With factories in Vietnam finally reopening earlier this month, Crocs is preparing for demand next year “way beyond” what it’ll be able to supply.
In a Nutshell: Speaking on a call with investors Thursday, CEO Andrew Rees revealed that most of the clog maker’s factories in Vietnam are once again operational after “several weeks” of closures. Though many workers fled the country’s population centers amid the summer’s lengthy lockdown, the CEO said labor is returning and Crocs is “pretty confident” its manufacturers will get back online quickly. Vietnamese state media reported Tuesday that 70 percent of workers at industrial parks in Ho Chi Minh City’s export processing and industrial zone have returned to work.
Rees struck a note of caution in regard to the immediate future, describing the situation as “fluid” amid Vietnam’s ongoing vaccine campaign. According to Reuters data, it has administered more than 67 million doses so far, enough to fully vaccinate one-third of its population. In Ho Chi Minh City—the base around which much of the city’s manufacturing is located and center of this summer’s outbreak—98.7 percent of adult residents had received a first dose as of Sunday, according to state media. Adolescents ages 12 to 17 are slated to begin receiving the jab Friday.
“We’re anticipating that we see some ‘on again, off again’ type of situation,” Rees said. “Our baseline projections do not anticipate they ramp up to full production in a number of weeks and then stay there for the rest of eternity. We think this is going to be volatile. We’ve incorporated that into our expectations and into our guidance.”
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Faced with difficulties in Vietnam—the Southeast nation was originally set to source 70 percent of Crocs product this year—the clog maker is diversifying its manufacturing base, including by moving some manufacturing back to China in the short term. Indonesia, however, is the company’s “most immediate target,” Rees said. There, the clog brand has two factories that it expects will come online by the end of the year and ramp up “very quickly” next year. A “major facility” in India is also a year out, the CEO added.
Crocs is taking a number of additional steps to mitigate its supply chain troubles beyond its adjustments in sourcing. To improve factory throughput, it is prioritizing top-selling products and narrowing SKU count. In the United States, it plans to reduce its dependency on West Coast ports and increase its shipment capabilities on the East Coast. To ensure Spring/Summer 2022 product arrives on time, it plans to drop an additional $75 million on air freight—a giant leap from the $8 million to $10 million it typically spends on air freight, chief financial officer Anne Mehlman said. When and where demand surpasses supply, Rees said Crocs will prioritize e-commerce, retail and “major” wholesale customers.
“As we all know, the situation is very fluid,” Rees said. “But I have full confidence in the supply chain team and our factory partners to manage through this temporary disruption.”
Despite these difficulties, Crocs remains optimistic about the future. Looking to the nearer term, it bumped the lower bound of its full-year revenue forecast from 60 percent growth to 62 percent growth and increased its full-year adjusted operating margin guidance from approximately 25 percent to approximately 28 percent. In full-year 2022, the company anticipates revenue will increase more than 20 percent. Its goal of hitting $5 billion in annual sales by 2026 remains in place.
Crocs’ cash and cash equivalents totaled $436.6 million as of Sept. 30, up from $135.8 million as of Dec. 31, 2020. Inventories totaled $212.5 million, versus $175.1 million nine months earlier.
Net Sales: Crocs’ third-quarter revenue increased 73 percent from last year—72 percent in constant currency—to $625.9 million. Compared to 2019, sales doubled, Rees said. Regionally, the Americas saw the largest growth, 95 percent, while Asia Pacific saw the least, 21.2 percent.
Its direct-to-consumer business grew 60 percent year-over-year and 90 percent on a two-year basis to represent 51 percent of revenues. Digital sales, specifically, climbed 69 percent, with double-digit growth in all regions, to account for 37 percent of total revenues. Crocs’ wholesale business, meanwhile, increased 88 percent.
The clog maker’s gross margin improved 670 basis points from 57.2 percent a year ago to 63.9 percent. Its adjusted gross margin, 64.2 percent, represented a 680-basis point bump.
Though selling, general and administrative expenses rose from $134.7 million a year ago to $196.7 million, SG&A as a percent of revenues dropped to 31.4 percent from 37.2 percent. Adjusted SG&A also improve, dropping from 36.6 percent last year to 31.4 percent.
Net Earnings: Crocs’ operating income more than doubled to $203.1 million versus last year’s $72.1 million as its operating margin improved from 19.9 percent to 32.4 percent. Its adjusted operating income from operations totaled $205.1 million and its adjusted operating margin was 32.8 percent.
Diluted earnings per share totaled $2.42, as compared to $0.91 in the year-ago period. Adjusted diluted earnings per share were $2.47, up from $0.94 a year earlier.
CEO’s Take: “Our extraordinary performance in spite of the ongoing Covid-19 pandemic and widespread supply chain disruptions demonstrate the strength of the Crocs brand and product offering globally and reinforces the confidence we have in achieving our short- and long-term goals,” Rees said. “Our team’s ability to navigate these disruptions for the last two-plus years has been and continues to be a key ingredient of Crocs’ success.”