Amgen Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
October 29, 2024

There are 11 speakers on the call.

Operator

Good day and welcome to the Crocs Third Quarter 20 24 Earnings Conference Call. All participants will be in a 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 Erin Murphy, Senior Vice President of Investor Relations and Corporate Strategy.

Operator

Please go ahead.

Speaker 1

Good morning, and thank you for joining us to discuss Crocs, Inc. 3rd quarter results. With me today are Andrew Reese, Chief Executive Officer and Susan Healy, Chief Financial Officer. Following their prepared remarks, we will open the call for your questions, which we ask that you limit to 1 per caller. Before I begin, I would like to remind you that some of the information provided on this call is forward looking and accordingly is subject to the Safe Harbor provisions of the federal securities laws.

Speaker 1

These statements include, but are not limited to, statements regarding our strategy, plans, objectives, expectations and intentions, including our financial outlook. These statements involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance or achievements to differ materially. Please refer to our quarterly reports on Form 10 Q and other reports filed with the SEC for more information on these risks and uncertainties. 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.

Speaker 1

All revenue growth rates will be cited on a constant currency basis unless otherwise stated. At this time, I'll turn the call over to Andrew Reese, Cross Inc. Chief Executive Officer.

Speaker 2

Thank you, Aaron, and good morning, everyone. Thank you for joining us today. We've reported 3rd quarter results that exceeded our guidance in terms of sales and profitability on an enterprise basis. Consolidated enterprise revenues of $1,100,000,000 grew 2% to prior year, led by 5% growth in DTC. By brand, Crocs brand grew 8% with international up 17% and North America up 2%.

Speaker 2

Hey Dude revenues contracted 17%, slightly below our expectations. Adjusted diluted EPS of $3.60 a share increased 11%. Today, I will be covering the following topics. I will first share deeper insights into our Q3 results along with what we're seeing from a broader consumer perspective. I will then elaborate on Hey Dude's strategic priorities and what gives me confidence around the brand's longer term growth prospects, touching on some of the early wins we're seeing in the business today.

Speaker 2

Finally, Susan will review our financial performance, our updated 2024 outlook and our preliminary thoughts on 2025. Now turning to Q3 insights, starting with the Crocs brand. The investments we are making in product and marketing enable us to win with consumers around the world. All three of our product pillars, clogs, sandals and personalization grew during the Q3, led by our icon, the Classic clog. In August, footwear news named our Classic Clog 1 of the greatest shoes of all time.

Speaker 2

Embracing the personalization platform that our clog provides, we launched our Live Life Fully Loaded campaign during the back to school season. This campaign created high consumer engagement in our stores and online, both for our classic clog as well as our Jibbitz business, as consumers were able to fuel their love for self expression. We're continuing to iterate on our clog by introducing new silhouettes and building durable franchises. The Echo franchise, which has developed a breadth of products across clogs, sandals, boots and sneakers continues to bring in new largely male explorer consumer to our brand. As we look into spring, we're excited to bring the Echo Wave, a molded mule and the Echo Search to market, both new innovations are priced under $100 Another example of how we have iterated on the clog is our In motion franchise.

Speaker 2

We have seen successful results in our tests of this franchise on our DTC channels ahead of a scaled rollout in 2025. This new innovation features our proprietary LiteRide foam footbed along with our Free Field technology. By applying the learnings from our quick to market DTC Cozy Slipper launch last year, we're able to scale the offering this fall across expanded colorways and with our wholesale partners at an incredible value of 49.99 dollars Sellout has been strong out of the gate and we're chasing replenishment. In addition to our mainline product, we brought many exciting partnerships to life during the quarter. These included a Bath and Body Works collection featuring a classic clog and a cozy sandal pre gibbeted with 4 mystery scent gibbet charms.

Speaker 2

We also introduced Batman and Squishmallow, and of course, our Crocs Times McDonald's Happy Meal. As a national of extension of our first collaboration with McDonald's, we designed and introduced a McDonald's Times Crocs Happy Meal with a curated assortment of 17 limited edition classic clog key chains and a sticker pack for personalization. We launched the Happy Meal first in China and saw fantastic results. Within the first 48 hours, over 400,000 Crocs Happy Meals were sold, generating over 10,000,000,000 brand impressions. Since then, we have launched a Happy Meal in over 40 countries, driving significant brand momentum and heat.

Speaker 2

Last week, we celebrated the 7th Annual Crop Day on October 23, our very own fan inspired holiday within the month of Croptober. With a much awaited debut, we celebrated the release of Pet Crocs, available alongside matching classic lion clogs, allowing dogs and dog parents to coordinate their looks in love step. Our pet Crocs designed in partnership with BARK were available globally on our own.com and in select retail stores. The release was a huge success. Fan inspired festivities did not stop there.

Speaker 2

This year, we released a Crocs costume, which is in the form of a life-sized iconic classic clog fully loaded with Jibbitz charms. And just like your favorite pair of Crocs clogs, this costume is available in both left and right versions, making a perfect pairing opportunity with friends. In September, we achieved another step forward towards our circularity goals with the launch of a limited edition Keep It Going Classic clog. The new clogs featured 25% post consumer recycled content from the shoes collected through our Old Crocs New Life Consumer Take Back program, with the remaining construction of the shoe containing up to 25% bio based cross light material. Now for a review of the cross brand business by geography.

Speaker 2

The North American market performed well with revenue growth of 2% versus prior year led by DTC. In North America, the consumer has reverted to pre pandemic shopping patterns, shopping closer to need and concentrating spend around key shopping events and holidays. We saw a solid back to school season, but since Labor Day, we have seen the consumer pull back. We anticipate the consumer environment being relatively muted in the U. S.

Speaker 2

Until Black FridayCyber Monday holiday period. Our overall international revenues grew 17% versus prior year, supported by notable growth in Australia, China, France and Germany. Our China business grew over 20% on top of more than 90% growth last year in the 3rd quarter, with approximately 2 thirds of the growth driven by mono brand partner stores. As we shared during our Q2 call, the industry was more promotional during the mid season festival. It is clear that the Chinese consumer is being far more conservative in their purchase behavior and we have seen an even more pronounced pullback within key Tier 1 cities like Shanghai and Beijing.

Speaker 2

In light of the broader macro environment in China, we're taking a more cautious view for the rest of the year. Despite this backdrop, our brand continues to gain share in China, which we believe is a direct result of our accessible, authentic and personalizable brand positioning serving as a meaningful competitive advantage. Turning to Hey Du. Our 3rd quarter results came in slightly below our guidance with revenues declining 17%. Before I provide further detail on the quarter, I want to start by sharing the progress we've made towards building Hey Dude into a consistent and profitable growth brand.

Speaker 2

In September of last year, we made a pivot to prioritize brand health, clean up channel inventory, while rightsizing our account base and began building a fleet of premium outlet stores to showcase the best expression of our brand. Since then, we've elevated ASPs, shutted more than 50% of our accounts, improved inventory turns to 4 times a year and opened 29 premium outlet stores. In addition, we invested in talent across the brand, while accelerating our market investment as we work towards driving higher awareness and relevance to generate brand heat. We strongly believe these are the right decisions to build a solid foundation for profitable growth at Hey Dude. While we recognize Hey Dude's performance this year has not yet reflected these investments and actions, let me share a little bit more about what has given me confidence.

Speaker 2

As we spoke about last quarter, we sharpened our strategy to focus on 3 strategic imperatives: driving youth female culture and creating a Hey Dude brand community, building the core, our Wally and Wendy and adding more, then stabilize and accelerate North America. Against these imperatives, we're seeing the following green shoots. First, we believe the female youth culture is a key driver of influence, brand connectivity and a catalyst to build community. In August, we were thrilled to announce Sydney Sweeney as our Global Brand Ambassador and our Director of Dudes. This partnership has generated the best performing content Hey Dude has seen to date and we have plans to ignite further content with Sydney Sweeney.

Speaker 2

During the quarter, we launched TikTok Shop and we've seen an excellent response, bringing a new younger consumer. In fact, on select launch days, our brand emerged as the number one global key account on TikTok shop. Adient's number of TikTok followers surpassed Instagram in the quarter, further underscoring our opportunity to reach a younger audience. We were also named the official comfort shoe of Barstool Sports in time for our refreshed collegiate collection. 2nd, we are focused on our icons, the Wendy and Wally.

Speaker 2

Our 3 core offerings include Stretch Socks, Stretch Canvas, Funk Momo. During the quarter, we iterated on these core offerings through our collaboration engine, successfully introducing Beetlejuice and SpongeBob to name a few. In October, we announced a long term partnership with country music singer Jelly Roll. Our initial call out with this famed artist featured our Wally slip, which sold out in minutes. Since the launch, we've seen the product show up on the secondary platforms for up to 6 $1,000 As we discussed on our Q2 call, the comp is a new product innovation that is an extension of our Wendy and Wally DNA with added cushioning and height.

Speaker 2

In the Q3, we began scaling this across select global accounts. As we look beyond our core, we're seeing very healthy demand signs in our women's Austin lift and our men's pull silhouette with plans to scale them in 2025. 3rd, we're hyper focused on stabilizing the North American market to drive a sustainable foundation from which to grow. We've streamlined our account base and are focused on building relationship across our strategic retailers similar to that of Crocs. We have worked to improve our inventory position in channel and improve ASPs across digital.

Speaker 2

In the Q3, our digital ASPs were up 10% of last year and we saw improving weeks of supply across our key strategic accounts. Our premium outlet stores are performing in line with our expectation. While we're encouraged by these early positive indicators, Hey Jude's recent performance and the current operating environment are signaling it will take longer than we initially planned for the business to turn the corner. We continue to have confidence about the long term potential of the brand and the green shoots we are seeing give us positive reinforcement around our opportunity. I'm incredibly proud of the AG team and the urgency with which they've executed against our Sharpen strategy.

Speaker 2

I will now turn the call over to Susan to walk through our financials for the quarter.

Speaker 3

Thank you, Andrew, and good morning, everyone. Our 3rd quarter results exceeded the high end of our enterprise guidance on the top and bottom line, supported by a combination of better underlying operating performance, a lower than expected tax rate and lower share count. For the Crocs brand, revenues were $858,000,000 growing 8% prior year and channel growth was balanced with DTC and wholesale each growing 8%. The growth was volume driven, each growing 8%. The growth was volume driven with units increasing 11% versus last year to a total of 32,100,000 pairs of shoes sold, while brand ASPs decreased 3% to $26.48 ASPs were below last year, tied largely to product mix and slight price erosion.

Speaker 3

North America revenues grew 2% versus the prior year to $491,000,000 Growth was led by DTC, which was up 4%, while wholesale was down 2%. Underlying North American brick and mortar growth was up mid single digits. International revenues of $367,000,000 grew 17% versus prior year, led by DTC growth of 18% and wholesale growth of 15%. In China, we saw growth in excess of 20% on top of last year's 90% plus growth rate, while our direct European markets continued to show healthy growth in the quarter led by Germany and France. Turning to Hey Dude, revenues were $204,000,000 down 17% from last year.

Speaker 3

Wholesale revenues were down 23% and DTC revenues were down 9%. While we did plan for wholesale declines in the Q3, our guidance anticipated stabilization of DTC. To support the strategies Andrew outlined earlier, we changed our investment strategy around performance marketing, shifting investments towards brand marketing, which impacted our digital performance negatively. We believe we are making the right decisions for the long term health of the brand, highlighted by the continued strengthening of our ASPs, up 4% to $30.94 in the quarter. Concurrently, volumes were lower with 7,000,000 pairs of shoes sold, 21% below last year.

Speaker 3

Consolidated adjusted gross margin for the 3rd quarter was 59.6%, up 2 20 basis points from last year. Crocs brand adjusted gross margin was 62.5% or 40 basis points higher than prior year. The primary drivers of margin expansion were favorable product costs and select international price increases offset in part by channel mix. Hey Dude brand adjusted gross margin was 47.9 percent or 5 10 basis points higher than prior year, driven primarily by freight, favorable channel mix and pricing. Overall, adjusted gross margin was below expectations as the channel mix benefit was not as favorable as expected given softer than anticipated digital trends in the quarter.

Speaker 3

Our 3rd quarter adjusted SG and A dollars increased 19% to prior year. Our adjusted SG and A rate was 34.2%, up 5.10 basis points compared to prior year, driven by continued investment in talent, marketing, digital and retail to support long term market share gains. Our 3rd quarter adjusted operating margin was 25.4%, down 290 basis points from 28.3% in the prior year, driven by planned investments in SG and A. 3rd quarter adjusted diluted earnings per share increased 11% to $3.60 Our non GAAP effective tax rate was 12.6%. Our lower than expected tax rate was largely tied to cash tax savings from the refinancing of our intercompany debt that occurred in the quarter.

Speaker 3

Our inventory balance as of June 30 was $367,000,000 a decline of 6% versus this time last year. Both of our brands achieved inventory turns above our goal of 4 times on an annualized basis. Our liquidity position remains strong, comprised of $186,000,000 of cash and cash equivalents and $559,000,000 of borrowing capacity on our revolver. During the quarter, we repaid approximately $110,000,000 of debt, reducing borrowings to approximately $1,400,000,000 Year to date, we have repaid $248,000,000 of debt and we ended the quarter at the lower end of our long term net leverage target range of 1x to 1.5x. Enabled by our best in class free cash flow generation, we also completed $151,000,000 of share buybacks during the quarter, repurchasing 1,100,000 shares at an average price of approximately $135 per share.

Speaker 3

Year to date, we have completed $326,000,000 of share buybacks, repurchasing 2,300,000 shares. We currently have $549,000,000 remaining on our share repurchase authorization. Now turning to 2024 guidance. Based on our Q3 results and the visibility we have heading into the Q4, we are adjusting our full year outlook. Our full year enterprise revenue growth is now approximately 3% versus 3% to 5% prior, assuming currency rates as of September 30.

Speaker 3

For the Crocs brand, we are narrowing our revenue range from 7% to 9% growth to approximately 8%. For Hey Dude, we are lowering our revenue range from down 8% to 10% to down approximately 14.5% based on lower than previously assumed sellouts in both wholesale and digital. We are maintaining our guidance for consolidated adjusted operating margins of more than 25% for the year, powered by our strong adjusted gross margins, which we continue to plan up to prior year across the enterprise. Resulting in part from our lower than expected annual tax rate and incremental share repurchase in the quarter, we are raising our 2024 adjusted diluted earnings per share from $12.45 to $12.90 to the high end of our prior range at $12.82 to $12.90 Consistent with our previous guidance policy, this range reflects future debt repayment, but does not assume any impact from future share repurchases. We are now expecting an underlying non GAAP effective tax rate, which approximates cash taxes paid to be approximately 16% and the GAAP effective tax rate to be approximately 21%.

Speaker 3

We are lowering our annual capital expenditures guidance from $100,000,000 to $110,000,000 to $90,000,000 to $100,000,000 tied to the cash timing of select operational projects. Turning to our guidance for Q4. We expect consolidated revenues to be in the range of flat to up slightly at currency rates as of September 30. We expect the Crocs brand to grow approximately 2%, led by double digit international growth. Our 4th quarter international growth rate is below our year to date growth rate based on 1, a more cautious consumer in China and 2, ongoing regulatory pressure in India, which is impacting our ability to meet demand.

Speaker 3

Turning to North America, we expect a slightly negative 4th quarter, which includes our expectations of a more choiceful consumer as well as the timing of wholesale shipments between quarters. For the second half, North America is expected to be flat to prior year, in line with our previous expectations. We expect Q4 DTC to remain positive. For Hey Dude, we expect revenue to be down between 4% 6% in the quarter, below the former implied range of up low to mid teens. The largest driver of our lower revenue outlook is tied to lower than expected sellouts on both digital and wholesale.

Speaker 3

Our assumptions around our non comp drivers, including our retail stores and our international distributor sell ins are in line with our former forecast. Adjusted gross margins are expected to be up for the enterprise with Crocs brand up slightly and Haydew slightly down versus prior year. We expect adjusted SG and A spend to be in the high teen range in Q4 and adjusted operating margin to be approximately 19.5%. Adjusted diluted earnings per share percent. Adjusted diluted earnings per share is expected to be between $2.20 to $2.28 But we are not guiding to 2025 yet.

Speaker 3

I want to provide some preliminary shaping for your models based on the visibility we have thus far. For Crocs, we expect revenue growth in 2025 to be led by international. As a reminder, we will be negatively impacted by the timing of Easter moving back into Q2. This will have an outsized impact to our North America region in the Q1 in addition to lapping leap year. For Hey Dude, next year is about brand stabilization.

Speaker 3

As Andrew shared, we are seeing green shoots around the brand receptivity from a broadening group of consumers, but note that financial results will lag the marketing momentum we are currently seeing. With the visibility we have 2025, we expect the Q1 to be sequentially down from the 4th quarter tied

Operator

to

Speaker 3

wholesale. In 2025, we plan to continue to invest behind talent, marketing, digital and retail in order to create sustainable long term growth, which will put incremental pressure on our EBIT margin rate versus 2024. In closing, we are making near term decisions that we believe are in the best long term interest of the company and our shareholders, and we will continue to focus on what our company does best, delivering growth with industry leading margins that generate significant free cash flow. I will now turn the call back over to Andrew for his final thoughts.

Speaker 2

Thank you, Susan. Our company's initiatives remain consistent and we'll focus on 3 primary levers to fuel durable long term growth. 1, ignite our icons across both brands to drive awareness and global relevance for new and existing consumers 2, drive market share gains across our Tier 1 markets through strategic investment behind talent, marketing, digital and retail and 3, attract new consumers to our brands through methodically diversifying our product range and usage occasions. At this time, we'll open the call for questions.

Operator

We will now begin the question and answer session. The first question today comes from Jonathan Komp with Baird. Please go ahead.

Speaker 4

Hi, good morning. Thank you. I'll stick with one topic here. I want to ask about Crocs North America. Could you just give a little more detail?

Speaker 4

Susan, I know you mentioned a shift in Q4 on wholesale, but expectations for D2C to remain positive. Could you just remind us of some of the moving parts for D2C and what's driving the forecast? And then maybe a bigger picture question, as we look forward into 2025, what role will North America play in the total Crocs outlook for 2025? And what are some of the drivers that you see, Andrew?

Speaker 2

Great. So let's do it in that order, Jonathan. Susan will kind of give you the mechanics around the remainder of this year and I'll touch on the bigger picture.

Speaker 3

Great. Thanks, John. When we think about North America, we are unchanged in our expectation that North America will be flat for the second half. And we were really pleased with the underlying performance in the Q3 of the Crocs brand in North America. But for the full back half, our expectations are unchanged.

Speaker 3

So by channel, 4th quarter DTC is expected to be positive, offset by wholesale, which is planned down as retailers took product earlier in Q3 than we planned. And overall, we're mindful of current consumer shopping patterns as well as macro headwinds in the Q4 and we're taking a prudent approach.

Speaker 2

Yes. So if we step back to the big picture, so North America this year based on all the guidance we provided for the 4th quarter will grow about 2.5% for the year. And so what role does this play within our overall business? So the North American business as we look at it is a well managed stable business. It's highly profitable.

Speaker 2

It's cash generative And it really is obviously a large business, you know the absolute size of it. And so it generates the income, the cash flow that we can use to fund, one is the international growth for Crocs, but also some of the investments we're making in Hey Dude. It's balanced across channels. So we have a wholesale business, we have a retail business, we have a digital business. We've made some strategic shifts over the past year within digital, going more to 3P on our Amazon platform.

Speaker 2

We think that's been highly productive and we think that will be attractive in the future. And we kind of think about the business as really being very well positioned to continue the role that it's playing today. We're confident that over the short to longer term, we'll be able to grow the business modestly and it plays a very important role in our overall portfolio.

Speaker 4

Great. That's helpful. Thank you.

Speaker 2

Thank you.

Operator

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

Speaker 5

ahead. Thank you. Good morning.

Speaker 6

Multi part question on Hey Dude. First, you mentioned streamlining the account base for Hey Dude. Can you elaborate on those distribution actions? And then I'm hoping you can speak to Hey Dude brand operating profitability your willingness to continue to invest against profitability to strive for brand inflection.

Speaker 2

Okay, great. So from an account based perspective, we really talked about this almost a year ago now, where

Speaker 3

we cut off some

Speaker 2

of the smaller customers to really focus back on the large national strategic accounts or alliance partners, as we call them, where we want to make sure that we have adequate segmentation and differentiation and we can grow with a broad base of accounts. We do keep a lot of what we're calling kind of smaller, more strategic, well positioned or regional customers we think are important in terms of reaching select consumers and also giving our broader consumer base some attractive points of distribution. So that has happened probably almost a year ago at this point. So we feel really good with where we are from an account based perspective. In terms of profitability, there's a couple of key drivers there as we think about the future.

Speaker 2

One is gross margin. You've seen us start to elevate gross margins from a low in 'twenty three to some substantial improvements in 'twenty four based on some of the infrastructure investments we've made, based on some pricing decisions we've made that have impacted gross margin in the past. We think long term gross margin is around 50 percent. We're not going to get there in the next couple of quarters, but that's in the midterm. We think that's a very strong place for a brand to be.

Speaker 2

And then obviously, we're investing substantially in SG and A. So we're investing at an elevated rate in terms of marketing. You saw a lot of the activities. We talked about them on our prepared remarks. I think you've seen them in the on social media and in the press, especially in this quarter.

Speaker 2

We're investing in marketing to engage a younger consumer to pivot to a more female orientated consumer and also to create broader awareness for the brand. We're also making SG and A investments to fuel growth both in our outlet stores that we've opened this year in North America and also preparing for our international growth. So I think what this tells you is that we're supremely confident in the long term growth potential of Hey Dude. We're prepared to make these investments. We're confident they will pay off.

Speaker 2

And frankly, the broader financial profile of the Crocs Inc. Business allows us to do this and we think they're prudent investments that will pay off to shareholders in the medium to long term.

Speaker 6

Okay. Just to follow-up on that, Andrew. In the context of valuing Crocs Inc, many people are looking at the contribution of the Crocs brand profitability and trying to isolate that for valuation purposes. And so additional perspective on the and trying to isolate that for valuation purposes. And so additional perspective on the Hey Dude brand profitability would, I think, help people get to that assessment of the size of the different profit pools?

Speaker 2

Yes. I mean, I guess I would encourage our investors to look at the totality, right? So, our total company is highly profitable, highly cash generative. And as you kind of think about investing in the company, I would encourage people to look at the totality and look at the future potential of those cash flow streams and the optionality that provides us to continue to deleverage and reduce risk within the company, but also return cash to shareholders in a sustainable basis. I think that's a pretty good investment profile.

Speaker 6

And then with the outlook for Hey Dude, have you at all tempered the SG and A investment plans?

Speaker 2

I would say no, we haven't. We I get back to what I said sort of in my first answer. We're extremely confident around the mid- to long term potential of the Haged brand. And as we analyze each of the investments we're making, we feel that they will provide a very strong return.

Operator

The next question comes from Adrienne Yih with Barclays. Please go ahead.

Speaker 7

Yes, great. Thank you very much. Andrea, you had talked about sort of the back to school season being kind of back to the highs are high and the lows are kind of, I guess, a choppy background. I'm wondering if you can sort of talk about how you operate in that environment, how you think the retail channel partners are kind of managing through that and if you think that we're pulling up some sales for holiday. And then my last question is, how long does it take for the sell through to work through itself?

Speaker 7

Do you think that you're having or will you have the spring order book, some futures? Can you give us some color on that? Thank you very much.

Speaker 2

Yes. Yes, I suspect you've heard others talk about this and you're probably as our retail partners report in a week or so, a month or so, you'll hear a lot more about this. But look, I do think the consumers return to a more traditional shopping pattern. We would kind of say it's kind of pre pandemics. They're going to shop when they need it.

Speaker 2

They're going to shop at key events, whether they be holidays or promotional events. And in some cases, they need a little extra incentive to transact. So I think that's what we were familiar with before we got into the sort of lack of supply, oversupply components of the pandemic. I think they're back there. They've been getting back there over the last kind of year or so.

Speaker 2

We're anticipating that into the Q4. And I think our retail partners, certainly in this country, are pretty adept. I mean, they're highly sophisticated. They're seeing this happen. They have probably more data than we do to really understand this.

Speaker 2

So I think they're pretty adept and they're transitioning pretty quickly and I think they'll do a good job. And in terms of order books, we're pretty prudent. We try and make sure our order books are very much lined up with expected sellout. We think the timing of that sellout is a little bit shifted, but we're trying to calculate the aggregate sellout. We don't want excess inventories in the market.

Speaker 2

And I think we're on top of that for Crocs. As we've talked about from a Hey Dude perspective, we have had excess inventories in the market and we've been aggressively trying to work those down this year and we've made good progress, but frankly not quite all the progress we want to make.

Speaker 3

Great. Thank you very much

Speaker 7

and best of luck.

Speaker 2

Thank you.

Operator

The next question comes from Chris Nardan with Bank of America. Please go ahead.

Speaker 8

Thank you, guys. Good morning.

Speaker 6

Can you just elaborate

Speaker 8

a little bit more on your confidence in growing your Crocs North America direct to consumer business in the Q4, maybe based on what you're seeing quarter to date? And then switching your Amazon business to a 3P model, I think you fully lapped that now. Can you just elaborate on the rationale around doing that and just how you view your Amazon business relative to like your crocs.com business? Thank you.

Speaker 2

Yes. I would say that's a hard question to answer, Chris. So, look, I think all the plans that we put in place for our Crocs North America DTC business, we feel great about, right? We feel great about the product line up. We feel great about our holiday planning.

Speaker 2

We feel great about our back end logistics, etcetera. But growing that business and comping is based on all those things going well. And so so and our product lineup and marketing, so we feel really good about it. I would say that's a combination of obviously our stores, which are predominantly premium outlet stores. It's a combination of our dotcom business and also our marketplace business.

Speaker 2

And so, we feel really good about it and fingers crossed everything will play out how we think it's going to play out, but there obviously is some uncertainty there. And I would also say we kind of try to plan it prudently as well. We've got backup plans if things don't go 100% to our expectations. Big picture on Amazon, I would say, look, Amazon is a super important customer. We're a broad democratic brand.

Speaker 2

We want to reach our consumers where they are. They're clearly on Amazon. They start a lot of their shopping on Amazon. Their initial search is on Amazon when they're looking for a pair of Crocs, but also many other things. And from a participating on that very important marketplace, both here in North America and other parts around the world, we think this is an opportunity for us to have more emphasis in our brand, a little bit better control of the products that we bring to market, etcetera.

Speaker 2

And so, we're liking the transition we think is productive and I think the consumer is enjoying it too.

Speaker 8

Thanks, Andrew. And just one quick follow-up on the operating margin outlook. I think you mentioned it should be a little bit lower next year. Just wanted to hear your rationale about balancing investment spend to grow both of these brands for the long term, but also trying to maintain an operating margin around the mid-twenty percent range and close to your longer term 26% plus target?

Speaker 3

Yes. So I can take that one. This is we're really planning on continuing to invest. We see revenue generating opportunities for both brands. We look, as Andrew

Operator

said, very disciplined about what we see the

Speaker 3

return on investment and when we see planning process for next year, but we're going to continue to invest behind talent, marketing, digital and retail. And as we said, that's going to put incremental pressure on our EBIT margin rate versus 2024 and we'll give you more guidance about 2025 on our Q4 call.

Speaker 2

Yes. And I would say, big picture, Chris, look, I would say mid-20s, I think, will be above 25% according to our guidance for this year. We've been significantly above that in recent years. These are extraordinary levels of profitability. If you look at our competitive base, there are very few players that come close.

Speaker 2

Nobody is above. So, we've got a balance maintaining high levels of profitability and cash flow generation, which obviously underpin our overall valuation, we're actually investing in attractive mid to long term growth opportunities. And we'll toggle backwards and forwards between those.

Speaker 8

Thank you. Good luck.

Operator

The next question comes from Bob Drbul with Guggenheim Securities. Please go ahead.

Speaker 9

Hi, good morning. Two questions actually. The first one is, can you talk about the change in the investment marketing strategy for Hey Dude in the quarter and what KPIs you're seeing? And the second question is, can you just clarify for Crocs for North America, do you expect growth in North America market

Speaker 5

for 2025?

Speaker 2

Okay. Two different questions. So the first one actually is a super important question, Bob. Glad you asked it. So one of the key decisions that we made in the Q3 is we pulled back on performance marketing for the Hey Dude brand.

Speaker 2

As we've looked at the sort of multi year trajectory, our level of performance marketing had been creeping up. I would say the marginal ROIs were still positive, but they were not where we wanted them to be. And we wanted to push more of a marketing investment into the brand and into the long term future of the brand. So we made a pretty distinct pullback in performance marketing. So that's ad dollars, Google search, all of those kind of things that you can spend money on, on a short term basis.

Speaker 2

You can measure the returns, but if your marginal return dips to a level that you don't really feel comfortable with, so we pull back on that. And then we use that money to fund Sydney Sweeney, Jelly Roll, Barstool Sports, some of the TikTok activations that we've been doing, starting up the TikTok shop. And we think that will be much more attractive from a brand return and investment perspective over the long term. That has had a short term impact and it's probably the biggest expander for our miss in Q3 from a Hey Dude revenue perspective and also the biggest expander for the reduction in the Q4 guide for Hey Dude. That's the biggest dollar change, and we think it's the right thing to do in the long term.

Speaker 2

And then your question on Crocs, I think it was a clarification on North American. Yes, we think we will grow modestly slightly for North America Crocs in 2025. That is our current plan. But I would say the real value creator and the value driver for Crocs is the international growth. We've seen that come through for the last 2 years and we are very confident that will continue into 2025.

Speaker 5

Thank you.

Operator

The next question comes from Rick Patel with Raymond James. Please go ahead. Rick, your line is now open. You may ask your question.

Speaker 2

Hi, sorry about that. Thank you. Good morning. I was hoping you can expand upon what you just ended with in terms of Crocs international growth potential in 2025. So given the slowdown that you're seeing in China that you expect to continue, how should we think about the building blocks of growth next year and which markets you have the most confidence in to do the heavy lifting?

Speaker 2

Yes. So, thank you, Rick. So, what I would say is we've definitely seen a slowdown in China, but I would point out we are still growing in China and we still intend to grow in China next year, right? So, it's not the 80%, 90% growth that we saw in 2023. We grew 20 plus percent growth in Q2 sorry, Q3 that we just reported.

Speaker 2

But we do intend to continue to grow in China, really underpinned by a lot of the mono brand store openings that we've done in China. So we've grown our digital business successfully. We've opened some select retail stores we operate ourselves and we also work with a range of brand partners who open Mono Brand stores. I think we've opened by the end of the year, we'll have close to 400 Mono Brand stores and we've opened in excess of 150 stores year to date. Obviously, as those have grown open through the year, that will provide growth for next year as well as we think our positioning in the marketplace, our accessible price points, personalization, comfort, etcetera, is going to be a competitive positioning.

Speaker 2

So we will grow in China. In addition to China, I think we're confident around India. We have, I think, a very attractive business model in India that has been impeded recently with the BIS. If everybody knows what that is, that's the Indian government's been imposing some restrictions associated with you need to make your products in India. We will have production up and running for both Crocs and Haydun in India next year.

Speaker 2

It started this year, but it will reach its reach enough supply to fund the market next year. So we're confident about India. We've talked quite a bit about how our key direct markets in Western Europe continue to be successful. Germany and France, we anticipate that continuing. So those are some of the key drivers.

Speaker 2

We've had great success in Australia for the last couple of years. We see that as probably a little bit more stable for the next couple of years, but that's obviously attractive business as is South Korea. I would say to be frank, Japan remains a work in progress. We're focused on kind of resetting the business and focusing on the classic clog and personalization in that market with evidence that is starting to get traction. But that obviously is a very big market with big long term potential.

Speaker 2

So I think there are plenty of growth engines to support our international aspirations from a proxy perspective. Thank you very much. Thank you.

Operator

The next The next question comes from Sam Poser with Williams Trading. Please go ahead.

Speaker 5

Good morning. Thank you for taking my questions. So, can we talk about Hey Dude? And I mean, Andrew you reiterate your confidence in it. I guess my question is what how did this all evolve or and what happened different than what you thought was going to happen that was under your control that you have to fix and how long and what specifically other than switching marketing and cleaning up are you doing to sort of start driving sales again?

Speaker 5

It looks to me like you have some good stuff going on as far as partners and so on, but the consumer is not responding. And that's not let's take macro out of the picture, let's say what's under your control?

Speaker 2

Okay. So let me start with the last part of your question, then we can go back to the first part and you can kind of just clarify it. So the last part, I think, is you're kind of getting at what are we doing? Why do we think that will help the situation, if you like? So, the things that we're doing are multi pronged, right?

Speaker 2

So, one is marketing, which you highlighted. So, I think a pretty significant pivot in the marketing agenda to engage a broader set of consumers, drive brand awareness, drive brand relevance, pivot towards a younger female culture female consumer, which drives culture in this country certainly, and we think culture in this country drives culture and resonance in other countries around the world. That's very, very important. And I think you talked about that or you mentioned that. 2nd is, I would say, wholesale management.

Speaker 2

So that is reducing end market inventories, working proactively with all of our alliance partners to make sure they have the right product at the right time, they have adequate differentiation. And I think we're making some good strides there, but there is still work to be done. So I think there is more work to be done, but we're doing the right things and they will pay off in the longer term. Number 3 is building, I would say, complementary channels of distribution, premium outlet stores. We've opened a chain of premium outlet stores, I think about 29 year to date through the end of September.

Speaker 2

We'll open another 11 in the Q4. They are performing well. That is a very attractive investment from our perspective. And it allows the consumers that are in those centers to see the breadth of the brand. We see a much better balance in those environments between Wally and Wendy, between male and female.

Speaker 2

We also have a kids business in those environments. So we think that's a very valuable consumer exposure mechanism. Third thing is laying the groundwork for international growth. We opened up 4 direct markets, 2 in the quarter. So as you might remember, we're now present in the UK, in Germany, India and Australia as direct markets.

Speaker 2

They are all small. And when I say present in direct market, that means we have wholesale distribution, we have a digital presence, we don't have any retail presence in those markets, just too small at this stage. And but I would say, what we're seeing, while the numbers are small and we expected them to be small, is a relatively positive reception from those consumers. And that's a pretty diverse set of consumers from the U. K.

Speaker 2

To Germany to India to Australia. In addition, the international business in Spain and Italy continues to perform well through a distributor And we have a range of incremental distributors that we will ship in Q4 and Q1. Essentially, they're opening orders, so they'll be starting up the business. So I would say it's the marketing, but it's building all the platforms that will enable future growth in the future well, growth in the future. All right.

Speaker 2

And now let's come back to what we're getting at at the beginning of your question.

Speaker 8

Well, I mean,

Speaker 5

I wrote about this a long time ago. At the end of fiscal 2020 end of calendar 2022, end of the beginning of 2023, you shipped a ton of product into the marketplace. So I guess the question is, how overstated were the sales last year and what's the right starting point to think about and how much of just filling shelf space, doing the things you did back then sort of caused what happened now and should you have taken sort of a more measured growth approach and maybe you would be ahead of where you are today. And what decisions were made that caused this? And then I know you're confident, but the slower numbers and I don't know what next we'll see what happens next year, but I just want to get a little more meat on the bone as to what happened that was in your control versus

Speaker 2

Yes. So I think yes, I think you kind of said some of it. We definitely grew too fast, right? So out of the gate when we bought the brand, nobody knew how high was up. We didn't know how high was up and our customers didn't either, right?

Speaker 2

So, they were constantly out of stock and they wanted more product, we shipped more product. And I think if you think about the sort of 2022 into 2023 timeframe, in retrospect, we absolutely shipped too much product. So if you're kind of asking what decisions were made that were wrong, that was wrong, that was wrong, right? And then the other thing I think that we did not do well is the initial marketing activities were ineffective. We spent money, but they were ineffective.

Speaker 2

They were not sufficiently effective. They weren't focused at the right consumer and they weren't creating the kind of resonance and impact that we wanted. I think the third thing is the process of integrating the brand and putting in place all of the infrastructure, whether that be DCs, whether that be systems and capabilities because it came with very little of that. We knew that, but that took us time, but it took us a little bit longer than we'd hoped. And that delayed some of the, I would say, offensive investments that we're now making around stores and international.

Speaker 2

So that's taken longer than we thought. Now that being said, we bought a business that was approximately $600,000,000 in revenue and it is now high 800s, almost $900,000,000 sorry, dollars 800 ish million in revenue. So, it's substantially bigger. It is less profitable on an EBIT percentage perspective because we've invested for what we think is the longer term growth potential. But it has been profitable all along.

Speaker 2

It's been accretive all along and has generated cash and we pay down the debt associated with the investment or pay down a lot of the debt associated with the investment. So, it has not gone, if that's what you're kind of trying to get at, as we would have hoped and expected. But that doesn't change our confidence around the future. The team that we have in place, the strategies and activities that we have deployed and our willingness to support those that team, those strategies and activities. So, I just want to make sure we're super clear about that.

Speaker 2

That is what we're going to do and we're very confident that will be a positive outcome for investors.

Operator

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

Speaker 10

Great. Thank you so much. Andrew, if we could just talk about the Crocs brand sort of big picture, obviously talking about a little bit of growth in North America next year. But beyond that, what's the plan to drive growth? I mean, do you see an opportunity to raise brand awareness?

Speaker 10

Are there new wholesale doors you can get into? I mean, can you open a more maybe of your own stores in your direct consumer channel, new categories you can get into or market share gains in existing categories? Just tell us how growth should trend big picture and why maybe we'll see growth accelerate beyond sort of in North America beyond whatever rate you expect to get in 2025?

Speaker 2

Yes. That's a great question, Jay. I would say, look, in the very short term, sort of the 1 to 2 year timeframe, the primary growth driver for Crocs will be the international business, right? I just want to make sure I reiterate that. And that's a big and attractive business, right?

Speaker 2

So, and the underlying strategic issue there is that our penetration in those large international markets is a fraction of what it is here in the U. S, okay? But that's not your question. Your question is what drives growth in North America. I don't think there is a huge amount of distribution growth.

Speaker 2

I think we are the places we want to be. There are other places we could go. There are mass retailers that we're not represented in. I just don't think that's the right place for our brand as we want to continue to maintain a democratic, but elevated positioning for our brand. So, I don't think we're going to go there.

Speaker 2

We do think there is continued digital growth and development as the consumer goes more and more digital. We do think there is growth in personalization. We think there's growth in sandals. We had a nice sandal growth here in North America in 2024. We think that continues into 2025 and has long range potential.

Speaker 2

And we do think there's an opportunity for us to play in a broader set of, I would say, silhouettes or wearing occasions. You have seen us experiment there. We will continue to experiment there. But I wouldn't say we today have a slam dunk winner in that arena, but we think we can get there over time. So for the sort of 12 to 24 month timeframe, we're really thinking about North America as that cash cow funding that international growth, while we can continue to experiment and engage our consumers in incremental growth opportunities from a Silhouette and product perspective.

Speaker 10

Got it. That's very helpful. Andrew, thank you.

Speaker 2

Thank you.

Operator

The next question comes from Anna Andreeva with Piper Sandler. Please go ahead.

Speaker 7

Great. Thanks so much and good morning. We wanted to follow-up just on the overall profitability of the business given investments at Hey Dude. Can you guys talk about what guardrails you have in place at the consolidated levels to offset some of these investments? Andrew, I think you mentioned 25% is the right level for the business.

Speaker 7

Are there additional opportunities at the Crocs side of things, either with pricing or maybe OpEx management as we think about next year? Thanks so much.

Speaker 3

Thanks for the question, Anna. This is Susan. One thing I think it's really important to emphasize here is how disciplined we are about our investments. I mean, we've mentioned increasing our SG and A, which we continue to plan to do into next year. But there's a lot you mentioned guardrails and KPIs.

Speaker 3

There's a lot of scrutiny around making sure we're making the right investments. And as Andrew indicated, talking about Hey Duke, when we find that we need to pivot, we do that pretty readily and pretty nimbly as we did with the marketing investment on Hey Dude pivoting from performance to brand when we saw a better opportunity there. So we're super disciplined about it. But when we said we're increasing 2024 is an investment year and 2025 will continue to be an investment year, that will be create incremental EBIT margin pressure. So the 25% guidance that Andrew reiterated was for this year and next year's we would expect to be below that.

Speaker 7

Okay. Appreciate it. Best of luck.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Andrew Reese, Chief Executive Officer, for any closing remarks.

Speaker 2

I just want to conclude by thanking everybody for their continued interest in our company. We appreciate spending time with us today. Thank you.

Operator

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

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Earnings Conference Call
Amgen Q3 2024
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