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Crocs Commits to Net Zero Emissions by 2030, Expects Temporary Vietnam Factory Closures

For the third-consecutive quarter, Crocs reeled in record revenue, which increased 93.3 percent year over year to $640.8 million.

As such, the popular casual footwear brand raised its full-year outlook for the second time this year, with revenue growth now expected to be between 60 and 65 percent, up from the prior expectations of a 40 to 50 percent jump.

In a Nutshell: The blowout quarter came as Crocs committed to net zero emissions by 2030, prioritizing the mitigation of Scope 1, 2 and 3 CO2 equivalent emissions. The footwear seller is putting more of a focus on sustainable ingredients, minimizing packaging, responsible resource use and exploring innovative product afterlife solutions.

At 3.94 kg CO2 equivalent per pair of Classic Clogs, according to data verified by Higg, Crocs shoes already have a low carbon footprint. And by the end of 2021, Crocs will be a 100 percent vegan brand. Currently, Crocs is finalizing its approach to a more sustainable bio-based Croslite material, the predominant input in its footwear.

While 85 percent of all Crocs shoes were sold without boxes in 2020, the brand is committing to explore sustainable alternatives for all other elements of its packaging. Additionally, Crocs is examining ways to give its products a second life through consumer-led donations, recycling and re-commerce programs.

Currently, 45 percent of all Croslite material production scrap is recycled. Crocs said it will continue to explore ways to minimize its impact, including transitioning to renewably sourced energy in its offices and distribution centers. Where this isn’t possible, Crocs will purchase carbon credits to offset any remaining emissions. The company has also committed to establishing carbon reduction goals informed by the UN’s Science-Based Targets initiative.

As part of the net zero commitment, Crocs will publish an annual ESG report in early 2022.

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The second-quarter success comes as the collaboration-heavy brand was light on promotions and discounts, and heavier on pricing, causing gross margin to increase 740 basis points (7.4 percentage points) to 61.7 percent, compared to 54.3 percent in the year-ago period.

In fact, across the board, prices increased 8 percent to an average sales price of $21.84 as the company makes the most of its strengthened pandemic-driven pricing power, particularly in international markets.

Clog sales doubled at a rate of 101 percent year over year, while sandal sales increased 57 percent. While the company expects clog growth to outpace sandals in 2021, it anticipates that over the longer-term sandals will grow faster than clogs, CEO Andrew Rees said in an earnings call.

Inventories increased 42 percent to $209.1 million as of June 30, up from $146.8 million in the year-ago period. The company ended the quarter with higher “in-transit” inventory due to the continuation of global logistics challenges.

“Transit times from Asia to most of our leading markets are approximately double what they were historically, but that’s been the case for some time and we are expecting to live with that,” said Rees in the call. “We’ve also seen elevated freight costs in the first half of the year. We’re expecting to see more in the back half of the year and we’ve embedded that expense into our projections.”

Rees expects that Crocs will see some temporary factory closures in Vietnam the next quarter as the country still battles the Covid-19 pandemic and struggles to administer vaccinations. Vietnam is the “most significant manufacturing geography” for Crocs, chief financial officer Anne Mehlman said in the call. While Rees said the closures would impact supply, he said Crocs already has the impacts added into its upcoming guidance.

“We’re confident in the amount of inventory that we have on hand and what we have in transit, and we feel really comfortable with where we are given those uncertainties,” Rees said.

Third-quarter revenue growth is expected to be between 60 and 70 percent compared to third-quarter 2020 revenues of $361.7 million. The quarter also will include adjustments of approximately $3 million related to distribution center investments that will negatively impact gross margin. Non-GAAP operating margin is expected to be between 24 and 26 percent.

The full-year outlook also now includes adjustments of approximately $8 million to $10 million related to distribution center investments that will negatively impact gross margin. Expected non-GAAP operating margin is approximately 25 percent. Capital expenditures within the supply chain are now projected to between $80 million and $100 million, a decrease from the previous range of $100 million to $130 million anticipated.

Cash and cash equivalents were $197.9 million as of June 30, compared to $135.8 million as of December 31, 2020. Capital expenditures during the six months ended June 30, 2021 were $21.3 million, compared to $24.3 million for the same period last year.

Borrowings at June 30, 2021 were $386.4 million, including $350 million of senior notes issued in March. The company still has $454.7 million in available borrowing capacity.

Net Sales: Revenues were $640.8 million, an increase of 93.3 percent from the same period last year, or 88.4 percent on a constant currency basis. DTC revenues grew 78.6 percent to $333.4 million and wholesale revenues grew 112.1 percent to $307.3 million.

On a regional, constant-currency basis, revenues in the Americas improved 135.6 percent to $405.7 million, while EMEA jumped 52.6 percent to $108.3 million. Asia Pacific came in at 27.1 percent revenue growth to $126.8 million.

Digital sales grew 25.4 percent in the quarter, now representing 36.4 percent of total revenue. While that total is down versus the 56.1 percentage of revenue in 2020, digital penetration still surpasses 2019’s 32.6 percent.

Net Earnings: Net income for Crocs came in at $319 million, well ahead of the $56.6 million taken in throughout the 2020 second quarter.

Income from operations grew to $195.3 million from $56.6 million, while operating margin expanded to 30.5 percent from 17.1 percent. Adjusted income from operations rose 166.1 percent to $196.4 million and adjusted operating margin was 30.7 percent compared to 22.3 percent.

Diluted earnings per share were $4.93 in the 2021 second quarter, as compared to 83 cents for the same period last year. Adjusted diluted earnings per share were $2.23, up from $1.01 in the year-ago period.

CEO’s Take: In the earnings call, Rees also shed light on the company’s thoughts on the upcoming seasons ahead.

“We’re very optimistic about back-to-school,” said Rees. “I would say early reads are strong. Obviously, there’s some parts of the country that go back earlier than others. As we look at the performance in those markets, we were seeing trajectories that we really like. Looking at our seasonality, the growth in back to school, and the strength of fourth quarter, a lot of our seasonality that was historically in the business is really smoothed out so we can be incredibly profitable.”