Crocs Inc. posted better-than-expected results in the third quarter ended Sept. 30, but management acknowledged that a turnaround at its Heydude brand is taking longer than expected, and it has become more cautious on prospects for China this year. As a result, the company now anticipates full-year sales growth at constant currency rates of just 3 percent, at the bottom end of a previous 3 to 5 percent guidance range.
In the third quarter, enterprise revenues increased by a reported 1.6 percent, or 2.0 percent on a constant currency basis, to $1,062 million, above a forecast for 0.5 percent constant currency growth at the high end of company guidance. Direct-to-consumer (DTC) sales rose by 4.4 percent as reported and 4.9 percent at constant currency rates, while wholesale sales fell by a reported 1.4 percent, or 0.9 percent on a constant-currency basis.
Crocs brand revenues increased by 7.4 percent to $858 million. They were up by 7.9 percent on a constant currency basis, comfortably above the company’s 3 to 5 percent growth guidance. The increase in sales was driven by an 11 percent increase in volumes to 32.1 million pairs of shoes, while average selling prices decreased by three percent to $26.48 due largely to a different product mix as well as to slight price erosion. Growth was led by the brand’s international business and balanced between DTC and wholesale channels, both of which saw 8 percent sales growth.
Heydude brand revenues slipped by 17.4 percent to $204 million, worse than the guidance of a 14 to 16 percent contraction. The brand’s DTC revenues fell by 9.3 percent to $91 million, although guidance was for that sales channel to stabilize. In comparison, wholesale sales revenues tumbled by 22.9 percent to $113 million, which is in line with expectations.
The third-quarter adjusted gross margin widened by 2.2 percentage points to 59.6 percent. The adjusted gross margin at the Crocs brand increased by 0.40 percentage points to 62.5 percent, driven by favorable product costs and select international price increases, partly offset by channel mix. At Heydude, the adjusted gross margin jumped by 5.1 percentage points to 47.9 percent, driven primarily by freight, favorable channel mix and pricing.
Diluted earnings per share increased by 17.1 percent to $3.36 while adjusted diluted EPS grew by 10.8 percent to $3.60, above guidance of $2.95 to $3.10 due largely to a lower-than-expected tax rate.
For the full year, Crocs Inc. now expects Crocs brand sales to rise by 8 percent, in the middle of previous guidance of 7 to 9 percent growth. Sales at Heydude are seen contracting 14.5 percent, worse than the previous guidance of an 8 to 10 percent decline. For the fourth quarter, total revenues are expected to be flat to up slightly at constant currency rates, with the Crocs brand growing approximately two percent and Heydude down by four to six percent.
“For Heydude, next year is about brand stabilization,” said Susan Healy, CFO, in a conference call with analysts. “We are seeing green shoots around the brand receptivity from a broadening group of consumers but note that financial results will lag the marketing momentum we are currently seeing.”
International business leads growth
The international business outperformed in the third quarter, and management expects it will continue to be the driver of growth in coming years. Crocs brand revenues grew by 2.1 percent to $491 million in North America, with a 2.2 percent rise at constant currency rates, as a 4 percent rise in DTC sales was partially offset by a 2 percent decline in wholesale. Internationally, brand sales jumped by a reported 15.5 percent to $367 million and were 16.5 percent higher at constant rates, as the company pointed to “notable growth” in Australia, China, France and Germany. DTC sales growth internationally stood at 18 percent, and wholesale growth at 15 percent.
Crocs brand sales in China grew by over 20 percent after rising by more than 90 percent in the third quarter of 2023. “It is clear that the Chinese consumer is being far more conservative in their purchase behavior, and we have seen even more pronounced pullback within key Tier 1 cities like Shanghai and Beijing,” said Andrew Rees, CEO. “In light of the broader macro environment in China, we’re taking a more cautious view for the rest of the year,” he said. Crocs nonetheless expects to continue to grow in China, with expansion underpinned by the openings of mono-brand stores in the country, which are seen rising to nearly 400 by the end of the year.
Rees added that the company also remains confident on India, where it is ramping up production for both Crocs and Heydude brands in response to a quality scheme implemented by the Bureau of Indian Standards, which is aimed at trying to help develop a local production market.
Laying the groundwork for international growth is also part of the turnaround strategy for Heydude, which now has small direct markets – wholesale distribution and a digital presence but no retail presence – in India, the UK, Germany and Australia.
