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

Okay. Welcome to Piper's Consumer and Tech Conference. I'm Anna Andreeva, and I cover footwear, beauty and brands here for the firm and super excited. Next up to have Crocs from the management team, we have CFO, Patraic Reagan. Welcome. Great to have you.

Yes. Great to be here. Thank you.

Okay. Fantastic. So there's been a bit of a footwear angst as of late in the industry. And certainly, a shift with some of the legacy kind of a sneaker -- lifestyle sneaker players, telling us that the consumer is going more towards the brown shoe, the dressy shoe, et cetera. It's definitely interesting shift going on across this industry. Just talk about how you think your brands fit into that and potentially benefit from that?

Yes. Yes. So I think what we've been seeing recently in footwear is just kind of a continuation of some cyclicality that you see every few years. What I would say is that specifically means to Crocs is how we compete is really through the diversification of our product offering. So for those of you who may not be as familiar with the story, you probably -- when you think about Crocs, the image that comes up in your mind is our iconic classic clog, but really is on a note, we're so much more than that. So if you think about our product offering, we are the industry leader in clogs. We're the globally recognized leader. Our product is iconic and recognized throughout the world. But that's just the beginning of the story. The continuation of the story is that from a diversification perspective within clogs, we compete through many different silhouettes. For example, we have our Echo franchise, which is very much more of a streetwear kind of edgier fashion forward silhouette. We have Crocband, which is more collegiate, a little bit younger in nature. We also outside of clogs, compete in sandals. So not many people know this, but we are nearly $0.5 billion a year in annual revenues in our sandal business. And we've been developing this over the last few years, but really just getting to scale in the last couple. And within that, our leading silhouettes are the Getaway, the Brooklyn, the Miami, we've recently introduced the Miami silhouette, which has a little bit of upscale and has done really well. So we've got clogs, we've got sandals. We also have a lot of lifestyle product, which continues our diversification story. So within lifestyle, we have a product that helps and aids in terms of recovery from athletics called Mellow, which has been meeting with a lot of success in the space. And this year, we had an absolute runaway hit with our Ballet flats, which was something that we were testing into as we began the year and ended up chasing throughout the year, unable to really fulfill all the demand that was in the marketplace. And so that's kind of a little bit of what we have in the Crocs side of the house. And then from a HEYDUDE perspective, which is our complementary brand to Crocs. We've been doing a lot of work, again, from a diversification standpoint, building on the success of our Wally & Wendy icons and moving into all things in all ways for our consumer, whether boating, fishing to our HEY2O franchise as well as our work franchises and our boots franchise. So we feel great about where we are. Yes, there's always some cyclicality, but we feel through the breadth and the depth of our diversification, we're well positioned within the space.

So part of the bear case, we often hear from investors on cross is you had a phenomenal 1H, right, this year. But a lot of that upside was driven by sandals, and you mentioned some of the innovation. Now that the seasonality is kicking in and we're here in September, the business will slow inevitably. So how would you respond to that? Just any particular kind of areas of opportunities this fall and back-to-school that you see compared to last year? I mean I know casual and comfy right, is a big area that you usually lean into. So anything you can share about?

Yes. I'd say a few different things. Maybe one to address kind of the bear case, which is growth through sandals. It's interesting. For those of you who've been around the company for a while, and I have because I've been in the footwear space for quite some time. The bear case traditionally for Crocs was always that we're overly relying on one product, which is very much not the case today. Now as it relates maybe closer in, yes, there was growth certainly driven by sandals, which we absolutely love, and we feel like it could have been even larger just from a size of consumer adoption, we left some dollars on the table. But I would say, as we kind of turn the clock now, there's a few things that are at work as we move from spring, summer into holiday fall and winter now. Number one is the season for sandals is no longer kind of constrained and confined just to spring and summer. The shoulder seasons are much longer. I mean, it's going to be 98 degrees here today. I'm afraid to step outside in my suit, that's for sure. But I'd say, number one, that season is longer. So it gives us some ability to drive additional revenue. But I'd also say that from a seasonality standpoint, this is where our diversification strategy really kind of provides us a lot of strength. And so as we now turn into fall holiday time period as we think about some of what's becoming iconic in terms of silhouettes within our fur lined clogs and our sandals -- or I'm sorry, our slippers business. We've got 2 silhouettes that we're really excited about. The first one is called the Unfurgettable. So think of about a play on words forgettable, Unfurgettable, which is aligned silhouette, which is exceptionally comfort comfortable. It's also very warm. So it really kind of plays counter to the cyclicality of -- or I'm sorry, the seasonality. And then the Cozzzys, which is spelled with 3 Zs, so Cozzzy is also another cold weather silhouette. And so as we think about that, that helps to then during the cold weather months augment where we've seen growth from a sandal business. Now it's on the Crocs side, on the HEYDUDE side. We have, what I would say, a less seasonal business. Certainly, there's kind of ebbs and flows towards the year, but particularly within our boots business in our work business, we have quite a bit of ammunition in terms of products as we go into the fall and holiday selling seasons.

That sounds great. And you've talked about this before and you just mentioned this now, but innovation pipeline at Crocs, especially, but also HEYDUDE improved, I mean, really significantly this year. Usually, that starts, right, internally with people changes. So can you talk about what's changed and durability of some of those changes? And I know as you think about marketing, bringing Terence back and elevating his position has really provided a halo effect for the business. Just maybe any updates on that.

Yes. So product innovation and marketing. I would say, within those 2, and I'll add a third here in a second. But from a product innovation standpoint, I mean, we are a product company. We are a product company. So if we're not innovating on behalf of the consumer, then we just -- we lose. And so I think, to your question, going back about 12, 18 months, probably closer to 18 now. There was kind of a refocus. I wouldn't say a change, but there was just a refocus and a heightened sense of urgency around product innovation. Not that it wasn't there, it was, but I think all things can be heightened. And our CEO, Andrew Rees, really kind of started hammering home with the organization that we have to just always be on the front foot in terms of innovating on behalf of the consumer. And so as you saw that repositioning come through, and then when I came in last year to the role as CFO, we really kind of established that we were going to ring-fence investment into the product innovation standpoint. Some of that comes through talent. Some of that comes through experimentation. Some of that comes through understanding when you've got some hits on your hands and how you can get into the marketplace faster. So I think that has been #1. So we've really built the company and involved the company now to say that is above and beyond all things, ring-fenced from an investment standpoint, what we're doing in the product, the product innovation space. The second one, which you're hitting on with Terence Reilly. Terence Reilly, for those of you don't know, he's our Chief Marketing Officer. He had been at Crocs for a while, went to Stanley. So for all you whose retirements were put off by those expensive Stanley cups that probably a number of about 5 or 6 or 7 in your house. I know I have about 7. That was Terence. The -- he's brought to the organization, he initially came back in through a more commercial role but he was recently elevated about 8, 9 months ago or so to the Chief Marketing Officer. And really, he's brought kind of the view, the visioning of what true global brand awareness is at scale. And Terence is a masterful storyteller at heart. And what he's been able to bring in terms of focus to the Crocs brand through some of the stories that we've been doing on TikTok and some of the work that we've been doing in terms of reinvigorated ad campaigns and marketing campaigns for HEYDUDE has been amazing. He's also -- if you guys haven't seen this, this is actually kind of fun. I'd encourage you to have a laugh. But he has brought a real-life mascot to the Crocs brand called Niles. Niles is a Crocodile. He was hatched roughly about 6 weeks ago. Nils has already been to a few NFL games. Niles has got over 25,000 followers, and we've been building kind of the brand and the brand affinity through a fun, playful way with Niles. You can search on LinkedIn and YouTube and Niles went through an employee onboarding experience, which is kind of comical. We thought he might have eaten one of our employees at one point in time. And so we're getting -- and we're having a lot of fun with this. We're getting a lot of resonance from a consumer standpoint about where and how we can continue to make the brand fund refreshed and inviting.

That's awesome. No, thank you for that. I'll make sure to follow to add to his following. You've done a really good job on DTC side of things and have seen nice acceleration this year despite being less promotional. North America wholesale, right? That's been more of a challenge. And last year, you were in a cleanup mode and actually exited that pretty quickly like you said, I mean, cleanup mode in that channel can really take quite a while. And you guys did it quickly. Would you give us just the state of the union on North America wholesale at this stage? I mean what are you seeing in terms of appetite from the partners towards the brands just given all of the improved innovation across the portfolio?

Yes. Yes. So I would start by saying that all of our channels of distribution are important. For us, we don't try to kind of elevate one way of engaging with the consumer over the other at our heart and part of our ethos is what we say we're delightfully democratic. And so we aim and focus on selling to the consumer wherever he or she may be. So we just -- we want to be in their path. If they want to shop with us through Famous Footwear, we want to be there if they want to shop with us through DICK'S Sporting Goods, we want to be there. So kind of put that is just table stakes. We don't try to point the consumer in any one direction or the other. Now that being said, as we've been really increasingly focusing on our innovation journey and our new product introduction strategy, what inevitably happens is you have more control and it's a little bit easier to bring that product to market at scale with the brand story and the brand storytelling through your own channels. And so on to your question, what happens is we typically get a little bit slower uptake on the wholesale side of the business through -- versus what we control internally. And so you'll see those styles coming to market first in our stores, in our dot-com, in TikTok Shop and with our other marketplace partners. And then typically, what we see and what we're starting to see and what we continue to see is then wholesale partners will then come back in and invest. They're open to buy behind those styles as they've seen a little bit more proven success out in our own channels. And so I wish it wouldn't happen that way. We'd like to be equal to all things, all folks, but it's just -- I think it's just a little bit more of a cautious play, which I understand. But we view it as our responsibility to kind of prove it to the wholesale partners before they adopt.