Crocs Q3 2023 Earnings Call Transcript

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Provided by Quartr
November 2, 2023

Key Takeaways

  • We delivered Q3 revenues over $1 billion (6% growth on a constant-currency basis) with industry-leading 28.3% adjusted operating margin, exceeding the high end of guidance.
  • Crocs brand posted double-digit direct-to-consumer growth (18%), with 8% revenue growth in North America, 29% in Asia (China +90%), and strong product innovations and licensed collaborations boosting full-price selling and social engagement.
  • Hey Dude revenues declined 9% in Q3 ($247 million), with wholesale down 20% offset by 15% DTC growth, and the company is taking decisive price and inventory control actions leading to a 20–25% Q4 revenue decline expectation for the brand.
  • Full-year 2023 revenue guidance was cut to 10–11% growth (from 12.5–14.5%), with Hey Dude now expected to grow 4–6% reported (down 4–6% pro forma), Q4 consolidated revenues of $903–$938 million (–1% to –4%), and adjusted EPS lowered to $11.55–$11.85.
  • Strong free cash flow supported $90 million of debt repayment and $150 million of share repurchases in Q3, maintaining a net leverage ratio around 1.7× while continuing to invest in long-term brand and supply-chain initiatives.
AI Generated. May Contain Errors.
Earnings Conference Call
Crocs Q3 2023
00:00 / 00:00

There are 8 speakers on the call.

Operator

Welcome to the Crocs Incorporated Third Quarter 2023 Earnings Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask 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. Please go ahead.

Speaker 1

Good morning, everyone, and thank you for joining us today for the Crocs, Inc. 3rd quarter 2023 earnings call. Earlier this morning, we announced our latest Quarterly results and a copy of the press release and our slide presentation may be found on our website at croc.com. We 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. These statements include, but are not limited to, statements regarding our supply chain challenges, cost inflation, the acquisition of Hey Dude, The benefits therefore, cross strategies, plans, objectives, expectations, financial or otherwise, and intentions, These statements involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward looking statements.

Speaker 1

Crocs is not obligated to update these forward looking statements to reflect the impact of future events, except as required by applicable law. We caution you that all forward looking statements are subject to risks and uncertainties described in the Risk Factors section of our annual report on Form 10 ks and our subsequent filings with the SEC. Accordingly, actual results Could differ materially from those described on this call. Please refer to Crocs' Annual Report on Form 10 ks as well as other documents 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

Joining us on the call today are Andrew Reese, Chief Executive Officer and Ann Melman, Executive Vice President and Chief Financial Officer. Following their prepared remarks, We will open the call for your questions. At this time, I will turn the call over to Andrew.

Speaker 2

Thank you, Erinn, and good morning, Everyone, let me start by welcoming Erinn Murphy, our new SVP of Investor Relations and Corporate Strategy And by thanking Corie Lynn as she transitions to a new role within Crocs and for her dedication to leading Investor Relations over the past 3 years. We delivered strong 3rd quarter results with quarterly revenues over $1,000,000,000 exceeding the high end of guidance, led by double digit growth in the Crocs brand, partially offset by high single digit decline in the Hey Dude brand. I'm pleased by our team's agility as we continue to operate in an increasingly challenging macro environment. We drove strong 18% direct to consumer revenue growth at the enterprise level and once again delivered industry leading margins with 28% adjusted operating margins. Anne will review our financial results in more detail shortly, but here are a few highlights from the Q3.

Speaker 2

Revenues of over $1,000,000,000 grew 6% on a constant currency basis. North America revenues up 8% and Global DTC Comparable Sales up 15 with strong full price selling. Hey Dude brand revenues were $247,000,000 with DTC growth of 15% offset by declines in wholesale. During the quarter, we took decisive action around Hey Dude to maintain price integrity and elevate our marketplace management strategy to ensure long term brand health. I will elaborate on our strategy in a moment.

Speaker 2

I want to start my comments today with our views on the macroeconomic backdrop and the health of the consumer. We are operating with greater uncertainty than we started the year with persistent inflation, higher interest rates, the resilient and continues to show up during key shopping events such as back to school, which was strong for both brands. In September, trends softened across the footwear industry and we are seeing consumers pull back in between peak shopping events. Against this backdrop, we're focused on making the right decisions for the health of our brands, keeping a tight control of inventory and investing behind initiatives to support profitable long term growth. We believe we are well positioned in the current economic backdrop and see our value orientated price points as a durable competitive advantage.

Speaker 2

Moving on to our brand highlights, Let's begin with the Crocs brand. We're continuing to see broad based consumer love for the Crocs brand. In Piper Sandler's fall 2023, 3, taking stock with team survey. Crocs was the number 6 favorite footwear brand among U. S.

Speaker 2

Teams, registering A new record high mind share with balanced contribution across all genders. With respect to product innovation, Our strategy to diversify our clog offering, grow sandals and leverage personalization is working. We demonstrated double digit growth in clogs With outsized momentum with our height orientated offerings including the crush and mega crush styles. As we look at our broader assortment, I want to call out the Echo Franchise, which has developed into a sizable business across Crocs and Sandals. In September, we introduced the Echo Boot, which is off to a good start.

Speaker 2

Turning to Sandals. In Q3, Sandals revenues grew 6% on top of nearly 20% growth in 22 and a 35% growth on a trailing 12 month basis. We had a solid back to school season for sandals in all three regions with Amelia as a standout region in the quarter. In fact, we were the number one sandal and flip flop brand on Amazon U. K.

Speaker 2

During the month of August, Growing 37% over last year. Globally, the Classic and Brooklyn remain our leading fan franchises followed by The Crush. This quarter, we proactively destocked our classic sandals as we prepared to relaunch a new version of this franchise in 2024. In Q4, we'll also test the Getaway, our newest sandal innovation. The Getaway is built around our newest proprietary material innovation known as Free field technology and will initially come to market with 4 styles.

Speaker 2

For 2023, we expect our channel business to be approximately 400,000,000 From a marketing perspective, Q3 has some of our biggest wins to date. In July, our Barbie collaboration, which featured Clogs, sandals and gibbets sold out quickly ahead of the blockbuster movie launch and we restocked the collection twice during the quarter. It was our number one licensed property in the quarter. In August, we dropped our 4th Lightning McQueen adult clog with strong with a very strong unveil on TikTok, garnering approximately 38,000,000 views, our best performing TikTok ever. Finally, in September, we launched Shrek!

Speaker 2

Globally online and with select retail partners. This launch gathered over 300,000,000 global media impressions and helped land Crocs as the number 3 on Hypebeast rankings. These partnerships among several others drove new consumers to our brand and to our social channels. In fact, we crossed 2,000,000 follower mark on Instagram in September and recently crossed the 2,000,000 follower mark on TikTok. In October, we celebrated our biggest Croctober yet with a fan inspired Crocs Classic Cowboy Boot generating significant buzz, garnering $2,000,000,000 global media impressions through the month long celebration with the boot almost completely selling out globally in a few days.

Speaker 2

At $120 per pair, this was our highest price point for October shoe to date and gives us confidence in the permission our brand has with consumers. Asia is another important long term growth driver for the Croft brand as the brand is currently underpenetrated relative to the U. S. In Q3, Asia revenues grew by 29% in constant currency. Growth was again broad based With strong brand momentum across the region.

Speaker 2

We've continued to invest in talent in the region. During Q3, we welcome Carol Chen, our new SVP and General Manager of APAC, who joined us following a 22 year career at Nike. Drilling down into China, we had another exceptional quarter of growth, where Q3 revenues increased over 90% in constant currency, ahead of our expectations. Crocs' rising popularity in China has created a passionate following with a hashtag known as Dongmen or clogsfollowers. We now have close to 60,000,000 Dongmen hashtags on read, up from approximately 40,000,000 at the end of Q2.

Speaker 2

In the quarter, we had a particularly Successful Big Brand Day campaign, which leveraged the introduction of the Siren silhouette, a Tmall first launch. Revenue during this campaign vested our internal targets handily, driven by our traffic and record high average order value, which underscored to drive quality business through new product introductions. Finally, on the sustainability front, Crocs is taking steps to further its circularity ambitions with the recent launch of our new retail take back partner program, Pilancing this week in 45 of our U. S. Retail stores, we're inviting consumers to give all Crocs new life by dropping Crocs In any condition, in collection bins at participating stores.

Speaker 2

Through this effort, Grox is working to keep shoes on feet for those who need them and keep shoes out of landfills. Turning to Hey Dude. I remain confident in the brand health metrics that underscore How beloved this brand is with consumers. This fall, Adud was the number 7 favorite footwear brand in the Piper Sandler taking stock with team survey, taking the highest share we have seen to date. In underpenetrated markets like the Northeast, mine share almost tripled among the teen demographic.

Speaker 2

Despite a tough footwear backdrop, we're pleased with the performance of our strategic accounts during the back to school season. Strategic wholesale now represents 50% of our brand sales mix, up from 39% last year. In Q3, sell out from our strategic accounts was up 28% year over year, offset by the rationalization of our non strategic accounts. From a product perspective, we'll focus on new style introductions that create heat and drive new consumers to our brand, while working down our carryover inventory. During the back to school season, top selling styles included core icons like the Wally Socks Micro in black, Alongside our updated icons like the Wendy Funk Mono in Electric Pink, we also saw continued strength in our Sirocco sneaker, which rounded out our In the Q3, we dropped our 2nd Mossy Oak collaboration with sell through rates of greater than 60%, attracting an influx of younger consumers to our biopharma.

Speaker 2

In September, there was tremendous Excitement around our first ever collegiate collection, which featured 12 schools alongside several NIL athletes who will act as brand ambassadors. We had strong consumer feedback as several schools sold out of the collection in the 1st 5 days. In August, we aim for long term partnership with Duprefect, a content group that is known for its humor and iconic trick shots. Duprefect has amassed a powerful social community with approximately 90,000,000 followers across YouTube, TikTok and Instagram and believes in coming together in good times, a brand ethos consistent with Hey Dude. Leveraging our consumer insights That over 50% of our buyers give Hey Dudes as gifts, Dude Perfect will be the face of our Happy Holidays holiday programming.

Speaker 2

As I reflect on where we are as a brand, I remain as confident in the long term opportunities as I was when we acquired Hey Dude. We believe that the brand's versatility, the product's easy on and off nature, iconic silhouettes and the permission to expand into new categories and regions remains unparalleled. That said, I acknowledge that there have been several growing pains this past year, some of our wrongdoing and others tied to the macro backdrop. I want to take the time to share our learnings and our recent designed to bring the brand to a healthy pool market. In 2022, we accelerated growth within our strategic accounts and we did it fast.

Speaker 2

The intent of this decision was to build brand awareness and secure self space with our most important retail partners. We've delivered on both of these goals. As evidenced in our recent brand health tracker, aided awareness of the Heyedric brand in North America It's now up 32% in Q3, up from 18% in Q1. That said, we recognize the need to be better around driving effective segmentation alongside new product introductions to sustain this broader customer base. There was also more carryover inventory in our legacy customers than we had expected, which further diluted our offerings.

Speaker 2

Year to date, we've made considerable progress in cleaning up our inventory and are pleased that our Haydewood inventory ended down 41% from Q3 last We've also made several key hires over the past 12 months to fortify our efforts in North American marketplace management, including hiring a GM of North America, VP of Global Category and Channel Management and other talents in product design, Wholesale Sales and Insights and Consumer Insights. We're already seeing the benefits of the augmented team and believe this collective impact will build as we move throughout 2024. As we've talked about on our previous calls, We are anniversarying last year's pipeline fill, which impacted Q3 by approximately $60,000,000 and we expect to be approximately $50,000,000 headwind in Q4, unchanged from our former outlook. What has changed since we last updated you in July, retailers are more cautious around our Hey Dude brand and App1's demand was lighter than we previously expected. For the industry, post back to school wholesale market has been soft as consumers have pulled back and football has been down double digits.

Speaker 2

Our Hey Duke brand, which has limited history with retailers, I've seen a more restricted open to buy as we look into the spring season. In sharp contrast, our spring order book for Crocs brand are strong for the first half of twenty twenty four, reflecting the ongoing momentum we see in the cross brand. Taking the environment aside, we made an important pivot to our digital pricing strategy in September. Specifically, we made the decision to stop price matching with the gray market goods that are selling on Amazon, forfeiting near term sales to prioritize long term market We know it's the right decision for the brand going forward. Already we are seeing immediate positive impacts with ASP up over $10 on Amazon and the pivot has been acknowledged by our wholesale partners.

Speaker 2

While this will hinder sales growth in Q4 and possibly into the first half of We believe this will set us up for a much cleaner marketplace as we move throughout 2024 as well as protect the brand. Unauthorized inventory levels have improved versus where they were in June. And based on our current visibility, we expect gray market goods to be in a substantially better position in the first half of twenty twenty four. While we are not guiding to 2024, we would expect Hey Dude wholesale revenues in North America to remain negative through Q2, tied in part to macro and in part due to our decision to pull back on promotional activity prioritizing brand health of Marketplace Management. Beyond this year, I would like to provide some of the building blocks on how we're thinking about Haidu's growth agenda.

Speaker 2

First, we are adopting an omnichannel approach to drive engagement and meet consumers where they shop. In addition to Strengthening our digital capabilities and staying disciplined with our strategic wholesale partners will explore brand accretive opportunities. To that end, we're in the early days of developing an outlet retail strategy for the Hey Jude brand, leveraging Crocs' successful retail playbook. We've opened our 1st outlet locations and expect to have 5 locations by the end of the year. 2nd, we're remaining laser focused on winning with our U.

Speaker 2

S. We are focused on strengthening our family channel partners, further tapping into the sporting goods channel where we made where we have ample white space and elevating our approach with more based specialty. We also expect to start 2024 with a much cleaner account base, Having shutted over 50% or 600 accounts during the year, we have also pulled back on digital rights for accounts that fall outside of our strategic accounts. 3rd, international. We have set up a few test markets in Europe and are laying the groundwork to expand in new international markets in the next 2 to 3 years.

Speaker 2

We'll be using approach that is consistent with our Crocs playbook, go direct in markets where we are direct for Crocs and utilize distribution partners in markets where we are indirect with Crocs. In summary, our Crocs brand has never been stronger And we remain steadfast on executing our global long term strategy. With Hey Dude, we're focused on protecting profitability and elevating marketplace management even if that comes at the expense of near term revenues in an effort to support consistent profitable growth on the long term. I will now turn the call over to Ann, who will review our Q3 financial results in more detail.

Speaker 1

Thank you, Andrew, and good morning, everyone. I will begin with a short recap of our Q3 results. All revenue growth rates will be cited on a constant currency basis unless otherwise stated. For a reconciliation of the non GAAP amounts mentioned to their equivalent GAAP amounts, please refer to this morning's press We had a strong Q3 with over $1,000,000,000 in consolidated revenues, representing approximately 6% growth year over year. We delivered another quarter of industry leading margins with adjusted gross margins of 57.4%, Adjusted operating margin of 28.3 percent and adjusted diluted EPS growth of 9%.

Speaker 1

Our portfolio is diversified from a brand, Channel and geography perspective. On a trailing 12 months basis ending Q3, Crocs brand revenues were 75% of total And Heiju brand revenues were 25%. Channel mix was well balanced with wholesale revenues representing 53 percent of TTM revenues and DTC at 47%. Finally, approximately 33% of total TTM revenues and 40% of cross brand TTM revenues We're from international markets. During the Q3, cross brand revenues were $799,000,000 growing 11% relative to prior year and driven by strong DTC growth of 18.4%.

Speaker 1

The brand sold 29,000,000 pairs of shoes, a decrease of 4% from last year. The unit decline came almost entirely from our Amelia region tied to the corrective We took last quarter to curtail a significant African distributor that we believe was diverting goods to the U. S. Gray market. The Crocs brand average selling price during Q3 was $27.25 which was up 15% on a constant currency basis, driven by product mix, fewer DTC promotions, international price increases and channel mix.

Speaker 1

Within the Crocs brand, Claws grew double digits and continued to generate demand with newer products such as Echo, Mega Crush and Height In Asia, Kids is also developing into a solid category for the brand and took significant share during the back to school season, representing approximately 20% of footwear revenues. Sandals increased 6% in Q3. As Andrew Sandal growth was lighter in Q3 as we destock the Classic franchise ahead of relaunching an updated line in 2024. Finally, Jibbitz continues to create excitement and engagement with consumers around the world, growing 15% from last year with growth across all three regions, but particularly strong in Asia. Now, let's discuss a few cross brand highlights by region.

Speaker 1

In North America, 3rd quarter revenues increased 8% to $481,000,000 We gained significant market share in a declining U. S. Footwear market. North America DTC comparable sales were up 10.2%. Wholesale revenues decreased 1%.

Speaker 1

The double digit brick and mortar wholesale growth was offset By declines to Amazon as we evolve our distribution model on Amazon. This shift negatively impacted unit growth and positively impacted ASP growth in our North America region. As we look into 2024, we are pleased with the strength of our spring quarter book for North America wholesale. Cross Brands Q3 revenues in Asia grew 29% to $175,000,000 and growth was broad based across countries and channels. Australia led the growth with revenues increasing triple digits and China grew over 90% versus last year.

Speaker 1

South Korea and Southeast Asia each saw strong double digit growth rates in the quarter. Cross brand revenues for Amelia were $143,000,000 up 3% from the Q3 of 2022. This quarter, we saw robust double digit growth in the UK and France. This strength Somewhat offset by Germany, which weakened during the quarter against a tough economic backdrop. As previously mentioned, we terminated a relationship with a significant distributor servicing Africa in Q2.

Speaker 1

In Q3, we saw an $8,000,000 revenue headwind This corrective action and we expect to see a $13,000,000 headwind in Q4 bringing the year to a cumulative $29,000,000 revenue headwind. Turning to Hey Dude. Q3 revenues were $247,000,000 a decrease of 9% from last year. During Q3, The brand sold 8,300,000 pairs of shoes, a decrease of 11% over last year. Hey Dude average selling price during Q3 was 29.68 or 3% higher than prior year as channel mix into DTC and product mix in wholesale was partially offset by double digit pricing declines on e commerce.

Speaker 1

As a reminder, our average selling price is a basic average and not adjusted for channel dynamics. Wholesale revenues were down 20% from Q3 last year, as we continue to let pipeline fill and as lower consumer football led Retailers taking a more conservative approach to at once orders. The D2C channel, which is predominantly e commerce, led the growth with revenues increasing 15% from last year. Consolidated adjusted gross margins for the 3rd quarter were 57.4%, increasing 2 30 basis points from last year, driven by favorability in ocean freight rates and the absence of airfreight, as well as lower promotional activity in the Cross These were both partially offset by higher overhead and fulfillment costs associated with our Haydew distribution network inefficiency. Turning to the brands.

Speaker 1

Adjusted gross margin for the Kross brand was 62.1% or 4 60 basis points higher than prior year. Key drivers of This improvement include 3.40 basis points from lower freight, fewer year over year promotions, partially offset by product mix. Hey Dude, adjusted gross margins were 42.8%, down 600 basis points from prior year. Approximately 500 basis points Setting these headwinds, we saw lower inbound freight in the quarter. During the Q3, consolidated adjusted SG and A represented 29.1 percent of revenues, which is 190 basis points higher than last year as we invested more in talent and marketing for both brands to support our growth trajectory and we annualized additional investment for Hey Dude.

Speaker 1

Our 3rd quarter consolidated adjusted operating income was $296,000,000 an increase to prior year by 8% and consolidated adjusted operating margins increased 40 basis points remaining best in class at 28.3%. Our 3rd quarter non GAAP diluted earnings per share increased 9% to 3.25 Our continued strong free cash flow generation enabled us to repay approximately $90,000,000 of debt in Q3, reducing borrowings to approximately $2,000,000,000 At the end of Q3, our gross leverage was approximately 1.7 times as we ended the Q3 with $127,000,000 of cash and cash equivalents. During Q3, we resumed our Share repurchase activity and completed $150,000,000 of share buybacks, repurchasing 1,400,000 shares at an average price of 107.85 We currently have $900,000,000 remaining on our share repurchase authorization. We will continue to balance debt repayment and share repurchases and remain committed to our long term net leverage target of 1 to 1.5 times. Our inventory balance at September 30, 2023 was $390,000,000 a decline of 24% to last year.

Speaker 1

Crocs brand inventory was 279,000,000 down 14% to prior year and Haydew inventory was $111,000,000 a decrease of 41% to prior year. Inventory turns In the 1st 9 months of the year and the standout performance of our Crocs brand, we recognize our Hey Doo performance has fallen short of expectations. As Andrew mentioned, we took actions during Q3 to prioritize longer term marketplace health. As such, we are reducing our expectations for Q4 and the full year. For fiscal 2023, we now expect consolidated Cross Inc.

Speaker 1

Revenue growth to be 10% to 11% compared to 2022, down from the prior range of 12.5% to 14.5% growth and resulting in full year revenues of approximately $3,905,000,000 to $3,940,000,000 From a brand perspective, our expectation for the Crocs brand remain unchanged 12% to 13% revenue growth despite a tougher FX headwind than we previously projected. For Hey Jude, we are lowering our full year revenue outlook to up Approximately 4% to 6% on a reported basis, down from our prior range of 14% to 18% growth. This translates to a contraction of 4% to 6% on the 2022 pro form a revenues of $986,000,000 As always, We are focused on best in class profitability. We continue to expect our consolidated gross margins to be greater than 55.5% led by the Crocs brand. Given the confidence we have in our brands long term, we are making a conscious effort to continue to invest across the enterprise and we now expect Full year adjusted operating margins of approximately 27%.

Speaker 1

Our adjusted diluted earnings per share outlook Moved to $11.55 to $11.85 down from our prior guidance range of $11.83 to $12.22 For Q4, we expect consolidated revenues to be between $903,000,000 $938,000,000 implying a contraction of 1% to 4% from last year. Within the brands, we expect Crocs to grow 4% to 7% and Hey Dude to be down 20% to 25%. We expect Q4 adjusted operating margin to be approximately 21% And adjusted diluted earnings per share of $2.05 to $2.35 At this time, I'll turn the call back over to Andrew for his final thoughts.

Speaker 2

Thank you, Anne. As we look forward, our focus remains squarely on

Operator

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

Speaker 3

Yes. Hi. Thank you. Good morning. I want to ask first, hey dude, maybe Anne if you could clarify the 4th quarter outlook just Broad expectations for the 2 channels.

Speaker 3

And for your strategic accounts in wholesale, are you losing shelf space? Or what should we make of The reported revenue trend there. And then maybe Andrew more broadly for 2024, I wanted to get your thoughts. I know when you On the brand, you talked about revenue north of $1,000,000,000 for 2024. Is that still a realistic Possibility or it's definitely pushed out a while.

Speaker 3

And when you think about the factors to drive sell throughs, how do you rank orders sort of the biggest opportunities into next year?

Speaker 2

Yeah. Okay. Let me talk about Q4 shelf space and I'll then give you some updates on the channel expectations for Hey Dude And then I'll come back and talk about 2024. So from a Q4 perspective, yes, we don't believe we're losing shelf space. In fact, we're not losing shelf space in our We have ample evidence for that.

Speaker 2

We're taking down our sell in expectations to allow us to lower in channel inventories. We're doing that in a number of ways. 1 proactive cancellation of prior orders so that There's less inventory flowing into the channel. We're also supporting our wholesale partners with some inventory cleanup That includes both returns and also some markdown funding, so they can clean their inventories in the Q4 of this year. The strategic accounts In the Q3, we're up 28% in terms of their sellout.

Speaker 2

And we think they will continue to grow in terms of sellout And Gage and the brand will gain share in the Q4.

Speaker 1

And then, John, for your question on clarifying Hey Dude growth. So Our full year Hey Dude guidance on a reported basis is 4% to 6%. On

Speaker 4

On a

Speaker 1

pro form a basis, it's to shrink 4% to 6%. So that implies that Our Q4 growth for Hey Dude, our Q4 would be negative 20% to negative 25% is the revenue guide. And then when you think about Channels, that's as we talked about, it's still that implies negative wholesale and then we expect DTC to be slightly better than that.

Speaker 2

And then from a 2024 perspective, the last part of your question, John. Yes, I think we're very confident the brand will be north of $1,000,000,000 in 2024. We do anticipate that wholesale sales, which is obviously predominantly North America, will be down in the first Part of the year, but we're confident that DTC will be up and overall will drive growth for the full year.

Speaker 3

Okay. And is it possible Andrew just your thinking today? I know it's early, but in terms of The biggest contributors to the sell through, whether it's some of the distribution capacity, new products, new geographies, how are you thinking about Sort of

Speaker 2

the biggest

Speaker 3

drivers as they line up sitting here today?

Speaker 2

Yes. So I think There's a few things going on. One is I think account rationalization. So as we think of sell out, sell out at our Strategic accounts has been strong as we highlighted the 28% growth in Q3 that we published the growth rates that we've seen in prior quarters. So So the strategic accounts Hey Dude is performing well with those accounts.

Speaker 2

We have rationalized a significant number of non strategic accounts or legacy accounts About 50% will close over 600 doors by the time we get to the end of the year. We've also rationalized the digital selling for the non Strategic accounts, there was I think a very long list of accounts that historically had the rights to sell digitally. They have all been revoked apart From our core strategic accounts, so I think we're doing the hard work to get a significant reset for the brand in the North American marketplace with our wholesale partners. We do anticipate our wholesale partners Planned our overall business pretty conservatively in this consumer environment both through the Q4 of this year and in the 1st part of next year. And I think we also are very focused on driving improved product differentiation and segmentation across our wholesale partners With both new product introductions, I think we feel very confident about the pipeline of new products that we have.

Speaker 2

And you've seen us start to Ramp up the licensing and collaboration engine that we use on Crocs in Hey Dude. You've seen a couple of those we talked about in his prepared remarks. And that will accelerate through the back half of this year into next year. Okay.

Speaker 3

That's very helpful. And then just last one, Anne, if I could on the Q4 operating margin target. Could you just comment, are you embedding any Change in promotional activity for the Crocs brand and the gross margin there? And G and A, are you changing the expectations at all for the slightly more Thanks again.

Speaker 1

Yeah. So a couple of things. I I would say we're really pleased overall with our Crocs gross margins and we reaffirmed our gross margin guidance for the year. So we actually think from Promotional standpoint year over year promotions, we're planning last year we'll participate in no more normal promotional periods, but we don't see we don't anticipate any big change. And then from an SG and A standpoint, we do think it's really important to invest for the future and Not try to manage 1 quarter from a profitability standpoint.

Speaker 1

So we do expect to continue to invest SG and A and that's how you get to the overall profitability guidance.

Operator

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

Speaker 4

Thank you. Good morning. I wanted to ask a few questions on Hey Dude. I guess Andrew I'll ask you a Monday morning quarterback the Hey Dude business. Some you built a lot of awareness to the brand, Generated a lot of cash, successfully paid down a lot of debt from the Haydew deal.

Speaker 4

If you had to do it over again, what would you have done differently? And maybe would that give us some context for the extent of the marketplace challenge and maybe size the spring order declines to give us context for that impact. Thanks.

Speaker 2

Yes. I think that's a good question is well framed Jim. As we kind of look at the brand, We've grown it over 60% from a top line perspective since we've earned it. We've generated of approximately $470,000,000 of EBIT since we've owned it. It's had strong Cash flow and it's been accretive from day 1.

Speaker 2

So I think while there are some short term challenges, it's been a great addition to our portfolio. In terms of the challenges, I think we've really focused on kind of 3 key areas. 1 is getting Stronger control of in market inventory. And I think the rationale here, so the sort of Monday morning quarterback Perspective, we sold in a lot of inventory in 2022 into the market. We wanted to penetrate The sort of broad based national accounts very quickly.

Speaker 2

And so sorry, it's asking me to move closer to the mic. We wanted to penetrate the broad based National accounts for two reasons. We wanted to capture the shelf space. We also wanted to leverage the presence of the product on the shelf in the regions where the brand has not historically been distributed to raise brand awareness. I think that's worked extremely well.

Speaker 2

We've definitely captured shelf space And we've raised brand awareness. We talked in our prepared remarks as how we believe the awareness of the brand is now 32% on a national basis up From 18% earlier in the year. But I think the level of inventory was too high. So really what we're doing is proactively lowering in channel inventories, working with our strategic accounts to clean up that inventory and putting them in a stronger sell through and a more profitable position. That's painful in terms of sell in, which is what you see showing up in our Q4 guidance and what you see in our anticipated Spring 2024 order book.

Speaker 2

The second thing is improving segmentation and differentiation, such that all of our key customers that may trade in some cases in the same mall or in the same center Can continue to grow their businesses collectively. So as we get a stronger innovation and stronger product pipeline, We believe we can effectively do that. And the third thing is taking control of pricing, particularly in the digital realm. We've talked about When we Show up on Amazon in the gray market. We've seen a lot of price pressure from that.

Speaker 2

Historically, we had a strategy where we thought we could compete from a price perspective and make sure we captured our fair share. That was dragging down overall pricing in the market. So we've pivoted from that perspective. That's given us given up quite a bit of revenue expectation in the short term, but it's raised our ASPs, raised our profitability. It's It's obviously much more supportive of our wholesale customers and we're hoping that that gray market inventory sells down quickly and we can reset the digital market.

Speaker 2

So those are probably the 3 big buckets from a sort of Monday morning quarterback perspective. And we're very confident that those will Put us in a great position to continue to accelerate this brand in the long term.

Speaker 4

Thank you for that. And question just on the Hey Dude profit pool Outlook into fiscal 2024, do you still see Hey Dude gross margin of 50% is achievable in fiscal 2024? It looks like the inventories are tight and perhaps maybe even there's less clearance than this year. Do you think that the Haydu profit pool will be in decline in fiscal 2024?

Speaker 1

Yeah. So first I just I want to comment that I think both inventory inventories for both brands are in really good shape. So I would say that we're very pleased there. And as you mentioned, Hey Jude inventory was down about 40% for the quarter. We're not ready to guide for next At this point, but we do expect that Heyju gross margins will improve next year as we have less ASP pressure from the gray market As well as, as we've talked about, we'll have better distribution and logistics as we open up our distribution center in Q1 of next year.

Operator

Our next question comes from Abi Zsjaneck from Piper Sandler. Please go ahead.

Speaker 5

Great. Thanks so much for taking my question. Just on the gross margin piece, I know you maintained 55.5% or greater than 55.5%, but That could still imply some like year over year pressure on the gross margin line item. And since you're not planning for a different Promotional strategy at Crocs, can you just help us unpack what would lead to pressure on gross margin on

Speaker 2

a year over year basis?

Speaker 1

Yes. So can you so from a pressure on gross margin, I'm not completely sure that I understand the question. Abbie, I think For the overall, 55.5% guide that would imply that gross margins for the Q4 will be up versus last Yeah. For overall consolidated by, I think, a couple of 100 basis points. So maybe you can give me what you're thinking through.

Speaker 5

Yeah. I guess just like what's driving that pressure year over year?

Speaker 1

Specifically focused on the crocs side, again that will be helped overall. We've had Freight tailwinds all year and more full price selling on the Crocs side, which will be slightly offset year over year from the Hey Jude side as Gross margins will decline in Q4 as we've seen all year as we have a subpar distribution and logistics strategy, just given where we are until we can get into next year. But overall, we do expect gross margins to be up Year over year in Q4.

Speaker 5

Okay. Got it. That's helpful. And then just on the Hey, do D2C expectations for 4Q? I know you said it's better than wholesale, but can you just give any color on what you're seeing?

Speaker 5

I know maybe the pricing Controls are impacting that, but just any color?

Speaker 2

We have raised prices particularly on the Amazon component which shows up in DTC Because it's a 3P model if you remember correct. So we've we're no longer competing with the gray markets. ASPs are up. Even in this last few weeks, we can see ASPs up on average $10 a pair, which is obviously very significant. That has given up some market share.

Speaker 2

The gray market is taking a little bit greater share in the market. But we think net net with Some newness and excitement that will eject into the market that we overall kind of grow our DTC business. We also highlighted in our prepared remarks, we've opened we will have opened by the end of the quarter 5 outlet stores. Those are proper outlet stores. You may remember we had a number of clearance stores in I would say lower quality centers around the country We're looking to liquidate some of the aged inventory that we bought at the acquisition.

Speaker 2

We have opened 5 proper outlet stores that showcase Yes. Full price goods at the front of the store do have some liquidation capability and also I think showcase the brand and all of the various components of the brand. So Those will also be in the DTC number for the quarter and that will be obviously a non comp component.

Operator

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

Speaker 2

Hey, thanks for taking my question. I know you've got a lot going on at Hey Dude domestically, but In the past, you've kind of talked about expanding internationally, given how long to penetrate the brand is there. Do your plans To expand internationally get put on hold now? Or do you kind of pump the brakes a little bit, given the We've talked about in the past, We've reshaped the international business. When we bought the brand, their distribution strategy was distributor orientated.

Speaker 2

So they had A portfolio of about 35 distributors across the world, most of which were doing a poor job. We've terminated most of those distributors. There are 2 that continue to do a good job. I think we've highlighted this in the past. The distributor in Italy and the distributor in Spain, those are both They can succeed in those markets.

Speaker 2

Those are some of the tougher markets in my view for a U. S.-centric brand to perform. I I think it gives you evidence that the brand can perform more poorly sorry perform well across a broad range of international markets. We are putting some time and effort into, I would say, experiments as we try and understand which are the right markets to penetrate Internationally, we know brand awareness is very, very low, but we are putting time effort and some resources against that. It will take kind of 2 to 3 years, but it does start next year.

Speaker 2

All right. Thanks, Andrew. Best of luck this holiday season. Thank you.

Operator

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

Speaker 6

Thank you all for taking my questions. I have I want to follow-up on Monday morning quarterbacking here a little bit Andrew. At the Hey Dude business now?

Speaker 2

Yeah. I think I wouldn't say it quite like that, but I think in essence you end up in the same place Sam, right? So yes, we're certainly cutting supply into the wholesale arena to ensure that supply is pegged at or below demand, right? So that is a demand based Environment, I think as we sold in historically, we didn't know where demand was going to be, but I do think we now have a much stronger lens on that. So Yes.

Speaker 2

That is a reasonable way of saying it.

Speaker 6

If you had to do it all over again, would you have grown the business as quickly as you did last year?

Speaker 2

I probably would have done, but probably would have hoped that we could have had I would say stronger segmentation between the such that we could give everybody the opportunities to succeed and they weren't competing against each other. I do think it was important to grab shelf space, which we were able to do very effectively. Obviously, it's not great if you're Public company to have 1 year of great growth and the next year of flat to contracting growth. But net net, I think we've put ourselves in a good position from a brand and consumer perspective. So I probably would do it, but probably do it in a better way of Maybe slightly moderated.

Speaker 6

Is the Las Vegas distribution center up and running now?

Speaker 1

Jen, this is Ann. So we have we're most

Speaker 6

percent in your strategic Wholesale accounts, but what were the was how much of that was at the How much of that was on sale? I mean did the ASPs go down to drive that given the gray market And the amount of inventory in the marketplace?

Speaker 2

The ASPs in the strategic wholesale accounts were actually up Over the prior year, they were strong. So that wasn't a sell. That wasn't a promotional. Obviously, there are promotions during back to school, But that wasn't more promotional than the year before. The compression on ASPs was really on digital, on Amazon and on our own.com.

Speaker 2

So the yes, so hopefully that answers your question.

Operator

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

Speaker 2

Thank you. Good morning. I'm looking for additional color on the distribution of Hey Dude. So can you paint a picture for what Hey, do distribution look like earlier this year perhaps in terms of number of doors and where you expect it to shrink as the brand rightsizing goes on. And then as you think about 2024 and leading into some of the growth areas and higher quality Point to the business, where do you see the distribution evolving too?

Speaker 2

Yes. I think I'd probably go back further in the beginning of this year. What I'd Today is when we bought the brand, the brand had about 1300 points of distribution. That was regional and very much orientated towards small mom and pop accounts, right? So of that 1300 doors, we've closed over 600.

Speaker 2

And as we kind of think about the Hey Dude brand, we see the Hey Dude brand Essentially being sold almost everywhere that the Cross brand is sold. So I think about the primary chain, we're talking about family footwear, we're talking about sporting goods, We're talking about mall based specialty. And then I would say also some sort of We're all doors and there are a few of those customers we are partial doors, so we've got expansion So it's been a pretty dramatic reshaping of the overall customer portfolio. And I think The future growth comes from a number of things. What comes from some customers From accelerating sell through with that demand perspective that Sam highlighted.

Speaker 2

So hopefully that answers your question, Rick. That's very helpful. Thank you. And can you also talk about what your 4th quarter operating margin expectations are by And then what should we extrapolate from 4th quarter operating margins overall as we think about what the potential could be in 2024?

Speaker 1

Yes. So we don't guide 4th quarter operating margins by brand. Obviously, I think it will be We've had strong operating margins in both of our brands. Our overall operating margin guide of 27% remains an invest I wouldn't extrapolate Q4 to other quarters. As we said, we're going to invest in SG and A, and So that we can continue to support from a marketing perspective and a consumer perspective the long term growth potential of both of our brands and not manage for a quarter.

Speaker 1

But I think 27% operating margin overall, I feel really good about that overall.

Operator

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

Speaker 7

Thanks for taking my question. I first wanted to ask More about this guide for Q4 for Hey Dude just because it's such a significant downgrade from what we previously expected. If you bucket the change, how much of it is due to decisions that Crocs made to control distribution? And how much of it is something Happened to you meaning wholesale customers ordering less and this sort of glut of inventory in the resale channel?

Speaker 2

It's a little bit of both, right? I think what I'd say as we work with our wholesale customers, I think they're pretty cautious about the way the consumer is reacting right now, particularly post back to school. We talked about that in That remark. And honestly, I think that extends well into next year. So I think they're being cautious.

Speaker 2

So fewer they're looking to buy less inventory and put themselves in a stronger position. It is also proactive cancellations and returns that we're taking to clean up inventories for key customers to put them in a much stronger inventory position and a higher profit perspective. And it is also a lower digital selling expectation Based on not competing with some of the competitive sources on a price perspective. So we see Higher margins, higher ASPs, but less revenues. So it's really a combination of all those factors.

Speaker 7

If retailers who are fairly new to the brand are canceling orders and repositioning for lower inventories this Q4, What gives you the confidence that this brand can grow in 2024?

Speaker 2

The sell out that we're seeing, so the consumer takeaway, right? So as we look at Our data from our major retail customers both in Q3, which you kind of can see 28% increase in sell out. And we look at the week to week data that we get right now, we are selling More units to the consumer than we sold last year. So the consumer is taking away more goods. The sell in which is our revenue we're right Sizing inventory, but the consumer takeaway continues to grow.

Speaker 7

Got it. And then as we try to shape the year, Do you think that Q1 looks like Q4? Meaning for Hey Dude, do you think that there'll still be Some trend off with revenues down in this 20% range? Or should we see sort of immediate improvement because this is a

Speaker 1

Laura, I don't think we're ready to guide specifically for next year yet. We'll guide in our during our normal time periods. But we did say that we Wholesale will be negative in the first half of next year, but we haven't kind of given shade to that as we work through kind of our spring order books and our expectations.

Operator

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

Speaker 2

Good morning. Thanks for taking my question. Andrew, I was wondering if you could maybe just opine it strikes me that Hey Dude the similarities between Hey Dude and Crocs There's an awful lot of them. And when you joined Crocs back in the early to mid-2000s, It just seems like there's quite a lot of parallels here to where Hey Dude is now and where Krox was then. And I was just wondering if you could kind of Through your thought process and how you might use that as a blueprint?

Speaker 2

And then lastly, has the thought that hey maybe we should just Focus on maximizing profitability as opposed to revenue has that kind of entered into the equation now? So I would agree and disagree, Jeff. I think that there is a very, very important parallel between the two brands and the work that we did To improve dramatically the performance of Crocs, there are a couple of parallels, right? One was managing The in market inventory is much more closely, which I think we've clearly articulated here that we're really trying to get on top of for Hey Dude. I think the second is driving brand heat or demand I think as Sam would say for the brands Through marketing, through limited supply, through licenses, collaborations and really kind of I would say event driven opportunities to drive the Consumers to the brand and we can accelerate and do more of that for Hey Dude, which is definitely a parallel to Crocs.

Speaker 2

I would say Way back when in the consumer's mind Crocs was incredibly cold, right? So I think we just kind of used the Piper Sandler EANS survey as a proxy, right? I think back then Crocs was number 38 on that list, right? So Crocs is now number 6. Heydu is not number 38.

Speaker 2

Heydu is number 7, right? So It is a brand that resonates very strongly with a broad base of consumers. So I think that's a huge difference In terms of kind of what we're looking at here.

Speaker 1

And then in terms of maximizing for profitability, Jeff, we're maximizing for the long term health of the brand. Certainly prioritizing profitability from a gross margin standpoint, but not maximizing for profitability overall. We think it's really important for us to invest. We made a conscious decision to continue to invest in Q4. We certainly could maximize for short term profitability, but we don't actually think that gets us the best long term outcome.

Operator

Due to time constraints, this concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks.

Speaker 2

Yes. I just want to thank everybody for joining us this morning and their continued interest in our company and Wish everybody a happy holiday season when it comes around.

Operator

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

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