Earnings » Revenue Radar: Crocs Steps Back on HEYDUDE Slowdown

Revenue Radar: Crocs Steps Back on HEYDUDE Slowdown

Crocs Inc. delivered mixed results in Q3 2024, demonstrating continued strength in its core brand while facing significant headwinds in its HEYDUDE business. The footwear company lowered its full-year guidance on the back of slower HEYDUDE sales, leading to a sharp decline in its stock price despite beating overall enterprise expectations on sales and profitability.

“We reported third quarter results which exceeded our Enterprise guidance on sales and profitability,” said Andrew Rees, Chief Executive Officer. “Our overall performance including strong gross margin gains allowed us to accelerate our strategic investments in the quarter while continuing to deliver earnings per share growth through the deployment of our strong cash flow. Strength was led by our Crocs Brand fuelled by 17% international and 8% direct-to-consumer growth.”

Key Financial Highlights:

  • Net sales increased 1.6% to $1.06 billion
  • Organic sales grew 2.0% on a constant currency basis
  • Gross profit margin expanded to 59.6% from 55.6% year-over-year
  • Operating profit:
    • GAAP operating profit decreased 1.5% to $270 million
    • Operating margin of 25.4% compared to 26.2% in prior year
  • Earnings per share:
    • GAAP EPS up 17.1% to $3.36
    • Adjusted EPS up 10.8% to $3.60
  • Repaid $110 million of debt
  • Repurchased approximately 1.1 million shares for $151 million

Brand and Regional Performance

Crocs demonstrated a tale of two brands in the third quarter, with its flagship Crocs Brand showing continued momentum while HEYDUDE faced mounting challenges in the marketplace.

The core Crocs Brand delivered robust performance, with revenue climbing 7.4% to $858 million. This growth was driven by balanced strength across both direct-to-consumer and wholesale channels, which saw increases of 7.7% and 7.1% respectively. Direct-to-consumer sales reached $463 million, while wholesale revenue totalled $396 million.

International markets emerged as a particular bright spot for the Crocs Brand, with revenue surging 15.5% to $367 million. The international segment demonstrated broad-based strength across channels, with direct-to-consumer sales jumping 17.6% to $134 million and wholesale revenue growing 14.3% to $233 million.

North American performance, while more modest, remained positive with overall revenue growth of 2.1% to $491 million. The region’s growth was primarily driven by direct-to-consumer sales, which increased 4.1% to $329 million, while wholesale revenue saw a slight decline of 1.7% to $162 million.

Crocs announced it was acquiring the HEYDUDE brand at the end of 2021 for $2.5 billion. The purchase price of $2.5 billion was funded by $2.05 billion in cash and $450 million in Crocs shares issued to former HEYDUDE founder and CEO Alessandro Rosano.

However, the HEYDUDE brand faced significant headwinds during the quarter, with revenue declining 17.4% to $204 million. The brand’s challenges were particularly pronounced in the wholesale channel, where revenue dropped 22.9% to $113 million. Direct-to-consumer sales also struggled, falling 9.3% to $91 million.

Adding to the company’s challenges, Crocs has encountered resistance in schools across the United States, with some institutions implementing bans on their products citing safety concerns – a move the company has characterized as “baffling.” Despite these obstacles, the core Crocs Brand has maintained its growth trajectory, particularly through its international expansion and direct-to-consumer initiatives.

Outlook and Guidance

Following the mixed third-quarter performance, Crocs Inc. has adjusted its growth expectations for the full year 2024. The company now expects revenue growth of approximately 3%, landing at the lower end of its prior guidance range of 3% to 5%.

The revised outlook reflects a divergence between its two major brands. The Crocs Brand is expected to grow approximately 8%, a slight adjustment from the previous guidance of 7% to 9%. However, HEYDUDE’s outlook has deteriorated significantly, with management now projecting a decline of approximately 14.5%, compared to the previous guidance of down 8% to 10%.

Despite the headwinds, the company maintained its adjusted diluted earnings per share guidance of $12.82 to $12.90. For the fourth quarter of 2024, Crocs expects:

  • Revenue to be flat to up slightly compared to fourth quarter 2023
  • Crocs Brand to grow approximately 2%
  • HEYDUDE Brand to decline between 6% and 4%
  • Adjusted operating margin of approximately 19.5%
  • Adjusted diluted earnings per share of $2.20 to $2.28

The company continues to demonstrate strong cash flow management, maintaining its commitment to debt reduction and shareholder returns. At quarter end, $549 million of share repurchase authorization remained available for future repurchases.

Operational Performance and Margin Analysis

Crocs demonstrated strong margin improvement in the third quarter despite broader market challenges. The company’s gross margin expanded significantly to 59.6% compared to 55.6% in the prior year, reflecting successful operational efficiency initiatives and strong pricing power.

Selling, general, and administrative expenses (SG&A) increased to $364 million, representing 34.2% of revenues compared to 29.4% in the prior year. This increase in SG&A as a percentage of revenue reflects the company’s strategic investments during the quarter, though it impacted the overall operating margin, which decreased slightly to 25.4% from 26.2% in the prior year.

The company maintained strong financial discipline through active cash management. Inventory levels showed improvement, decreasing to $367 million compared to $390 million in the prior year. This reduction in inventory demonstrates the company’s effective supply chain management and ability to align stock levels with demand.

Crocs shares dropped 16 percent in premarket trading after the company lowered its growth expectations and warned of sales declines

Capital expenditures were notably lower at $51 million compared to $86 million in the prior year period, indicating more selective investment in growth initiatives. Meanwhile, the company continued to strengthen its balance sheet, with total borrowings reduced to $1,422 million compared to $1,939 million in the prior year.

Looking ahead, management expects non-GAAP adjustments of approximately $28 million related to the implementation of a new enterprise resource planning (ERP) system for HEYDUDE, and costs associated with transitioning to a new HEYDUDE distribution center in Las Vegas, Nevada. The company anticipates a combined GAAP tax rate of approximately 21% and a non-GAAP effective tax rate of approximately 16%.

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