Crocs, Inc.

Good day, and welcome to the Crocs Third Quarter 2024 Earnings Conference Call. All participants will be in a 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 a touch-tone phone. 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 Erin Murphy, Senior Vice President of Investor Relations and Corporate Strategy. Please go ahead.

Good morning, and thank you for joining us to discuss Crocs, Inc. third quarter results. With me today are Andrew Reese, Chief Executive Officer, and Susan Healy, Chief Financial Officer. Following their prepared remarks, we will open the call for your questions, which we ask that you limit to one per caller. Before I begin, I 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 strategy, plans, objectives, expectations and intentions, including our financial outlook. These statements involve known and unknown risks, uncertainties, and other factors which may cause our actual results, performance, or achievements to differ materially. Please refer to our quarterly report on Form 10-Q and other reports filed with the SEC for more information on these risks and uncertainties. Certain financial metrics 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. All revenue growth rates will be cited on a constant currency basis unless otherwise stated. At this time, I'll turn the call over to Andrew Reese, Cross Inc. Chief Executive Officer.

Thank you, Erin, and good morning, everyone. Thank you for joining us today. We've reported third quarter results that exceeded our guidance in terms of sales and profitability on an enterprise basis. Consolidated enterprise revenues of $1.1 billion grew 2% to prior year, led by 5% growth in DTC. By brand, Crocs brand grew 8%, with international up 17%, and North America up 2%. Paydude revenues contracted 17%, slightly below our expectations. Adjusted diluted EPS of $3.60 a share increased 11%. Today I will be covering the following topics. I will first share deeper insights into our third quarter results, along with what we're seeing from a broader consumer perspective. I will then elaborate on HeyDude's strategic priorities and what gives me confidence around the brand's longer-term growth prospects, touching on some of the early wins we're seeing in the business today. Finally, Susan will review our financial performance, our updated 2024 outlook, and our preliminary thoughts on 2025. Now turning to third quarter insights, starting with the Crocs brand. The investments we are making in product and marketing enable us to win with consumers around the world. All three of our product pillars, clogs, sandals, and personalization, grew during the third quarter, led by our icon, the classic clog. In August, Fortway News named our classic clog one of the greatest shoes of all time. Embracing the personalization platform that our clog provides, we launched our Live Life Fully Loaded campaign during the back-to-school season. This campaign created high consumer engagement in our stores and online, both for our classic clog as well as our gibbets business, as consumers were able to fuel their love for self-expression. We're continuing to iterate on our clog by introducing new silhouettes and building durable franchises. The Echo franchise, which has developed a breadth of products across clogs, sandals, boots, and sneakers, continues to bring in new, largely male, Explorer consumer to our brand. As we look into spring, we're excited to bring the Echo Wave, a molded mule, and the Echo Search to market. Both new innovations are priced under $100. Another example of how we've iterated on the clog is our InMotion franchise. We have seen successful results in our tests of this franchise on our DTC channels ahead of a scaled rollout in 2025. This new innovation features our proprietary LightRide foam footbed along with our free-fill technology. By applying the learnings from our quick-to-market DTC Cozy Slipper launch last year, we're able to scale the offering this fall across expanded colorways and with our wholesale partners. at an incredible value of $49.99. Sellout has been strong out of the gate, and we're chasing replenishment. In addition to our mainline product, we brought many exciting partnerships to life during the quarter. These included a Bath & Body Works collection featuring a classic clog and a cozy sandal pre-gibbeted with four mystery scent gibbet charms. We also introduced Batman and Squishmallow, and of course, our Crocs x McDonald's Happy Meal. As a natural extension of our first collaboration with McDonald's, we designed and introduced the McDonald's x Crocs Happy Meal with a curated assortment of 17 limited edition classic clog keychains and a sticker pack for personalization. We launched the Happy Meal first in China and saw fantastic results. Within the first 48 hours, over 400,000 Crocs Happy Meals were sold, generating over 10 billion brand impressions. Since then, we have launched our Happy Meal in over 40 countries, driving significant brand momentum and heat. Last week, we celebrated the seventh annual Crock Day on October 23rd, our very own fan-inspired holiday within the month of Crocktober. With a much-awaited debut, we celebrated the release of Pet Crocs, available alongside matching classic lion clogs, allowing dogs and dog parents to coordinate their looks in lockstep. Our pet Crocs designed in partnership with Bark were available globally on our own.com and in select retail stores. The release was a huge success. Fan-inspired festivities did not stop there. This year we released a Crocs costume, which is in the form of a life-size iconic classic clog fully loaded with gibbous charms. And just like your favorite pair of Crocs clogs, this costume is available in both left and right versions, making a perfect pairing opportunity with friends. In September, we achieved another step forward towards our circularity goals with the launch of a limited edition Keep It Going Classic Clog. The new clogs featured 25% post-consumer recycled content from the shoes collected through our All Crofts New Life Consumer Take Back program, with the remaining construction of the shoe containing up to 25% biobased cross-layer material. Now for a review of the cross-brand business by geography. The North American market performed well with revenue growth of 2% versus prior year led by DTC. In North America, the consumer has reverted to pre-pandemic shopping patterns, shopping closer to need and concentrating spend around key shopping events and holidays. We saw a solid back-to-school season, but since Labor Day, we have seen the consumer pull back. We anticipate the consumer environment being relatively muted in the U.S. until Black Friday slash Cyber Monday holiday period. Our overall international revenues grew 17% versus prior year, supported by notable growth in Australia, China, France, and Germany. Our China business grew over 20% on top of more than 90% growth last year in the third quarter, with approximately two-thirds of the growth driven by monobrand partner stores. As we shared during our second quarter call, the industry was more promotional during the mid-season festival. It is clear that the Chinese consumer is being far more conservative in their purchase behavior, and we've seen an even more pronounced pullback within key Tier 1 cities like Shanghai and Beijing. In light of the broader macro environment in China, we're taking a more cautious view for the rest of the year. Despite this backdrop, our brand continues to gain share in China, which we believe is a direct result of our accessible, authentic, and personalizable brand positioning, serving as a meaningful competitive advantage. Turning to Hey Dude, our third quarter results came in slightly below our guidance, with revenues declining 17%. Before I provide further detail on the quarter, I want to start by sharing the progress we've made towards building Hey Dude into a consistent and profitable growth brand. In September of last year, we made a pivot to prioritize brand health, clean up channel inventory, while right-sizing our account base, and began building a fleet of premium outlet stores to showcase the best expression of our brand. Since then, we've elevated ASPs, shuttered more than 50% of our accounts, improved inventory turns to four times a year, and opened 29 premium outlet stores. In addition, we invested in talent across the brand while accelerating our marketing investment as we work towards driving higher awareness and relevance to generate brand heat. We strongly believe these are the right decisions to build a solid foundation for profitable growth at Hey Dude. While we recognize Hey Dude's performance this year has not yet reflected these investments and actions, let me share a little bit more about what has given me confidence. As we spoke about last quarter, We sharpened our strategy to focus on three strategic imperatives, driving youth female culture and creating a hey dude brand community, building the core, our Wally and Wendy, and adding more, then stabilize and accelerate North America. Against these imperatives, we're seeing the following green shoots. First, we believe the female youth culture is a key driver of influence, brand connectivity, and a catalyst to build community. In August, we were thrilled to announce Sydney Sweeney as our global brand ambassador and our director of dudes. This partnership has generated the best performing content HeyDude has seen to date, and we have plans to ignite further content with Sydney Sweeney. During the quarter, we launched TikTok Shop, and we've seen an excellent response, bringing in new, younger consumer. In fact, on select launch days, our brand emerged as the number one global key account on TikTok Shop. Adu's number of TikTok followers surpassed Instagram in the quarter, further underscoring our opportunity to reach a younger audience. We were also named the official comfort shoe of Barstool Sports in time for our refreshed collegiate collection. Second, we're focused on our icons, the Wendy and Wally. Our three core offerings include Stretch Socks, Stretch Canvas, Funk Mama. During the quarter, We iterated on these core offerings through our collaboration engine, successfully introducing Beetlejuice and SpongeBob, to name a few. In October, we announced a long-term partnership with country music singer Jelly Roll. Our initial collab with this famed artist featured a Wally slip, which sold out in minutes. Since the launch, we've seen the product show up on the secondary platforms for up to $6,000. As we discussed in our Q2 call, the conference is a new product innovation that is an extension of our Wendy and Wally DNA with added cushioning and height. In the third quarter, we began scaling this across select global accounts. As we look beyond our call, we're seeing very healthy demand signs in our women's Austin lift and our men's pole silhouette, with plans to scale them in 2025. Third, we're hyper-focused on stabilizing the North American market to drive a sustainable foundation from which to grow. We've streamlined our account base and are focused on building relationships across our strategic retailers, similar to that of Crocs. We've worked to improve our inventory position in channel and improve ASPs across digital. In the third quarter, our digital ASPs were up 10% of last year, and we saw improving weeks of supply across our key strategic accounts. Our premium outlet stores are performing in line with our expectations. While we're encouraged by these early positive indicators, HeyDude's recent performance and the current operating environment are signaling it will take longer than we initially planned for the business to turn the corner. We continue to have confidence about the long-term potential of the brand, and the green shoots we are seeing give us positive reinforcement around our opportunity. I'm incredibly proud of the HeyDude team and the urgency with which they've executed against our sharpened strategy. I will now turn the call over to Susan to walk through our financials for the quarter.

Thank you, Andrew, and good morning, everyone. Our third quarter results exceeded the high end of our enterprise guidance on the top and bottom line, supported by a combination of better underlying operating performance, a lower than expected tax rate, and lower share count. For the Crocs brand, revenues were $858 million, growing 8% prior year, and channel growth was balanced, with DTC and wholesale each growing 8%. The growth was volume-driven, with units increasing 11% versus last year to a total of 32.1 million pairs of shoes sold, while brand ASPs decreased 3% to $26.48. ASPs were below last year, tied largely to product mix and slight price erosion. North America revenues grew 2% versus the prior year to $491 million. Growth was led by DTC, which was up 4%, while wholesale was down 2%. Underlying North American brick-and-mortar growth was up mid-single digits. International revenues of $367 million grew 17% versus prior year, led by DTC growth of 18% and wholesale growth of 15%. In China, we saw growth in excess of 20%, on top of last year's 90% plus growth rate, while our direct European markets continue to show healthy growth in the quarter, led by Germany and France. Turning to Hey Dude, revenues were $204 million, down 17% from last year. Wholesale revenues were down 23%, and DTC revenues were down 9%. While we did plan for wholesale declines in the third quarter, our guidance anticipated stabilization of DTC. To support the strategies Andrew outlined earlier, we changed our investment strategy around performance marketing, shifting investments towards brand marketing, which impacted our digital performance negatively. We believe we are making the right decisions for the long-term health of the brand, highlighted by the continued strengthening of our ASPs. Of 4%, to $30.94 in the quarter. Concurrently, volumes were lower, with 7 million pairs of shoes sold, 21% below last year. Consolidated adjusted gross margin for the third quarter was 59.6%, up 220 basis points from last year. Crocs brand adjusted gross margin was 62.5%, or 40 basis points higher than prior year. The primary drivers of margin expansion were favorable product costs and select international price increases, offset in part by channel mix. Hey Dude brand adjusted gross margin was 47.9%, or 510 basis points higher than prior year, driven primarily by freight, favorable channel mix, and pricing. Overall, adjusted gross margin was below expectations as the channel mix benefit was not as favorable as expected, given softer than anticipated digital trends in the quarter. Our third quarter adjusted SG&A dollars increased 19% to prior year. Our adjusted SG&A rate was 34.2%, up 510 basis points compared to prior year, driven by continued investment in talent, marketing, digital, and retail to support long-term market share gains. Our third quarter adjusted operating margin was 25.4%, down 290 basis points from 28.3% in the prior year, driven by planned investments in SG&A. Third quarter adjusted diluted earnings per share increased 11% to $3.60. Our non-GAAP effective tax rate was 12.6%. Our lower than expected tax rate was largely tied to cash tax savings from the refinancing of our intercompany debt that occurred in the quarter. Our inventory balance as of June 30th was $367 million, a decline of 6% versus this time last year. Both of our brands achieved inventory turns above our goal of four times on an annualized basis. Our liquidity position remains strong. comprised of $186 million of cash and cash equivalents and $559 million of borrowing capacity on our revolver. During the quarter, we repaid approximately $110 million of debt, reducing borrowings to approximately $1.4 billion. Year-to-date, we have repaid $248 million of debt, and we ended the quarter at the lower end of our long-term net leverage target range of 1 to 1.5 times. Enabled by our best-in-class free cash flow generation, we also completed $151 million of share buybacks during the quarter, repurchasing 1.1 million shares at an average price of approximately $135 per share. Year to date, we have completed $326 million of share buybacks, repurchasing 2.3 million shares. We currently have $549 million remaining on our share repurchase authorizations. Now turning to 2024 guidance. Based on our third quarter results and the visibility we have heading into the fourth quarter, we are adjusting our full-year outlook. Our full-year enterprise revenue growth is now approximately 3% versus 3% to 5% prior, assuming currency rates as of September 30th. For the cross-brand, we are narrowing our revenue range from 7% to 9% growth to approximately 8%. For HeyDude, we are lowering our revenue range from down 8% to 10% to down approximately 14.5% based on lower than previously assumed sellouts in both wholesale and digital. We are maintaining our guidance for consolidated adjusted operating margins of more than 25% for the year, powered by our strong adjusted gross margins, which we continue to plan up to prior year across the enterprise. Resulting in part from our lower than expected annual tax rate and incremental share repurchase in the quarter, we are raising our 2024 adjusted diluted earnings per share from $12.45 to $12.90 to the high end of our prior range at $12.82 to $12.90. Consistent with our previous guidance policy, this range reflects future debt repayment but does not assume any impact from future share repurchases. We are now expecting an underlying non-GAAP effective tax rate, which approximates cash taxes paid, to be approximately 16%, and the GAAP effective tax rate to be approximately 21%. We are lowering our annual capital expenditures guidance from $100 to $110 million to $90 to $100 million, tied to the cash timing of select operational projects. Turning to our guidance for Q4, We expect consolidated revenues to be in the range of flat to up slightly at currency rates as of September 30th. We expect the Crocs brand to grow approximately 2%, led by double-digit international growth. Our fourth quarter international growth rate is below our year-to-date growth rate based on, one, a more cautious consumer in China, and two, ongoing regulatory pressure in India, which is impacting our ability to meet demand. Turning to North America, we expect a slightly negative fourth quarter, which includes our expectations of a more choiceful consumer, as well as the timing of wholesale shipments between quarters. For the second half, North America is expected to be flat to prior year, in line with our previous expectations. We expect Q4 DTC to remain positive. For Haydood, we expect revenue to be down between 4% and 6% in the quarter. below the former implied range of up low to mid-teens. The largest driver of our lower revenue outlook is tied to lower-than-expected sellouts on both digital and wholesale. Our assumptions around our non-comp drivers, including our retail stores and our international distributor sell-ins, are in line with our former forecast. Adjusted gross margins are expected to be up for the enterprise, with Crocs brand up slightly and Haydood slightly down versus prior year. We expect adjusted SG&A spend to be in the high teen range in Q4 and adjusted operating margin to be approximately 19.5%. Adjusted diluted earnings per share is expected to be between $2.20 to $2.28. While we are not guiding to 2025 yet, I want to provide some preliminary shaping for your models based on the visibility we have thus far. For Crocs, we expect revenue growth in 2025 to be led by international. As a reminder, we will be negatively impacted by the timing of Easter moving back into Q2. This will have an outsized impact to our North America region in the first quarter, in addition to laughing leap year. For Hey Dude, next year is about brand stabilization. As Andrew shared, we are seeing green shoots around the brand receptivity from a broadening group of consumers, But note that financial results will lag the marketing momentum we are currently seeing. With the visibility we have into 2025, we expect the first quarter to be sequentially down from the fourth quarter tied to wholesale. In 2025, we plan to continue to invest behind talent, marketing, digital, and retail in order to create sustainable long-term growth, which will put incremental pressure on our EBIT margin rate versus 2024. In closing, we are making near-term decisions that we believe are in the best long-term interests of the company and our shareholders, and we will continue to focus on what our company does best, delivering growth with industry-leading margins that generate significant free cash flow. I will now turn the call back over to Andrew for his final thoughts.

Thank you, Susan. Our company's initiatives remain consistent and will focus on three primary levers to fuel durable long-term growth. One, ignite our icons across both brands to drive awareness and global relevance for new and existing consumers. Two, drive market share gains across our Tier 1 markets through strategic investment behind talent, marketing, digital, and retail. And three, attract new consumers to our brands through methodically diversifying our product range and usage occasions. At this time, we'll open the call for questions.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. We ask that you please limit yourself to one question. At this time, we will pause momentarily to assemble our roster. The first question today comes from Jonathan Komp with Baird. Please go ahead.

Hi, good morning. Thank you. I'll stick with one topic here. I want to ask about Crocs North America. Could you just give a little more detail? Susan, I know you mentioned a shift in Q4 on wholesale, but expectations for D to C to remain positive. Could you just remind us of some of the moving parts for D2C and what's driving the forecast, and then maybe a bigger picture question as we look forward into 2025. What role will North America play in the total crocs outlook for 2025, and what are some of the drivers that you see, Andrew?

Great. So let's do it in that order, Jonathan. Susan will kind of give you the mechanics around the remainder of this year, and I'll touch on the bigger picture.

Great. Thanks, John. When we think about North America, we are unchanged in our expectation that North America will be flat for the second half. And we were really pleased with the underlying performance in the third quarter of the Crocs brand in North America. But for the full back half, our expectations are unchanged. So by channel, fourth quarter DTC is expected to be positive, offset by wholesale, which is planned down, as retailers took product earlier in Q3 than we planned. And overall, we're mindful of current consumer shopping patterns as well as macro headwinds in the fourth quarter, and we're taking a prudent approach.

Yeah, so if we step back to the big picture, so North America this year, based on all the guidance we provided for the fourth quarter, will grow about 2.5% for the year. And so what role does this play within our overall business? So the North American business, as we look at it, is a well-managed, stable business. It's highly profitable. It's cash-generative. And it really is obviously a large business. You know the absolute size of it. So it generates the income, the cash flow that we can use to fund. One is the international growth for Crocs, but also some of the investments we're making in HeyDude. It's balanced across channels. So we have a wholesale business. We have a retail business. We have a digital business. We've made some strategic shifts over the past year within digital, going more to 3P on our Amazon platform. We think that's been highly productive, and we think that'll be attractive in the future. And we kind of think about the businesses really being very well positioned to continue the role that it's playing today. We're confident that over the short to longer term, we'll be able to grow the business modestly, and it plays a very important role in our overall portfolio.

Great. That's helpful. Thank you.

Thank you.

The next question comes from Jim Duffy with DFL. Please go ahead.

Thank you. Good morning. Multi-part question on HeyDude. First, you mentioned streamlining the account base for HeyDude. Can you elaborate on those distribution actions? And then I'm hoping you can speak to HeyDude brand operating profitability and your willingness to continue to invest against profitability to strive for brand inflection.

Okay, great. So from an account-based perspective, we really talked about this almost a year ago now, where we cut off some of the smaller customers to really focus back on the large national strategic accounts or alliance partners, as we call them, where we want to make sure that we have adequate segmentation and differentiation and we can grow with a broad base of accounts. We do keep a lot of what we call kind of smaller, more strategic, well-positioned or regional customers we think are important in terms of reaching select consumers and also giving a broader consumer base some attractive points of distribution. So that has happened probably almost a year ago at this point. So we feel really good with where we are from an account-based perspective. In terms of profitability, there's a couple of key drivers there. as we think about the future. One is gross margin. You've seen us start to elevate gross margins from a low in 23 to some substantial improvements in 24, based on some of the infrastructure investments we've made, based on some pricing decisions we've made that have impacted gross margin in the past. We think long-term gross margin is around 50%. We're not going to get there in the next couple of quarters, but that's in the midterms. We think that's a very strong place for a brand to be. And then, obviously, we're investing substantially in SG&A. So we're investing at an elevated rate in terms of marketing. You saw a lot of the activities. We talked about them on our prepared remarks. I think you've seen them on social media and in the press, especially in this quarter. We're investing in marketing to engage a younger consumer, to pivot to a more female-orientated consumer, and also to create broader awareness for the brand. We're also making SG&A investments to fuel growth, both in our outlet stores that we've opened this year in North America and also preparing for our international growth. So, you know, I think what this tells you is that, you know, we're supremely confident in the long-term growth potential of HeyDude. We're prepared to make these investments. We're confident they will pay off, and frankly, you know, the broader financial profile of the Crocs Inc. business allows us to do this. And we think they're prudent investments that will pay off the shareholders in the medium to long term. Okay.

Just to follow up on that, Andrew, in the context of valuing Crocs Inc., many people are looking at the contribution of the Crocs brand profitability and trying to isolate that for valuation purposes. And so additional perspective on the hey dude brand profitability would, uh, you know, I think help people get to that, uh, assessment of the, the size of the different profit pools.

Yeah. I mean, I guess I would encourage, uh, our investors to look at the totality, right? So, uh, uh, our total company is, uh, highly profitable, highly cash generative. Um, And, you know, as you kind of think about investing in the company, I would encourage people to look at the totality and look at the, you know, future potential of those cash flow streams and the optionality that provides us to continue to deleverage and reduce risk within the company, but also return cash to shareholders in a sustainable basis. I think that's a pretty good investment profile.

And then with the outlook for Hadrian, have you at all tempered the SG&A investment plans?

I would say no, we haven't. I go back to what I said sort of in my first answer. We're extremely confident around the mid to long-term potential of the Hadrian brand. And as we analyze each of the investments we're making, we feel that they will provide a very strong return.

The next question comes from Adrian Yee with Barclays. Please go ahead.

Yes, great. Thank you very much. Andrew, you had talked about sort of the back-to-school season being kind of back to, you know, the highs are high and the lows are kind of, I guess, a choppy background. I'm wondering if you can sort of talk about how you operate in that environment, how you think the retail channel partners are kind of managing through that, and if you think that we're pulling up some sales for holiday. And then my last question is, how long does it take for the sell-through to work through itself? Do you think that you're having – oh, well, you have the spring order book, some futures. Can you give us some color on that? Thank you very much.

Yes. Yeah, I suspect, you know, you've heard others talk about this, and you'll probably, as our retail partners report in a week or so, a month or so, you'll hear a lot more about this. But, look, I do think the consumers return to a more traditional shopping pattern. You know, we kind of say it's kind of pre-pandemics. They're going to shop when they need it. They're going to shop at key events, whether they be holidays or promotional events. And in some cases, they need a little extra incentive to transact. So I think that's what we were familiar with before we got into the sort of lack of supply, oversupply components of the pandemic. I think they're back there. They've been getting back there over the last kind of year or so. We're anticipating that into the fourth quarter. And I think, you know, our retail partners, certainly in this country, are pretty adept. I mean, they're highly sophisticated. They're seeing this happen. They have probably more data than we do. to really understand this. So I think they're pretty adept, and they're transitioning pretty quickly, and I think they'll do a good job. And in terms of order books, you know, we're pretty prudent. We try and make sure our order books are very much lined up with expected sellout. We think the timing of that sellout is a little bit shifted, but we try to calculate the aggregate sellout. We don't want excess inventories in the market, and I think we're on top of that for Crocs. As we've talked about from a HeyDude perspective, we have had excess inventories in the market, and we've been aggressively trying to work those down this year. And we've made, you know, good progress, but frankly not quite all the progress we want to make.

Great. Thank you very much, and best of luck.

Thank you.

The next question comes from Chris Nardone with Bank of America. Please go ahead.

Thank you, guys. Good morning. can you just elaborate a little bit more on your confidence in growing your Crocs North America direct to consumer business in the fourth quarter, maybe based on what you're seeing a quarter to date, then switching your Amazon business to a three P model. Um, I think you fully lapped that now. Can you just elaborate on the rationale rationale around doing that and just how you view your Amazon business relative to like your crocs.com business? Thank you.

Yeah, I would say, um, That's a hard question to answer, Chris. So, look, I think all the plans that we put in place for our Crocs North America DTC business, we feel great about, right? We feel great about the product line-up. We feel great about our holiday planning. We feel great about our back-end logistics, et cetera. But, you know, growing that business and company is based on all those things going well. And so, you know, and our product line-up and marketing. So we feel really good about it. I would say that's a combination of obviously our stores, which are, you know, predominantly premium outlet stores. It's a combination of our dot-com business and also a marketplace business. And so, you know, we feel really good about it. And, you know, fingers crossed, everything will play out how we think it's going to play out. But, you know, but there obviously is some uncertainty there. And I would also say we kind of try to plan it prudently as well. We've got backup plans for customers. If things don't go 100% to our expectations Big picture on Amazon. I would say look Amazon's a you know a super important customer We're a broad democratic brand. We want to reach our consumers where they are They're clearly on Amazon. They start a lot of their Shopping on Amazon their initial searches on Amazon when they're looking for you know a pair of Crocs, but also many other things and From a participating on that very important marketplace, both here in North America and other parts around the world, you know, we think this is an opportunity for us to have, you know, more emphasis in our brand, a little bit better control of the products that we bring to market, et cetera. And so we're liking the transition we think is productive, and I think the consumer is enjoying it, too.

Thanks, Andrew. And just one quick follow-up on the operating margin outlook. I think you mentioned it should be a little bit lower next year. Just wanted to hear your rationale about balancing investment spend to grow both of these brands for the long term, but also trying to maintain an operating margin, you know, around the mid-20% range and close to your longer-term 26% plus target.

Yeah, so I can take that one. We're really planning on continuing to invest. We see revenue generating opportunities for both brands. We look, as Andrew said, very disciplined about what we see, the return on investment. And when we see these opportunities, we're investing. 2024 has been an investment year. We're very early in the planning process for next year, but we're going to continue to invest behind talent, marketing, digital, and retail markets. And as we said, that's going to put incremental pressure on our EBIT margin rate versus 2024, and we'll give you more guidance about 2025 on our fourth quarter call.

Yeah. And I would say, you know, big picture, Chris, you know, look, I would say, you know, mid-20s I think we'll be above 25% according to our guidance for this year. We've been significantly above that in recent years. These are extraordinary levels of profitability. If you look at our competitive base, There are very few players that come close. Nobody is above. So, you know, we've got a balance maintaining high levels of profitability and cash flow generation, which obviously underpin our, you know, overall, you know, valuation with actually investing in, you know, attractive mid to long-term growth opportunities. And, you know, we'll toggle backwards and forwards between those. Thank you. Good luck.

The next question comes from Bob Durbel with Guggenheim Security. Please go ahead.

Hi, good morning. Two questions, actually. The first one is, can you talk about the change in the investment marketing strategy for Hey Dude in the Quarter and what KPIs you are seeing? And the second question is, can you just clarify for Crocs, for North America, do you expect growth in North America market for 2025? Okay.

Two different questions. So the first one actually is a super important question, Bob. Glad you asked it. So one of the key decisions that we made in the third quarter is we pulled back on performance marketing for the Hey Dude brand. As we've looked at the sort of multi-year trajectory, our level of performance marketing had been creeping up. I would say the marginal ROIs were still positive. but they were not where we wanted them to be. And we wanted to push more of a marketing investment into the brand and into the long-term future of the brand. So we made a pretty distinct pullback in performance marketing, so that's ad dollars, Google search, or all of those kind of things that you can spend money on on a short-term basis. You can measure the returns. But if your marginal return dips to a level that you don't really feel comfortable with, so we pull back on that. And then we use that money to fund Sydney Sweeney, Jelly Roll, Barstool Sports, some of the TikTok activations that we've been doing, starting up the TikTok shop. And we think that will be much more attractive from a brand return and investment perspective over the long term. That has had a short-term impact, and it's probably the biggest explanator for our miss in Q3 from a Hey Dude revenue perspective, and also the biggest explanator for the reduction in Q4 guide for Hey Dude. That's the biggest dollar change, and we think it's the right thing to do in the long term. And then your question on Crocs, I think was a clarification on North American. Yeah, we think we will grow, you know, modestly, slightly for North America Crocs in 2025. That is our current plan. But I would say the real value creator and the value driver for Crocs is international growth. You've seen that come through for the last, you know, two years, and we are very confident that will continue into 2025. Thank you.

The next question comes from Rick Patel with Raymond Jean. Please go ahead. Rick, your line is now open. You may ask your question.

Hi, sorry about that. Thank you. Good morning. I was hoping you can expand upon what you just ended with in terms of Crocs international growth potential in 2025. So given the slowdown that you're seeing in China that you expect to continue, how should we think about the building blocks of growth next year in which market you have the most confidence in to do the heavy lifting?

Yeah, so thank you, Rick. So what I would say is we've definitely seen a slowdown in China, but I would point out we are still growing in China, and we still intend to grow in China next year, right? So it's not the 80%, 90% growth that we saw in 23. We grew 20-plus percent growth in Q2. Sorry, Q3 that we just reported, but we do intend to continue to grow in China next really underpinned by a lot of the monobrand store openings that we've done in China. So we've grown our digital business successfully. We've opened some select retail stores. We operate ourselves, and we also work with a range of brand partners who open monobrand stores. I think we've opened, by the end of the year, we'll have close to 400 monobrand stores, and we've opened in excess of 150 stores year to date. Obviously, as those have grown open through the year, that will provide growth for next year as well as we think positioning in the marketplace, our accessible price points, personalization, comfort, et cetera, is going to be a competitive positioning. So we will grow in China. In addition to China, I think we're confident around India. We have China. I think a very attractive business model in India that has been impeded recently with the BIS, if everybody knows what that is. That's the Indian government imposing some restrictions associated with you need to make your product in India. We will have production up and running for both Crocs and Hayden in India next year. It started this year, but it will reach enough supply to fund the market. next year, so we're confident about India. We've talked quite a bit about how our key direct markets in Western Europe continue to be successful. Germany and France, we anticipate that continuing. So those are some of the key drivers. We've had great success in Australia for the last couple of years. We see that as probably a little bit more stable for the next couple of years, but that's obviously attractive business as is South Korea. I would say to be frank, Japan remains a work in progress. We're focused on kind of resetting the business and focusing on the classic clog and personalization in that market with evidence that it's starting to get traction. But that obviously is a very big market with big long-term potential. So I think there are plenty of growth engines to support our international aspirations from a crock's perspective.

Thank you very much. Thank you.

The next question comes from Sam Poser with Williams Trading. Please go ahead.

Good morning. Thank you for taking my questions. So can we talk about Hey Dude? And, I mean, Andrew, you reiterate your confidence in it. I guess my question is, how did this all evolve? And what happened different than what you thought was going to happen that was under your control? that you have to fix and how long and what are, what specifically other than switching marketing and cleaning up are you doing to, to sort of start driving sales again? It looks to me like you have some good stuff going on as far as, you know, partners and so on, but the consumer's not responding and that's not, you know, let's take macro out of the picture. Let's say what's under your control.

Okay, so let me start with the last part of your question, then we can go back to the first part, and you can kind of just clarify it. So the last part, I think, is you're kind of getting at what are we doing, why do we think that will help the situation, if you like. So the things that we're doing are multi-pronged, right? So one is marketing, which you highlighted. So I think a pretty significant pivot in the marketing agenda to engage a broader set of consumers, drive brand awareness, drive brand relevance, pivot towards a younger female consumer, which drives culture in this country, certainly, and we think culture in this country drives culture and resonance in other countries around the world. That's very, very important. And I think you talked about that or you mentioned that. Second, is I would say wholesale management. So that is reducing in-market inventories, working proactively with all of our alliance partners to make sure they have the right product at the right time, they have adequate differentiation. And I think we're making some good strides there, but there is still work to be done. So I think there's more work to be done, but we're doing the right things, and they will pay off in the longer term. Number three is building, I would say, complementary channels of distribution. Premium outlet stores. We've opened a chain of premium outlet stores, I think, about 29 year-to-date. So at the end of September, we'll open another 11 in the fourth quarter. They're performing well. That is a very attractive investment from our perspective. And it allows the consumers that are in those centers to see the breadth of the brand and We see a much better balance in those environments between Wally and Wendy, between male and female. We also have a kids' business in those environments, so we think that's a very valuable consumer exposure mechanism. Third thing is laying the groundwork for international growth. We opened up four direct markets, two in the quarter. So as you might remember, we're now present in the U.K., in Germany, India, and Australia as direct markets. They are all small. And when I say present in direct market, that means we have wholesale distribution, we have a digital presence, we don't have any retail presence in those markets, just too small at this stage. But I would say what we're seeing, while the numbers are small and we expected them to be small, is a relatively positive reception from those consumers, and that's a pretty diverse set of consumers from the UK to Germany to India to Australia. In addition, the international business in Spain and Italy continues to perform well through a distributor, and we have a range of incremental distributors that we will ship in Q4 and Q1. Essentially, they're opening orders, so they'll be starting up the business. So I would say it's the marketing, but it's building all the platforms that will enable growth in the future. All right, and then let's come back to what we're getting at at the beginning of your question.

Well, I mean, I wrote about this a long time ago. At the end of calendar 22, end of the beginning of 23, you shipped a ton of product into the marketplace. So I guess the question is, is how overstated were the sales last year, and what's the right starting point to think about, and how much of just – you know, filling shelf space, doing the things you did back then sort of caused what happened now. And should you have taken sort of a more measured growth approach, maybe you would be ahead of where you are today. And what decisions were made that caused this? And then, you know, I know you're confident, but, you know, you just lowered numbers and you know, I, I don't know what next, you know, we'll see what happens next year, but I just want to get a little more meat on the bone as to, you know, what happened that was in your control versus. Yeah.

So I think, yeah, I think, I think you kind of said some of it. Um, we definitely grew too fast, right? So out of the gate, we bought the brand, um, nobody knew how high it was up. We didn't know how high it was up, and our customers didn't either, right? So they were constantly out of stocking. They wanted more product. We shipped more product. And I think if you think about this sort of 22 into 23 timeframe, in retrospect, we absolutely shipped too much product. So if you're kind of asking what decisions were made that were wrong, that was wrong, that was wrong, right? And then the other thing I think that we did not do well is the initial marketing activities were ineffective. We spent money, but they were ineffective. They were not sufficiently effective. They weren't focusing on the right consumer, and they weren't creating the kind of resonance and impact that we wanted. I think the third thing is the the process of integrating the brand and putting in place all of the infrastructure, whether that be DCs, whether that be systems and capabilities, because it came with very little of that. We knew that, but that took us time. Probably took us a little bit longer than we'd hoped. And that delayed some of the, I would say, offensive investments that we're now making around stores and international. So that's taken longer than we thought. Now, that being said, You know, we bought a business that was approximately $600 million in revenue, and it is now high 800s, almost $900 million. Sorry, 800-ish million dollars in revenue. So it's substantially bigger. It is less profitable on an EBIT percentage perspective because we've invested for what we think is the longer-term growth potential, but it has been profitable all along. It's been accretive all along and has generated cash and we pay down the debt associated with the investment, or pay down a lot of the debt associated with the investment. So it has not gone, if that's what you're kind of trying to get at, as we would have hoped and expected, but that doesn't change our confidence around the future, the team that we have in place, the strategies and activities that we have deployed, and our willingness to support that team, those strategies and activities. You know, I just want to make sure we're super clear about that. That is what we're going to do, and we're very confident that will be a positive outcome for investors.

The next question comes from Jay Full with UBS. Please go ahead.

Great. Thank you so much. Andrew, if we could just talk about the Crocs brand sort of big picture, obviously talking about, you know, a little bit of growth in North America next year. But beyond that, what's the plan to drive growth? I mean, do you see an opportunity to raise brand awareness? Are there new wholesale doors you can get into? I mean, can you open up more maybe of your own stores in your direct consumer channel, new categories you can get into, or market share gains in existing categories? Just tell us how growth should trend big picture and why, you know, maybe we'll see growth accelerate beyond sort of, you know, in North America beyond whatever rate you expect to get in 2025. Yeah.

That's a great question, Jay. I would say, look, in the very short term, sort of the one to two-year timeframe, the primary growth driver for Crocs will be the international business, right? I just want to make sure I reiterate that. And that's a big and attractive business, right? So, you know, and the underlying strategic issue there is that our penetration in those large international markets is a fraction of what it is here in the U.S., okay? But that's not your question. Your question is what drives growth in North America. I don't think there is a huge amount of distribution growth. I think we are the places we want to be. There are other places we could go. There are, you know, mass retailers that we're not represented in. I just don't think that's the right place for our brand as we want to continue to maintain a, you know, a democratic but elevated positioning for our brand. So I don't think we're going to go there. We do think there is continued digital growth and development as the consumer goes more and more digital. We do think there is growth in personalization. We think there's growth in sandals. We had a nice sandal growth here in North America in 24. We think that continues into 25 and has long-range potential. And we do think there's an opportunity for us to play in a broader set of, I would say, silhouettes or wearing occasions. You have seen us experiment there. We will continue to experiment there. But I wouldn't say we today have a slam dunk winner in that arena, but we think we can get there over time. So for the sort of 12 to 24-month time frame, we're really thinking about North America as that cash cow funding that international growth while we can continue to – to experiment and engage our consumers in incremental growth opportunities from a silhouette and product perspective.

That's very helpful. Andrew, thank you.

Thank you.

The next question comes from Anna Andreva with Piper Sandler. Please go ahead.

Great. Thanks so much, and good morning. We wanted to follow up just on the overall profitability issue. of the business given investments at Hey Dude. Can you guys talk about what guardrails you have in place at the consolidated level to offset some of these investments? Andrew, I think you mentioned 25% is the right level for the business. Are there additional opportunities at the Crocs side of things, either with pricing or maybe OPEX management as we think about next year? Thanks so much.

Thanks for the question, Ana. This is Susan. You know, one thing I think it's really important to emphasize here is how disciplined we are about our investments. I mean, we've mentioned increasing our SG&A, which we continue to plan to do into next year. But there's a lot, you mentioned guardrails and KPIs. There's a lot of scrutiny around making sure we're making the right investments. And as Andrew indicated in talking about, hey, dude, when we find that we need to pivot, We do that pretty readily and pretty nimbly as we did with the marketing investment on Hey Dude, pivoting from performance to brand when we saw a better opportunity there. So we're super disciplined about it, but when we said we think 2024 is an investment year and 2025 will continue to be an investment year, that will create incremental EBIT margin pressure So the 25% guidance that Andrew reiterated was for this year, and next year we would expect to be below that.

Okay, appreciated. Best of luck.

This concludes our question and answer session. I would like to turn the conference back over to Andrew Reese, Chief Executive Officer, for any closing remarks.

I just want to conclude by thanking everybody for their continued interest in our company. We appreciate them spending time with us today. Thank you.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.