocs playbook, go direct in markets where we are direct for Crocs, and utilize distribution partners in markets where we are indirect with Crocs. In summary, our Crocs brand has never been stronger, and we remain steadfast on executing our global long-term strategy With HeyDude, we're focused on protecting profitability and elevating marketplace management, even if that comes at the expense of near-term revenues, in an effort to support consistent, profitable growth on the long term. I will now turn the call over to Anne, who will review our third quarter financial results in more detail.