Crocs, Inc. (CROX) Earnings Call Transcript & Summary

Okay. I think I'll get us started. Hello, and welcome to the next meeting in KeyBanc's consumer spotlight series. My name is Matt Degulis. I'm a softlines analyst here at Key. We're happy to have Crocs' CFO and EVP, Anne Mehlman, joining us today. [Operator Instructions] And I will hopefully get to ask it before we end. Anne, first, thank you so much for joining us today.

Thanks for having us. We appreciate it.

So just as a brief opener, can you talk about how Crocs was positioned entering the pandemic and how you adapted as consumer behavior changes, particularly on e-com, were beginning to become more apparent?

Yes. It's a great question. So we entered the pandemic with actually very, very strong momentum. We came into the year. We've really seen big increases in our brand heat, and how we define brand heat is really our relevance with consumers as well as our consideration. And we saw double-digit increases in both of those metrics over the past couple years. And we had a record 2019 results. So we came in, and we guided 12% to 14% revenue growth pre-pandemic. Very excited about the year. I think we quickly figured out things weren't going to play out quite as we expected. We have a decent-sized Asia business and watched our Asia business kind of struggle with the COVID in the first quarter. And then obviously, it quickly kind of started playing out across the world. And I would say we were really well positioned to adapt, I think, because we are very -- we've been very focused on building out our digital channels. And the way that we think about digital is both our own .com channels as well as marketplaces that we sell on around the world and then our e-tail partners, so Amazon and Zappos in the U.S., Zalando in Europe, those big e-tailers. And we have a 30% -- over 30% digital penetration rate. So our consumers are really used to seeing us online. So it was an easy kind of adoption flip over from the change from brick-and-mortar to digital. I will say at the beginning of the pandemic, we definitely were concerned about cancellations we were seeing in the market. And so we canceled a lot of our inventory receipts and tried to get really lean to make sure that we were preserving our balance sheet. And as the pandemic continued to play out, it became apparent that after kind of a short shock, actually, things came in much stronger, and we ended up having record results in Q3, so -- and started chasing little inventory, but a good position to be in. I think the other thing that we did coming into the pandemic is we realized that a lot of frontline workers -- there was a lot of demand for our shoe by health care workers because they're easy to clean. And obviously, we've had a good health care business in the past. And people were reaching out. We didn't have an efficient way to kind of get them shoes quickly. So we opened up a donation program on our website where you could comment and get free shoes if you are health care worker. So we ended up donating about $40 million at retail worth of shoes, $10 million of Crocs to health care workers just through our e-commerce site. And I think it was a really good thing to do. It also kept us top of mind with the consumer and really reminded us of an amazing health care opportunity that we have as well because our shoes are so well built for that.

Yes. Awesome. I did see that program, and it's great that you guys did that. So with the Black Friday and Cyber Monday weekend just wrapping up, I'm curious if you're able to comment on your performance over the weekend and how this compares maybe to your expectations?

Yes. We were really pleased with our Black Friday and Cyber Monday. It was definitely in line with expectations, and we continued to see trends play out that we've seen kind of the back half of this year, which is really retail traffic has remained down, but our conversion and our strong average selling prices have actually more than made up for that. So continued to see that trend. We've also seen, of course, strong e-commerce traffic and really strong ASPs. And then -- and we've also continued to be see more full price selling, both in our retail sites and our e-commerce sites, in line with expectations. So we were really pleased with, overall, the performance of the brand during the holiday, kind of beginning of the selling season.

Awesome. So if there's one theme from this conversation today, it will probably be how can you keep this up? Because Crocs has really had an extraordinary year amidst the really tough environment. So with that in mind, what are some strategies that you'll use next year to keep up the momentum in lion's share, shelf space and market share?

Yes. So the way that we think about our business is we developed a playbook a couple of years ago. And we continue to execute on that playbook, and it's working really well. So from a product perspective, we have 4 product pillars, which are clogs, which you're all familiar with, our iconic classic, and really continuing to drive relevance to the consumer there through powerful marketing, including powerful digital and social marketing. And I think what -- and obviously, through collaborations, which you've seen from us, especially through the back half of this year. So that will continue. The second piece is sandals, which is a natural extension, people expect that from us, a natural extension of our product line. And we do it in a way that's very unique to Crocs, which is using our molded technology to give comfort sandals. And this year, we actually expanded into some height sandals and a little bit more of -- that we have done in the past. And obviously, we didn't have a great sandal season, as there really wasn't a great sandal season overall. But we're excited about that for next year and for years to come. The sandal industry is at -- sandals are a much bigger business than just clogs. It's a bigger market, and there's not a clear market leader. So we think we have a lot of opportunity to really take share there. The third product pillar is personalization, and the way we think about personalization is through our Jibbitz Charms. And again, that business has doubled this year, even amidst the pandemic. And that really allows consumers to create -- that connection with consumers that they can personalize their clogs to them. And we do -- I think our product team does a great job on capitalizing on things that are trending on social by getting out relevant charms for people to personalize their clogs. And then the fourth piece of our product strategy is comfort technology, which is really -- we're known for comfort. So we're -- we can see visible comfort technology like our LiteRide clog, which is a little bit lighter. We have a Pacer, which is a shoe that's molded. So where we can do comfort in the way that's unique to Crocs, that's the fourth pillar. So we expect to see those continue to grow in the future and power our growth, so continuing of our on cost strategy. And really, I think the next kind of pillar in is sandals, capped off by personalization. And then from a geography perspective, Americas has continued to surprise and delight our customers through really relevant marketing and collaborations. And we've seen that continue to grow over the last couple of years, and we think there's still a lot of leeway there. EMEA is starting to really see that brand heat that the Americas is seeing. And then our longest-term opportunity is Asia with a focus on China. Our China business was about 5% of our overall business in 2019, and that's underpenetrated for where we think it should be. So I would say longer term, we think there's a great opportunity in China. But we also have focus markets in Japan and Korea. South Korea is a really good market for us, one of our highest penetrated markets in the world. And then we also do business in India and with our Southeast Asia distributor markets in Asia. So I would say Asia is sort of a longer-term opportunity, but certainly a growth driver for us in the future.

Got it. Helpful. So building on what you said about comfort. Your brand obviously has a comfort and casual aspect to it. I can speak to that being an owner of Crocs, which are the most comfortable pair of shoes I own. But as we look to, hopefully, a return to normal next year, at least at some point next year, returning to work, returning to social functions, how is Crocs positioned in that environment?

Yes. I think the overall trend we've seen pre-pandemic is really a casualization of the consumer. I think you saw it with athleisure, and that really started to play out probably, what, 3 to 4 years ago now, and that's continued. And while I think the pandemic has accelerated certain trends like digital penetration and probably casualization, we don't think that casualization is going to reverse. There may be more functions where dress comes back. Well, we don't think that takes the place of casualization. And we really compete for wearing occasions. There's not -- we don't have a direct competitor in our space from a classic clog perspective. And we think those wearing occasions are still really relevant, whether it be around the house, outside, after sport, obviously, sandals, and just overall continued -- the consumer wants to be comfortable, casual, and we offer great value. And then if you add on our personalization, where you can come and change out our Crocs and give us a -- give you a reason to come back to the brand often, we think that, that still has a long runway.

Crocs had a really big year in collaborations, Justin Bieber, Bad Bunny, KFC, just to name a few. Can you talk about your collaboration pipeline and how you can build on 2020's success?

Yes. Really excited about our collaboration pipeline. I think our marketing team has done an amazing job. Starting a couple of years ago, we started this strategy. Our first collaborations were with Christopher Kane and Balenciaga, kind of luxury, top-of-the-pyramid fashion designers. And then we really kind of exploded with some -- Post Malone was one of our first really well-known collabs, and I think we've built on that. And obviously, as we've shown that we can be successful and as we can collaborate all along the spectrum because we have such a democratic consumer base, we can collaborate with brands and celebrities and all different types of unsurprising icons. And I think you will continue to see that happen in 2021. I can't give specifics. My marketing team will not fill me in. But I think it's -- I think we have a full slate. We actually build out in advance. So I think we're pretty full for 2021, and we're already working on 2022. So I will say we donate have more than what we can even entertain at this point. So it's really just focused on making sure we get them all around the spectrum. I think one change you will see from us is this year, we've started to do a lot more international collaborations. So we did Justin Bieber in China and around the world, Bad Bunny actually we did in a lot of different markets. So I think you'll continue to see us do that as well as local collaborations. So we've done some really neat ones with BEAMS in Japan and some interesting ones in Korea, and you'll see us continue to do that both in Asia and Europe. So I think that will be kind of something that's really exciting for next year as far as collaborations. And I wouldn't count out this year. I think we still have 1 or 2 that are pretty exciting ones.

I'm excited to see what those are. So similar to many others, your e-commerce business has really powered results for the year. Can you talk to when you're thinking long term, what do think digital should be as a percentage of mix and any puts and takes that has for the model?

Yes. So we think -- we're really excited about seeing the digital trends accelerate. We think we play really well there. We're an easy product to buy online. Our sizing is simple. People understand our fit. And we're relatively well priced, well priced from a price point perspective. We haven't given out a specific percentage yet of where we think -- obviously, we've seen huge digital penetration increases. But we do think that we see it continue to accelerate from where it is today, even just given the pandemic push. And I think from an overall economic model, we're rather agnostic about what channel we sell through. Whether it's retail, wholesale or e-com, they're all very profitable channels. I think from the digital side, obviously, you get full revenue if you sell it on your own .com, and then you have a little bit more expense in the shipping line. But then obviously, all of the SG&A is variable, so very profitable channel. I think the advantage for e-com is really the chance to connect with your consumer directly in a way that you could really engage them and work on kind of customization with your consumer. I think the other piece of digital that's really important is that you do have to invest to make sure that you can fulfill appropriately to that consumer. And so as we've seen and as we're starting to see play out in the industry, even now with the massive shift to digital, it's putting pressure on all different types of shipping, all the way from carriers to the actual brands themselves. And I think we'll probably continue to see that play out. I'm pleased that we actually invested earlier this year in opening up additional distribution capacity to our distribution network in the U.S., and we'll continue to do that to make sure that we can service that e-commerce customer in an SLA that makes sense.

Following up on that, on your additional DC, so lots of companies have discussed potential capacity constraints in the fourth quarter, both in-store and online. Can you speak to the recent DC you opened in Dayton, the new capabilities and capacity it enables, and how your digital capacity is positioned for the fourth quarter?

Yes. We're really excited because it more than doubles our e-com. I think it doubles our e-commerce capacity. So we opened up the additional capacity specifically to support e-commerce, which also obviously frees up some of our other capacity for other channels. And that's open now and going really well. And so kudos to our DC team. It's always hard to open a DC, but especially when you have a global pandemic. But I think they've done a great job. And I think you'll -- there are certainly constraints on the carrier side, and we're kind of seeing that. I think there were some articles today out about UPS and really sticking to that. But as far as constraints on our own distribution, we feel really good about it. Again, luckily, we opened it up early. And so we feel really good about being able to service our customers from our perspective through the season. But certainly, I think there's a lot of constraints. And also just even on the overall shipping, inbound shipping from Asia, I think there's port delays. So I do think with the pandemic, logistics are a little bit difficult right now. But we don't foresee any near-term issues, and we'll continue to look at distribution and distribution and logistics facilities around the world. As we see e-commerce grow, we'll continue to make those investments.

Got it. So turning to your Asian business. I'm curious what drove the large disparity of sales growth in Asia during the year, with direct sales up and wholesale down? And as you look to 2021, will those 2 channels converge in terms of growth rates?

Yes. It's a great question. When you think about our Asia business, we go to market in a couple of different ways: so obviously, digital. We have our own retail stores, mostly focused in Korea, which are shop-in-shops, a variable model. And then we do some multibrand wholesale mostly in Japan, but the biggest part of our wholesale business in Asia is actually distributor business. And so the big disparity was during the pandemic, a lot of our distributor markets, Southeast Asia markets, are very tourist-influenced, Thailand being one of our largest distributors. And so we were very cautious, especially with the lack of Chinese tourism, not to force end product into those markets. We thought we're much better equipped to deal with the product if we have extra inventory ourselves because we have a much bigger market. And we want -- we're really focused on keeping our distributor markets clean and fresh so that when we did start to see those markets recover, then we can make sure they have freshness and newness and really speak to those consumers. So we do expect that to recover and not be such a big disparity next year, but we think the distributor markets are the slowest to recover and probably won't recover until late next year.

Got it. And longer term, can you speak to the opportunity in Asia and your strategies for building market share there?

Yes. I think our 3 key markets in Asia are China, Japan and South Korea. South Korea, as far as kind of doing -- continuing the existing strategy now, I think we're well positioned there. It's a great market. It's a high fashion market, and it's a great market for us. So I think our continued distribution of shop-in-shops and a healthy, robust digital business is the right strategy there. From a Japan perspective, I think we've seen some slowdown there. Their consumer tends to be a little bit more conservative in times when you have a pandemic. So I think just continuing to build the brand in Japan, and that will come back. I think from -- China is -- obviously, we talked a lot about this. We have a China acceleration board committee that we're really focused on building the brand in China. And China for us, sure, 4, 5 years ago, we were known in China as a men's loafer brand. So it's taken a lot of work to kind of shift that to really be, we're a Crocs-focused brand, bring kind of relevance and recognition to that clog and basically take our U.S. strategy and use that in China, right, which is invest in relevant marketing and social to really spur your presence with the consumer. So we made a big investment last year in bringing on Yang Mi as our celebrity in China, which was our first kind of big celebrity in China. So we'll continue looking at the right mix of celebrities, KOLs and influencers in China, along with collaborations and really taking our playbook from the U.S. that's worked so well and transposing that to China. I would say that's the biggest opportunity. I think the rest of Asia, we do have a big long-term opportunity both in India, where we were -- pre-pandemic, we were performing really well in India. I think pretty big growth there, and so excited about that longer-term opportunity. And then also, we do think our Southeast Asian markets will recover. And those are big markets, and they have a huge potential for growth.

Crocs guided to 20% to 30% revenue growth in the fourth quarter. While many other softlines companies were a little more cautious in the fourth quarter, can you talk through what gave you the confidence to give that fourth quarter guidance range?

Yes. I mean, we have good data around, obviously, the trends. We've seen, as we talked about, really strong traffic in Q3 on our e-com sites. We know what kind of the retail trends would look like. And then we do have pretty good visibility into wholesale orders and, obviously, what our prebook looks like. And so given all of that and just the strength of the brand, certainly, the consumer connection point, we felt great about being able to come out and give that guidance.

So it seems like selling and sell-through are converging in the fourth quarter in the U.S. wholesale channel. Can you talk a bit about how inventory sits in the channel today? And can you also touch on where your own inventory sits today? I know you're a bit -- running a bit low in the third quarter.

Yes. So as I mentioned, coming -- going into the pandemic, we had a lot of receipts on order, and we canceled a lot of them. We've been -- we're preparing for a big growth here. We pulled back significantly. And then as things played out and we saw growth ramp up really in Q3, we started chasing receipts. We feel pretty good about where we're at from an inventory perspective in Q4. Obviously, it's just getting things through the DC and through the logistics channels out to our wholesale partners. But inventory in the channel remains very, very clean. We talked about coming out of Q3, we saw our out the doors and wholesale up significantly, which means that there -- we don't have any -- a lot of excess inventory in the channel. So I wouldn't say -- obviously, there's always places that are going to be a little leaner. But we feel pretty good about our inventory right now and where we sit in Q4. And obviously, we're focusing on inventory for next year as well, what I would say.

So Crocs was one of the very few companies, at least in consumer, that established an expectation of positive 2020 free cash flow as early as your first quarter earnings call, really in the height of the uncertainty of the first lockdown. What gave you the confidence to draw that line in the sand? And what does this say about your cost structure?

Yes. One of the great things about our business is we're low capital. And we're low -- we generate a lot of cash. And so we knew that if we were kind of backing away from what we thought was going to be growth and then obviously, we reverse, but that -- if by cutting receipts, by cutting inventory and really focusing on free cash flow, cutting expenses, then we could see very clearly that we could generate free cash flow. And obviously, we generated record free cash flow in Q3. So we could generate free cash flow even without growth. And then what ended up happening is we ended up adding some nice growth on top of that. So that operating income just added to the free cash. I think what that says is that we can quickly scale expenses, and we can quickly scale our cost structure as well as our investments based on what we see happening in the business. And I think that's really important. Obviously, longer term, as you continue to support growth, you'll continue to invest. But one of the benefits of this brand is it doesn't take a lot of capital investment to get good growth.

What are the margin implications of the current demand surge in the fourth quarter? And given your AUR strength in 2020, how are you thinking about potential price increases down the road?

Yes. So let me tackle prices -- price increases first. So we've taken a number of price increases the last couple of years on our classic franchise, particularly in the U.S., and moved it up to a place where we're pretty comfortable. We don't have a worldwide pricing position. We try to be really selective and look market by market, and we're also very sensitive because we don't want to outprice our consumer. We think we offer good value. So where we think where there's opportunity to get more value and the -- and makes sense for us and the consumer, then we'll take price, especially in environments where we may have currency pressure or things like that. But I wouldn't say that we're planning on any huge price increases. We'll look market by market, but we've done quite a bit of work there. I think where you see a bigger tailwind to our ASPs, including this year, was really on pulling back on discounts and promotions. And that's really what supported our ASPs this year, and our margins this year was just with inventory clean and the heat behind the brand, we could really sell at much more full price. And so we pulled back a lot on some of our discounts and promotions, and we think that maintains. We don't see any reason why we can't do that. And obviously, that's why we're focused on maintaining a lean, clean inventory and maintaining brand heat because all of those drive your ability to really get value for your brand.

Got it. Can you talk about the rollouts of Foot Locker and Finish Line? How big of a launch has this been in terms of number of doors and depth of inventory buys? And what opportunities do you see for further distribution expansion in the U.S.?

Yes. So when we think about distribution expansion and how we're distributed, largely, we are family footwear and sporting goods, and that's kind of been where we've been in the U.S. for the last couple of years. And as you watch your consumer develop and as we bring new consumers into the brand, then you can think about opening up new distribution where you can talk to those consumers. And I think an example of that is we opened up Journeys, I think, a couple of years ago now, where once we saw that we had traction with the younger consumer, then that made sense. But you want to make sure that you can actually reach that first because you don't want to just put more inventory out into the market and not have a customer that's wanting to see it there. I think we saw that we were definitely doing well with kind of more of the athletic urban consumer who is shopping maybe Finish Line, Foot Locker. And so that made sense for those -- for them and for the brand to open it up. I think it's going fine. We're excited about the partnership there. I think Foot Locker, we've done some fun partnerships on their -- they do collaborations through a channel with them. And we've launched a couple of them, including the Nicole McLaughlin one we did with them, Project Greenhouse. So I think that's been really successful. And I think when LeBron James wore shoes in Q3, which was really exciting, at one of our collaborations, that really drives very -- importance for that consumer. I think as far as new distribution opportunities, overall, we're really pleased about our distribution. I don't think it's about opening up more distribution. It's about sell-through. It's about depth and maybe expanding some of the products that they take. But I don't think it's about just opening up new distribution.

Got it. I do want to bring this back into personalization because you guys really do a great job there with your Jibbitz platform. Can you talk about what the Jibbitz platform for business adds to your business and how you can continue to build on momentum there?

Yes. The most important thing about Jibbitz, we don't break it out financially because the important thing about Jibbitz is driving that connection with the consumer. So you have a white clog. It's a blank canvas, and our Jibbitz can give you the ability to personalize that to you and drive that connection and give you a reason for you to come back to our e-commerce stores or our retail stores or our wholesale partners and re-personalize your shoes or buy more clogs to have a place to put all your Jibbitz. So I think we really saw that take off in U.S. retail a couple of years ago, where we first saw it was sports teams really starting to personalize their shoes with numbers and letters or their team names or their last name. And so we really started building on that in U.S. retail, and then we doubled down and started focusing on that in e-com. And it's really now taking off. I think the really big opportunity there is continue to do that in the U.S., but to expand that globally because we know personalization is a mega trend. And it is really important because it does -- it's very unique to us. And I think we'll definitely see that kick in, in the next, hopefully, year or 2 in EMEA and Asia as we continue to kind of accelerate Jibbitz penetration there. Obviously, they're extremely high margins. So we also like them. They're a margin enhancer, and they also help our ASPs. So we think about them as an add-on to our clog. So you could see that, that was a big driver of our ASPs in Q3 as well.

Got it. Crocs has done some pruning to the store fleet in recent years. As you assess your store fleet today, where do you see opportunities to add or subtract?

Yes. I think we're pretty happy overall with our store fleet. We've had really good comp growth, especially in the U.S. When you think about our store fleet, it's mostly outlets. It's mostly U.S., South Korea, where it's shop-and-shops, a variable rent model. And then there are opportunities for us to have certain stores that make sense, possibly in China, that showcase kind of the brand and really that brand energy. So I do think there's probably a few opportunities in Asia for some more stores. But there's probably a few stores we want to still exit in EMEA and some places in the U.S. So overall, I would say we don't anticipate huge changes to our fleet because we like how it's positioned now. But I do think if there's any changes from an expanding part, it's probably mostly related to Asia.

Got it. Can you speak to your business with Amazon and how you view that business moving forward?

Yes. So we do business with Amazon on a global level. They're a great partner. We've done that for a number of years, and we really work hard to manage that and really manage our product there. You -- we really manage our inventory with them, and that really creates good out the doors with them as well. So obviously, their pricing mechanism reflects market pricing. So the better the job that you could do to keep inventory clean in channel, the better your pricing is going to look. Obviously, it reaches a consumer and also satisfies a consumer that has certain demand for an SLA that maybe we don't want to take on. So we do think it's really important. We have kind of a mantra that we want to be where our consumer shops, and the consumer certainly shops on Amazon as well as global marketplaces. It's Amazon here. It's Tmall in China. It's Rakuten in Japan. It's all of those global marketplaces. We think it's really important for us to be there, but you do have to manage it to make sure that you're doing it in a way that's accretive to your overall brand.

So that brings us right to 4:30. So I think I can close it out. Anne, thank you so much for joining us today. And thank you, everyone else, for attending online. I hope you have a great rest of your day.

Thanks, Matt.