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

Thank you. Good afternoon, everybody. Welcome to UBS' Global Consumer and Retail Conference. I'm Jay Sole, UBS' retailing department stores and specialty softlines analyst, and welcome to our fireside chat with Crocs. We are super excited that Andrew Rees, Chief Executive Officer; and Anne Mehlman, CFO and are here with us today to talk about the company. Now before I be going any further, I just want to read the legal disclaimer briefly. As a research analyst, I'm required to provide certain disclosures relating to the nature of my own relationship in UBS with any company on which I express of you at this event today, these disclosures are available at www.ubs.com/disclosures. Alternatively, please reach out to me, and I can provide them to you after the call. Okay. So I just want to get that out of the way.

I want to start off talking about some of the hot topics that are out there, obviously, a lot going on in the world and then really dig into the acquisition of HEYDUDE, which you made a couple of months ago and then just really talk about the Crocs business. Obviously, a ton of interest out there about the stock in your business right now. But just to start off, I want to ask about Russia and Ukraine. What percentage of the company sales are happening in Russia, Ukraine in Eastern Europe?

Yes. I mean, first, before going to dive into that, obviously, it's tragic what's happening in Ukraine and Russia. We're also terrible about that. As we look at our business, so we have a distributor or we had a distributor in Ukraine, very small. Obviously, that no longer exists. From a Russia perspective, it's about 2% of our business. We issued a press release today, it's about 2% of our business. And what we've decided to do is essentially pause our business at this stage. So we're not going to be importing any more goods. We're going to pause our DTC business, which is both stores, we have 26 stores that we own and operate in Russia and then an e-com site. So we're putting all that on pause. There is some inventory in Russia, which will get sold to local distributors if they wish it, but we're going to take a pause here and see what happens.

Okay. Now one sort of corollary to what's going on in Ukraine is inflation. I want to first ask about inflation from a consumer perspective. And the question is, do you feel like consumers will trade down to Crocs in an inflationary environment? Or do you feel like that Crocs' items consumers will buy less of as maybe they try to prioritize other spendings? In other words, is the beneficiary of trade down or sort of not a beneficiary of trade down?

So I think the inflation impact is an interesting one. So I'll get to the trade down question, but we're definitely seeing inflation as a company, as a brand. We anticipated this inflation coming that wasn't out of the normal, but we actually raised prices quite significantly last year, which helped drive our margin performance last year. I think it's put us in a great position to absorb a lot of the inflationary costs that we're seeing. From a trade down perspective, we have a hypothesis that we will see trade down in a recession, right? Or in a consumer compression. We have not been able to test that hypothesis adequately, right? So if we look at the Crocs brand, it's 25 years old. It's been through essentially 2 recessions, 1 significant recession in 2008. And I would say I wasn't there at that time, but the company was not in good shape. The brand was not in good shape. The company was not operating effectively. So it wasn't really tested. As we entered the pandemic, we anticipated that maybe that would result in a recession, and we would see some -- obviously, that didn't happen with all the stimulus. So our thesis is that in a recessionary environment, we will see trade down because we give the consumers tremendous value. We give them a shoe, which is incredibly versatile, it's incredibly comfortable at $50. There's almost nobody else who does that. And frankly, we do that with HEYDUDE too. So we think we benefited in that environment, but it is untested.

Okay. All right. So the other side of inflation is just costs. And you mentioned took some price increase to offset the cost, but the price of oil is going up. How should we think about the price of oil impacting cost of goods sold for the company.

Let me let Anne talk about that.

Yes, I think the bigger impact from an oil perspective and the most immediate impact is really on shipping costs. So fuel surcharges, both on your inbound freight, which obviously we've seen elevated levels along with the industry over the past year. as well as your outbound freight. So I would expect with that if oil prices continue at those levels that we will see those impacts. And obviously, as Andrew mentioned, we took pricing very early last year, and some of that is still rolling through this year. So we have some wholesale price increases in the U.S. that are still rolling through Q1 and Q2 of this year as well as some international price increases we took in EMEA and Asia that are going into effect this year. So kind of both the inflationary side and then from a revenue standpoint. I think from the cost of the shoe or the resin it's difficult because petrochemical industry is very complex, and there are several markets. So it's not a perfect correlation between the input of our shoe and oil. So it's kind of difficult to delineate and it's also a further a long impact because we buy inventory in advance and we negotiate. So I think at this point, it's kind of hard to understand what that impact looks like, and we'll need a little bit more time to understand how that would roll through. But I think overall, just thinking about the guidance that we laid out, we did anticipate that we would be in an inflationary environment this year. And while we didn't indicate a war or quite the pressure on oil, we did leave room within our guidance to accommodate some inflation. So depending on what happens, we should be able to accommodate some of that.

Okay. I want to ask about the supply chain because, obviously, supply chain has been a huge issue. -- how does the current flow of product in the United States compared to a month ago and 3 months ago? What are you seeing?

Yes. I would say it's essentially is the same, right. So I know there is some sort of press commentary that the number of boats stacked up outside Long Beach are less than it was, right? And that is true, but we also see more congestion out of the places, right? So people like us have diverted product to different ports and some of those ports are now getting congested. So I think the core issue is that there's 2 things going on, that the transportation time frame that it takes you to get from Asia to the U.S. and Asia to Europe is dramatically longer than it used to be. We think of it averaging around 100 to 110 days right now. That's kind of what we're seeing. And if you think about it in normal times 2 years ago, it was 40 to 45 days. That's a dramatic difference and a similar kind of lag in Europe. I would say it's getting more repeatable a little bit, right? So it's not extending or contracting so you can plan around it easier, but there's still a lot of volatility. So it's difficult, but it's been difficult for 18 to 24 months now. And so I think companies like ours have found ways to accommodate that and deal with it.

Okay. So if the sort of the flow of inventory is kind of the same, at least it's relatively stable. I mean, how is that impacting supply chain costs?

Yes, supply chain costs are elevated. I'll let Anne talk about that.

Yes. And I think what we've seen in the last couple of years, as you know, is really elevated inbound freight rates. That's been the biggest pressure. Now obviously, from a Crocs standpoint, we've been able to offset that through price increases and other work we've done in our margin, and we expanded gross margin last year quite significantly. I will say this year one of the biggest supply chain impacts that we had that was outside of freight was the Vietnam closures in manufacturing last year. So that impacted us and it's impacting us now because we would have been receiving those goods mostly in Q1 of the closures for Vietnam. So we've made the decision to air freight about $75 million worth of products in so that we can kind of fill that product tool, which is we don't normally use air freight because it's expensive. So I would say that's an elevated product cost as a result from the supply chain disruption that we don't expect to repeat because of the shutdowns, but that is something that we've incorporated into our guidance for this year.

Okay. Another hot topic is obviously the consumer. First, I want to ask you about Europe. Are you seeing a sort of a CNN effect, so to speak, where maybe people were distracted and not buying footwear because of what's going on in Ukraine? What have you observed?

We're not seeing that today, right? So it may be early. I mean that hasn't sort of transpired, but we're certainly not seeing that today in terms of -- we can observe directly our own digital business, our own e-commerce business. We can observe our Amazon sell-through. We can observe our a limited number of stores we have in Mainland Europe and reports we get from our wholesale customers. So we're certainly not seeing that today.

Okay. The other point we talked about inflation, the impact on trade down, which is sort of a bigger picture theoretical question. But I mean, in terms of the U.S. consumer, the Europe consumer, even like the Chinese consumer, are you seeing any type of change in behavior? Are people starting to react to price of the pump or anything out there that's sort of maybe the market at large is worried about?

We are not seeing it, right? So it doesn't mean it's not there, right? And it doesn't mean it won't transpire at some point in time, but we're certainly not seeing that now.

Okay. All right. One more hot topic question before I get to HEYDUDE. It's a strange question to ask sort of but I think everybody wants to know. The stocks had a unique surprising kind of move, turning at a single-digit multiple despite tremendous growth over the last 3 years. And obviously, not everybody understands maybe it's a beneficiary of stay-at-home and some people worry maybe that reverses. But when you see the stock price, what does it tell you? And obviously, from a capital allocation standpoint, does it change your thinking about what you want to do?

Yes. I think the biggest thing it tells me is that clearly, there's a disconnect, right? So we've clearly communicated in 2022 that we think the Crocs brand will grow at 20-plus percent, right? We'll add in HEYDUDE, which will be an additional on a pro forma basis, $700 million to $750 million in revenue. We've communicated clearly that we'll make about 26% EBIT, which is a staggering amount for our industry. There's nobody that's even close, right? And we'll generate around $10 per share in earnings per share, right? I would say that's the -- what we've communicated, right? I would say, in addition, you take into consideration that this management team has not missed a single number in 5 or 6 years, right? The one exception would be the first year of 2020 in COVID, where nobody knew that the world was going to get locked down. And even then, we missed our revenue, but we actually made more money, so like there's a lot of credibility in this team and there's a very clear guidance. So that kind of multiple relative to that guidance makes absolutely no sense. So why that is, I think we hear a few things. We hear that people are expecting the Crocs business to decline, right? They're expecting the clog trend or the clog fad to evaporate. That is absolutely not -- we have no evidence for that, right? We don't believe that. We have no evidence to that. But I do understand why people might believe that, right? Or might think that. And then I think people are a little nervous about HEYDUDE. They don't know what it is, right? So this is a brand that's scale, and we're going to go on and talk about that. So they don't know what that is. So I think that to me, that represents a significant opportunity.

I think, yes, from a capital allocation standpoint, just to kind of finish up your question, we have suspended buybacks until we're below 2x leverage or below, which is consistent with the covenants on our debt. We took on debt in order to finance a HEYDUDE transaction at a very compelling rate. So happy to do that. It makes a lot of sense. But -- so we will focus on debt pay down to get to that 2x or under that we can resume our very successful share buyback program. We think that matters, and we spin off a lot of cash in the combined entity and spends off more cash. So it's very compelling from a free cash flow standpoint. So we're still committed to that. And if we could be in the market right now, obviously, we would be -- we've had a bunch of insider buying in the last couple of weeks showing really the belief that we have as a management team and how the stock is performing compared to the company. But overall, we're doing what you guys would want us to do, which is focused on execution.

Absolutely. All right. So let's talk about HEYDUDE because you talked about building HEYDUDE into a $1 billion brand by fiscal '24, which is obviously not that many brands in the world of footwear get to $1 billion ever or even to $570 million, which is the number from last year. Where will the growth come from?

Yes. The growth is actually the easy part of the story, right? So this is a company and a brand that has achieved, as you said, $570 million, $580 million, I think it was last year, and we're pro forma at $700 million, $750 million this year. with really distribution in just a very narrow portion of this country, let alone other countries, right? So as we look at kind of the brand awareness, average brand awareness is about -- is in the early 20%. So very, very low. It's much, much higher in the sort of Midwest, Texas and the South, which is where the brand is predominantly distributed. It's extraordinarily low here in the Northeast and on the West Coast. So it's today is a brand that's only sold in a certain portion of the country. And that's really just a function of the entrepreneurs who started the company where they had sales distribution, right? So they had sales distribution in those areas. They manage the land accounts in those areas. They sold product in those areas, and that basically fulfilled all the supply they had. So there wasn't a need to go any further. So the first thing is we're going to extend distribution across the United States. As we look at the overlap between HEYDUDE and the core customer base that we have for Crocs, which is family channel, sporting goods, very selected premium department stores. So that distribution is exactly the right distribution for HEYDUDE, and so we will put HEYDUDE in that distribution. I would say, as we talk to those retailers, and we've -- that's well advanced. They're clamoring for it. They can see the sell-through rates that maybe 1 or 2 of their competitors are experiencing because they already have the brand, they can see the profitability, they absolutely wanted. So that's actually pretty easy. What we have to do to sustain that over a longer period is bolster their supply chain so that we can actually make more products and feed that demand. And we also have to add to marketing, right? They've done very little marketing. So they've also achieved that revenue growth that you just talked about with almost no marketing. They'll do digital marketing to drive to the website search and customer acquisition, but no brand marketing. So we've got to layer that on. And then beyond that, we have the opportunity for international. And we've prioritized international markets is where we want to take it. There has been some experimentation in some of those international markets. It's very clear that it resonates in those markets. So we're enthusiastic about that, too.

Okay. What have you learned about this brand since you bought it and the deal closed?

We've learned a lot, right? So this all happened relatively quickly. We're able to do pretty effective due diligence, but that was over a compressed time frame. I think the things that we're learning are actually very encouraging. So we're learning about the consumer, the customer and the fan love, right? The consumers absolutely love this brand. They love the product, they love the way it fits on their feet. They love the value that they can get and they love the versatility and flexibility of the product. And that's going to -- that's a core that allows you to build out from that. The second thing is -- the operations of the company, they need a lot of support, right? So we're going to be hiring a lot of people. We're going to be building out almost all aspects of the organizational structure, whether it be product design and development, whether it be wholesale sales, whether it be running the warehouse, we'll leverage a lot of our core back-office capabilities around finance and legal and HR, et cetera, to really support the company, but we need to support the company to be able to realize that growth. And then I think the last thing I'd probably kind of call out is we're really -- we've got great engagement from the founder. He remains very well engaged, and he's really the kind of the blue touchpaper in terms of carrying the torch for the brand. And while their organization is much lighter than it needs to be for the size of business, they've got a few core actors and employees who are really passionate and very strong in the business.

So I want to ask you, you mentioned raising awareness of the brand in the East Coast and the West Coast is part of the job of growing the brand. And part of -- I think the idea is that you have this great playbook for Crocs that you've used to increase brand relevance, take it global. Have you been able to start to run that playbook with HEYDUDE? And have you had any insights from that?

Yes, we will be able to, right? So that is the plan, right? So we'll think about our social digital marketing, we think about our collaborations. We think about all of the great marketing work we do and combine that with product innovation, we will absolutely bring all that to bare HEYDUDE. It is early days right now. So we've got a really -- we're doing the research because a lot of that work is based on a strong foundation of consumer understanding. It's a strong foundation of kind of product directions that we're doing consumer research, we're doing ethnographic work. We're doing creative work with a couple of key agencies to really understand where we think the brand should be pointed and articulated because I'd say today, one of our biggest concerns and criticisms, it isn't really a brand, right? It's a great product, and we need to make it a great brand as well. Obviously, that's what we're really good at. We're super confident about that, but we're going to do the research, develop the point of view, and then we'll roll that out.

Interesting. Okay. I want to ask you about $1 billion is a very nice round number target, but it sounds like you feel pretty -- there's a lot of opportunity out there, perhaps beyond fiscal '24 could be more opportunity. Is there another brand that you compare HEYDUDE to when you think about like a like a GOAL like a NorthStar where you think this could be -- I mean, could be like another Crocs, Crocs talking about $5 billion in sales. I mean can HEYDUDE be like that? Or is it like a Vans or something like that, where you sort of say, this brand when I think about the total addressable market and what -- how much this brand the product resonates to consumers, it can be something bigger without having to put a date on it.

Yes. I think it's much more versatile and broader and bigger than Crocs. I think it will take some time to get there because they're starting from a very -- they and we are starting from a very nuance place from a very narrow place. But I think ultimately, it can be bigger and broader because the wearing occasion is broader, right? It's more accessible. As wonderful as we think Crocs are, not every consumer believes that they could wear them to every kind of occasion, right? There's very few occasions you can't wear HEYDUDE to so it's much more versatile. I think the brand can also transcend product -- transcend footwear eventually as we really build out the brand. I think there are the opportunities beyond footwear. So I think it could be a bigger brand. And maybe a good archetype will be something like a Vans, which I think has done a super job of extending their brand around the world of leveraging their brand into adjacent product categories. and really telling a cohesive brand story across multiple wearing occasions. And they've done a very nice job.

We talked about the TAM and we talked originally about the DLT was that we would expand our TAM to $125 million based on the compelling nature of Crocs was we said our TAM for Crocs really focused on the clogs that we've talked about with the $8 billion and then the sandals for $30 billion. So it obviously expands the TAM for HEYDUDE we said was $125 million, so it expands the TAM quite a bit.

Got it. All right. So maybe let's talk about Crocs because I know you guys -- and you get this question probably 3 times a day. But I think it still needs to be asked, given the stock price movement. And I think the perception of the market is Crocs is something that people were when they were saying at home, it was comfortable shoe for being at home, but as people go back to work and life gets back to normal, hopefully, like maybe people are going to have a less of a need for it, and maybe that's why people are afraid to own the stock right now. I mean what's your view on that?

Yes. I mean I think, obviously, we hear that story, right? There's not a lot of evidence to support that story, right? So I think what's coming into play there is people, especially those who've been involved with the stock over the years, have seen a couple of different cycles in Crocs, right? So they've seen probably 3 significant cycles, so they've got, it's gone up, it's gone down, right? What I would say, I think what's different about today is I think we're a much more well-rounded company. We have very clear footwear expertise. We have very clear marketing expertise. We have very clear product development and go-to-market expertise. We were a much stronger company than we were historically. And part of the scale in the company and the growth we've experienced since 2018 has allowed us to kind of build that out. So I think we've got a modern foundation. And in terms of the consumer perception, we have engaged a very broad consumer base, right? So we sell men, women's and kids. We sell across a socio-demographic platform as well we sell highly affluent people and people for whom this is an aspirational purchase, right? And that exists around the world. So we have an incredibly broad customer base. The benefits are then incredibly broad customer base as a lot of people can buy the product. We focus on creating a want for the product versus a need for the product. And that want comes from the marketing. It comes from product innovation. It comes from new colors and new graphics and giving them an opportunity to buy. And the question we want our consumers to ask is not should I buy a pair, but how many colors would I buy? And I think we've been incredibly successful at that. And so I don't think that is all oriented around the pandemic. It's not because people have been sitting at home at Zoom that they decided to wear Crocs. They decided to wear Crocs because it's comfortable, it's incredible value, and they can express themselves, whether it's through color and graphics and/or Jibbitz and personalization. And those are mega trends. Those are trends that existed before the pandemic, I think will exist after the pandemic. So I think the sort of post pandemic sort of thesis is way of a blown. And there's probably no really compelling way or to refute it at this point, time will tell, right? And as we look at our order book for this year, it comfortably supports the guidance we've provided.

Understand. All right. So I guess I want to ask another question in another way. And you mentioned at the top when you're talking about gives it a -- if there's fashion mix associated with a product that -- obviously, clog, it makes up the high percentage of the company's total sales. So there's always an element of people being uncomfortable with fashion risk. And I think that people even done a remarkable job increasing brand relevance compared to where it was 5 years ago, 7 years ago, 10 years ago. What can you say to people who are worried about fashion risk and just concentration in 1 product. Like how do you keep it relevant? How do you keep it new and evolving even though it's kind of like the clog over and over again in some respects to the untrained eye.

Yes. Look, I think one of the biggest things that we see in the competitive marketplace today is a lot of our competitors making clogs, right? So the total addressable market, the Tampa Clogs has actually expanded dramatically. -- because we've expanded it, but also others have expanded it, right? So we see a lot of competitors making clogs. And as I talk to some of them and hear from retailers, they're actually having great success. So I think what's happening is the consumer is becoming to understand that it actually is a great silhouette, right? It gives them a lot of consumer benefits. It can be colorful, it can be fashionable, but it also could be comfortable and it could be easier on and off. So there's a compelling consumer benefit there, which is consistent with kind of those global mega trends we just talked about. And we see that increasing competition in the silhouette is really helpful because it's growing the total addressable market for clogs. So people can be concerned about it. Yes, they can be concerned it's a fashion risk. I would say the industry is leaning into it and having success with it.

So Andrew, I don't know, I mean, if I'm interpreting what you're saying properly, but I think it -- not the category needs credibility. But when you see a lot of big brands come in and try to copy what you're doing, I mean, it's sort of -- it elevates the category to some degree and it creates a sort of more like it's not just here today, gone tomorrow. It's everywhere now, and it's sort of -- that's helping just become part of the everyday wardrobe that people have...

It becomes less niche.

Less niche.

Yes.

All right. I want to ask about product innovation because you do talk about product innovation a lot. And I think that, first, I want to just talk about product innovation with Crocs. And how do you define innovation, first of all? I mean, I guess the point is like keeping an iconic silhouette fresh UGG boots, for example, hell of a problem with that. If you go back years ago where it was kind of like the same old thing every Christmas, and I think they needed to find a way to sort of tell a story -- moving the brand story forward. How do you do that? And what's part of your secret sauce?

Yes. So there's layers to that. And you can see this in UGG and Vans and all those other things, right? So the first layer of innovation is color and graphic, right? and the clog obviously takes color and graphic extremely well. But having the right color and the right graphics in any given season, it gives the consumer, frankly, more reasons to buy because it goes with everything else, right? So that's important. So I don't -- we shouldn't rush past that because actually that's a huge driver.

I think there's a lot of Air Force, Vans and Nike sells every year just based on color and graphic. I don't think that [indiscernible] different.

Exactly. Same shoe tweak of color, right? Second layer is collaborations, right? So collaborations, we can do lots of fun stuff and you've seen us over the years. I'm sure everybody has their favorites in terms of collaborations, limited supply, something creative, premium price combined with the brand and combined with the celebrity, et cetera. So that creates opportunity to -- for the consumer to engage, they can buy them, but they can also become interested in the rest of the offering based upon that. Second layer is really innovating on the actual product. So height is an important innovation. So you also see it in therefore why and you see the platform, we see Anne right here. So we can add height, and we have multiple height versions of the clogs, we have the platform, which is on mini height that we added last year and was very successful supply constraint all year long. The Bay, this was developed about 3 years ago, off the Balenciaga collaboration that we did 4 years ago. So that was a platform clog, that inspiration drove this. We have another platform or another elevated height version coming out next year called the Crush and the Crush sandal. So height is really helpful. Women love height and especially in Asia, right? So height is an important innovation. The other is tweaking the clog for different usage occasions. So one might be outdoor and adventure. So we have the All-Terrain, which has rubber pods on the outside. It has a slightly more aggressive appearance, and that has been supply constrained for the last 18 months as well. And then we have Work. right? Where you put a non-slip sole on the bottom, and it's perfect for food service and healthcare applications. So that's kind of the innovation road map within the clog. And then obviously you got innovation out of the clog, which is why we're focused on sandals.

Right. So maybe let's talk about sandals if we can. I mean what -- you're talking about quadrupling the sandals business. I think over the next 5 years, remind us maybe how big was the sandals business in '21? And how big it will be this year? And sort of where do you see the sandals growing? Maybe we'll start like there with the sandals.

It grew almost $300 million sandal business. It grew almost 20% -- or almost 30% in 2021. So in line with that long-term guidance is about a little over 14% of sales. [indiscernible]

Yes. And if you think about that relative to other sandal players, right? There are 2 big sandal players, Havaianas and Birkenstock, both real scale companies. Most of the other sandal brands that you know of and you are aware of are half of that, right? So we're already a big sandal player, right? So if you think about a Teva, you think about a REEF, they're half that, right? And those are brands that everybody has heard of in this room I'm sure. So how we're going to grow it? So we're going to -- our intent is to quadruple that sandal business. We're looking at 4 different segments in the sandal business. We're looking at the Jibbitable sandals. So we haven't talked about personalization yet, but that's incredibly powerful. And when we brought out Jibbitable sandals last year, they were an instant hit. So we have a slide in a 2 strap -- they have the holes in the consumer can put Jibbitz in them. So that was really selling a sandal to our existing clog customer. And so that's a category that we think has a lot of legs. We have comfort casual sandals. So comfort is often for an older consumer. It's a generous lot, et cetera. It's got comfort properties. That's been historically a good business for Crocs, so we believe we can continue to build upon that. We've got style sandals. So something more like a Brooklyn or -- that we've done 1 in the recent past, which is a little wedge sandal. I think there's a lot of innovation we can do in style sandals. And then we've got adventure sandals. So we've kind of divided the sandal world up into 4 territories. And this is a lot about product innovation because we're going to bring new offerings to the table in each of those categories to grow our business.

We just actually launched a cozy sandal this week, and we launched it for some of our app, which is really fun because we played with our digital innovation. So we launched a digital app last year. And we actually saw like most downloads related to this cozy sandals kind of the mixture of digital innovation plus product innovation together, really seeing the consumer respond to that. It's been great.

Now I think it's fundamental brand management when consumers love your brand and you've been giving them something great. They want more from you. And that's why you give them other opportunities to participate in the brand and make it a bigger part of their life. I think what we've talked about over time with Crocs is it is polarizing, right? And that's a great thing because it can really create a lot of love for people who love it. Some people, it's not for them. Now is it part of your assumption that sandals are a great opportunity to get people who like Crocs, who like the collaborations who think it's fun, but maybe they don't want to wear what Anne is wearing today, but they want to participate in the brand. Does that give you an entry point to other people? Is that part of the idea behind sandals.

Yes. Yes, it's less polarizing for sure, right? Why we're focused on sandals? Is a few things. One, it's a big category, right? So we estimate $30-plus billion on a global basis annually. It's more female-centric but male. It's very much a replacement category. A lot of women will throw their sandals away from last year to buy new ones. So it's a definitely replacement category. So it's a big category. And I think it's a little less -- and our product, so our technologies, our materials, et cetera, a lot of the molded work that we do allows us to give the consumer incredible value. It gives them a comfort sandal in lots of different versions at a very approachable price point and it kind of allows us to -- and we've seen historic success within that category. We also looked at the competitive landscape, and we decided the competitive landscape was pretty weak. There are a couple of big competitors I talked about. But as we look in more detail, it's often a secondary category for everybody else that competes. And if it's a secondary category, it doesn't get the focus that is requiring. So we felt like it was very compelling. And as we thought about our growth strategy, we knew we wanted to grow outside of Crocs, but we try to learn from the history of Crocs which is when they were trying to diverse away from the clog at some point in time earlier in the history of the company. They did a lot of things very quickly right? None of which really got traction. So we said, look, we want to identify 1 big area where we can really put resources, time, energy, people and marketing and go after that with pick sandals. And we've seen, I think, several years really a great start, but we've got much greater ambitions.

Okay. I want to keep moving because we got a lot to talk about. Tell us about the growth path in China. Andrew, I know you've been working on China for a while and a lot of reach in the marketplace there. Where does it stand today? Obviously, China is a market from a macro standpoint has been kind of down through COVID. How far along are you in the work that you've been doing in China? And what do you see is the growth opportunity.

I think we're in a really good place with the work that we've been doing in China. So as alluded to, we've been reengineering the market for about 2/3 years now, it was a real mess in terms of how we've been constructed in the past. We've been refreshing our distributors, opening energy stores, investing in celebrities and ambassadors to carry the brand as well as investing in our digital footprint. We grew double digits last year. We'll grow strong double digits again this year. We're very confident in that somewhat impacted by COVID and the lockdowns that you see, but we still managed to grow through that. And that gets us, but that's still a small business. right? We've talked about it being less than 5% of our overall sales. It's still a small business. Our ambition is much greater. So what we're looking for is that sustained level of focus and investment that gets you to that tipping point where your growth can accelerate, and you've seen that from a lot of other brands. I would say we're not at that tipping point yet, but we feel like we're seeing very positive and reinforcing signs that we're getting incremental contraction with the Chinese consumer, and there's no reason we can't get that.

Okay. So I was going to ask you about that tipping point or that's something where the brand really takes off. And -- is it something you can engineer -- or is it something the fashion guys are just going to touch Crocs in China and all of a sudden every consumer is going to want and you're going to see this huge double-digit growth? Or I mean is that -- I mean, it sounds kind of like not [indiscernible].

I think you can get close to engineering it, right? There is always a bit of luck or a bit of good fortune in some of these things. But we've essentially engineered it here in the U.S. we're seeing that trajectory in some key European markets like the U.K., Germany, et cetera, today, where we're seeing really that tipping point and explosive growth -- and it's the same formula that we applied here in the U.S. We applied it in EMEA, where we're applying it in China today. So I think it's persistence. It's having the right strategy model and persistence and investment, and I think you can get to that.

Is it possible to put a time frame on it? Or is it sort of like the persistence is...

Well, I can say it's probably not this year. We will get strong double-digit growth, but that's not that inflection I'm talking about. That inflection I'm talking about is when you get to hundreds of millions of dollars, maybe even $1 billion in China, right? That's in the future.

Got it. Okay. I guess the -- part of -- Let's get to $5 billion in sales for Crocs. I mean people are under trying to figure out by geography. I want to talk about North America for a second because sales went from $640 million before the pandemic. I think that was an [ $18 billion to $1.6 billion ], right? That's a phenomenal amount of growth -- how do you think about the growth in the Americas over the next 3 to 5 years? And kind of where are some of the puts and takes?

Anne, do you want to.

Yes. Sure. Just one thing to think about with the Americas too is that it didn't just happen overnight. So we grew pre-pandemic too. So '19 was a big growth year. '20 was actually a big growth year in the back half of the year, so not just pandemic growth. And I'll also say a lot of our consumer in the Americas, just something back to the pandemic story has not been at home during this time because we service a broad base of consumers, lots of them in the South and the Midwest. But I will say from an Americas overall standpoint, we haven't said what it's going to do. We said that it will grow like we have -- we expect good growth out of our Americas business this year, both -- and we expect even growth. So that means wholesale growth and DTC growth. So if you think about Americas growth last year, we had 86% wholesale growth. We also had 86% DTC growth. So consumer takeaway has obviously been very strong. The Americas has also been supply constraint in the last couple of years as we've gone through pandemic and we've had supply chain and been trying to grow the business so quickly. So they've definitely, last year was a function some-- especially in the back half of getting them back in stock and getting our wholesale consumers back on stock and getting our own channels back in stock. And I think we feel pretty good about our inventory levels at this point. So we feel like that will drive good even growth this year. And then from 3 to 5 years, we didn't give that out specifically. We just said that would be factored in to our $5 billion. But obviously, that factors in Americas growth, EMEA growth, which we said would be the strongest in the shorter term. And then Asia is our longest growth term opportunity led by China, but also we have some other really important Asian markets that are -- have been really good for us the last couple of years, including South Korea and India, which are both pretty big markets.

I mean is it fair to assume -- obviously, Americas encompasses many countries, not just the United States and also the sandals opportunity. If we were just to focus on clogs in the United States like within the Americas because I think that's what people think about when they Americas like they're not it's sort of not -- was how big is South America, how big is Canada, whatever. How do you think about the clogs piece within the United States? Or how do you think about -- maybe instead of that? How do you think about everything else as a contributor?

Yes. So I think probably -- it's coming in from a product perspective, right? Clogs is not tapped out in the United States, right? So we are planning and seeing continued growth in clogs, number one. Number 2 is I think sandals is that key, right? That's the key that can really sustaining a strong growth rate. It's really building out our sandal business. And personalization Jibbitz has been super important. We have the highest penetration of Jibbitz here in the United States in our own stores, but also on our websites and in our wholesale partners. So that's also been an important vehicle. So -- and as you do the airport test, right, everybody in footwear does the airport test kind of walking through the airport you're looking around. And you look at those feet. And you see Crocs, but there's a lot of feet that don't have Crocs on them, right? There's plenty of people and plenty of incremental penetration for clogs as well as our other growth platforms.

Right. I do like the airport [indiscernible] . I've seen a lot of that in the airport recently.

Exactly.

I saw a ton of that which was neat. But -- all right. So I would do 1 more top line question about Jibbitz. And I think people they wonder about Jibbitz because people are how many jibes do people buy per their shoe and I have an 11-year-old daughter, she has 3 pair Crocs, and she probably has like 15 Jibbitz because every hole on the Crocs has to have a jibbit. I think that if Jibbitz is like 7% of sales, and it implies that maybe the average jibbit per shoe was like 2%. But I'm not -- I don't think that's right. But I mean how do we think about the contribution of Jibbitz? I mean is it is a trend that's getting bigger and Jibbitz's been around since Crocs has been around. What do you -- how do you see that contributing to growth over time?

Yes. I think we think it's an important driver of growth on 2 dimensions, right? The first dimension is the consumer engagement, right? So when that customer buys a pair of clogs without jibbitz, they're buying something that everybody else has. White clogs, literally millions of other people have that, right? Same with the white Air Force 1, right? When they buy it with a curated set of Jibbitz, that they spent time picking out and thinking about the story they want to tell to their friends and family in the whole world on their shoes. That's a very different level of emotional engagement from the consumer, right? So the emotional engagement aspect is critically important, right? Second aspect is just the pure dollars and cents, right? So we are getting better and better around product innovation, limited releases, collaborations and social listening that drives the Jibbitz as well as persuading and working with our partners like our wholesale partners and our [indiscernible] partners to merchandise them better and to really buy into them. So we think we've got a good runway of incremental growth and incremental penetration from Jibbitz. And also you add into that whole equation that they're very profitable, right? So it's a very valuable piece of the business.

Okay. All right. I want to ask about gross margins because it's such a hot topic a market investors, but the gross margin expanded last year to 61.6% and that was versus 51.1% in fiscal '19. So obviously a tremendous growth. And I guess people wonder about the durability of the price increases that you talked about and sort of wondering how you might respond if the retail environment gets promotional? Because presumably that would hurt the gross margin. I think people wonder about that. But what do you think?

Why doesn't Anne talk about the kind of drivers of that expansion? And then I'll talk a little bit about the durability.

Yes. So I think from a pricing standpoint as you know, we've taken price. We didn't just take price last year. We've been taking it pretty consistently since 2018. So like the easiest way to think about that is our classic clog in the U.S. has moved from $35, I think at the beginning of 2018 to $50 now right? And we haven't seen any pushback obviously because we've had big unit growth since that time. So it's not like we just took it overnight. So there is big dream there. So that's been a big driver of some of the gross margin gains. So I would say that's a piece of it. Obviously, there has been pullback in promotions and discounts globally. So pricing promotions and discounts, Jibbitz are a big piece of that gross margin reconstruction because, as Andrew just talked about, they're really profitable. So it's 7% of our sales, that drives profit. Mix is a big component of that because clogs have a really high profit margin. And over time, we have shrunk the other kind of less undifferentiated products that's like stitch in zone with leather uppers, we're now 100% began. So molded as actually much more profitable than leather product for us. So that rebuild of both our product and our product mix is sitting there. So that's helpful, and that obviously isn't going to reverse. And then finally, just scale and the investments we've made into our distribution centers. So we've made a ton of progress and investment in things that we've worked on from a gross margin standpoint that have driven that improvement from '18, '19.

Yes. And I think sustainability, I think there's a couple of things. One, one is I think all of the price increases we've introduced so far have been, I think, well accepted, well accepted by consumers, but also wholesalers and partners that we operate with. Typically, what we see from our wholesale partners. They may be nervous about it. But when they see the rate of sale that's sustained, they're actually making more money too, right? So they're making more dollar margin per sale. And so it's all the way through the chain, it's been well accepted. So we haven't really seen any pushback. We do kind of test these prices and make sure that we think things are going to work well. But we've seen definitely acceptance and sustained benefit from all of our price increases. I think the you kind of alluded to the potential for a more promotional environment in the future. Look, I think we're at a low point in terms of promotion that we've seen certainly in this industry in this country for many, many years, right? So I think we're not diluted around that. And the way that you protect yourself against increasing promotion is inventory control, right? So -- and as you kind of look at our inventories, we really keep our inventories lean. We keep our inventories at our customers lean. That presents challenges sometimes in chasing growth, but we'd rather leave a little on the table and be lean because that should defense around the roading price.

Yes, I agree. And I actually think about it's not why our margins are 60%, it's why they were ever 52% because we should have high gross margins because we make molded footwear, which are just by nature high gross margin.

Right. All right. So in the time maybe 1, maybe 2 SG&A questions. But I want to ask about SG&A dollars this year because I think the consensus forecast implies SG&A dollars go about 53%. And just in terms of pure dollars, that's almost $450 million. It's a lot -- versus, I think you're $730 million last year. Can you -- obviously, there's an acquisition coming in, let's talk to...

Right. Yes, because the acquisition that's not pro forma. So you don't have the acquisition of the base, so it's not a 53% increase. right? Because you don't have any SG&A dollars in last year for HEYDUDE. So the best way to think about it is there's kind of 2 pieces, right? So the biggest investment piece is continuing to invest in marketing and talent, both in Crocs and in HEYDUDE. So from a HEYDUDE perspective, we're taking our operating margins from 40% to 26%, and that's all coming in the form of SG&A investment, right? And that's all money that we need to invest in the brand to build a sustainable runway for that brand to hire talent and invest in marketing and the things that Andrew has talked about in product innovation. So those are really important for that piece. And then also, we're continuing to invest in Crocs. So that looks like marketing, that looks like marketing in China. That looks like talent and especially in our digital arena to continue to support that growth and product innovation. So that's the SG&A increase, but the 50% isn't a good -- 50% growth is a big good compare because yes...

Obviously, adding a -- we assume $1 billion brand into the Crocs sector so, yes.

Yes. I guess maybe another way of asking it is that you mentioned the 26% margins that's unprecedented in the world of footwear. I mean, nobody's achieving that kind of margin. But if you do 20% growth organically with Crocs, I mean it stands to reason there could be some leverage opportunities perhaps that's not the plan. But I mean, what -- within the buckets of SG&A, I mean, how do you think about...

We've certainly been leveraging I mean, as you know, we've been leveraging SG&A significantly from a scale perspective in Crocs. So not only have we expanded gross margin by -- right, whatever you said from 52% to 61%. So we've also declined -- SG&A, I think it was like up 40% and now we're in the 30%. So I think we've also been able to leverage SG&A, but we also want to make sure that we're not just -- we want to build the brand for the long term. We want to make sure that it's sustainable growth. So we will always focus on making good investments and making sure long term we have leverage of scale, but there may be periods of time where we continue to invest. But we're not actually guiding deleverage for the Crocs brand.

Got it. Okay. All right. We're out of time. So why don't we stop there? Andrew, Anne, thank you so much for doing this today. Really appreciate it.

Jay, thank you very much. Appreciate you orchestrating this, and thanks, everybody, for their interest.

Great. Thanks, everyone. Thanks, everybody, for dialing on the webcast. Thank you.