Crocs Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 15, 2024

There are 12 speakers on the call.

Operator

Good morning, and welcome to the Crocs 4th Quarter 2023 Earnings Conference Call. All participants will be in listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Aaron Murphy, Senior Vice President of Investor Relations and Corporate Strategy. Please go ahead.

Speaker 1

Good morning and thank you for joining us to discuss Crocs Inc. 4th quarter and full year results. With me today are Andrew Reis, Chief Executive Officer and Ann Mehlman, Executive Vice President, Incoming Brand President and current Chief Financial Officer. Following their prepared remarks, we will open the call for your questions, which we ask you to limit to 1 per caller. Before we 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 annual report on Form 10 ks 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 Rees, Crocs Inc. Chief Executive Officer.

Speaker 2

Thank you, Aaron, and good morning, everyone. Thank you for joining us today. 2023 was a record year for the Crocs enterprise, and we're starting off 2024 from a position of strength. Our teams are focused on continuing to drive market share gains and sustainable profitable growth. We ended the year strong, delivering better than expected Q4.

Speaker 2

Let me start by sharing a few highlights from the full year of 2023. Total revenues grew 12% year on year to almost $4,000,000,000 driven by 19% direct to consumer growth at the enterprise level. Crocs brand revenues surpassed the $3,000,000,000 mark, increasing 14% versus last year. Haydu brand revenues were approximately $950,000,000 and delivered over $200,000,000 in operating income. We expanded our gross margins and once again delivered industry leading margins with adjusted operating margins of almost 28% exceeding our guidance.

Speaker 2

We grew our adjusted diluted earnings per share by 10% versus last year to $12.03 Our strong cash flow generation allowed us to repay $666,000,000 of debt and we resumed our share repurchase program during the year. Finally, we're pleased to see the Crocs Inc. Achieved the number 20 spot on Fortune's 2023 Top 100 fastest growing companies. Before I provide strategic updates by brand, I want to speak to the recently announced executive transitions. Michelle Poole, Crocs' Brand President, will be retiring from the company, following a distinguished 32 year career in the footwear industry, the last decade of which she had a tremendous impact on Crocs.

Speaker 2

Michelle will remain in her role through early May and transition to a special advisor through early 2025. In keeping with our succession planning, I'm pleased to promote our current CFO, Anne Melman, to Cross Brand President. Many of you have the opportunity to work closely with Anne and know she brings a strategic and consumer focused commercial lens to her leadership. I have strong confidence in her commercial acumen, deep knowledge of the Crocs business and global mindset. Anne will remain CFO until a replacement is named and an active search for her successor is already underway.

Speaker 2

Moving on to our performance against our key strategic pillars, starting with the Crocs brand. We continue to invest in our Crocs brand through our socially led digitally first marketing playbook and product innovation, naming a few of our accomplishments this year. Our marketing wins range from creating hype to mainstream moments, including the mischief yellow boot Asper, a K Pop brand that featured our Stomp Line clog and we ended the year unveiling our META clog, the perfect friend to Lightning McQueen. Complex, a leading culture publication said it best, Crocs cannot stop going viral in 2023. We celebrated our most successful Croctober yet, fueled by the Span inspired Crocs Calvert boot that sold out in 24 hours.

Speaker 2

We were awarded collection of the year by footwear news for the Salehi Bembry Times Crocs Pollux Clog Book Partnership. Moving on to product, innovation and ongoing diversification remain important areas of focus. While we've had great success creating consumer moments through partnerships and collaborations, our core franchises are our fundamental growth engines and all three of our product pillars, clogs, sandals and personalization, grew double digits in 2023. Clogs grew 12%, supported by solid growth in both our core classic as well as new clog franchises fueled by height and product innovation. Sandals surpassed the $400,000,000 mark, growing 29% versus last year and now makes up 13% of our Crocs sales mix.

Speaker 2

We gained market share across our 4 sandal segments that we prioritized, Everyday, Style, Sports Street and Adventure. Beyond the revenue milestone, the sandals category brings diversification not only to our overall product mix, but to our customer mix. In 2023, 61 percent of consumers that purchased sandals on ownedecom channels were new to the brand. These consumers shop more frequently, carried a higher average order value and purchased multiple silhouettes. Our sandal consumers skew more female versus our other buyers.

Speaker 2

Our Givit business grew 17% to over $250,000,000 making up approximately 9% of our total mix. We continue to view personalization as a mega consumer trend and see opportunity to further grow our Jibbitz penetration in 2024, notably through improved wholesale execution, deeper international penetration and increased speed to market. We're elevating our franchise management capabilities and have built several sustainable multi product platforms, including the Echo, Brooklyn and Crush, to name a few. Each of these franchises caters to unique customer groups and diversified wearing occasions. The Eko franchise, which has developed a breadth of products across clogs, sandals, boots and now sneakers, is bringing in a largely male explorer consumer.

Speaker 2

In fact, 71% of consumers who shopped our Echo franchise on our owned ecom channel in 2023 were new consumers. We're becoming faster and more agile, and we see opportunities to further capitalize on these attributes in 2024. In the Q4, we tested slippers in 4 colorways, and were able to get these to market 60% faster than our normal product cycle. This test sold out in 2.5 weeks and we're building this into our full line for 2024. We're expanding our speed to market capabilities across other areas of our product portfolio, including emerging new franchise such as the Getaway assortment.

Speaker 2

As we think about distribution, I'm pleased by the broad based growth of the Cross brand for the year. For 2023, North America grew 8% and international grew 23%. In fact, 4th quarter represented our 12th consecutive quarter of strong double digit growth outside of North America. Globally, South Korea and the UK grew double digits and Australia and China each grew triple digits. While we reported a record revenue in China, it still only represents 4% of revenues, underscoring the untapped potential we have in the region.

Speaker 2

We continue to see our organic fan base in China grow as evidenced by our hashtag known as Dongmen or Klug's Followers. We now have 70,000,000 Dongmen hashtags on red, highlighting the consumer engagement and excitement for the brand. 3 weeks ago, I had the opportunity to visit several of our Tier 1 countries in Asia alongside our broader leadership team. It is evident that the brand's trajectory is taking hold across the region. The Asian consumer is embracing personalization at a rate higher than other parts of the world, Another anecdote that gives me confidence broadly in our international growth agenda is that South Korea, our most established market in the region, carries the highest market share of any discrete market globally and is one of the best representations of our core strategies across clogs, sandals and personalization.

Speaker 2

The strong market position highlights the potential upside opportunity across our other international markets. The Croft brand has entered 2024 with momentum. From a product perspective, we expect to deliver more height for her, street for him and drive personalization at scale. We expect sandals to continue to gain as a percentage of sales, driven by newness as we relaunch the Classic Sandal 2.0 and scale our recently introduced Getaway sandal franchise. From a sustainability perspective, I'm incredibly pleased to announce that we achieved our 2023 goal to reach 20% bio based cross light material across our portfolio, a significant milestone on our journey to 50% bio based cross light by 2,030.

Speaker 2

We also saw promising results in our pilot shoe recycling program that we launched in late October, and we now plan to expand this initiative to all stores. We will share more on these and many other initiatives in our mid year comfort report. Turning to Heydu, we generated almost $950,000,000 of revenue and over $200,000,000 in operating income in 2023. This year had its share of learnings, but I'm very confident that the Hey Dude brand benefits from the lightweight, comfortable, easy on and off and value remain top of mind with consumers. While our brand awareness significantly improved year over year, reaching 32% in the second half, it is still low by any global brand standard, but our brand love and affinity are high.

Speaker 2

As we talked about in our Q3 call, we made a number of strategic pivots in September, which impacted our sell in within the wholesale channel, curtailed smaller non strategic accounts and focused our efforts around improving full price sell through on digital. We're pleased with the initial impact of our decisions, as evidenced by improved gross margins and healthy channel inventories, and expect sell in and sell through to normalize as we move throughout the second half of twenty twenty four and prioritize returning to a full market position. In the Q4 and on a full year basis, we gained market share among our key strategic accounts, underscoring our confidence in the brand's underlying demand with consumers. In 2023, the Hey Dude brand gained approximately 200 basis points of U. S.

Speaker 2

Market share versus 2022 in the casual fashion category according to Sukana's retail tracking service. During the Q1, the Hey Dude brand had some big moments with Dude Perfect as the face of a Happy Holidays holiday programming. Leveraging our consumer insights, we know that 50% of our buyers give Hey Dudes as gifts, and we saw evidence of this during the Q4. Looking forward, we plan to create consumer moments through scaling our collaborations and partnerships. We recently collaborated with actor Chase Stokes from the popular out of banks Netflix show to launch The Wally will be expanding our collegiate program to more schools during March Madness to deepen consumer engagement.

Speaker 2

From a product perspective, during the Q4, our icons, the Wally and Wendy, were top sellers. Our Bradley Boot rounded up our top 3 selling styles overall with exceptional sell through as consumers responded to its compelling price point, lightweight and attractive styling, despite a soft overall industry boot season. Once again, our seasonal ugly sweater Christmas styles were standouts. As we move into 2024, we're focused on continuing to invest in core and expect the Wally and Wendy franchises to remain the lion's share of our offerings, driven by newness in color, graphic and hype. We will capitalize on our successful sneaker franchises, including the Carina and the Sirocco and build on our fashion boot offering in the fall.

Speaker 2

We're taking a focused approach to how we allocate inventory by account and expect to see more evidence of account and channel segmentation as we move throughout the year. From a distribution perspective, we're in the early days of implementing our outlet retail strategy for the Hey Dude brand, leveraging Croft's successful retail playbook. On the Hey Dude side, we opened 5 outlet locations in the second half and have been pleased with the results thus far. We plan to open up 30 outlet stores in 2024 spread throughout the year. For context, retail is roughly 1 third of our North American business for the Crocs brand and is highly profitable.

Speaker 2

Turning to wholesale. While our spring order books are down versus last year, as we discussed on our November call, we expect sell in and sell through to normalize as we move throughout the back half of the year. As it relates to international, we remain in test mode in a few direct markets in Europe, as well as in several distributor markets, leveraging the success of the Crocs brand playbook. This will lay the groundwork to expand its new international markets in the next 2 to 3 years. We're coming into the year from a position of strength.

Speaker 2

While there are question marks around the global macro backdrop and the broader consumer health, I'm confident in our brands, our people and our purpose and are looking forward to another year of outsized share gains, industry leading profitability and top tier cash flow generation. Anne will now review our financial results in more detail.

Speaker 1

Thank you, Andrew, and good morning, everyone. I'm very pleased by our Q4 results, which exceeded the high end of our guidance across all metrics. We generated $960,000,000 in consolidated revenues, growing 1.5% over last year led by the Crocs brand. We delivered top tier profitability with adjusted gross margin up 2 40 basis points to 55.7 percent, adjusted operating margin of 24.1 percent and adjusted earnings per share of $2.58 ahead of our guidance of $2.05 to $2.35 Our strong profitability and focus on networking capital enabled us to repay $277,000,000 of debt in the 4th quarter. We also repurchased $25,000,000 of stock in the 4th quarter at an average cost of $86.34 per share.

Speaker 1

As discussed earlier in January at the ICR conference, we made a change to our segment reporting that will now be reflected in our 10 ks. Our reportable operating segments will now be the Krotz brand and the Hey Do brand. We plan to continue sharing our progress against our strategic growth pillars, key country call outs and channel dynamics. Turning to the Krotz brand in the 4th quarter. Revenues were $732,000,000 growing 10% relative to prior year, driven by strong DTC growth of 12% and wholesale growth of 7%.

Speaker 1

Brand ASPs were up 12% to $26.76 led by both channel and product mix, higher international pricing and lower discounting. The brand sold 27,000,000 pairs of shoes, a decrease of 1% to Q4 last year or up 5% excluding the impact of the termination of our African distributor. For the year, the brand sold 120,000,000 units, up 3.5% versus last year and ASP growth of 10%. Now, let's review the cross brand highlights by country and channel. In the quarter, North America revenues of $471,000,000 were up 3% from 2022, as strong DTC growth of 7% was partially offset by a 5% decline in wholesale.

Speaker 1

The decline in wholesale revenues reflect a full quarter of impact from our e tail distribution model change, partially offset by double digit growth in our brick and mortar wholesale. Crocs brands in the 4th quarter was led by international with revenues up 25%, driven by DTC, which grew 37% in the quarter against 2020 2. In fact, all 6 of our Tier 1 markets grew in the 4th quarter: China, India, Japan, South Korea, the U. S. And Western Europe.

Speaker 1

As Andrew noted, 2 of our countries grew triple digits for the year, Australia and China. China was a record revenue year, ending the year at $120,000,000 In Western Europe, we saw strong double digit growth in the UK and France, while Germany ended the year flattish despite a tough macro backdrop. Turning to Haydew. Revenues were $228,000,000 down 19% from last year, but ahead of our guidance. During Q4, the brand sold 7,400,000 pairs of shoes, a decrease of 18% from last year as we lapped pipeline fill and as we took decisive actions to reduce channel inventories.

Speaker 1

Hey Dude average selling price during Q4 was roughly flat to last year at $30.65 Relative to Q3, our e commerce ASPs were up 15% as we pulled back on price matching online. We continue to make progress against Great Goods cleanup and expect to be in a substantially better position exiting the first half of twenty twenty four. Wholesale revenues down 28% from Q4 last year as we lap 2022 pipeline sales, rightsized our non strategic wholesale accounts and faced a more challenging wholesale environment. The DTC channel contracted 9% as we forfeited sales for better pricing and margin. Consolidated adjusted gross margin for the 4th quarter was 55.7%, up 240 basis points from last year as freight was a key tailwind for both brands.

Speaker 1

Crocs brand adjusted gross margin was 59.5% or 3 40 basis points higher than prior year. The increase in adjusted gross margin is attributable to approximately 2.40 basis points of freight tailwinds, increases in international pricing and favorable promotion and customer mix, partially offset by negative currency impact of 100 basis points. Stay Dude brand adjusted gross margin for the quarter was 45.5 percent and came in better than expected. The margin decrease of 170 basis points from Q4 2022 was driven by excess distribution costs and product mix. This was partially offset by reduced freight and storage costs.

Speaker 1

Our Q4 adjusted SG and A at 31.6 percent of revenues deleveraged by 4.30 basis points compared to prior year. For full year 2023, adjusted SG and A deleveraged 200 basis points to 28.7%. The significant increase in adjusted SG and A rate for the quarter and the full year is attributable to continued marketing investment, talent and infrastructure to support future growth and durable market share gains. Taking these drivers together, our 4th quarter adjusted operating margin declined 190 basis points to 24.1 percent compared to 26% for the same period last year. In Q4, the company reported a one time GAAP tax benefit of approximately $112,000,000 primarily related to the closing of our in Hong Kong and the related transfer of our intellectual property.

Speaker 1

4th quarter adjusted diluted earnings per share decreased 2.6% to $2.58 when reflecting our non GAAP tax rate of 19.6%. For the full year, our adjusted diluted earnings per share increased 10% to $12.03 We ended the year with clean inventory on our balance sheet and in the channel. Our inventory balance on December 31, 2023 was $385,000,000 a decline of 18% against this time last year. The cross brand inventory balance was $281,000,000 down 70% from last year and roughly flat to Q3 2023. Paydude inventory was down 38% from last year to $104,000,000 and down 6% versus Q3.

Speaker 1

We ended 2023 with a strong liquidity position comprised of $149,000,000 of cash and cash equivalents and $570,000,000 of borrowing capacity on our revolver. Through strong cash flow generation and diligent management of net working capital, we have reduced total borrowings to $1,700,000,000 and our net leverage to approximately 1.3x. Since acquiring Hey Dude in February 2022, have repaid $1,200,000,000 in debt and resumed our share repurchase activity in the second half of twenty twenty three. On a full year basis, we repurchased $175,000,000 of stock at an average price of $104 per share. Our strong liquidity position and best in cash flow generation will enable us to continue to pay down debt and buy back stock in 2024.

Speaker 1

In February, we successfully refinanced our term loan B and achieved a 75 basis point reduction in borrowing rate from SOFR plus 3% to SOFR plus 2.25 percent with no change to our leverage covenants or maturity date. Now turning to the future, I would like to share our current outlook for Q1 and then full year 2024. For Q1, we expect consolidated revenues to be down 1.5% to up 0.5% at year end currency rates with the cross brand growing between 6% to 8%. We expect NewJeune revenue to be down 20% to 23% as we lap pipeline fill from last year and given our aforementioned spring order book trends. We expect adjusted operating margin to be approximately 22% and adjusted diluted earnings per share of $2.15 to 2.25 dollars For the full year 2024, we are reiterating our revenue outlook of 3% to 5% growth assuming year end currency rates.

Speaker 1

For cross brand revenues, we expect to grow 4% to 6% with growth led by international. For Haeju brand revenues, we continue to expect growth to be flat to slightly up. In terms of shaping, we expect Hey Dude sales trends to improve throughout the year. We expect gross margin improvement over 2023 at the enterprise level. We expect stable crop brand gross margins and expect Hey Dude gross margin to be up for the year as we start to realize the benefit of our newly opened Las Vegas DC and our planned ERP implementation.

Speaker 1

We expect to reinvest these dollars into brand accretive strategic SG and A investments, resulting in consolidated adjusted operating margins for the year of approximately 25%. Following our tax structure changes, for full year 2024, we expect our underlying non GAAP tax rate, which approximates cash taxes paid to be approximately 18% and GAAP tax rate of 21.5%. We anticipate non GAAP diluted earnings per share to be approximately $12.05 to $12.50 in 2024. This range incorporates our recent tax changes in Term Loan B refinancing, but does not assume any impact from potential future share repurchases. We also expect to incur $10,000,000 of one time charges, primarily in the Q1 related to the completion of our distribution and logistics projects for Hey Dude.

Speaker 1

To support growth for both brands, we expect to invest approximately $120,000,000 to $130,000,000 in capital expenditures in 2024 and continue to expect best in class cash flow generation. At this time, I'll turn the call back over to Andrew for his final thoughts.

Speaker 2

Thank you, Anne. Crocs Inc. Had a record breaking year in 2023. As we move into 2024, we are on the offense and proactively making the decision to invest incrementally in our business to set ourselves up for continued durable market share gains while delivering top tier total shareholder returns. At this time, we'll open the call for questions.

Operator

And our first question will come from Tom Nikic of Wedbush Securities. Please go ahead.

Speaker 3

Hey, everybody. Thanks for taking my question. I want to ask about Hey Dude. I know you gave some of the reasons why we should expect better performance from May, dude, over the course of the year. But it seems like you're kind of digging yourself into a pretty big hole in Q1 and you kind of need a pretty significant amount of reacceleration the remainder of the year.

Speaker 3

I guess kind of the confidence in that reacceleration stems from order books or like feedback you've gotten from wholesale partners? And I guess just on the wholesale front, I think obviously, last year was a much choppier year than you had expected for the Hey Dude brand. And I guess like one of the wholesale partners seen lately that's gotten them more comfortable to help drive that reacceleration in the Hey Dude brand that you're expecting?

Speaker 2

Yes. Thanks, Tom. Yes. I think I'll hit the start of this and Anne can pick it up at the end with a few sort of points around how we think the year will play out for Haydew. So I think the first thing you've got to do is you've got to separate sell in from sell out, right?

Speaker 2

So yes, I absolutely you can see that the Hey Dude band has been choppy from us from a sell in perspective and didn't play out as we thought it would during the full year. And you heard us on our Q3 call talk about how we're going to pivot or how we pivoted some of our kind of strategic actions. But if you kind of step all the way back to sell out and the consumer takeaway that we see for the brand, because that is what our wholesale partners experience, right? So I think we can see a few things that are very, very clear. The underlying sellout for the Hey Doo brand has been strong, right?

Speaker 2

It is a top performing brand for many of our wholesale partners and it ranks highly in their brand stack. The Hey Dude brand during 2023 gained market share in the fashion casual category, actually substantial Sakana data, about 200 basis points. So it was one of the larger market share gainers, and that's in terms of consumer takeaway. And then we can also see that in our underlying DTC business. Now we've changed some pricing strategies and dynamics in our DTC business, which is causing us to give up some revenue, but also to drive higher margins.

Speaker 2

So in essence, what we see is we kind of read through to the consumer that we are selling more pairs to more consumers and gaining market share. And so that's kind of the important read. Now we acknowledged that in the back half of 'twenty two, early part of 'twenty three, we put too many pairs into the market. So we sold more in than we should have done. We also have gone through the process of cleaning up our account base, because I think we had too many accounts with too much inventory kind of competing against each other.

Speaker 2

So I think we've got real clarity on who our strategic partners are. And I would say as we talk to those strategic partners and frankly, you've heard from a number of them, those that are public, they're really bullish on the brand. So that's kind of what we see from a consumer lens. I think the second piece I'd say that drives trajectory for the business is, before I hand it over to Ann, is that outlet business, right? So we opened up those 5 outlet stores in the back end of last year.

Speaker 2

We're very pleased with the performance of those stores and we'll open more this year. And as you go through the year, the cumulative revenues and profit that you get from those stores is substantial, and we'll continue to build that business in the future. And the sort of benchmark we gave you to kind of get your head around it was the retail business for Crocs North America is about a third of the total business. So it's very substantial. We think that exists for Hey Dude, too.

Speaker 1

Yes. And Tom, just to give you a little context on the shape and a little bit more detail. So embedded in our full year guidance of flat to slightly up for Hey Dude, we are assuming that Full Sail right now is down through the year in our guidance. Although we do assume it improves every quarter throughout just as we look at the trajectory. In Q1, we would expect a similar channel dynamic to what we saw in Q4.

Speaker 1

And then we really start to see the benefits of retail contribution start to impact us in Q2 and beyond. So I would say 24 is really about from a wholesale perspective focusing on sell out, as Andrew mentioned, making sure we have the right inventory in the market and letting that really be a pull market and wholesale revenue will be what it is and that's incorporated into our guidance.

Speaker 3

A quick follow-up on Hey Dude. Just where sorry if you mentioned this during the prepared remarks if I missed it, but where are we at in terms of cleaning up the gray market and all that?

Speaker 2

Yes. I think we're making great progress. Yes. We see substantial dips in the gray market from sort of earlier in 'twenty three. We're not done yet.

Speaker 2

We think it will take through the first half of 'twenty four to complete that, but certainly solid progress.

Operator

The next question comes from Jonathan Komp of Baird. Please go

Speaker 2

ahead. Yes. Good morning. Thank you. I want

Speaker 4

to ask about Crocs North America. Could you just share your current thoughts on the health of the business? Any thoughts on the trajectory in 2024 here and maybe include with that gibbets in your view there? I know you mentioned penetration increases for the year. And then just one separate question more for Anne.

Speaker 4

As we think about the margin guidance for the year, it looks like you're implying pretty significant SG and A deleverage for the Crocs brand. I wanted to see if you can give any more color there if that's the case and further give detail on what's driving that? Thank you.

Speaker 2

Yes, John. So I think the Crocs brand continues to be very well positioned in North America. Obviously, it's our largest business and it is a scale business. We have substantial market share. We're well penetrated from a wholesale perspective, from a retail perspective and from a digital perspective.

Speaker 2

But we do see we were very happy with the performance of the cross brand in the market in 2023. We see we have very positive, I would say, indications of continued support from our wholesale partners. We have a strong pipeline of product innovation that we'll bring to market. We have a strong pipeline of licensed products, collaborations that we'll bring to market during the year. In fact, I was just spent mostly yesterday afternoon reviewing new products.

Speaker 2

So super excited about that. So I think the brand is well positioned. I think it also does and as you rightly call out, we do think we have incremental penetration opportunity for Givots. We see the consumer dynamic with personalization being incredibly positive. As you saw in 2023, it grew above the overall growth of the business and gained penetration.

Speaker 2

We think we see opportunities in the wholesale market where, look, it is a more difficult product to display and sell in the wholesale market, but we have some creative solutions that we'll be testing and rolling out. We also are bringing the timelines in for Jim, it's dramatically so that we can respond to, I would say, kind of social trends much more quickly. So we're super excited about using personalization to create ongoing consumer engagement.

Speaker 1

Yes. And just as a reminder that North America in 2023 grew 8.3% on a constant currency basis and 3% in Q4, so pretty good results out of the North America Gale Crocs business. I think from an SG and A perspective, as we talked about at ICR, we are going to invest some of our margin improvements in SG and A this year. We think it's really important and that goes for both brands. Just to give you context, we do expect higher SG and A dollar growth in the first half versus the second half because we're still anniversarying some larger investments on both brands that we made in 2023.

Speaker 1

So SG and A growth is up mid-twenty percent in both Q1 and Q2, so just something to keep in mind. And why we're not going to guide specifically from a both brand perspective on investments, the investments that we're making across the board are really on the marketing side. Talent in both brands on Crocs is really focused on our international markets, which we expect to drive the growth this year. And then on Hey Dude, some of that is related to our outlet store investment. And that's, the biggest pieces.

Speaker 1

And then some technology associated with both brands.

Operator

Next question comes from Rick Patel of Raymond James. Please go ahead.

Speaker 5

Good morning, everyone. Congrats to Anne on the new role and all the best to Michelle on your new chapter. Just wanted to ask a question about the long term potential for growth. So with total revenues being guided up 3% to 5% here, how should we think about the potential to hit $5,000,000,000 of revenue by 2026? Just hoping you could add some color on the building blocks there.

Speaker 2

Thanks, Rick. And I assume you're referring to the $5,000,000,000 for Crocs that we guided some years ago? Correct. Yes. Okay.

Speaker 2

So, yes, because I think so a number of years ago, we guided we thought that the Crocs could be a $5,000,000,000 brand. And I think at that point, we said we thought that could happen by 2026. I think where we are today is we absolutely still firmly believe that Crocs is a scale business, the Crocs brand and can easily be $5,000,000,000 And we look at the pillars that we're using to drive that growth, which is Asia, digital, clogs, sandals and personalization. We see really kind of solid progress against all of those pillars. In fact, I'd say more than solid progress.

Speaker 2

We've seen sort of incredible progress over the last several years against those pillars. I think quite a few things have changed since we provided that guidance in around global supply chain. We had to pull back out of Russia because of all the issues that you're well aware of. And frankly, currency as well cost us about $200,000,000 in top line. So I don't think that it's realistic to achieve the $5,000,000,000 by 2026.

Speaker 2

But and so we're really focused on driving continued growth in a profitable and sustainable way, and probably take a little bit longer. But I think it still drives incredible shareholder returns and value creation for shareholders. And in terms of operating margins, will be the 1st year I think we're deviating from the or we're projecting to deviate from the 26%. We still think the operating margins for our company are in the mid-20s, but will not be every single year above the 26 percent mark. We think it's very prudent to invest incremental dollars from time to time to create the capabilities that allow us to grow in the future.

Speaker 2

Hopefully, that gives you a perspective in the long term.

Speaker 5

Very helpful. Thank you.

Operator

The next question comes from Abby Zogenix of Piper Sandler. Please go ahead.

Speaker 6

Great. Thanks for taking my question. Just on the Crocs brand, is there any color you can give on quarter to date trends and the coxswain being guided to 6% to 8% versus 4% to 6% for the year? What are you seeing that gives you confidence in that number? And does that assume just a continuation of trends that you're seeing so far?

Speaker 6

Is there any improvement contemplated in getting to that 6% to 8% for the quarter?

Speaker 2

Yes, I think I'll let you obviously, we get a bit of a brand color and Anne can give you some of the more specifics. I would say it's a continuation of the trends from last year basically. We see we don't give a lot of in quarter color, But if you think about some of the big drivers that have really been propelling the brand, so Asia and international growth has been super important. We see cloud growth, cloud growth and gibbit growth from a product perspective important. And as you know, we have visibility to bookings, so we feel real confident around our wholesale bookings.

Speaker 2

And we see solid sell out for the brand. So I'd say it's continuation mostly.

Speaker 1

Yes. And just January, we don't really comment on trends inter quarter, but January is a very small piece of our overall quarter when you think that is pretty immaterial for us as a business.

Speaker 6

Got it. That's helpful. And just one follow-up, more of a housekeeping question. Since you changed the reporting segments, is there any way you can tell us kind of what 4Q would have looked like under the old reporting segments? Thank you.

Speaker 1

Yes. So as we did change our reporting segments. So our new reporting segments are Hey Do brand and Krotz brand as we think that reflects how we should look at the business. So as reported, North America grew 3% in Q4, international grew 25%, led by Asia Pac, which was up 36% and EMEALIA was up 16%. For the year, operating profit dollars across all regions increased double digits versus prior year and the strongest growth was came from Asia and EMEALIA.

Speaker 1

So this will be the last time we'll give the information as our statements have now changed, but that gives you some a full year picture.

Operator

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

Speaker 7

Thank you. Good morning. Appreciate you taking my question. Hope you guys are doing well. Two questions.

Speaker 7

First, can you speak to the outlook for international markets, specifically which are the markets you're excited about for 2024? Certainly, China is on that list. Are there others that you would highlight? And likewise, in the international landscape of the markets you expect to be more challenging?

Speaker 2

Yes. Absolutely, Jim. So I think let me start with the sort of highlights. China is probably top of the list, as you rightly pointed out. We've got kind of a multiyear investment effort and focus on China.

Speaker 2

I'm really thrilled that that's starting to pay off in 2023 with triple digit growth, so essentially doubling the business during that year from a top line perspective. Obviously, it improves dramatically from a bottom line perspective as well. But we're just getting started in China, right? So 4% of our overall revenues, if you look at sort of other global brands that benchmark of sort of Greater China substantially higher than that, maybe 4 to 5 times higher than that. So I would say second, we're seeing great trajectory in parts of Western Europe, particularly the U.

Speaker 2

K. We're probably on a 2 to 3 year very strong growth trajectory in that market. And it's also an important market for influence across the European marketplace. We're seeing a strong trajectory in France also. I would say thirdly, North Korea sorry, South Korea has been a very steady growth driver for us.

Speaker 2

And I think I mentioned in my prepared remarks, it's actually when we isolate our countries around the world, there's the highest market share performance, even above the United States. But we've seen future opportunities, continued growth opportunities in South Korea. Australia has performed very strongly. We've seen a real turnaround in the business there. And so those are probably the highlights.

Speaker 2

I think the more challenging markets, Japan remains a slightly more challenging market. I think we're shifting focus that market because it is a large market. And we do anticipate growth in the future, but we've got some work to do. And I think we're very, very optimistic about India in the long range, and we're putting substantial investments into that market a little bit like we did around China. But there are a number of kind of short term issues around sourcing that are creating some, I think, some headwinds in the very short term.

Speaker 2

But I think in the long term, India will be a big success.

Speaker 7

Very helpful. Thank you, Andrew. And soon you'll be above the fray on questions like this, but I do have a question on the tax rate outlook. It came in a little bit lower than I expected. Is that reflective of geographic mix of the profit pools?

Speaker 7

I guess that what I'm after here is that a sustain do you view that as structurally sustainable tax rate or is there a one time dynamic related to that?

Speaker 1

Yes. Thanks, Jim. Yes, I'm very excited to turn tracking over to tax tracking back tax over to somebody else. But I think our tax rate so at the end of Q4, we moved our Hey Dude IP from Hong Kong, where we don't have operations to Singapore and Netherlands. And that created that one time benefit of $112,000,000 that we backed out for the purposes of adjusted EPS.

Speaker 1

So you could have a better idea of our true underlying tax rate for the current year. That does have underlying benefits for this year. So that's how we get to the 18%. So it reflects some geographical mix, but also just the restructure in our tax structure. Right now, we're saying we think 18% is right for this year.

Speaker 1

I would still use 20% long term until we have a better picture going forward.

Speaker 7

Helpful. Thank you.

Speaker 1

Thank you.

Operator

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

Speaker 8

Great. Thank you. Good morning. Can you talk about the underlying assumptions in your outlook for the relatively stable gross margins for your core Crocs business this year? I'm just trying to understand what would be holding that back from expanding on the mid single digit growth?

Speaker 8

And if margins do come in better, are you expecting to spend against that strength? Or will you allow some level of flow through to the bottom line this year?

Speaker 1

Yes. Thanks. That's a great question. So obviously, we are really pleased with our crossroads margins for the year. They expanded nicely after what was a tougher 2022 on some we had some significant freight tailwinds.

Speaker 1

We think that's pretty normalized, at this point. So we think that just given all of the puts and takes, so you've got currency, you've got freight, you've got mix from a channel perspective, pricing and product mix. We think that about where we were last year is a fairly good place to be. So on revenue growth, that's not necessarily where we tend to see margin expansion on revenue growth is your operating margin because you leverage your SG and A. This year, we've made the conscious decision to take those dollars and really invest.

Speaker 1

As Andrew talked about, we're investing in India and some of our other international markets as well as talent and really focused on that long term sustainable growth. If we exceed what we said, if we have good investments, we will make the call whether we should continue to invest for the long term or let that flow through to an operating margin perspective.

Speaker 8

Got it. That's very helpful. And then just as a quick follow-up, can you provide an assessment of how the Red

Speaker 9

Yes

Speaker 1

Yes. So right now from a Red Sea perspective, we're really seeing an impact from our mostly our EMEA business at this point. We're seeing a couple of weeks delay overall from a shipping time perspective. We haven't seen a material change to our freight rates at this point. So I would say, we don't know what's going to happen this year.

Speaker 1

Obviously, we don't know how this is going to play out. But at this point, it's not been a material impact to our

Speaker 3

business.

Operator

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

Speaker 9

Thanks for taking my question and Anna, I'd extend my congratulations, incredibly well deserved promotion and increase in role. Andrew, I was wondering if you could take a step back and look at 2019 as a starting point where North America was $640,000,000 at the Crocs brand and international was $590,000,000 Obviously, there's way more people internationally than in the U. S. And I think there's an argument to be made that the Crocs brand might even resonate a little better with certain countries and populations than the U. S.

Speaker 9

So I'm just wondering if all the things that you had done leading up to the pandemic, customization, social influencing, speed to market with distribution, Obviously, you did that in the U. S. First. If you use the U. S.

Speaker 9

As a kind of a leading indicator, I'm wondering kind of where you're at, like what you're seeing internationally and would you disagree that international should be at least as big, if not bigger than the U. S? And then I guess the critics might say, well, gee, the U. S. Is going to come back.

Speaker 9

That obviously hasn't happened. I was wondering maybe you could speak to like what people are missing as to if anything the U. S. Has accelerated, just the dynamics between the U. S.

Speaker 9

And international, what you could give us there?

Speaker 2

Okay. Yes, I think like I honestly, Jeff, I think it's a great way of thinking about it, right? So just to sort of paint the picture for everybody, what we saw, the Crocs brand really started to inflect in the U. S. Marketplace sort of late 2018 into 2019 and then grew dramatically through the pandemic.

Speaker 2

I think a lot of people outside of the company kind of put that down to, well, that was the pandemic and people were happy to wear Crocs at home, but they're not happy to wear Crocs when they're back out in the real world, right? So I think at this point, hopefully, that has proven to be incorrect in that people are happy and excited to wear Crocs out in the real world. And I think what's happening there is we're engaging in the consumer, we're exciting the consumer with innovative new product, with a high comfort product, with a high value product, with a product that can be personalized in many different ways and is pretty exciting and the customers engaged in it. So that's grown that business dramatically. We've seen that trajectory repeated in a number of our international markets.

Speaker 2

So if we look at markets like the UK, we're still probably in our 3rd year of very accelerated growth. So we're seeing that trajectory play out. And so and then as I highlighted in earlier question and in our prepared remarks, we actually have the highest market share in the Korean marketplace as of today, so even above the U. S. So that's to your point around there might be some places in the world where the cross brand actually resonates even better than in the U.

Speaker 2

S. Easy on and off been a kind of key component there where culturally there are many markets where people take their shoes off when they go into a building or go into somebody's home. So I think that's a viable thesis. We're not guiding the international business, just to be clear, then it will be bigger than the U. S.

Speaker 2

Business. I mean, I think when we did our $5,000,000,000 plan, we were pretty clear that a lot of our growth would come out of Asia and the international will be super important. And you've seen that in the last like 6 quarters, the international business has grown very strongly. So we concur. Cut.

Speaker 3

The next question

Operator

comes from Sam Poser of William Stratton.

Speaker 10

I have 2. For Anne, I want can you talk about the evolving demand planning, especially with the Hey Dude brand in order to get to the pull model that you're working towards and how that is working within the Crocs brand and how you and your new role intend to make that work further work. And then for Andrew, Andrew, you talked about it in the prepared remarks about promoting Anne to this position. Could you just expand on why

Speaker 7

she is you went

Speaker 3

through a long process here. It wasn't quick from what I gathered.

Speaker 10

But can you sort of nuanced discussion of why she ended up being the best person for the job in your view? Thanks.

Speaker 2

You mean other than she's awesome? I'll let Anne answer the first question.

Speaker 1

Andrew is thinking of a good answer for you, Sam. No, I'm just I'm kidding. So, yes, so on the demand planning front, so for both PDUDE and from a crack perspective, we have key account planning. We look very thoughtfully at our big accounts, and we plan strategically what sell out is and then that obviously drives sell in. We as we talked about on Hey Dude, a couple of the key differences we were making and remember when we bought Hey Dude, we didn't really have the infrastructure in place.

Speaker 1

So these are new tools and gilts that we're implementing. We worked really hard to do that last year. So, we're also looking at making sure that the Andrew mentioned, that we have the right product in the right accounts, and that we're thoughtful about, seeding product in the right place and also depth and where we put things. So we're really focused on, as you mentioned, letting it be a pull model. And if we are a little bit short on some things and it sells out fast, then that's great and that's more demand for next year.

Speaker 1

That's kind of how we're thinking about it. That's how we think about it existing on the Crocs side.

Speaker 2

Great. So your second question, so look, I mean, my flippant answer is important, right? Like we have great confidence in Anne, both her knowledge of the business, the commercial acumen, her understanding of kind of the consumer trends beyond her abilities as a CFO. So that's important. I would say this transition is part of the succession plan planning that we've been doing for some time.

Speaker 2

We do it for all of our senior leaders. We do that in conjunction with the Board, as you'd expect. And we have a very thorough process around this. So it's definitely something we take very seriously. And we think this is Michelle is retiring, and we wish her well.

Speaker 2

I mean, she's done an amazing job. And as I also said in my prepared remarks, she's been doing this in the footwear industry for a long time and has some other things that she would like to spend a bit more time doing. So I think it's a very natural transition and very well planned.

Speaker 10

Thanks. And I just have a quick follow-up for Anne. It was to somebody else's question about comfort that the pay due business would grow in the back half of the year. How much of the

Speaker 9

sort of

Speaker 10

the way this looks like it's going to flow is retailers and you overreacted, put too much product into the market place at the beginning of last year, given sort of the way things were in the middle of this year when they were writing spring, retailers over probably overreacted and may not have written enough. And now they're sort of seeing what's going on and then that's starting to normalize as the orders move throughout the year. Am I thinking about that correctly?

Speaker 2

I think mostly, Sam. Yes, that's mostly a very thoughtful understanding of the marketplace.

Speaker 8

Thanks very much. Good luck.

Speaker 1

Thank you. Thanks, Tim.

Operator

The next question comes from Aubrey Tiano of BNP Paribas. Please go ahead.

Speaker 11

Hey, good morning. Thanks for taking the question. I wanted to follow-up on Crocs North America. You mentioned changing the distribution model with Amazon. Could you maybe give a little more detail on what's changing, how those changes flow through the P and L and also what the timeframe is for that?

Speaker 1

Great question. So as we talked about in our 3rd call, I think taking a step back, really at the highest level globally, we are trying to have more brand control in global marketplaces where our brand is sold. So we talked about marketplaces that's on a digital front and those maybe Amazon or others. And so the best way to do that is for us to sell directly to the consumer on those marketplaces. So it's a direct to consumer sale versus a wholesale sale.

Speaker 1

So the dynamics of how it flows through the P and L, it's a higher gross margin, higher SG and A, higher revenue, but it's really not that's not the focus point. The focus is just controlling our brand and how the consumer how it shows up to the consumer and making sure that we provide a consistent and best experience for our consumer. I would say this distribution model has been performing in line with our expectations of these changes. And so we will expect to continue down the path this year.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Andrew Reeves for any closing remarks.

Speaker 2

Thank you. I just wanted to express our sincere appreciation for everybody's joining us today and their interest in our company. So thank you so much and have a great day.

Operator

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

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Earnings Conference Call
Crocs Q4 2023
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