Crocs Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 27, 2023

Key Takeaways

  • Crocs reported a record Q2 revenue of over $1 billion, up 12% on a constant currency basis, with industry-leading 30% operating margins and 26% direct-to-consumer growth.
  • The Crocs brand grew 15% constant currency, fueled by Asia revenues up 39%, 20% DTC comparable sales growth and a 34% surge in sandals, which are on track to exceed $400 million this year.
  • Hey Dude delivered $239 million in Q2 revenue with 30% DTC and 37% digital growth, but full-year revenue guidance was lowered to 3.5%–7.5% growth due to cautious wholesale orders and ERP/warehouse transitions.
  • Strong free cash flow enabled a net leverage ratio of 1.7x, $300 million of H1 debt repayment, a $50 million share repurchase in July, and raised full-year guidance to 12.5%–14.5% revenue growth and ~$11.83–$12.22 EPS.
  • Crocs gained significant market share in China (Q2 revenues +100%), driven by local influencer collaborations, personalization initiatives and social-commerce on platforms like RED and Douyin.
AI Generated. May Contain Errors.
Earnings Conference Call
Crocs Q2 2023
00:00 / 00:00

There are 12 speakers on the call.

Operator

Good morning, and welcome to the Crocs Second Quarter 2023 Earnings Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Corie Lynn.

Operator

Please go ahead.

Speaker 1

Good morning, everyone, and thank you for joining us today for the Crocs, Inc. 2nd quarter 2023 earnings call. Earlier this morning, we announced our latest quarterly results A copy of the press release may be found on our website at crocs.com. We would like to remind you that some of the information provided on this call It's forward looking and accordingly is subject to the Safe Harbor provisions of the federal securities laws. These statements include, but are not limited to, Statements regarding our supply chain challenges, cost inflation, the acquisition of Hagee and the benefits thereof, Crux's strategy, plans, objectives, expectations, financial or otherwise, and intentions future financial results and growth potential anticipated product portfolio Our ability to create and deliver shareholder value and statements regarding potential impact to our business related to the COVID-nineteen pandemic.

Speaker 1

These statements involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward looking statements. Crocs is not obligated to update these forward looking statements to reflect the impact of future events except as required by applicable law. We caution you that all forward looking statements are subject to risks and uncertainties described in the Risk Factors section of our annual report on Form 10 ks and are subsequent filings with the SEC. Accordingly, actual results could differ materially from those described on this call. Please refer to KRAX Sentinel report on Form 10 ks as well as other documents filed with the SEC for more information relating to these risk factors.

Speaker 1

Certain financial metrics that we refer to as adjusted or non GAAP are non GAAP measures. A reconciliation of these amounts to their GAAP counterparts is contained in the press release we issued earlier this morning. Joining us on the call today are Andrew Reach, Chief Executive Officer Ann Mehlman, Executive Vice President and Chief Financial Officer. Following their prepared remarks, we will open the call for your questions. At this time, I will turn the call over to Andrew.

Speaker 2

Thank you, Kari, and good morning, everyone. I'm incredibly pleased with our 2nd quarter results. We delivered record quarterly revenues of over $1,000,000,000 The Crocs and Hey Dude brands continue to perform extremely strongly as evidenced by 26% direct to consumer revenue growth. We gained appreciable market share and once again delivered industry leading profitability with 30% operating margins. Amar will review our financial results in more detail shortly, but here are a few highlights in the second quarter.

Speaker 2

Revenues of over $1,000,000,000 grew 12% on a constant currency basis. Crocs brand revenues grew to 15% constant currency, fueled by Asia revenues increasing 39% and global DTC comparable sales rising 20%. The Crocs brand continues to gain market share in North America with revenues up 13% driven by sandals and new product introductions. Hey Jude brand revenues were $239,000,000 with exceptional DTC growth of 30% and digital growth of 37% constant currency. Adjusted diluted earnings per share increased 11% to $3.59 per share.

Speaker 2

Gross leverage ended at 1.8 and net leverage was 1.7 times at quarter end, allowing us to repurchase $50,000,000 of shares in July. Finally, Krausz Inc. Was named to the Time 100 Most Influential Companies for 2023. In summary, we had an excellent quarter and our teams globally remain focused on driving brand health, market share gains and profitable growth in the back half of the year. I would now like to provide updates for each of our brands.

Speaker 2

Across brands, we delivered strong revenue growth since 2018 as we built both clog and brand relevance across the globe. This past quarter, our product and marketing efforts continue to deliver newness and excitement to the current brand in France, while simultaneously reaching new consumers who may not have considered our brand in the past. With respect to product innovation, we are diversifying our plug offering and growing sandals. We've seen significant success with a number of height orientated new clog introductions, including the Crush, Mega Crush and more recently the Siren. In addition, our recent launch of Dillon, a more elevated and fashion forward club is very encouraging.

Speaker 2

The Echo continues to outperform our initial expectations and personalization continues to drive global relevance for the Classic. Turning to sandals. As we have shared, this category is an important growth initiative for Crocs, allowing us to Into the adjacent $30,000,000,000 global saddle category, where we believe our molded technologies, accessible price points, Strong go to market will allow us to compete effectively in a relatively fragmented market. We're excited by our incredible sound performance where revenues grew 34% compared to Q2 last year and 40% growth on a trailing 12 month basis. Growth was robust in all regions driven by our diversified SAML offerings, New product introductions and robust marketing calendar.

Speaker 2

The Classic and Brooklyn continue to be our leading sandwich franchises. In addition, the more recent Mallow and Crush introductions have been extremely successful and are also top selling styles. We'll continue to drive sound awareness and customer acquisition with activations such as the new Pollux slide with Solady Bembroke. Overall, we're pleased with the Sandoz trajectory. I'm very confident that Sandoz revenues will grow to in excess of $400,000,000 this year.

Speaker 2

From a collaboration perspective, we announced plans for 2 year partnership with Soleil Bembury, who will serve as Creative Director At the Krotz Times Pollux pod to introduce innovative new styles. This quarter, we introduced the Pollux Slide, which sold out instantly and provided a halo for our sandal offerings globally. More recently, we partnered with rapper Lil Nas X to showcase our high collection such as Siren and Crush. During Paris Fashion Week, we took over the same Mercy pop up space. Other marketing highlights from the quarter include our NOLA slide with Taco Bell, a claw collaboration with Parisian running brand SataSci, And a slide and clog partnership with Korean food brand, OTOJI.

Speaker 2

Finally, this month, our Barbie Collection featuring cloths, sandals and gibbets quickly sold out ahead of the blockbuster movie launch last weekend. Asia is another important long term growth driver for the Crocs brand as the brand is currently underpenetrated relative to here in the U. S. In Q2, Asia revenues grew by 39% constant currency. Growth was again broad based with strong brand momentum throughout the region, including China, Australia, South Korea and Southeast Asia.

Speaker 2

We're particularly encouraged by another exceptional quarter of growth in China, where Q2 revenues increased over 100% ahead of our expectations And one more sign of the potential within this market. The leadership team and I had the opportunity to visit China in June for the first time in 3 years It was wonderful to see how much the brand could grow. We met with our partners, suppliers and visited many stores. We've been deploying the same playbook we've used globally, including influencers, collaborations and personalization. We partnered with local celebrities, including Bai Jing Ti and Zhou Yutong to style collaborations and products in their own authentic way.

Speaker 2

Brock's creations by 4 emerging Chinese designers from Fashion Incubator Labelhood were featured at Shanghai Fashion Week. And Givix, our vehicle for self expression continues to price and delight consumers and create great excitement in our stores. Crocs' rising popularity in China has created a passionate following with a hashtag known as Dongman or Clark's Followers. On RED, a leading Chinese social app, topics related to Crocs have accumulated over 310,000,000 views. During the popular mid season festival in June, Crocs sales ranked 2nd on Tmall within casual footwear brands.

Speaker 2

In Douyong, Chinese TikTok, we ranked 1st in sales during mid season festival. In summary, we're incredibly excited by the Crocs brand momentum in China and are even more confident about the potential for the Crocs brand in the 2nd largest footwear market in the world. Now to Edu. We're incredibly pleased with the exceptional DTC growth of 30% and constant currency digital growth of 37%. Our products and marketing innovation is driving new customer acquisition and is growing awareness on the coasts.

Speaker 2

Our e commerce data demonstrates The Q2 revenues on both the East and West Coast increased 45% compared to last year. New product introductions, which range from new colors to new silhouettes and driving excitement. Our Americana styles are top sellers ahead of Memorial Day and 4th July holidays amongst men, women and kids. As a demonstration of our test and learn approach, this year our Americana selection featured over 20 patterns and colors, Building on the early success we saw last year, the new Wally and Wendy Funk and Wash Canvas styles have performed strongly in both DTC and Wholesale, And our efforts to expand the brand beyond the iconic Wally and Wendy within sneakers are off to a great start. The Carina for Women and the newly introduced Scirocco sold out quickly and we're in the process of getting them back in stock.

Speaker 2

On the marketing front, we focused on enhancing brand awareness. We launched our first ever Hey Doo collaboration this quarter with outdoor lifestyle brand Mossy Oak We saw a great sell through. We've also started to seed our back to campus collection on social channels and look forward to launching our collection featuring colleges from the Southeastern Conference or SEC in September. Finally, with respect to wholesale revenues, as we discussed in June, The last part of last year's revenue related to pipeline fill for some of our new strategic alliance partners. We estimate pipeline fill was $70,000,000 for the Q2 of last year and $220,000,000 for fiscal 'twenty two.

Speaker 2

This pipeline build was very conscious decision in our part to secure self space knowing there will be competition in the marketplace. As we get consumer takeaways of the brand across all channels, we estimate to be up approximately 27% during Q2 of 2023 Based on over 80% increase in our strategic alliance accounts, shrinkage in our non strategic wholesale accounts and 30% DTC growth. Retail track and service data from Sukana, formerly MPD, indicates that Hey Dude rose from the number 15 in fashion As we look towards the remainder of the year for Hey Dude, we are lowering our outlook for revenues. Wholesale growth is expected to be low. As we outlined in June, there is $220,000,000 of non comparable sales last year due to the rapid expansion to major U.

Speaker 2

S. Strategic Customers and the discontinuation of relationships with some smaller customers. Since then, while our wholesale partners are very pleased with And a number have called us out in their recent earnings. Many are cautious in terms of future bookings based on their overall market outlook and lack of historical data on Haidu's performance. Finally, as we previously shared, we anticipate constrained distribution capabilities, particularly related to at once in the back half of the year due to ERP and warehouse transitions.

Speaker 2

Even with this low near term revenue outlook, the Hey Dude brand is acquiring new customers and is gaining penetration in strategic accounts and on the cuts. We remain incredibly optimistic about the long term potential of the brand on a global basis. Finally, turning to digital for both brands, We saw exceptional 21% constant currency growth driven by new product introductions that are resonating well with consumers globally. For the Crocs brand, the app is rapidly scaling and gaining consumer traction, reaching penetration over 20% in South Korea. In the U.

Speaker 2

S, we continue to be excited by our launch of customization and on our site now offering an online configurator Organizations design custom cloths and gibbons. Our global CRM database is also accelerating in key markets With the expansion of programs like SMS and the app. As we mentioned last quarter, to gain better control of our brand and realize higher ASP, We anticipate transitioning some of our Crocs Etail business that sits in our wholesale segment to a direct digital sale both on the crocs.com as well as marketplaces where we will sell directly to the consumer. This will result in lower wholesale sales and higher DTC sales. For Hey Dude, we're investing in digital capabilities such as enhanced site experience, payment offerings to improve the customer journey.

Speaker 2

We're also scaling our digital marketing investments to acquire and retain new customers. These efforts coupled with new product introductions have led to strong growth rates across all our digital channels, including being a top performing brand during Amazon's recent Prime Day. Overall, our digital first approach is working and is driving strong growth globally. In summary, we have tremendous confidence in and clear evidence as to the underlying strength and growth potential of both the Crocs and Hadeus brands. Sell through from both our brands continues to be robust and we believe we're benefiting from our democratic price points and gaining share in a difficult market.

Speaker 2

I will now turn the call over to Ann, who will review our financial 2nd quarter financial results in more detail.

Speaker 1

Thank you, Andrew, and good morning, everyone. I will begin with a short recap of our 2nd quarter results. All revenue growth rates will Please refer to this morning's press release. We had an excellent second quarter with over $1,000,000,000 in consolidated revenues, representing 12% year on year growth. We delivered another quarter of industry leading profitability with adjusted gross margin of 58.1%, adjusted operating margin of 30.3 percent and adjusted diluted EPS growth of 10.8%.

Speaker 1

Our portfolio is diversified from a brand, channel and geography On a trailing 12 month basis and in Q2, Hey Dude brand revenues were 26% of total revenue. Channel mix was well balanced with Wholesale revenues representing 54% of trailing 12 month revenues and DTC at 46%. Finally, approximately 31% of total TTM revenues and 40% of Krotz brand TTM revenues were from international markets. During the Q2, Crocs brand revenues were $833,000,000 growing 14.9% to prior year and driven by strong DTC growth of 26.8%. The brand sold 33,000,000 pairs of shoes, an increase of 1.8%.

Speaker 1

The Kross brand's average selling price during Q2 was $25 which was up 12.8% on a constant currency basis, driven by price increases and fewer DTC promotions internationally. Within the Croft brands, COGS grew double digits and continue to generate demand with newer products such as Echo, Crush and Dilton. Sandals, an important growth puller for the future, increased 34% in Q2 with growth in all regions to represent 16% of Crocs brand sales. Finally, Jivis continues to create excitement and engagement with consumers around the world, growing 13% from last year with strong growth internationally. Now let's discuss a few cross brand highlights by region.

Speaker 1

In North America, 2nd quarter revenues increased 12.5 percent to $475,000,000 and first half revenues increased 11.5%. We gained significant market share in the declining U. S. Footwear market. The North America DTC channel for the Cross brand, an indicator of underlying consumer demand, With the key growth driver with DTC comparable sales of 12.9%.

Speaker 1

Wholesale revenues were also robust, increasing 5.5% despite a more challenging wholesale environment. Asia Pacific delivered significant growth as we execute on our long term growth plan to ignite the brand in the region. Cross brand Q2 revenues in Asia grew 39% to $198,000,000 And growth was broad based across countries and channels. China and Australia led the growth with revenues increasing over triple digits, while South Korea and Southeast Asia also had strong double digit growth. Cross spread revenues for AMELIA were $160,000,000 a decline of 1.4% from the Q2 of 2022.

Speaker 1

As a reminder, Q2 last year from a $40,000,000 revenue shift out of Q1 following the Vietnam shutdown. This quarter, strong growth in direct markets, including the U. K. And France, Involved outstanding DTC comp growth of 38.6% was offset by a decline in distributors. In connection with the newly implemented marketplace management program, in the quarter, we terminated a relationship with a significant distributor Servicing Africa.

Speaker 1

This was not anticipated going into the quarter and we terminated the relationship after finding evidence of product diversion to the gray market outside of their approved territories. This impacted revenue by $8,000,000 in Q2 and will impact second half revenues by $21,000,000 We expect AMELIA revenue growth to reaccelerate in the back half of this year. Turning to Haydou. Q2 revenues were $239,400,000 an increase of 2.9% from last year. During Q2, The brand sold 8,300,000 pairs of shoes, an increase of 3.6% over last year.

Speaker 1

Continued average selling price during Q2 With $28.88 or 0.6 percent lower than prior year due to price pressure from gray market selling on Amazon. The DTC channel, which is predominantly e commerce, led the growth with revenues increasing 29.7% from last year. Digital sales increased 36.6 percent and digital penetration increased 1,000 basis points to 41.8%. As Andrew explained earlier, Underlying consumer demand for the Hey Dude brand is incredibly healthy. Consolidated adjusted gross margins for the 2nd quarter were 58.1%, Increasing 2.90 basis points from last year, driven by favorability in ocean freight rates and the absence of air freight That was partially offset by higher overhead and fulfillment costs associated with our Haidu distribution network inefficiency.

Speaker 1

Currency negatively impacted consolidated gross margins by approximately 50 basis points. Turning to the brands. Adjusted gross margin for the Krotz brand was 62% or 4 10 basis points higher than prior year, reduced airfreight of approximately 3 80 basis combined with lower inbound freight rates, higher prices internationally and channel mix were partially offset by product mix. Currency negatively impacted margins by 80 basis points. Feejood adjusted gross margins were 47.1%, flat with prior year.

Speaker 1

We continue to see a reduction in inbound freight rates. However, this has been offset by additional inventory storage and network costs related to the transition of our subscale distribution network, combined with greater market pressures on ASP and our digital channels. During the Q2, consolidated adjusted SG and A Represented 27.8 percent of revenues, which is 270 basis points higher than last year as we invested more in marketing and talent for both brands support our growth trajectory and annualized additional investments for HeyDo. Our second quarter Consolidated adjusted operating income was $325,000,000 and increased to prior year by 11.7% Consolidated adjusted operating margins remain best in class and increased 20 basis points to 30.3%. Our 2nd quarter non GAAP diluted earnings per share increased 10.8 percent to $3.59 Our continued strong free cash flow generation enabled us to repay approximately $300,000,000 of debt in the first half, Reducing borrowings to $2,000,000,000 At the end of Q2, adjusted gross leverage was 1.8 times, achieving our midyear leverage goal and net leverage was approximately 1.7 times as we ended the 2nd quarter with $166,000,000 of cash and cash equivalents.

Speaker 1

Our exceptional free cash flow generation has enabled us to quickly deleverage and resume our share repurchase program. In July, we completed $50,000,000 of share buybacks, We're purchasing 425,000 shares at an average price of $117.72 We currently have $1,000,000,000 remaining on our share repurchase authorization and we will continue to methodically balance debt repayment and share repurchase as we approach our long term net leverage target of 1x to 1.5x. Our inventory balance at June 30, 2023 was $436,000,000 a decline of 13% to Q2 last year. Craft brand inventory was $307,000,000 down 8.4% to prior year and Haydu inventory was $130,000,000 a decrease of 22.3% to prior year. Inventory turns continue to improve and we are very pleased with the health of our inventory.

Speaker 1

As we look forward, I would like to share our current outlook for the Q3 in the balance of 2023. All numbers will be on a reported basis unless otherwise stated. Having completed an exceptional first half And with improved visibility and confidence around the second half, particularly for the Crocs brand, we are raising our full year 2023 outlook for revenue and profitability. We now expect revenue growth of 12.5% to 14.5% on a reported basis compared to 2022, up from prior guidance of 11% to 14% growth and resulting in full year revenues of approximately $4,000,000,000 On a consolidated basis, as always, we are focused on best in class profitability and are raising our adjusted operating margin to be approximately 27.5% for We are confident in our ability to deliver higher operating margins as gross margins have outperformed and we have been able to closely manage SG and A While investing for future growth. We are also raising our adjusted diluted earnings per share outlook to be between approximately $11.83 to $12.22 up from the prior guidance of $11.17 to $11.73 From a brand perspective, we are raising our expectations for the Cross brand and now expect to grow 12% to 13% on a reported basis, up from 7% to 9% previously, With Asia expected to deliver the highest growth and PTC outperformance expected to continue.

Speaker 1

For Hey Dude, As Andrew mentioned, we are lowering our full year growth outlook to be between 14% 18% revenue growth on a reported basis. This translates to approximately 3.5% to 7.5% growth on the 2022 pro form a revenues of $986,000,000 While we continue to anticipate strong growth in wholesale sellout for the Veedu brand, our wholesale partners are planning to manage their inventory very closely for the remainder of the year and we have a constrained warehouse that limits our at once capability. On a 2 year basis, PAGU growth It's very healthy at approximately 80%, and we remain excited about the long term growth potential of this young brand. For Q3, we expect consolidated revenues to grow approximately 3% to 5% as we let significant pipeline sales for Asia. We expect Q3 adjusted operating margin to be approximately 27% and adjusted diluted earnings per share of $3.07 $3.15 In summary, we are incredibly pleased that we are able to raise expectations for revenues, operating margin and EPS.

Speaker 1

At this time, I'll turn the call back over to Andrew for his final thoughts.

Speaker 2

Thank you, Anne. As we look forward, We're incredibly confident in the strength of the Crocs and Hey Dude brands and our ability to drive market share gains and sustainable profitable growth. Our focus remains squarely on sustaining brand health and creating long term shareholder value. Operator, please open the call for questions.

Operator

Thank you. We will now begin the question and answer session. Our first question comes from Jonathan Komp from Baird. Please go ahead.

Speaker 3

Good morning. Thanks, everyone. I want to start just by asking a little more detail about your outlook for Hey Dude. Could you give a little more color what you're Expecting for the Q3, embedding in your total revenue guidance and just how to think about the channel expectations in Q3 for Hey Dude? And then maybe a bigger picture question.

Speaker 3

I know when you bought the brand, you pointed to at least $1,000,000,000 of revenue by 2024. You're delivering that this year. But how should we think about The growth drivers as we get beyond 2023?

Speaker 2

Great. Thank you, Jonathan. So Yes. Maybe I'll do the last part of your question first and kind of set the stage for Hey Dude, then we can come back to Q3. So As we look at the period since we've owned Hey Dude, look, we've been rapidly expanded distribution to what I would say is Essentially the same or very similar distribution to Crocs.

Speaker 2

A large part of that expansion was last year and I'll come back to that. At the same time, we've introduced new innovative silhouettes that we think are doing well, that we know are doing well, and we see we dramatically strengthen the team. As we look at Q2 sellout for the brand, up 27% as we look across all channels and consumer satisfaction is incredibly high. NPS for the brand is 1 which is up 50% higher than frankly most brands in the casual footwear space. As we look at the back After the year, we are reducing our expectations for the brand, principally related to wholesale.

Speaker 2

And there's a few things going on there. Number 1, as I talked about in prepared remarks, we've got $220,000,000 of sell in that we did last year that is Pretty hard to come. 2nd, we are seeing our wholesale partners be pretty cautious in the back half of the year. I think they're being cautious for kind of three reasons. One is, they're just cautious about overall traffic trends and the trajectory of the consumer.

Speaker 2

They've got some overstock in some other brands, principally some of the big athletic brands that they've got to work through. And they don't have good history on Hey Dude in the back half of the year. So we're seeing very cautious bookings. When we combine that with Some constraints that we have around our At Once business, we're transitioning towards the end of the year our Our warehouse and our ERP system, so we're being realistic about our at once capabilities. And then I think lastly, I think we've seen Some gray market from on the Amazon platform, which we think is principally coming from the distributors that we closed last year.

Speaker 2

We are seeing a Slight mitigation of that, but we're also working hard to clean up the Amazon presentation. So I think hopefully that gives you a strong picture of what's happening with Hey Dude. We're incredibly confident with the brand. I'm incredibly confident of the long term growth trajectory, we're not ready to guide next year's growth. I think that was embedded in your question, but we feel well positioned for the long term growth Hi, Duke brand, both here in the U.

Speaker 2

S. And internationally. I will add some commentary around

Speaker 1

Q3. Thanks, Andrew. Hi, John. I think The biggest thing for Q3 is just to remember we're still dealing with, as Andrew mentioned, the non comp business of Hey Dude or the pipeline sales. So for Q3, we do expect KEYU to be down and that's primarily that's really related to the wholesale part of the business, as Andrew just mentioned.

Speaker 1

And you can see From our presentation, we had about $60,000,000 of pipeline sold last year. And then we expect direct to consumer to be up and then crocs, Obviously, to continue to grow and that provides the color around the overall Q3 guidance for revenue growth.

Speaker 3

Okay. That's very helpful. And then if I could just ask separately about Crocs. Given some of the sales that looks like You're going to miss in the second half, maybe close to $30,000,000 from the distributor you mentioned, but you're still raising guidance for the year. Could you just Highlight maybe where you're seeing upside for Crocs and maybe tie in with that, any updated thoughts on the gross margin for the year for Brock, since it looks like it was quite strong in the quarter.

Speaker 3

Thank you.

Speaker 2

Yes. Thanks, John. Look, our cross business is very strong, And we're seeing the brand perform strongly in frankly many regions. I'd probably call out a couple. DTC is very strong particularly here in the North America but also in Asia.

Speaker 2

Our U. S. Wholesale business It's probably a little bit stronger than we thought it was going to be. So we feel really good about that. China, I think we gave you a lot of color around China In our prepared remarks, it's performing very well.

Speaker 2

And broader Asia is also performing well. So I think What we're seeing is continued strength in Crocs really driven by the same things that we've kind of talked about A few times, but it's really product innovation. It's marketing innovation. We see it across clogs as well as sandals as well as gibbet. So We feel very confident in the overall Crocs trajectory.

Speaker 2

I will add and pick up on your gross margin point.

Speaker 1

Yes. I would also just add that Amelia DTC is actually incredibly strong as well. So even though the Distributor Park is impacting that. We saw very strong growth in Amelia's DTC of, I think, around 40%. So But overall, from a gross margin perspective, so Krausz gross margins are also flowing through stronger.

Speaker 1

Some of that is just Stronger channel as DTC outperforms. The second piece is we've taken quite a bit of price in our international markets, which are really supporting margins. And then we've seen promotional levels kind of level out in North America. And then obviously, we've been able to recoup the freight, Airfreight last year as well as just lower freight rates. So, I would say overall we expect margins to be higher than that kind of original guide.

Speaker 1

We thought they were going to be like A little bit higher than 58, and now we're thinking they're probably going to be north of that. So overall, our gross margin expectations for the year Are higher than the kind of 55.5 we talked about last time and that supports the operating margin raise.

Speaker 3

All right. Thank you very much.

Speaker 1

Thank you.

Operator

The next question comes from Abi

Speaker 4

you just comment on any differences, I guess, that you're seeing from your wholesale partner behavior between Crocs and Hey Dude! In the U. S. Specifically? Is there any difference between sell out between the brands or is this really that non comp dynamic and then just not having that Historical, just historical data on what happened in the second half for Hey Dude?

Speaker 2

Yes, I think That is obviously a question that we've definitely been kind of asking ourselves and looking closely at AbbVie. And I would say A lot of it is really the newness of the brand we feel. Crocs is clearly performing well. And I would say Crocs at U. S.

Speaker 2

So it's the newness, it's both clouds, it's both sandals and it's performing well. I would say the Hey Dude sell is also very strong. I think we gave you some visibility to that in the strategic partners. It's up dramatically Close to 80% and sell out in aggregate across all channels, our estimate is up 27%. So consumer takeaway It's strong.

Speaker 2

It's definitely performing at wholesale. We think the principal issue is they have years years in history On Crocs and how it performs in the back half of the year, the history is very light and to Some of the wholesale fund is non existent for the back half of the year and we're seeing cautious bookings. And then as I highlighted in my earlier answer, it's hard for us to react to that without once given our kind of warehouse situation. So that's really our diagnosis.

Speaker 4

Got it. That makes sense. And then just on the inventory management was really strong during the quarter. So you talked about Heydu gross margin Flat year over year, but some pressure from those storage costs. So as you clear through inventory, when do you think you could start to see maybe some benefit to the Gross margin.

Speaker 4

Thanks.

Speaker 1

Yes. We're very pleased with our overall inventory, obviously, down for both brands and really coming in line with our longer term Target for turn targets for both brands do about 4 times. I think from a gross margin perspective, overall, there's kind of 2 pieces pressuring Gross margins. One piece, as you mentioned, is the additional kind of storage and subpar logistics situation for that brand, which We expect to, obviously cure next year with the opening up of our new Las Vegas distribution center. And the second piece is, We are seeing quite a lot of gray market activity on Amazon pressure our K2 ASPs and that's really related to some of the terminations that we did when we went through and terminated The legacy international distributors and also some of the legacy U.

Speaker 1

S. Partners. So we expect to work through that and that to improve throughout the year. So I expect next year Our gross margins should be back in line kind of with where we originally thought, which is more on the lines of around 50% in the shorter term.

Speaker 4

Got it. Thank you.

Operator

The next question comes from Tom Nikic from Wedbush Securities. Please go ahead.

Speaker 5

Hey, thanks for taking my question. So I guess when we think about Hey Dude, Obviously, and I believe you said down in Q3 and that would imply that there's a Pretty significant step up in the Q4. Based on the slide deck, there's also Pretty significant amount of new door contribution last year. I'm not sure if that's channel fill or Channel sell that it happened earlier in the year or whatever, but I guess how do we get comfortable with kind of the reacceleration That's embedded in Hey Dude! For the Q4.

Speaker 2

Yes, I think there's a few things. One is in the Q4, We anticipate that the DTC balance in the business is bigger, right? It typically is with the holiday period. So we think DTC is the bigger and as you can see we've gotten a nice trajectory on our DTC Business, and we also looked at our wholesale business. And yes, there is still a component of sort of pipeline fill that's Harder to comp in the Q4, but I think the balance of the business, we will see a rebound in Q4.

Speaker 5

All right. And then I just want to follow-up on inventories. So I think inventory was down 13 Year over year, if I'm not mistaken. Should we think about inventories being down year over year in the back half as well?

Speaker 1

Yes. I don't think we don't typically guide inventory. I would say that we expect by the end of the year to look at to be closer to our 4 turn target. So I think it depends a lot on obviously from a revenue perspective and we will Both brands tend to bring in inventories ahead of a very high selling season for wholesale in Q1. So some of that depends on our Q1 order book obviously.

Speaker 1

But we think that our inventories will be back in line probably around 4 turns by Q4.

Operator

The next question comes from Jay Sole from UBS. Please go ahead. Great.

Speaker 6

Thank you so much. The You gave us that nice data point that sandals continue to expect it to be $400,000,000 for the Crocs brand. You also mentioned some new styles from Hey Dude. Think you pointed out in the slide deck, the Funk, the Scirocco. What percentage of Hey Dude revenue is the wall in New Wendy right now?

Speaker 6

And where maybe where was it a year ago and where do you see it going from here? Thank you.

Speaker 2

Yes. That we don't we've not been providing that David, I can qualitatively tell you that a very large portion of the Hey Dude business is Wally and Wendy. That's the iconic silhouette. And while we're highlighting new styles, which we think is important to continue to diversify and build out the brand and take the brand into kind of other silhouettes and other wearing occasions. A ton of our effort from Product innovation and newness perspective is going into the Wally and Wendy.

Speaker 2

I think we will highlight a great example is the Patriotic Pack, Right. So last year, essentially, when we bought the brand, they had a Stars and Stripes Sure. It did really well going into Memorial Day in 4th July. We saw great traction with that. So we expanded that I think we said 20 plus style colors across men's, women's and kids and that did amazing.

Speaker 2

So a good last portion, very large portion of business Our innovation is going into Wally and Wendy, plus also the additional silhouettes. And I would call out Sirocco in particular, which is kind of a running oriented, so a casual running is performing very well in our DCC business and in our key wholesale accounts.

Speaker 6

Okay, got it. And then Anne, if I can maybe ask one more. Can you give us an update on the cash use plans for Q3 and Q4? Obviously, you've done a lot of debt I mean, do you expect those trends to continue at a similar rate or different rate? That would be helpful.

Speaker 6

Thank you.

Speaker 1

Yes. I think Yes, we're incredibly pleased with our historical debt pay down and what we've anticipated to pay down. So we've obviously done a lot of work on derisking the balance sheet And paid down $850,000,000 of debt since we purchased Tay Dude. We do expect to continue to generate incredible free cash flow. So That free cash flow given these dynamics after we will funding our business, obviously, we'll continue to deploy capital.

Speaker 1

So we'll prioritize paying down debt to get to a target net leverage longer term ratio 1 to 1.5 as we stated, and we will look to opportunistically also buy back shares. So we will balance both in the back half of the year.

Speaker 6

And is that included in the EPS guidance?

Speaker 1

No, the EPS guidance includes debt pay down and excludes any opportunistic share buybacks.

Speaker 6

Got it. Okay. Thank you so

Speaker 1

much. Thank you.

Speaker 2

Thank you.

Operator

Our next question comes from Samuel Carpenter from Williams Trading. Please go ahead.

Speaker 7

Good morning, everybody. Thanks for taking my questions. All right. What At the Fannie Show, we were told that when showing a lot of new product that to help balance You run a MAP program, but you have MAP holidays. My question to you is, how do you what are you doing with core product in both Crocs and Hey Dude to create more relative scarcity, so you don't need the MAP holidays, so you can drive A better more of a full price business because I think everybody out there has seen a good amount of promotion.

Speaker 7

And then I want to follow-up on how you're controlling Amazon and how long that's going to take to get that all cleaned up?

Speaker 2

Okay. All right. So I think, let me do the first part First, Sam. So what I'd say is for Crocs and Hey Dude, we operate MAP, as you well know. We try and make sure our key styles are mapped and so they are not promoted on an ongoing basis.

Speaker 2

And then we give the retailers, I think, 5 holidays a year throughout the year, which is frankly pretty typical. I'd say most brands follow that cadence and give them an opportunity to drive some promotion. Those are all key promotional periods when the consumer is expecting Promotion and we think that is a very sensible strategy to maintain majority full price sell through Plus, we'll also give our wholesale partners an opportunity to drive a little extra business at key times and compete with other brands. I would highlight particularly for Crocs, where that's been in place for some period of time, that is driving a very high overall achieved gross margin Right. And a great deal of profitability for the brand.

Speaker 2

And then So then, what do you want to ask you a question associated with Amazon cleanup?

Speaker 7

Yes. But I mean, I understand, but if people if you have a brand that appears as strong as both your brands are And you have a strong MAP policy. Wouldn't the consumer start waiting for the sale periods Over time versus just control it, I understand promoting stuff you need to clear, but if you have core colors that you're going to promote, I mean, it just I don't really understand that I

Speaker 2

Yes. I would say, Sam, there's not all evidence for that, right? We see our Core products, core colors, core products sell week in week out, right? So there's really not a lot of evidence that They're waiting for the math periods. And I would say the math breaks on the cause are pretty light.

Speaker 2

And I would say, look, we're doing a ton of other things with Scapsy, right? So we Multiple callouts a week to drive scarcity and drive consumer interest in the brand And the reason to buy, we have huge amounts of kind of seasonal product that's in and out. And if you think about the core classic clog, A whole range of seasonal colors that don't get replenished. And so the consumer knows if they don't buy them, they're not available later. So I think the balance of Colabs, marketing activity, consumer activation It's kind of working really well to be honest in terms of driving the overall trajectory of the brand as well as The sales and gross margin achievement.

Speaker 7

And then and apply that to Hey Dude including the Amazon question?

Speaker 2

Yes. We're transitioning to a similar strategy for Hey Dude, right? So we've rapidly expanded The distribution of the brand essentially to the same partners that have Crocs, we're following kind of a similar Pricing approach, but I would say we are seeing quite a lot of pressure In terms of Amazon Grey Market and working really hard to close that down. I think we highlighted that we think a lot of that product is coming from the distributors We closed internationally. So the amount of product that they have available is finite and will run out and believe it's running out.

Speaker 2

And so it's a disruption, temporary disruption to the business, but I think we're very clear about What it is and how we deal with it.

Speaker 3

Thank you very much.

Speaker 1

Okay. Thanks, John.

Operator

The next question comes from Jeff Licht from B. Riley. Please go ahead.

Speaker 8

Good morning, guys. Congrats on a great second quarter. Andrew or Ann, I was wondering your Q2 presentation that you put out on June 7, The implication is, you take the Hey Dude guidance from mid-20s down to the 14 to 18, The implication is things were probably on track at that point, given how you go about your IR efforts and your communications. I'm just wondering if you could walk us through some color as to what happened from June 7 on to today In terms of how would you get the feedback? Any color on how things deteriorated a little bit and changed?

Speaker 2

Yes. Look, I think the biggest thing, Jeff, is what I highlighted to earlier question, right, which was as we look at our There's really 2 big pieces. 1 is wholesale, the other is sort of our assets to clean up the grain market. The biggest probably is the wholesale. And as we look at our bookings for the 4th Quarter, they were more conservative than we thought they were going to be.

Speaker 2

That's really the biggest change. And the reasons we think the The reasons that we've been told and the reasons that we understand for that is number 1, the wholesale channel, majority of the wholesale channel has been pretty cautious About the back half of this year, they have some inventory overhang from some other brands that they need to work Bruce, they're open to buy dollars. They're a little bit more constrained than they'd like to be. Now you could argue that they should invest in the performing brands and then deal with The Overstock rents are separate layer, who certainly made that argument and will continue to make that argument. And they don't have strong history Right.

Speaker 2

So unlike Crocs, who have had years and years of history and can see exactly how it performs in the back half They don't have the same history and confidence in HeyDo and they're pushing a bit of the responsibility back on us In terms of at once, but we don't have the ability to deal with that to the degree they'd like us to. We just thought at this point it was prudent to lower expectations for the back half of the year. So that's really what changed. As we look beyond the back half of this year, we see lots of growth opportunities for the brand, both From a territory perspective, from a customer perspective and also from a silver weapon new products introduction perspective.

Speaker 8

Just a quick follow-up on the direct to consumer Hey Dude at 29.7%. I'm curious, is that Relative to the 40.6% in Q1, on a 2 year, is that are those comparable? It seems like that probably decelerated a little bit. And then I was wondering, As you guys measure the grade market impact, how much of an impact in terms of percentage points might that have on that DTC revenue percentage?

Speaker 1

Yes. So Jeff, the 40% was just the only that was just March. If you remember, that was direct to consumer For March because we didn't own the business before that. The 29.7% is total growth for direct to consumer, which is e comm and then we have a small amount of retail Retail type of clearance stores. So that's the 29.7 percent growth.

Speaker 1

So you're comparing kind of 3 months to 1 month when we kind of own the business. So I'm not sure it's Totally fair comparison, but we feel pretty good about a 30% direct to consumer growth. I'm not sure if we can actually Or we're ready to kind of talk about how much the gray market has hurt from a growth perspective. But I would say actually on both brands, it's not insignificant. It's actually pressured ASPs and also obviously we lose the bioxin being able to sell directly to the consumer.

Speaker 1

So We've been very aggressive in attacking that. We talked about we've launched a market cleanup kind of program and obviously canceled a pretty significant And we will continue to be very focused on making sure that our product ends up where it should be.

Speaker 8

Great. Thanks very much.

Speaker 1

Thank you, Jeff.

Operator

The next question comes from Jim Duffy from Stifel. Please go ahead.

Speaker 9

Thank you. Good morning. First, Andrew, I'm hoping you can speak to development of the China marketplace and opportunities Bill, maybe to start just can you size the baseline, a lot of moving parts with COVID, give us a sense for the size of that business Now and then maybe speak to the current channel mix. And then with that background, if you could speak to the different avenues for growth, will digital be the principal Do you plan to open more stores in China as well?

Speaker 2

Yes. Let me talk about the strategy about what we're going to do in China. I'll have Anne come in at the end and talk about the size of the base and give you some perspective there, right? So from a strategy perspective, the way to think about it and we talked about this historically with through the cleanup. So the way to think about it In China today, we have a large digital business.

Speaker 2

We've definitely invested very heavily in digital. It's probably Probably our most important channel within China. And then secondly, we have a small footprint of company owned stores. Those company owned stores are in the major cities and in the best malls, which are sort of quite expensive For your distributors or your distribution partners in country to invest in, they're super important because they showcase all of our latest products, They drive authenticity with the consumer. And then we have outlet stores that we also own directly ourselves important because they are highly profitable And also they allow you to keep your inventories clean.

Speaker 2

And then the 3rd component of the strategy is the franchise or partner owned mono branded stores. So as we look at growth, we think growth will principally come from 2 things. We think our digital business will continue to grow And that's diversified across the platform. So that's T ball, that's JD, but also increasingly Chinese TikTok, where we do a lot of social selling in China. And so the growth will come from digital and will also come from partner operated stores.

Speaker 2

And so if we look at the partner portfolio, they will continue to grow their store footprint Probably quite aggressively. The stores that they're operating for crops are performing extremely well. They're making a lot of money from those and they're really commercial animals. If they're making money and they can see an opportunity to open those stores, they will and obviously we'll encourage that. So Really, the partner operated stores and the digital will drive the business in the future.

Speaker 2

Yes.

Speaker 1

So I think historically from a size perspective, we said China was about 5% of the Crocs revenue base. And obviously, our longer term growth for that is we expect it to grow up to be 10%, which would be a $500,000,000 kind of base and roughly if you do the math historically when we said it would have been more like a $60,000,000 business. So We obviously are growing it very quickly. So it's outgrowing, so it is taking share and really on track with those kind of That long term trajectory. So we're pretty pleased, overall with how China is growing and that is on track.

Speaker 9

Ann, is that a margin accretive business?

Speaker 1

So we're investing quite heavily in it right now, right? So we're investing outsized marketing into that business. But long term, obviously, you leverage Into that business, but long term, obviously, you leverage that and the gross margins in that business are incredibly strong.

Speaker 9

Great. Then last question for me and it's just on the Hey Dude SG and A, I'm curious if you've at all adjusted it for The tempered revenue view.

Speaker 1

I'm sorry, can you say that again? What was the last part of your question?

Speaker 9

It's the Hey Dude SG and A. I'm curious if you've adjusted Your planned SG and A investment in the Hey Dude brand for the tempered revenue view?

Speaker 1

Understand. No, actually, We continue to accelerate investments into Hey Dude, in line with our original plans, because again, This is not a consumer takeaway issue. And so we feel very strongly that we need to invest in our brands. And luckily, we can still generate 27.5% operating margins The benefit of having a portfolio and also the benefit of having one brand spin off so much profitability. So we will continue to invest in Haidu's SG and A throughout the year at the same pace.

Speaker 9

Excellent. Thank you.

Speaker 1

Thank you.

Operator

The next question comes from Laura Champine from Loop. Please go ahead.

Speaker 10

Thanks for taking my question. So I hear that the shift from expecting Hey Dude to grow in the mid-20s to more like high this year is because of wholesale customer orders coming in conservatively. Does that impact your own internal thoughts About the growth rate for Hey Dude for next year and beyond?

Speaker 2

No, Laura. I think connected to Dan's answer to Jim's question immediately prior, no, We see Hey Dude on essentially the same trajectory as we saw it on when we bought the company and since we've owned it. We still have very high expectations for the long term growth of the brand and we continue to make, I would say the SG and A investments, the talent investments and the marketing investments that we had anticipated making even before taking down This adjustment to our growth rate and we will continue to do that. We're very confident in the long term potential of the brand and We're managing this brand for its ultimate potential, not its kind of 1 year sort of 1 quarter or 1 half 1 half year performance.

Speaker 10

Understood. And then just a follow-up on the sort of Wild, Wild West environment on Amazon And the gray goods sold there, has there been a change in your own policy for wholesale customers for Hey Dude To resell on Amazon and if so, how much is that impacting that guide for this year?

Speaker 2

Yes, there has been a change. So and we will make further changes. So what we did last year, So that doesn't impact our guidance for this year, just to be clear. What we did last year is we did terminate some customers that were operating, I would say 1 or 2 stores, but buying goods principally to sell on Amazon. So we terminated several customers that were doing that.

Speaker 2

That was done last year, that's not this year. We also are very clear in our terms of sale to all of our partners that they are not allowed On Amazon, that doesn't mean that some don't, some do because they do, but that is our policy. We will further as we go through the back end of this year Constrict our wholesale customers rights to sell on their own .coms as well, Right. So this is essentially moving Hey Dude to the same policy we have for Crocs, which is our large wholesale customers. So think Famous Footwear or Foot Locker, they absolutely have the rights to sell on their own.com, But the mom and pop retailers will not have the rights to sell on any web presence that they have.

Speaker 2

So we're in the process of the sort of continued reining in of Digital South.

Speaker 1

Got it.

Speaker 2

And just to emphasize, we're getting into the same place that Crocs is. We're not restricting further than that.

Speaker 10

Makes sense. And have you been can you be specific on how much that has impacted the guide for 20 23.

Speaker 2

Look, it's probably had some impact. We can't break that out and be specific about that, But it probably is a factor.

Speaker 10

Understood. Thank you.

Operator

The next question comes from Rick Patel from Raymond James. Please go ahead.

Speaker 11

Good morning, everyone. Thank you for taking the question. Can you talk about the drivers of the Crocs brand in North America going forward, I'm just curious how we should think about the contribution of pricing versus volume in the back half? And also if there's anything to call out In terms of the wholesale business in light of the trends that you're seeing at Hey Dude?

Speaker 2

Yes. I mean the drivers of crops, So we think I think your question is kind of a multi period question. So we see new product introductions. We see strong marketing support. We see collaborations continuing to drive Very high interest in the Crocs brand and in fact growing interest in the Crocs brand.

Speaker 2

We will capture that interest through continuing to diversify clogs and continue to grow Our club business, as well as the rapid acceleration of sandal and penetration of sandal categories and also continued Innovation within GeoMbits. So we really see those core businesses towards the back end of this year. We will and we'll also continue to experiment With, I would say, kind of new and innovative silhouettes that we think the Crocs brand can be particularly relevant. So you'll continue to see us Push the envelope in terms of experimentation. I think that's super important.

Speaker 2

And so I'm pretty confident, we'll as evidenced by our DTC growth and our strong wholesale performance that will continue to drive kind of multiyear trajectory for the Crocs brand in North America.

Speaker 11

Can you also update us on where you are with addressing Hey Dude's ERP and capacity constraint issues? And I believe you Touched on working through that next year, but I'm just curious if it's going to be a first half versus second half event. And when that does happen, what kind of Change we can expect from Hey Dude from a go to market strategy perspective in terms of potential to add new wholesale partners or accelerate international efforts?

Speaker 2

Yes. We plan to transition to our new ERP and our warehouse essentially at the end of the year. So that will be the transition period and that will release A couple of important constraints. One is we're incurring a lot of extra costs to move goods around double handle goods and have goods stored in subscale places. So that will reduce That will alleviate some expense and also some flexibility and ability to react to the business.

Speaker 2

It will also give us the opportunity to have a much larger at once business in the following year And it will also allow us a little bit more flexibility with some of our major wholesale partners with whom today we're really trying to do a lot of direct shipments, which can be efficient And cost effective, but are also not very flexible. So it will give us a lot more flexibility. It will give us lower costs, flexibility and the opportunity for

Operator

This concludes our question and answer session.

Speaker 4

I would

Operator

like to turn the conference back over to Andrew Reese for any closing remarks.

Speaker 2

So just to close, I think I'd like to Thank everybody for their continued interest in the business. Obviously, we had a phenomenal second quarter. And I think what You're also seeing is the real cash generated power of our portfolio and the ability to Pay down debt very rapidly and give us a lot of balance sheet flexibility. So thank you for your interest and we'll talk to you again next quarter.

Operator

Conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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