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Why Crocs Changed Its Tune On Third-Quarter Sales Guidance

Fresh off the heels of issuing an upbeat guidance of 10 percent sales growth to an expected $312.8 million for the third quarter and elevating chief product and merchandising officer Michelle Poole to company president, Crocs is confident in its ability to hurtle full-speed ahead into 2021.

The 10 percent growth estimate is a notable shift from Crocs’ initial projections for the second half detailed in its second-quarter earnings report, which anticipated flat sales growth due to deliberate inventory constraints stemming from the pandemic. Crocs cut total inventory by 14.9 percent in the first six months of the 2020 fiscal year, with the company’s core Classic Clog seeing periodic stockouts online during the summer amid surging digital demand. Collaborations with notable cultural figures ranging from Post Malone to Kentucky Fried Chicken to Peeps have helped fuel Crocs’ popularity with younger consumers.

Two events spurred the drastic change to what was admittedly a conservative growth projection, according to Crocs CEO Andrew Rees, who spoke to investors during a presentation at the CL King & Associates’ 18th Annual Best Ideas Conference Wednesday.

“We didn’t see significant disruption. Most of the stores remained open and DCs remained open so we could ship at essentially full capacity,” Rees said. “Secondly, we probably sold more inventory on hand than we thought we could, so we got more creative about selling what we had versus maybe what consumers initially wanted.”

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The bulk of the company’s approximately $50 million in capital expenditures this year have been devoted to distribution and supply chain amid the demand shifts from the Covid-19 pandemic. With the company’s distribution center in Dayton, Ohio, already seeing “record outputs through the summer,” Rees said, Crocs built out a new e-commerce-dedicated facility next to it ahead of the expected holiday rush.

“It’s a little bit of a different shipping model than retail and wholesale. It’s a little bit more intensive,” said Anne Mehlman, executive vice president and chief financial officer at Crocs. “It’ll be checked out during peak periods and also accommodate for the rapid acceleration we’ve seen in e-commerce.”

The casual footwear brand also is relocating its Netherlands-based EMEA distribution center from Rotterdam to Dordrecht, since the old facility has been at “overcapacity for a number of years.” The new warehouse is expected to be completed by April next year.

In Crocs’s second quarter, global e-commerce sales increased by 67.7 percent, helping make up declines through both its wholesale and retail channels as stores remained closed throughout April and May. In total, digital comprised 56.1 percent of total sales in the quarter. Since the company remained profitable throughout the quarter with a net income of $56.6 million, the continued investments in e-commerce bode well for Crocs’ future financial health.

Additionally, Mehlman pointed out that the company’s strong gross margins in the second quarter could be attributed to a better mix of products, overall prices that started to increase at the end of 2019, and an ability to pull back on promotions and discounts despite rampant disruption.

“Given our lean inventory position, that was necessary,” Mehlman said. “We obviously didn’t temper demand, so we feel very strongly that that’s a real big benefit of us running on leaner inventory, and we expect that to continue.”

While the back-to-school season has been a bane on footwear and apparel companies alike due to slowed sales in August as many schools had uncertain opening schedules, Rees said Crocs is “gaining substantial share” throughout the season.

“We don’t really see the issues that others have been talking about,” Rees said.

As far as holiday preparation goes, Rees believes the season is going to start early as consumers worry about constrained supplies themselves.

“I think there will be an elongation of the holiday season and a pull forward of the season as well, because I think consumers are definitely savvy to the fact that the things they want to buy might not be available on Black Friday,” said Rees.

And as shipping costs remain a concern for retailers and brands as the holiday season picks up, particularly as FedEx, UPS and the USPS are adding select surcharges for later in the year, Mehlman says Crocs will not be affected by any cost increases.

“We had already negotiated contracts on some of the things you’ve heard about in the news,” Mehlman said. “We’re not subject to those excess shipping charges, so those won’t affect us this year. We don’t see material differences between what we anticipate this year versus last year on outbound freight.”

Mehlman did note that the company still sees pressures from inbound freight costs and product costs related to labor in its Vietnam-based manufacturing plants, while additional headwinds in 2021 could potentially come from a weakened U.S. dollar against other major currencies, which has impacted Crocs’ product margins in the past.

When asked about growing Crocs through an acquisition, Rees noted that while the Crocs brand was the primary focus for the company, he said that there will definitely be transactions that take place over the next 12 to 24 months. But any acquisition would be in the footwear space, and not extended into apparel, Rees said.

“Our management team are really footwear professionals. We love the footwear space,” Rees said. “We think it’s frankly a far more attractive space than the apparel space in terms of margins and to the degree of which the brand is and the global nature of it.”