Crocs - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 delivered a broad beat vs internal guidance and Street: revenue $0.94B grew ~1% YoY; adjusted diluted EPS $3.00, gross margin 57.8%, and adjusted operating margin 23.8% all came in above plan. Compared to S&P Global consensus, revenue beat by ~$29.4M*, EPS beat by ~$0.51*, and EBITDA exceeded by ~$25.3M*.
• Management withdrew full-year 2025 guidance due to uncertainty from evolving global trade/tariff policy, noting potential annualized cash cost impacts of ~$45M (10% tariff case) to ~$130M (145% China tariff plus 10% elsewhere) based on current sourcing mix.
• Crocs brand strength continued (revenues +2.4% YoY to $0.76B; international +8.9% to $0.39B), while HEYDUDE remained down YoY (-9.8% to $0.18B) but saw DTC acceleration (+8.3%) and ASP growth.
• Capital allocation remained active: ~$61M repurchases in Q1 (607K shares), with ~$1.3B authorization remaining; total borrowings $1.48B with leverage within the 1–1.5x target.

Values retrieved from S&P Global for estimates marked with *.

What Went Well and What Went Wrong

What Went Well

• Broad beats vs plan: adjusted EPS $3.00, adjusted operating margin 23.8%, cash flow metrics ahead of plan; CEO: “both our Crocs and HEYDUDE brands contributed to the outperformance… margins, adjusted EPS, and cash flow coming in above plan”.
• Crocs brand international momentum: China grew “more than 30%,” Western Europe strong (France and Germany); Crocs was #1 footwear brand on TikTok Shop; Rees: “In Q1, we achieved 12% revenue growth in international”.
• Gross margin resilience: enterprise 57.8% (+180 bps YoY), Crocs brand 60.7% (+260 bps) driven by lower product costs and favorable mix; management confident in sustainability ex-tariffs.

What Went Wrong

• Guidance withdrawal due to tariff/macro uncertainty, creating visibility overhang; management highlighted scenarios showing sizable cash cost risk and potential demand softness.
• HEYDUDE still down YoY (-9.8% revenue), wholesale -17.9%; brand stabilization ongoing despite DTC acceleration (+8.3%) and ASP increases.
• SG&A deleverage: adjusted SG&A rate 34.0% (+520 bps YoY) as the company continued to invest in marketing, DTC, and talent to support long-term share gains.

Transcript

Operator (participant)

Note this event is being recorded. I would now like to turn the conference over to Erin Murphy, Senior Vice President, Investor Relations and Strategy for Crocs. Please go ahead.

Erinn Murphy (Senior VP of Investor Relations and Strategy)

Good morning, and thank you for joining us to discuss Crocs, Inc. first quarter results. With me today are Andrew Rees, Chief Executive Officer, and Susan Healy, Chief Financial Officer. Following their prepared remarks, we will open the call for your questions, which we ask you to limit to one per caller. Before we begin, I would like to remind you that some of the information provided on this call is forward-looking and, accordingly, is subject to the safe harbor provisions of the federal securities laws. These statements involve known and unknown risks, uncertainties, and other factors which may cause our actual results, performance, or achievements to differ materially. Please refer to our most recent annual report on Form 10-K, quarterly report on Form 10-Q, and other reports filed with the SEC for more information on these risks and uncertainties.

Certain financial metrics that we refer to as adjusted or non-GAAP are non-GAAP measures. A reconciliation of these amounts to their GAAP counterparts is contained in the press release we issued earlier this morning. All revenue growth rates will be cited on a constant currency basis unless otherwise stated. At this time, I will turn the call over to Andrew Rees, Crocs, Inc. Chief Executive Officer.

Andrew Rees (Director and CEO)

Thank you, Erinn, and good morning, everyone. Thank you for joining us today. We're incredibly pleased with the performance we delivered during the first quarter, despite what has been an increasingly volatile macroeconomic backdrop since the start of the year. At the enterprise level, revenues of $937 million grew 1% to prior year and came in ahead of our guidance, which called for a revenue decline of approximately 1.5% on a constant currency basis. Importantly, both of our brands contributed to this outperformance. Crocs brand revenues of $762 million grew 4% to prior year, led by double-digit growth in international, and the North American business performed ahead of plan. Hey Dude revenues of $176 million down 10% to prior year, including direct-to-consumer growth of 8%, an acceleration from the fourth quarter. Enterprise adjusted gross margins of 57.8% gained 180 basis points to prior year.

Adjusted operating margins of 23.8% came in more than 200 basis points above our guidance, while we continued to make strategic investments to extend our competitive advantages in the future. All in, we delivered $3 in adjusted diluted earnings per share, nearly 20% above the high end of our guidance range. During the quarter, we repurchased 607,000 shares, while at the same time, we remained well within our net leverage range of between one and one and a half times at quarter end. Before I share more insights from the quarter, I want to take a moment to discuss the dynamic landscape we're operating in, the actions we have taken to best position ourselves to win despite evolving global trade policies and our resulting decisions to withdraw guidance.

Since joining Crocs over 10 years ago, I have witnessed some extraordinary times, from charting our turnaround to the emergence of the Crocs brand as an icon of popular culture, to the global COVID-19 pandemic where retailers shuttered their doors for months, to the acquisition of HEYDUDE, and to today when many companies are grappling with and trying to understand our new global trade environment. Business and consumer uncertainty is extremely high. However, we're being prudent in the face of this uncertainty and are focused on what we can control, leaning into our clear competitive advantages and applying an agile mindset to how we adapt. Since we last reported, mid-February, the U.S. has implemented a series of incremental tariffs on countries where we source our product.

In addition, the daily uncertainty as to the level of these tariffs makes it incredibly hard to plan and predict both short and long-term impacts to our business. As we sit here today, we have a well-diversified sourcing mix. To provide some context, our anticipated sourcing mix into the US in 2025 stands at approximately 47% from Vietnam, 17% from Indonesia, 13% each for China and India, and 5% each for Mexico and Cambodia. We are mindful that we're in the midst of a 90-day pause from certain reciprocal tariffs, which could further escalate and impact on our sourcing in the countries previously mentioned. One of the primary reasons we've suspended guidance for 2025 is our ability to predict the financial impact of future tariffs.

To provide you with a framework, if we assume 10% incremental tariff on all sourcing destinations into the US, this would translate to a cost of approximately $45 million on an annualized cash basis. If the incremental 145% tariff on China remains in place, along with the 10% on all other sourcing destinations, this would imply a cost of approximately $130 million on an annualized cash basis based on our current sourcing mix. Given the broad range of outcomes that we're facing as a company and as an industry, we're focused on what we can control and on driving long-term value for our brands. In light of the current macroeconomic environment, we have taken swift action to proactively reduce our cost base.

Since we last reported, we've identified approximately $50 million of additional savings to be realized in 2025, and we are continuing to evaluate potential actions for future savings as well as closely managing our inventory levels. While we are encouraged by the performance of our overall business in April, it is challenging to predict how consumers may respond to prolonged uncertainty. It is possible that in the future, we could see softer demand for footwear and other consumer goods, particularly given the potential for increased costs and higher prices across the industry that could further burden an already choiceful consumer. Despite withdrawing our guidance, one thing is certain: we believe our industry-leading gross margins, low unit cost, well-diversified supply chain, global business model, and strong free cash flow position us well to take market share.

We are and expect to continue to be very profitable while generating significant free cash flow. We're committed to being transparent with all of our stakeholders as we navigate this current environment. Now turning to the performance by brand, starting with Crocs. First, we're continuing to drive global brand relevance through our icon and icon iterations, in addition to introducing new clog franchises. During the quarter, clog growth was led by our Classic Clog, in addition to growth within established franchises such as Echo, as well as new franchises such as InMotion. Height resonated well with notable success in Asia, led by the Classic Platform, Bay, and Crush. In China, the Bay, a height variation of our clog, was relaunched in partnership with global brand ambassador and Chinese celebrity TJC.

This campaign delivered very strong engagement across our key social and digital channels and an influx of traffic to our stores. Second, we are making clear progress towards introducing product for new wearing occasions outside of Crocs. Sandals gained a notable share of our business in the quarter, led by style sandals, and outperformed the overall Crocs brand. The strength was broad-based across our style sandal franchises, including Getaway, our number one franchise, Brooklyn, and Miami. Year to date, we are seeing very strong sell-throughs across these core style franchises, and our strategic accounts are chasing receipts. Into 2025, we tightened our sandal assortment, which has resulted in higher productivity per franchise. As a reminder, we see sandals as an avenue for attracting new consumers to our brand. Over the last 12 months, 54% of consumers who purchased sandals on our own dot-com channels were new to brand.

This performance has translated into incremental shelf space with our retail customers. We're building on these franchises into the summer and through fresh new colors and styles. Third, we remain laser-focused on our digitally-led, social-first marketing playbook, as this is a key ingredient to sustaining brand heat. During the quarter, we announced some exciting influencers, including our spring break activation with Alex Cooper, top-tier podcast host and style maven. This campaign featured our key influencers sporting Neon Classics all over Miami, driving more than 2.5 million social impressions over the weekend. While we introduced a number of partnerships during the quarter, perhaps the most anticipated drop was our limited-release collaboration with Tokyo-based streetwear brand Bape. This release amassed a substantial waitlist ahead of the launch. This release drove an exceptional level of traffic to our websites and app while garnering nearly 70% new customer acquisition.

Turning to social commerce, we are continuing to lead into this phenomenon as consumers are more frequently starting and completing their shopping journeys on social platforms. TikTok Shop scaled nicely in the quarter, and we see it as a halo to our other channels. During the quarter, Crocs brand remained the number one footwear brand on TikTok Shop. Finally, our fourth strategic pillar is to gain market share around the world. In Q1, we achieved 12% revenue growth in international, with balanced growth across wholesale and direct-to-consumer channels. China accelerated in the quarter, growing more than 30% as compared to the prior year. The growth in China was well-balanced across channels, including the addition of 40 new partner doors. In April, we secured our second-ever Super Brand Day on Tmall. During the multi-day event, nine of the top 10 footwear styles on the platform were Crocs brand.

Our successful activation was complemented by a celebrity and influencer-led livestream. In the quarter, we also saw robust growth in Western Europe, led by France and Germany. Our North American business came in ahead of expectations and was down 3% to prior year. Turning to the HEYDUDE brand, we continue to make progress on stabilizing the brand in North America, and I'm very pleased with how the team has executed to deliver a better-than-expected first quarter. First, starting with the HEYDUDE community, we're building a passionate fanbase. In February, Hey Dude had its first-ever TikTok Shop Super Brand Day, during which HEYDUDE ranked as the number one footwear brand across the platform, with particular success in our Austin Lyft and Hey2O styles. With an emphasis on Her, in March, we activated our Sydney Sweeney times Austin Lyft Fashion Crisis Hotline campaign under the "Beauty is Comfort" tagline.

The campaign content reached a staggering 8 million consumers, surpassing all internal benchmarks. We also were front and center at the Houston Rodeo, talking to the core HEYDUDE consumer, and were recognized as the number one brand, dubbed the grand champion of the rodeo for best brand experience. Second, we are building the core and adding more. We iterate on our icons, the Wendy and the Wally, through color, materialization, and partnerships. The three major platforms include Stretch Socks, Stretch Canvas, and Funk Mono. During the quarter, we successfully transitioned out of our legacy Wally socks program, and the retailer reception of our updated Wally Stretch Socks has been strong. In addition, we released two iterations of our Jelly Roll x Hey Dude Wally. The second Jelly Roll launch started as an early access exclusive release on TikTok Shop, where it sold out completely within the day.

When we launched the collab on our own DTC the next day, we saw very high levels of traffic, well above expectations. We also leveraged Travis Hunter, Heisman Trophy winner, and number two 2025 NFL draft pick to launch an improved Hey2O to update an already successful franchise. Finally, against our third strategic pillar, we continue to prioritize brand health as we stabilize the North America market while laying the groundwork for future international growth. We are pleased by the acceleration of our direct-to-consumer channel, up 8% in the quarter. This was supported by a significant improvement versus prior year in our own dot-com, growing traction of the TikTok Shop, and new retail expansion. During the quarter, we opened two premium outlet stores and converted two temporary stores, helping to drive brand awareness and connect consumers with a full expression of our brand.

We plan to open approximately 10 stores during the year. ASP for the HEYDUDE brand were up low single digits to last year, our seventh consecutive quarter of positive ASP growth. We also saw full-price sales in our own dot-com improve nicely in the quarter, fueled by product newness, including the Austin Lyft and the Pool. I will now turn the call over to Susan to provide more detail around our financial performance and how we are approaching the remainder of the year.

Susan Healy (EVP and CFO)

Thank you, Andrew, and good morning, everyone. We delivered strong first-quarter results that bested our guidance expectations across all core metrics. First-quarter enterprise revenues of $937 million were up 1% to prior year and ahead of our guidance of down 1.5%. Overall, first-quarter trends were more volatile than we have seen in recent quarters.

Trends were strongest in March, and our business continued to perform well in April. Crocs brand revenue of $762 million was up 4% to prior year. Growth was led by wholesale up 5%, while DTC was up 3%. North America was down 3% to last year, ahead of expectations, with DTC and wholesale declines of 2% and 5%, respectively. International revenue was up 12%. China led the growth, with revenue up more than 30% in the quarter, along with Western Europe, with notable outperformance in France and Germany. Hey Dude brand revenue of $176 million was down 10% to prior year and ahead of our guidance, which called for a revenue decline of 14%-16%. DTC was up 8%, accelerating from the fourth quarter. Upside to our guidance was driven by better-than-anticipated digital trends.

Wholesale was down 17% in the quarter, including the impact of resetting our Wally Stretch Socks program, which is performing well. Enterprise adjusted gross margin of 57.8% was up 180 basis points to prior year. Crocs brand adjusted gross margin of 60.7% was up 260 basis points to prior year, tied to lower product costs and favorable customer mix. Hey Dude brand adjusted gross margin of 46.6% was down 120 basis points to prior year, driven by deleverage against our supply chain costs. Adjusted SG&A dollars for the quarter increased 18% versus prior year. Adjusted SG&A rate was 34%, up 520 basis points compared to prior year, driven by incremental investment in talent, marketing, and DTC to support long-term market share gains. Adjusted operating margin of 23.8% was 230 basis points ahead of our guidance of 21.5% and down 330 basis points compared to prior year.

Adjusted diluted earnings per share was roughly flat to last year at $3, significantly above our expectations. Our non-GAAP effective tax rate was 17.2%, which reflects the tax impact of intra-entity transactions. Our inventory balance is healthy and current at $391 million as of March 31 and flat versus prior year. Enterprise inventory turns remained above our goal of four times on an annualized basis. Our liquidity position is strong, comprised of $166 million of cash and cash equivalents and $679 million of borrowing capacity on our revolver. During the quarter, we repurchased approximately 607,000 shares of our common stock for a total of $61 million at an average cost of $100 per share. At the end of Q1, we had just under $1.3 billion remaining on our buyback authorization.

We ended the quarter with total borrowings of $1.5 billion and remained within our net leverage target range of 1-1.5 times. As Andrew mentioned, we are withdrawing our full-year outlook. The primary reason for withdrawing guidance is that, at this point, it is extremely difficult to quantify and project the financial outcome of tariffs and the related potential for softer consumer demand across the industry. To illustrate the potential tariff impact, if a 10% incremental tariff on all sourcing destinations into the U.S. were in place, this would cost us approximately $45 million on an annualized cash basis. If the incremental 145% tariff on China were to remain in place, along with the 10% on all other sourcing destinations, this would imply a cost of approximately $130 million on an annualized cash basis based on our current sourcing mix.

As you would expect, we are pursuing three primary levers to mitigate any potential impact of tariffs in the short and longer term. One, adjusting our sourcing mix into the U.S. Two, further reducing costs. Three, evaluating potential price increases. While we have withdrawn our guidance, we do want to share some context for the near term. First, while much of the second quarter is ahead of us, we are pleased with how both of our brands performed in April. Second, we would expect tariffs to have a more adverse impact on HEYDUDE's gross margin rate as compared to the Crocs brand, given relatively higher China sourcing exposure for HEYDUDE. We expect gross margin pressure from tariffs to start in Q2 and expect the largest impact to begin in the second half.

Third, since we last reported, we have identified an incremental $50 million of cost savings in 2025, and we are continuing to evaluate potential actions for further savings. Fourth, we are carefully managing our forward unit inventory levels, but are mindful that incremental tariffs will add higher average unit costs. Finally, our capital allocation plans remain unchanged. We plan to pay down debt and opportunistically buy back stock while remaining within our 1-1.5 times net leverage target range. I will now turn the call back over to Andrew for his final thoughts.

Andrew Rees (Director and CEO)

Thank you, Susan. While the geopolitical climate has become more volatile since the start of the year, I'm confident that we will chart a winning course led by our talented team, the democratic appeal of our brands, and the value and comfort proposition that consumers clearly value.

As we have demonstrated in the past, we have a proven track record of coming out of periods of uncertainty stronger than we ended them, and I'm confident that the current reality presents a very strong opportunity to further our competitive advantages and gain market share. At this time, we'll open the call for questions.

Operator (participant)

We will now begin the question and answer session. To ask a question, you may press star, then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. We ask that you limit yourselves to one question. At this time, we'll pause momentarily to assemble our roster. The first question comes from Anna Andreeva with Piper Sandler. Please go ahead. Great.

Anna Andreeva (MD and Senior Research Analyst)

Thank you so much. Good morning and congrats. Nice results. We had a two-part question. First, on gross margins, really strong at the Crocs brand, and I think you mentioned product costs and favorable customer mix. Can you comment on sustainability of those? It sounds like the costing benefit gain may be accelerated sequentially. That is the first one. Secondly, you mentioned pricing as a potential lever. Can you just provide more color on that? Do you see that opportunity more at Crocs versus HEYDUDE, and would this be a global versus a U.S. increase? Thanks so much.

Andrew Rees (Director and CEO)

Great. Thanks, Anna. On gross margins, yeah, I think we had, you know, really pleased with the results in Q1. Look, you know, one of the strengths of this company is our incredible gross margins, which allows us to be very strategic where we invest.

In terms of sustainability, we do believe they're sustainable. The gross margin uplift or the strength of the gross margins really came from, I think, three things. One was good negotiating with our vendors, so we were able to continue to get some efficiencies in terms of sourcing. Over the last several years, we've made very substantial investments in our distribution and logistics infrastructure here in the U.S., in the Netherlands, and in other parts of the world. I think that's really paying off with efficiencies. Then we also had, you know, a really good customer mix and channel mix. I think we're pretty confident in the sustainability of that. You know, ex tariffs, obviously, I'm sure we're going to talk plenty about that on this call and appreciate you not leading with that. The second part of your question around pricing, yeah, absolutely.

That's a lever to mitigate sort of incremental costs. We expect, depending on the level of incremental costs that may come from tariffs and other factors, we do expect the industry to go up in terms of price. I would say at this point, we've been super strategic around that. We have probably initiated a very small number of very targeted price increases to really kind of mitigate some selective issues. We're really in a little bit of a wait-and-see mode, but doing a substantial amount of preparatory work to understand where and how we should manage price in the future. I think it's a lever that we expect the industry to use and we will use as well.

Anna Andreeva (MD and Senior Research Analyst)

Thank you so much and good luck navigating the environment.

Andrew Rees (Director and CEO)

Thank you.

Operator (participant)

Your next question comes from Jonathan Komp with Baird. Please go ahead.

Jonathan Komp (Senior Research Analyst)

Yeah, good morning. I guess I'll combine two questions. First, just, you know, obviously a difficult environment to decide, you know, what to communicate externally, but any thoughts on not, you know, guiding Q2 revenue or just any, you know, more specifics on a short-term basis or sort of commenting on comfort levels with the prior revenue outlook, assuming a stable environment, just any more color there on the approach. And then secondly, just on the mitigation strategies you mentioned, hoping to maybe clarify, are you thinking of scenarios to offset that full $130 million you outlined, including the higher China rate or just how you're thinking about the different scenarios and how you're planning your business to, you know, offset different potential levels of exposure? Thank you.

Andrew Rees (Director and CEO)

Yeah. Okay. Thanks, John.

With regards to Q2, look, I think we said a couple of times in our prepared remarks, you know, we've sort of April is behind us now. April was strong. We're very satisfied with April. I think, you know, the trajectory was consistent with March. I would say the U.S. consumer in particular seems to be holding up well. We're seeing sort of continued trajectory in our international business. The thing that I just think we're super wary and cautious of is, you know, we can't predict what's happening sort of day to day in this sort of global, you know, trade environment. We really sort of are being prudent and protecting ourselves from, you know, an unexpected shock that we have no idea that's coming. I think it's just being prudent and sensible.

As I would reiterate, you know, as we sit today, we feel good. From a mitigation perspective, we try to give you some bookends in terms of what tariffs might mean to us, right? That was really kind of the intent. If you had the 10% across the globe of everything coming in, just an elevated tariff level in general, that was $45 million. The $130 million, I think, is a pretty extreme case that would assume that two things happened. One is that the 145% incremental tariffs on China stayed in place and we continue to import goods from China at the rate which our current plan suggests, right? I would say right now with that 145% in place, we are bringing a minimal, in fact, fractional portion of goods in from China.

They're more very selective on the Crocs side and it's almost nonexistent on the Hey Dude side. If that remained in place, we were very unlikely to incur that $130 million because we just simply wouldn't bring the goods in. We'd cancel off some orders. I would say we are rapidly shifting sourcing to other countries. I think we've got a very well-diversified sourcing base, so it stands us in good stead. I think the thing that, you know, the whole industry is worried about, if a reciprocal tariff remains in place relative to Vietnam, that's a huge amount of production for us and everybody else. That would be incredibly hard to mitigate.

Jonathan Komp (Senior Research Analyst)

Yeah, that's very helpful. Thanks, Andrew.

Operator (participant)

Your next question is from Peter McGoldrick with Stifel. Please go ahead.

Peter McGoldrick (VP and Equity Research Analyst)

Thanks for taking our question. I wanted to ask about your level of marketing spend.

This is an area you stepped up in previous years to drive significant gross profit growth. How should we think of your approach to spending in marketing in 2025 against the uncertain backdrop?

Andrew Rees (Director and CEO)

Yeah, so I think when we finished Q4 in mid-February and announced those results in mid-February, obviously finished Q4 at the end of December, we did talk about we were planning a slightly more elevated level of marketing in 2025 to support both Crocs and Hey Dude. Our intent at this point, net of the $50 million of SG&A reductions that we have already enacted and completed, is to maintain that level of marketing. We think it is incredibly important in times that can be uncertain to continue to communicate very proactively, engage and connect with our consumers, and give them reasons to buy our brands.

As we think about our brands, they are both at approachable price points. Even in more uncertain times when the consumer is constrained, we still have two brands that I think are very accessible to a very broad range of consumers. We would maintain that level of investment. The profile of that investment is, you know, pretty consistent with what you've seen in the past, using key celebrities, using ambassadors, creating engagement around events. We talked about some of the events that we ran in Q1 with HEYDUDE. We have had a very successful Q1 in China where we have used high-profile celebrities and invested heavily in marketing.

Peter McGoldrick (VP and Equity Research Analyst)

Thank you for that.

Then diving deeper on the HEYDUDE refresh positioning with expanded product assortment and new marketing initiatives, could you discuss the strategy to balance that new direction while maintaining the brand identity and appeal with the core customer group?

Andrew Rees (Director and CEO)

Absolutely. Look, I think, you know, overall, we're super happy with the last two quarters for HEYDUDE. The brand has performed ahead of expectations for both of those quarters. We're very happy with that. Really, that is as a result of exactly what you just said, right? Maintaining a strong commitment to our core consumer with the Wally and the Wendy and updating and introducing new styles for that core consumer. We talked in prepared remarks around how we have repositioned the Wally, particularly around a Stretch Socks platform.

It took a myriad of disparate styles with different style names and numbers and colors, etc., and householded them under a, you know, a coherent program. It makes it much easier for the consumer to shop. We have also updated the product with additional details and key features. We also reset the marketplace, pulling back a lot of the old products, resetting our core wholesale partners. That was a pretty big investment on our part. I said that I think we and they are really pleased with that so far. At the same time, as investing in communication with a younger female consumer, using Sydney Sweeney as our key ambassador there, launching some new product, the Austin Lift on TikTok Shop. Both of those activities are performing very well.

I think that's really the core explanator for the, you know, really pleasing results in Q4 of last year and Q1 of this year. We expect that to continue.

Peter McGoldrick (VP and Equity Research Analyst)

Thank you.

Operator (participant)

Next question, customer Laura Champagne with Loop Capital. Please go ahead.

Laura Champagne (Analyst)

Thanks for taking my question. This is a quarter where it's tough to know what's best to ask, but let's start with kind of the framework that you've given us for cost impact for tariff. I get it that the $130 million is not really reasonable, is not going to happen. We also are hearing of significant cost increases coming out of Southeast Asia as those factories get a lot busier. What is a more reasonable expectation of a cost increase?

I'm guessing it's somewhere between the $45 million and the $130 million, but is there anything you can do to help us kind of frame it up, ballpark it?

Andrew Rees (Director and CEO)

I would say, Laura, if we could, we would, right? This is not an effort to be obtuse. It's just simply impossible. What I would say is in terms of cost of goods increases without tariffs coming out of Southeast Asia, we're not seeing that at all. You know, we have a base of five or six key manufacturing partners, each of which operate multiple large facilities for us in multiple countries and have done so for 20 years. We are not seeing any cost increases coming out of those partners. In fact, I think in response to an earlier question, we saw some cost decreases from some of those partners going into Q1.

That's not a factor that we're seeing or concerned about. I could imagine the people who have been heavily in China and trying to transfer that volume to new manufacturing partners in Southeast Asia are seeing a pretty high price or pretty high cost, but that doesn't apply to us at this stage. In terms of being able to predict the cost, what you're really talking about is predict the tariff load that we're going to pay on the goods that we bring in from different areas. I have no way of providing you a number there. I would if I could.

Laura Champagne (Analyst)

Understood. Just as a follow-on, kind of what's your latest thinking about elasticity of demand? Like you mentioned price increases. If you could help us ballpark that, it would be great.

But what is your latest thinking strategically on elasticity of demand as sort of industry-wide price increases go through?

Andrew Rees (Director and CEO)

Yeah. This category is not in elastics as a double negative, but so there is elasticity, right? If prices go up, we would expect volumes to go down and would therefore plan accordingly. What I would say is I would rather increase prices, protect margin, and have adequate room in the P&L to invest in marketing and consumer communication to drive consumers to our brand than take margin reductions and have no latitude to communicate effectively with consumers. I think a higher price, higher margin, and maybe a slightly lesser volume is a much stronger place to be.

Laura Champagne (Analyst)

Understood. Thank you.

Andrew Rees (Director and CEO)

Thank you.

Operator (participant)

Your next question comes from Aubrey Tianello with BNP Paribas. Please go ahead.

Aubrey Tianello (Equity Research Associate)

Hey, good morning. Thanks for taking the question.

I really appreciate the framework and all the help on tariffs. I wanted to go back to the comment on not bringing goods in if the 145% tariff remained in place that you look to shift production. What would be the timeframe to relocate production out of China and which parts of the business are still sourced from China? Is it kids, anything specific?

Andrew Rees (Director and CEO)

Yeah, it's not anything specific. I think, you know, we gave you the percentage mix in China. That is more Hey Dude than it is Crocs. In fact, it's a lot more Hey Dude than it is Crocs. In terms of shifting the remaining piece of Crocs, I think that could happen quickly.

That could happen, you know, if we got an indication that the 145 is going to stay in place for a long time or a large elevated tariff on China is going to stay in place for a long time, we would shift that, you know, within six months. There are capabilities that we get in China that we do not get elsewhere, right? And those, you know, will take a little bit longer because they have been, you know, manufacturing footwear for a lot longer than some of the other places we are talking about. The Hey Dude piece is also doable within a relatively short timeframe. I would say within 12 months, we could shift all of that volume. We might be able to do it a little bit quicker. I am being relatively cautious there. I would not say it is impacting any particular product.

I'm aware that a couple of brands have called out that they're heavily in China for kids, which makes sense because it's still a lower-cost environment. So your lowest margin product, you put in the cheapest sourcing place. That is not the case for us. We're confident we'll have ample kids' supply for our consumers.

Aubrey Tianello (Equity Research Associate)

Great. Thank you.

Operator (participant)

Your next question comes from Rick Patel with Raymond James. Please go ahead.

Rick Patel (MD and Equity Research Analyst)

Thank you. Good morning. Can you double-click on the drivers for, I'm sorry, for Crocs international growth? Maybe update us on how big the largest regions are today and what you see as the most compelling growth drivers as we think about organic growth versus new distribution.

Andrew Rees (Director and CEO)

Right. Okay. I think the macro comment or the macro driver is brand penetration.

You know, as we look at the Crocs market share in many of our international markets, it is a third of the market share we would see in many of our stronger markets, U.S., U.K., for example, will be two where we have high market share and Australia. It is really, it is penetrating the market to the degree which we have penetrated the market elsewhere. That is the macro driver. In terms of the, you know, how we are doing that, it is product, it is marketing, it is incremental distribution, it is heavily digitally led, it is leveraging social selling and social commerce. The playbook that, you know, we have operated elsewhere applies most places. In terms of the larger focus areas, China is really important. We have been talking about that for some time and continue to see real success in China, clearly gaining market share in a market which is relatively difficult.

We ascribe that to approachable price points, very strong marketing, and digital-first activation. We are increasingly focused on India, where you have a rapidly growing middle class and a very large population. We saw some constraints in India, which we've talked about historically around their import restrictions that they've applied. We have solved all of those. We now have adequate production for both Crocs and Hey Dude in India to satisfy all of the demand we have in India, plus export. It's become a more significant manufacturing hub and export market for us as well. We're really pleased with the traction that we're seeing in Western Europe. I think we've highlighted historically the U.K. has performed very well, but we're seeing really nice traction in France and Germany. That's, again, really about penetrating the market. Those are a little bit more wholesale markets.

That is about penetrating new customers, getting new presentation in front of the consumers, supported by localized marketing. [crosstalk].

Rick Patel (MD and Equity Research Analyst)

[crosstalk]. Thank you. Just to follow up on that, like as we think about the importance of marketing investment and, you know, the company strategy, the continued leaning in, like how much of that marketing investment is distorted towards white space opportunities for Crocs like in international markets as opposed to trying to turn around HEYDUDE?

Andrew Rees (Director and CEO)

It is both, I would say. The overall Hey Dude marketing budget is a little bit above that of Crocs, but not massively. As a percentage of sales, I am talking about. Obviously, dollars is a lot less, but in terms of percentage of sales.

I would say for Crocs, we very strategically allocate it to the markets that we see the greatest opportunity. We have had a sustained level of spending in China. That is definitely paying off. We are ramping up our spending in India, and we have a strong level of activity in Western Europe.

Rick Patel (MD and Equity Research Analyst)

Very helpful. Thanks so much.

Operator (participant)

Your next question comes from Adrian Yee with Barclays. Please go ahead.

Michael Vuong (Analyst)

Good morning. This is Michael Vuong for Adrian Yee, and thank you for taking our question. Related to the wholesale versus DTC channels, can you share any details on the relationship or, in better words, how it would work for distribution in the wholesale channel? If you increase prices in DTC, what happens for wholesalers for those who have already placed their orders?

Is there any negotiating room with the wholesalers on increasing prices of orders on the ones that they've already placed? Thank you.

Andrew Rees (Director and CEO)

Okay. That's a complicated question. Obviously, in DTC, we have latitude to change prices whenever we wish. I would say that's not likely unless we're kind of testing price elasticity. We'd probably want to keep pricing in the market or a given market, whether that be, you know, the U.S. or the U.K. or China, pretty consistent across channels. In terms of changing the price of goods that have already been ordered from a wholesale partner, I think that's what you're really getting at with your question. Look, we have done that in the past when it was an emergency situation or it's a situation we thought that was warranted. I don't think in this case we're likely to take that approach.

Anna Andreeva (MD and Senior Research Analyst)

I think we have a little time here to see how things settle out. I think that's extremely likely. It's doable, but it's very unlikely we would do that. We would be looking for a more coordinated change in pricing across multiple channels at a designated point in time in the future.

Michael Vuong (Analyst)

Sounds great. Thank you very much.

Operator (participant)

Your next question comes from Ashley Owens with KeyBanc Capital Markets. Please go ahead.

Ashley Owens (VP and Equity Research Analyst)

Hi. Good morning. Maybe just a follow-up on the wholesale channel in general. We're hearing from others that some of the suppliers are planning the balance of the year more prudently than initial expectations had suggested. Is this something you're currently seeing with the order books or any color you could provide on how that's shaking out or shifting in real time would be helpful? Thank you.

Andrew Rees (Director and CEO)

Yes.

I'm probably going to reiterate what you already [audio distortion]. What I would say is major retailers, our wholesale partners, particularly here in the US, are planning their futures conservatively, right? I think they'd probably say the same thing that we're saying is, you know, April looks pretty good, but I don't know what's going to happen in the future. If you're a, you know, major retailer, the most important thing for you to manage and control is your inventory levels. They are planning future inventory levels conservatively. We are seeing that, right? We expected to see that and are seeing that. Frankly, support that, right? You know, generally the worst thing for a brand is to force a whole bunch of inventory into the channel that's not going to sell.

And then as the consumer rebounds at some point in the future, the channel's less selling, aged, and out-of-date inventory. We're totally in sync with that and would rather have that dynamic than a different dynamic.

Ashley Owens (VP and Equity Research Analyst)

Okay. Great. Thank you.

Operator (participant)

Your next question comes from Tom Nikic with Needham. Please go ahead.

Tom Nikic (MD and Senior Equity Research Analyst)

Hey, everyone. Thanks for taking my question. My question is about capital allocation. This may be, you know, maybe a Susan question, but it sounds like, you know, the current environment would not change your plans for investment in the business, but does it change the way you think about capital allocation? Would you stockpile more cash? Would you prioritize, you know, debt paydown versus buyback or vice versa? Just curious if your thought process has changed at all there.

Susan Healy (EVP and CFO)

Yeah. Yeah. Great question, Tom.

You know, when we look at our cash flow for the year, first of all, you know, we do model various different scenarios. And as we've evaluated a range of potential scenarios, one thing stands true. We would continue to generate a significant amount of free cash flow. And so given that, we're still committed to our one to one and a half times leverage range, but within that, we have the opportunity to do both. So both opportunistic share repurchases like we did in Q1, as well as paying down debt.

Tom Nikic (MD and Senior Equity Research Analyst)

Okay. Thanks very much and best of luck the rest of the year.

Susan Healy (EVP and CFO)

Thank you.

Andrew Rees (Director and CEO)

Thanks, Tom.

Operator (participant)

And your next question comes from Sam Poser with Williams Trading. Please go ahead.

Sam Poser (Senior Equity Analyst)

Thank you very much for taking my questions. I've got one that I'll break into three parts or three.

Can you break out with Hey Dude in your direct business, like sort of the idea of how much comes from stores versus your own dot-com versus social? Can you give us some idea of that breakout?

Andrew Rees (Director and CEO)

Yeah. Yeah. We're not providing that breakout, Sam. So, but I, you know, just to give you some qualitative comments, if that's helpful. I'll start with the last piece, the social, right? You know, look, social selling is something which we have embraced, right? We've been doing it for several years in China, and it's been incredibly successful. TikTok launched their shop in the fall of last year. We put both of our brands on that shop relatively quickly, and we've seen tremendous success.

We're seeing success both in terms of the amount of selling that we do, but we're also seeing a very clear halo from that selling on those styles, both to our other digital channels and also into store. We think it's a combination of selling and marketing, if you like, a sort of perfect storm. In terms of the other components for Hey Dude, that's our direct digital business. That's heydude.com and also Amazon, where we are a three-partner with Amazon for Hey Dude. We have complete control over both of those channels. We feel good about the performance of those channels. We feel good about our ability to showcase our brand and also introduce new products and storytell around that product well. The last piece is the retail business, which is our outlet stores that we opened last year. Those are performing well.

It gives us multiple vehicles, as you well understand, from an outlet business. We can showcase the breadth of our product. We can also have a vehicle to clean up excess inventory. Importantly, in some of the markets where the brand is less well known, it is an introduction for the consumer to the brand. All qualitative, but I hope that helps you understand how we think about those components of our DTC business.

Sam Poser (Senior Equity Analyst)

Yeah. Thank you. Secondly, you talked about April maintaining, you know, the momentum in April maintained with, as some retailers call it, Marple, March and April together because of the shift of Easter. Can you give us a little more color on that trend line between March and April in the big picture? I'll just ask the other one now.

It sounds to me like you're planning the pairs, like you're being more conservative with the pairs you're going to put in the marketplace towards the back half of the year and willing, still plan to gain share, but willing to give up some unit sales in place of brand. Is that given the uncertainty of the marketplace?

Andrew Rees (Director and CEO)

Yeah. That's a fair question. That's a fair summary sound, right? Yes. We would prefer to, so for example, right, if the $145, sorry, the 145% tariff remains in place in China, we will cancel off goods that we were planning to bring in from China for Hey Dude versus bring them in at essentially zero profit, which will take pairs down in the marketplace.

In addition, if a, you know, given retail partner wants to manage down their order book collectively or specifically, we are working with them to do that versus trying to force them to take orders which they do not need. What was the March and April piece?

Susan Healy (EVP and CFO)

Trend line.

Andrew Rees (Director and CEO)

Yeah. Yeah. I mean, I think we have said a few times that, you know, the trend is good, right? We feel good about March and April, but we, like anybody else, do not really have a crystal ball as to how long that continues.

Operator (participant)

This concludes our question and answer session. I would like to turn the conference back over to Chief Executive Officer Andrew Rees for any closing remarks.

Andrew Rees (Director and CEO)

Just to close out, appreciate everybody's interest in our company, and we look forward to speaking to you again at the end of the next quarter. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.