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Crocs Raises Revenue Forecast After Strong Hey Dude Debut

A strong performance at Crocs’ newly acquired Hey Dude brand helped push the clog maker well beyond its first-quarter revenue forecast.

The company reported consolidated revenues of $660.1 million Thursday. In February, it estimated sales would land between $605 million and $630 million. Hey Dude revenue alone totaled $114.9 million, nearly $25 million more than the midpoint of the guidance it offered three months ago. The Crocs brand recorded revenues of $545.2 million, more than $15 million above the $520 million to $535 million it predicted in February.

Though the company retained its namesake brand’s full-year forecast—revenue growth exceeding 20 percent—it upped its guidance for Hey Dude from between $620 million and $670 million to between $750 million to $800 million. Across both brands, it expects revenue to grow 52 percent to 55 percent in full-year 2022 to $3.5 billion, up from its prior forecast of $3.4 billion.

CEO Andrew Rees said “the principal reason” Crocs upped its guidance on Hey Dude was its increased confidence around supply. Three months ago, the company “had strong visibility into supply, but we had some questions,” he said.

“I think that’s probably the biggest thing that’s changed,” Rees continued. “I think we have much more confidence in both inbound supply and logistics of getting it to our customers.”

In a Nutshell: Prices continued to rise at Crocs during the first quarter. Within its namesake brand, average selling price shot up 19.6 percent year over year to $21.10. In the fourth quarter, average selling price grew 18.9 percent to $25.71. Though the Crocs brand grew currency-neutral sales nearly 22 percent, it actually sold 1.1 percent fewer pairs of shoes.

Executive vice president and chief financial officer Anne Mehlman attributed the uptick to price increases, reduced promotions and discounting and incremental penetration of its Jibbitz charms business. Rees said these factors all produced “very significant underlying [gross] margin increases.”

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In anticipation of inflationary cost increases, Crocs began raising prices a year ago. Though these hikes began in DTC last April, they spread to “major” wholesale customers “later in the year,” Rees said. Earlier this year, it “took some additional pricing in some select international markets,” he added.

“If we look at the promotional environment and we monitor closely the promotions that we are doing relative to last year and relative to competition, our promotional cadence, in aggregate, was less than this time last year, and I think it’s also generally competitive with competition,” Rees continued.

The CEO noted Crocs is currently seeing “an enhanced cadence of some promotional activity” and feels it is important to participate in “key events” like Easter and Memorial Day.

The company’s total inventories grew from $196.5 million on March 31, 2021 to $407.6 million at the end of the first quarter. This included $92 million in Hey Dude inventory and another $20 million of inventory step-up related to the acquisition. Mehlman noted that the company continues to see “significant” in-transit inventory increases due to longer transit times. In-stock levels on core products, however, have improved, “particularly in the U.S.,” thanks to investment in air freight, she said.

Crocs saw many of its suppliers close up shop for months last year when a spike in Covid cases prompted restrictions in Vietnam. Though the recent wave of cases in China has produced “some factory closures over the last couple of months” among its Hey Dude suppliers, it isn’t having a “material” impact on its overall supplier base “in the grand scheme of things,” Rees said.

However, the company has seen an impact in its e-commerce business due to the shutdowns in Shanghai, the port city from where it ships some of its goods, according to Mehlman. “That’s incorporated into our Q2 guidance as well, but that has impacted our China business for Crocs for Q2,” she said.

Net Sales: Crocs’ first quarter revenue, $660.1 million, represented a 46.7 percent increase on a constant-currency basis versus the prior-year period. Its namesake brand recorded sales of $545.2 million, a 21.7 percent year-over-year increase. Following Hey Dude’s acquisition on Feb. 17 through the end of the quarter on March 31, the brand’s revenues were $114.9 million. Including the first month and a half of the year, revenue grew 81 percent year over year to $205 million.

Company-wide direct-to-consumer revenue grew 36.1 percent in constant currency versus the year-ago quarter to $229 million. Wholesale revenue grew 52.9 percent to $431.2 million.

Within the Crocs brand, DTC sales increased 19.7 percent on a constant-currency basis. Wholesale performed slightly better, growing 22.9 percent. North America revenues increased 19.5 percent to $319.5 million. The Asia-Pacific region and Europe, Middle East Africa and Latin America (EMEALA) saw sales growth of 22.1 percent and 26.8 percent, respectively.

Crocs Brand’s currency-neutral digital sales climbed 23.5 percent to represent 32.8 percent of its revenues—a slight increase from 32.3 percent a year earlier. Digital represented 25.9 percent of Hey Dude’s sales.

Crocs anticipates revenues will increase approximately 43 percent to 49 percent in the second quarter to between $918 million and $957 million. Within the Crocs brand, it predicted revenue will grow 17 percent to 20 percent on a constant-currency basis—12 percent to 15 percent on a reported basis—to approximately $718 million to $737 million. Excluding the impact from currency and Russia—Crocs estimates the pause in sales there will produce a roughly $20 million impact—Mehlman said the company would forecast 20 percent to 23 percent sales growth.

Crocs estimated that Hey Dude will record revenues of between $200 million and $220 million.

Net Income: Crocs’ gross margin fell 580 basis points in the first quarter from 55 percent to 49.2 percent. Its adjusted gross margin, however, fell just 130 basis points to 53.9 percent. This figure excludes $30.9 million of costs, including a $27.9 million Hey Dude inventory fair value adjustment and a $1.8 million Russia inventory reserve.

Crocs Brand’s gross margin dropped 60 basis points to 54.4 percent. This included $24.6 million, or 450 basis points, of incremental air freight costs, which was mostly offset by higher average selling prices.

Company-wide selling, general and administrative expenses totaled $206.2 million and increased as a percent of revenues from 27.9 percent a year ago to 31.2 percent. Adjusted SG&A, which excludes $20.6 million related to the Hey Dude acquisition and $5.3 million of “bad debt” associated with Russia, improved to 27.3 percent of revenue versus 27.9 percent the same period last year.

Increased air freight and acquisition expenses ultimately brought Crocs’ income from operations down to $118.7 million, a 5 percent decline from $124.7 million in first-quarter 2021. Its operating margin dropped from 27.1 percent to 18 percent. Diluted earnings per share fell from $1.47 to $1.19.

Adjusted income from operations grew 39.6 percent to $175.5 million. Adjusted operating margin slipped from 27.3 percent to 26.6 percent. Adjusted diluted earnings per share increased from $1.49 to $2.05.

Crocs expects to see an adjusted operating margin of approximately 26 percent in the second quarter, inclusive of an estimated $50 million impact from air freight. Its full-year gross margin forecast includes an incremental $75 million of air freight from the first half of the year.

The company said it anticipates its adjusted operating margin will be between 26 percent and 27 percent in 2022. Its forecast called for adjusted diluted earnings per share of $10.05 to $10.65.

CEO’s Take: “The backdrop of high inflation, rising interest rates and supply chain disruptions has only become more complicated with the war in Ukraine and the ongoing shutdowns caused by the zero-Covid policy in China,” Rees said. “The impact of all these factors on consumer confidence remains uncertain. However, we have tremendous confidence and clear evidence to the underlying strength and growth potential of both Crocs and Hey Dude brands. We look forward to continuing to execute on the long-term vision for both brands and are extremely confident about our ability to grow the Crocs brand to $5 billion in revenues by 2026 and the Hey Dude brand to $1 billion of revenue by 2024.”