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Crocs Says Hey Dude on Fast Track to $1 Billion

No matter the macroeconomic headwind or supply chain snafus, Crocs continues to demonstrate that its rapid growth is not slowing down.

The clog seller saw third-quarter revenues soar 57.4 percent to $985.1 million, or 63 percent on a constant-currency basis, from the prior-year period’s $625.9 million. Net income in the period was $169.3 million.

But perhaps most impressive for Crocs is that it raised its full-year guidance amid the uncertainty and reaffirmed its long-term projections to reach $5 billion in revenue by 2026. The company’s stock price reacted in kind, rising more than 16 percent on Thursday.

In a Nutshell: The Justin Bieber-approved brand also expects its comfort shoe label Hey Dude to generate $1 billion in revenue in 2023—one full year earlier than previously anticipated, according to Crocs CEO Andrew Rees.

Crocs has major plans for the casual brand, which now constitutes 27 percent of the company’s overall revenue. To support Hey Dude’s growth, Crocs signed a lease to open a new distribution facility in Las Vegas, which the company anticipates will begin operating in the 2023 fourth quarter.

“We are a little bit infrastructure constrained from a Hey Dude perspective,” Rees said in an earnings call. “Their warehouse and facilities that we bought or took over in the Las Vegas area are very small. We’ve done our best to expand them in the short term, but they will be restricted in terms of how much we can grow the business based on that infrastructure…we’ve also just got to make sure we manage the business within the constraints that we have.”

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Hey Dude has set up two small clearance stores to relieve an overflow of inventory in warehouses. However, Rees said these locations are “not a precursor for a store strategy.”

Inventories increased to $513.7 million as of Sept. 30, a notable 141.7 percent increase compared to $212.5 million in the year-ago period. However, this increase was driven primarily by the addition of $189.5 million of Hey Dude inventory after acquiring the brand in December 2021. On its own, Crocs brand inventory increased 52.6 percent to $324.2 million.

Gross margin was the only major nick against Crocs, decelerating 900 basis points (9 percentage points) to 54.9 percent from 63.9 percent in the 2021 third quarter. Adjusted gross margin was 55.1 percent compared to 64.2 percent in the same period last year.

Crocs brand gross margin was 57.3 percent, or 660 basis points (6.6 percentage points) lower driven by approximately 200 basis points (2 percentage points) of inflationary costs and approximately 270 basis points (2.7 percentage points) of higher freight and inventory handling costs.

Hey Dude brand gross margin was 48.8 percent, which Crocs attributes to legacy freight contract costs and higher inventory storage costs.

With a successful third quarter in tow, Gen Z’s favorite clog dealer now expects revenue for the full year to be approximately $3.455 billion to $3.52 billion, representing growth between 49 percent and 52 percent compared to 2021. This is the third revenue guidance issued this year for Crocs, which initially called for sales of approximately $3.5 billion before guiding down in August to a range of $3.395 billion to $3.505 billion.

For the Crocs brand, revenues are now expected to be between $2.605 billion and $2.63 billion, implying approximately 17 percent growth on a constant currency basis, and approximately 13 percent growth on a reported basis.

Hey Dude brand revenues are still expected to bring in approximately $850 million to $890 million on a reported basis, implying $940 million to $980 million when including the period prior to the acquisition’s closing.

Adjusted diluted earnings per share are now estimated to be between $9.95 and $10.30, with the low estimate increasing from the previously guided $9.50 per share.

Crocs now forecasts adjusted operating income between approximately $920 million and $950 million on adjusted operating margin of roughly 27 percent. The new guidance comes out ahead of the previous $880 million to $945 million range on adjusted operating margin between 26 percent and 27 percent.

Cash and cash equivalents were $143 million at the end of the quarter, compared to $213.2 million as of Dec. 31, 2021. Borrowings were $2.62 billion, compared to $771.4 million at the end of last year. The massive increase was driven by borrowings used to finance a portion of the Hey Dude acquisition.

During the third quarter, the company repaid $155.3 million of debt, and has $611.1 million in available borrowing capacity.

Net Sales: Consolidated revenues across Crocs brands totaled $985.1 million, skyrocketing 57.4 percent from the $625.9 million in the year-ago period, or 63 percent on a constant-currency basis, as compared to 2021.

Crocs brand revenues jump 14.3 percent, or 19.9 percent on a constant-currency basis, to $715.7 million. Wholesale revenues ticked up 14.1 percent, or 21.8 percent on a constant-currency basis, to $353.3 million from $309.6 million. Direct-to-consumer (DTC) sales increased 14.6 percent, or 18.1 percent on a constant-currency basis, to $362.4 million from $316.3 million in the year-ago period. DTC comparable sales improved 18.2 percent.

Hey Dude brand revenues during the third quarter were $269.4 million, up approximately 83 percent versus pre-acquisition sales, according to Crocs chief financial officer Anne Mehlman. Wholesale revenues were $181.8 million and DTC revenues were $87.6 million.

By region, North America revenues of $445.3 million increased 1.7 percent, or 1.8 percent on a constant-currency basis, from the prior third quarter’s $437.7 million.

Asia Pacific had the largest growth rate by far, increasing 65.5 percent, or 82.3 percent on a constant-currency basis, to $138.5 million in revenue from $83.6 million in 2021. And unlike many other brands that have struggled in China like Nike, Adidas or Skechers, Crocs is still seeing significant growth in the market to the tune of “30-plus percent,” according to Rees.

Europe, Middle East, Africa and Latin America (EMEALA) generated revenues of $131.9 million, up 26.2 percent from $104.5 million—or 45.6 percent on a constant-currency basis.

Net Earnings: Crocs generated $169.3 million in the third quarter, up from $153.5 million in the year-ago period.

Diluted earnings per share was $2.72, as compared to $2.42 for the same period in 2021. Adjusted diluted earnings per share increased 20.2 percent to $2.97 compared to $2.47 last year.

Income from operations increased 30 percent to $264.1 million, while operating margin slipped to 26.8 percent, compared to 32.4 percent for the same period last year. This was due to lower gross margin and Hey Dude integration expenses. Adjusted income from operations rose 33.8 percent to $274.5 million and adjusted operating margin was 27.9 percent.

CEO’s Take: Rees further touched on the Hey Dude expansion efforts, also revealing that the brand will soon be testing international waters in 2023.

“We think it’s an important part of the long-term growth trajectory for Hey Dude, but we’re going to start with some presence in Europe,” said Rees. “We’re going to focus on really two major countries, the U.K. and Germany. Those will be direct markets where we’ll go direct to two major brick-and-mortar wholesalers. And we will also start a number of major distributors out of our kind of European headquarters. That’s really our toe in the water for international. We’ve been preparing the groundwork doing some research, etc. We’re very optimistic about that, but we want to make sure that we set the brand up for success. And that we do that in a very disciplined and sequential fashion.”