Crocs - Q2 2024

Transcript

Operator (participant)

Good day, and welcome to the Crocs Q2 2024 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touch-tone phone. To withdraw your question, please press star two. Please limit yourself to one question, and please note this event is being recorded. I would now like to turn the conference over to Erinn Murphy, Senior Vice President of Investor Relations and Corporate Strategy of Crocs. Please go ahead.

Erinn Murphy (SVP of Investor Relations)

Good morning, and thank you for joining us to discuss Crocs, Inc. Q2 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 that you 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 include, but are not limited to, statements regarding our strategy, plans, objectives, expectations, and intentions, including our financial outlook. These statements involve known and unknown risks, uncertainties, and other factors which may cause our actual results, performance, or achievements to differ materially.

Adrienne Yih (Managing Director and Consumer Discretionary Analyst)

Please refer to our 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'll turn the call over to Andrew Rees, Crocs, Inc. Chief Executive Officer.

Andrew Rees (CEO)

Thank you, Erin, and good morning, everyone. Thank you for joining us today. Before we discuss the quarter, I'd like to start by welcoming Susan Healy to her first Crocs, Inc. earnings call. We reported Q2 revenue of more than $1.1 billion, which represents the highest quarterly achievement in the company's history and exceeded our guidance. Coupled with robust adjusted gross margin expansion of 330 basis points, adjusted earnings per share grew by 12% to $4.01, even as we accelerated strategic investments. This performance resulted in record free cash flow for Crocs, Inc., which we utilized to pay down $200 million in debt and repurchase $175 million of our common stock. Our enterprise initiatives remain consistent, and we focus on three primary levers to fuel durable long-term growth.

Adrienne Yih (Managing Director and Consumer Discretionary Analyst)

1, ignite icons across both of our brands to drive awareness and global relevance for new and existing consumers. 2, drive market share gains across our tier one markets through strategic investment behind talent, marketing, digital, and retail. And 3, attract new consumers to our brands through methodically diversifying our product range and usage occasions. Starting with the Crocs brand, the investments we are making in product and marketing are enabling us to win with consumers around the world. During the quarter, we saw further growth in global brand awareness and desirability. We have continued to evolve our partnership model with a clear intent to drive engagement, build consumer love, and ultimately fuel brand heat. During the Q2, we celebrated SpongeBob's 25th anniversary by creating a SpongeBob and Patrick Clog, with the official announcement unveiled on the Las Vegas Sphere.

Along with this, we released a number of partnerships that range from Pringles to Naruto to Treasure, a K-pop brand, and Minions. We continue to push into sneaker and lifestyle opportunities, as exemplified through our Salehe Bembury sneaker release, which sold out within minutes at $140 and was seen on secondary shopping platforms for multiples of the original price, a testament to the strong consumer response. Looking at product overall, growth in the Q2 was once again led by our icon, the Classic Clog. As we prioritize durable growth, we have built several successful franchises that aim at expanding into new usage occasions to drive new and repeat purchases. The sandal category strengthened in the quarter as the consumer reacted favorably to the newness that we have brought to the market this year.

In particular, our style sandals are performing well across both new franchises like the Getaway and Miami, as well as established franchises like the Brooklyn. We introduced a Jibbitable version of the classic Brooklyn, as well as a woven style, leveraging our molded DNA. The growth of our Jibbitz business during the quarter was led by strong double-digit growth in Asia, which was also our highest penetration by geography. Our Jibbitz consumer continues to be one of our most valuable consumers, and we see them purchasing with high frequency and average order value. Our strategic priorities within Jibbitz are centered around driving higher penetration in digital and wholesale channels, enhancing speed to market, and continually introducing product freshness. Moving to a review of our business by geography, we saw broad-based strength led by our Tier One markets.

The North America market performed ahead of our expectations and gained market share, with revenue growth of 3% versus the prior year. Strength was driven by better at-once demand from our retail partners and solid DTC channel growth. For the first half, our North American revenues grew 6% against a broader market that was essentially flat. International revenue grew 22% versus prior year, supported by exceptional growth in China and Australia. China grew over 70% on top of triple-digit growth last year. While there is evidence in the market that the Chinese consumer is becoming more cautious, we see our accessible, authentic, and personalizable brand position as a clear competitive advantage. Coming off the strength of our Super Brand Day in the Q1, we emerged as the number 1 women's footwear brand on Tmall in the days that followed.

This momentum drove outside strength in the Midsummer Festival, where Crocs led the conversation and took notable share on Tmall and Douyin, despite more promotional period for the industry at large. For the first time ever, Crocs emerged as a top 10 overall fashion brand on Tmall during the festival, and was one of only two footwear brands mentioned in the top 10 fashion rankings. Our direct markets within Europe registered double-digit growth in the quarter, led by the U.K. and Germany, and we continue to see ample opportunity for growth in the future. Turning to the HEYDUDE brand, we remain focused on solidifying the business in North America and establishing the Wendy and Wally as iconic franchises for the consumer.

We've made progress in improving the health of our underlying business in North America, exemplified by pricing on digital up versus prior year, solid recovery in gross margins, and our inventories turning in excess of four turns. That said, our wholesale business with HEYDUDE remains challenging, and we expect that to continue through the second half of the year. As we shared in the Q1 earnings call, sell-in and sell-out are down versus last year, and we're focused on energizing the brand through improved marketing effectiveness and new product introductions. During the quarter, we brought new HEYDUDE partnerships to the market, including Corona, a four-piece collection with the iconic beverage brand, featuring our Wally, Wendy, and Hudson styles. Our Lee partnership, Denim and Dudes, marked the first HEYDUDE collaboration with international reach.

From a product perspective, we're bringing more focus around our core across the Wendy and Wally, and we're leaning into three primary offerings: Stretch Suedes, stretch Canvas, and Funk ono. While leading from the core is our focus, we'll make calculated bets with key sneaker and boot styles that the brand is also known for. As we look into 2025, we see an opportunity to optimize our SKU count, while still improving our channel segmentation and bringing new innovations to market. For example, we introduced the Comf this quarter, leveraging our Wendy and Wally DNA and added cushion and height, retailing for $85. We initially tested this product in DTC, and we'll bring it to wholesale in time for back to school. From a distribution perspective, we opened 13 new HEYDUDE outlet locations in the quarter, bringing our total year-to-date openings to 19.

We are pleased with our new stores and see growing consumer engagement and shopping across genders and ages, as consumers can experience the full breadth of the line. During the quarter, we also introduced Haymakers, our personalization proposition within our direct channels. These stations are creating buzz in our stores as consumers explore self-expression with the brand. For the year, we plan to open approximately 30 outlet stores. On the wholesale side, we'll continue to optimize our account base and focus on improving customer segmentation. Internationally, we're making progress in our direct markets in Europe as we build the brand in the UK and Germany. We're also introducing the Hey Dude brand in Australia this quarter, and have plans to expand into select distributor markets in 2025.

We're working on elevating our reach and effectiveness of our marketing to drive bigger brand moments, geared at accelerating awareness and creating community. We plan to introduce the brand in a methodical and consistent way and get more shoes on feet. In addition to igniting our icons and focusing on the core, we're bringing her to the center of the conversation. We believe female youth culture is one driver of influence and brand connectivity, and plan to accelerate our influence opportunity as we move into the fall. We plan to significantly accelerate our marketing investment and effectiveness in the second half of this year to drive more brand heat for Hey Dude. Before turning the call over to Susan to review our financial results, I want to call out the publication of our 2023 Crocs, Inc. Comfort Report, released in June.

This annual report highlights our commitment to, and progress on our purpose, to create a more comfortable world for all through action-oriented ambitions of inclusivity, climate stability, circularity, and community. I'd encourage you to check out the report for more information against these initiatives. I will now turn the call over to Susan to walk through our financials for the quarter.

Susan Healy (CFO)

Thank you, Andrew, and good morning, everyone. Before I review the quarter, I'd like to say what an honor it is to have the opportunity to serve as the CFO of Crocs, Inc. This is a company with strong financial performance, brought to life by its culture, brands, people and purpose. I look forward to working with Andrew and our talented management team to further advance the company's strategic and financial goals, as well as to get to know many of you in the investment community in the weeks ahead. Now for a review of our Q2 financial performance. We generated over $1.1 billion in consolidated revenues in the quarter, growing 5% over last year, led by the Crocs brand.

Adrienne Yih (Managing Director and Consumer Discretionary Analyst)

Adjusted gross margin improved 330 basis points from prior year to 61.4%, and adjusted operating margin was 29.3%, resulting in adjusted earnings per share of $4.01. Our Q2 results exceeded the high end of our guidance for the enterprise. For the Crocs brand, revenues were $914 million, growing 11% to prior year, driven by DTC growth of 14% and wholesale growth of 9%. The growth came from a mix of volume and ASP, with units increasing 6% versus last year, to a total of 35 million pairs of shoes sold, and brand ASP increasing 4% to $25.96. As Andrew noted, North America revenues came in ahead of our expectations, growing 3% versus the prior year to $489 million.

Growth was led by DTC, which was up 7%, while wholesale was down 4%. Underlying North American brick-and-mortar growth was up mid-single digits. International revenue of $425 million was up 22% from prior year, led by DTC growth of 28% and wholesale growth of 18%. China led the way, growing over 70% on top of triple-digit revenue growth last year, and we also saw exceptional growth in Australia. In addition, our direct European markets grew by strong double digits. Turning to Hey Dude, revenues were $198 million, down 17.5% from last year and within our guidance range. Consistent with our strategy to strengthen the Hey Dude brand for the long term, brand ASPs were up 7% to $30.76, while volumes were lower.

We sold 6 million pairs of shoes, 23% below last year. Wholesale revenues were down 24% from last year, since which time we have strategically reduced our account base and right-sized channel inventories. The DTC channel was down 8%, supported by retail contribution, offset by digital contraction as a result of prioritizing brand health through higher ASPs. Consolidated adjusted gross margin for the Q2 was 61.4%, up 330 basis points from last year. Crocs brand adjusted gross margin was 64.1%, or 210 basis points higher than the prior year. The primary drivers of margin expansion were favorable product costs, lower freight costs, and higher international pricing.

HEYDUDE brand gross margin was 49.1% and 200 basis points higher than prior year, driven by lower freight costs, channel mix, and higher ASPs, partially offset by investments in infrastructure. Our Q2 adjusted SG&A dollars increased 19% to prior year. Our SG&A rate was 32%, up 420 basis points compared to prior year, driven by continued investment in talent, marketing, and DTC to support long-term market share gains. Our Q2 adjusted operating margin declined 100 basis points to 29.3%, compared to 30.3% for the same period last year, but was favorable to our expectations on higher gross margin and revenue. Q2 adjusted diluted earnings per share increased 12% to $4.01. Our non-GAAP effective tax rate was 17.8%.

Our inventory balance as of June 30 was $377 million, a decline of 14% versus this time last year. Both of our brands achieved inventory turns above our goal of 4 times on an annualized basis. Our liquidity position remains strong, comprised of $168 million of cash and cash equivalents and $559 million of borrowing capacity on our revolver. During the quarter, we repaid approximately $200 million of debt, reducing borrowings to approximately $1.5 billion. We ended the quarter within our long-term net leverage target range of 1 to 1.5 times. We completed $175 million of share buybacks during the quarter, repurchasing 1.2 million shares at an average price of $149.53 per share.

We currently have $700 million remaining on our share repurchase authorization. In the second half of 2024, we plan to continue to buy back stock and pay down debt, enabled by our best-in-class free cash flow generation. Now, turning to 2024 guidance. We are reaffirming our full-year top-line guidance range and raising our operating margin and EPS expectations to reflect the beat in Q2, partially offset by continuing investment in talent and marketing in the back half of the year. We are maintaining our full-year revenue outlook of 3%-5% growth, despite $11 million of incremental FX headwind, underscoring the underlying strength of our business. Our guidance assumes currency rates as of June 30th. For the Crocs brand, we continue to expect revenue growth between 7% and 9%, led by international.

For Hey Dude, we continue to expect revenues to contract between 8%-10% and expect wholesale to be negative for the year and DTC trends to be better than wholesale, as we communicated last quarter. We are raising our guidance for consolidated adjusted operating margins from approximately 25% to more than 25% for the year. We are maintaining our guidance for enterprise gross margin, as well as Crocs and Hey Dude brand gross margins, to be up for the year versus 2023. We remain focused on investing behind brand accretive and strategic SG&A initiatives, which we believe will drive second half SG&A dollar growth to be above the first half.

We are raising our 2024 adjusted diluted earnings per share guidance from a range of $12.25-$12.73 to a range of $12.45-$12.90. Our updated full-year range balances the strength we saw in Q2, along with appropriate caution around consumer spending trends and the geopolitical landscape, as well as the timing of our SG&A investments. Consistent with our previous guidance policy, this range reflects future debt repayment, but does not assume any impact from future share repurchases. We are maintaining our expectations of underlying non-GAAP effective tax rate, which approximates cash taxes paid to be approximately 18%, and the GAAP effective tax rate to be 21.5%.

Our annual capital expenditures are now planned between $100-$110 million, down from $120-$130 million, tied to the cash timing of select operational projects. Turning to our guidance for Q3. We expect consolidated revenues to be in the range of -1.5% to +0.5% at currency rates as of June 30, with the Crocs brand growing 3%-5%, led almost entirely by international growth. We expect Hey Dude revenue to be down between 14%-16% in the quarter, showing modest sequential improvement versus Q2. Embedded in our Hey Dude guidance is the impact of lapping significant discounting on our marketplace for most of Q3 last year, as well as timing of wholesale orders.

We expect SG&A spend to be up in the low to mid-20% range in Q3, with talent and marketing investments elevated versus the year-to-date trend. We expect adjusted operating margin to be approximately 24.5% and adjusted diluted earnings per share to be between $2.95 and $3.10. As we look to the fourth quarter for the Hey Dude brand, we expect revenue growth to be supported by, one, easing comparisons, two, the timing of wholesale shipments, three, the contribution from new retail stores, four, sell-in to new international distributors, and five, lapping last year's pricing reset on digital late in Q3. In summary, we had a record Q2. We have clear plans to invest further in our business to fuel long-term profitable growth, and I am confident in our ability to achieve our 2024 objectives.

I will now turn the call back over to Andrew for his final thoughts.

Andrew Rees (CEO)

Thank you, Susan. We're pleased by the results our teams have delivered through the first half, including our ability to pay down debt and return significant capital to shareholders. We believe the strategic investments that we're making in talent and marketing will set our brands up for durable long-term share gains. 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 one on your touch-tone phone. If you're 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 it, please press star, then two. At this time, we ask that you please limit yourself to one question only. I will pause momentarily so we may assemble our roster. Our first question comes from Jonathan Komp of Baird. Please go ahead.

Jonathan Komp (Senior Research Analyst in Apparel and Footwear)

Yeah. Hi, thank you. Good morning. I want to ask about the second half revenue outlook. Could you maybe talk, Andrew, about your assumptions and what you're seeing in terms of the core North America Crocs sell-throughs and how you're expecting that to trend? And then, Susan, just to follow up on the fourth quarter Hey Dude outlook, I know you highlighted, I think it was four or five reasons for this, for the inflection in year-over-year performance, could you maybe just talk about the underlying assumptions in terms of the sell-through rates or the consumer end demand that's needed to hit the guidance in Q4 for Hey Dude? Thank you.

Andrew Rees (CEO)

Yeah. Thank you, Jonathan. So, look, before I start, obviously, we're really thrilled. We had an exceptional Q2, we're thrilled to announce those results today. In terms of the back half for Crocs, we're obviously not adjusting our overall expectations for the Crocs brand. But we had an exceptional first half for the Crocs brand. As we look at the back half in North America, you know, I think we're very satisfied with the share gains that we've achieved in the first half. We've grown about 6% on through the first half. That's against a market that is approximately flat, so substantial share gains. In the back half, we are more cautious, right? I think, we definitely see the U.S. consumer behaving cautiously. We think our brand is well positioned relative to a cautious consumer environment.

Adrienne Yih (Managing Director and Consumer Discretionary Analyst)

We excel at exceptional value. We give the consumer exceptional value, but we are planning the back half in North America from a Crocs revenue perspective, approximately flat. And I'll let Susan talk about HEYDUDE, and I'll maybe add something at the end.

Susan Healy (CFO)

Yeah. Hello, Jonathan. So when you think about HEYDUDE in the back half of the year, you've gotta really think about Q3 and Q4 in tandem. So we expect Q3 wholesale to be down to last year and below Q2 versus last year, and we anticipate Q4 sell-in to be up. Part of what's driving that is the fact that we, last year, we had some orders that we shipped in Q3, and we deliberately did that to get them ahead of our planned ERP implementation, just to avoid any potential disruption. And so when you look at Q4, then, you're gonna see, one is you're gonna see more normalized wholesale flow between Q3 and Q4.

Adrienne Yih (Managing Director and Consumer Discretionary Analyst)

Then there's also some other, sort of non-comp compares, things like our rollout of retail stores, which are ramping up this year, our sell-in to new international distributors, and then you're also lapping last year's pricing reset in digital, which took place late in Q3.

Andrew Rees (CEO)

Yep. Thank you.

Operator (participant)

The next question comes from Adrienne Yih of Barclays. Please go ahead.

Adrienne Yih (Managing Director and Consumer Discretionary Analyst)

Yes, thank you very much, and congrats on the nice quarter. I guess my question is on the SG&A, the talent and brand creative marketing. Can you give us examples of what has worked thus far in the, you know, year-to-date period, where you're placing those incremental, you know, investments in the Q3, and when do you see the type of payback, the return on that ad spend and the talent investments? Thank you very much.

Andrew Rees (CEO)

Yeah. Yeah, Adrienne, I would say these are long-term investments we're making. You know, our company, as it stands today, is exceptionally profitable. You know, our four-year guide for EBIT is now 25.5%. This is an exceptional number. And we've grown extremely rapidly over the last several years, both organically in the Crocs brand and also through the acquisition of Hey Dude. At this time, we're making a, you know, a series of investments in talent to enable us to grow in the future. Some examples around that would be, enhancing our international teams for Crocs, where we're growing very rapidly, in Asia and also in Europe. Investing in our marketing functions for both Crocs and Hey Dude in terms of talent.

Adrienne Yih (Managing Director and Consumer Discretionary Analyst)

We've historically made some meaningful investments in terms of distribution infrastructure, and we're actually seeing some nice benefits from the efficiency of our distribution infrastructure. And I think that really the big one is really marketing, right? We see a consumer that's obviously, I think, somewhat cautious here in the United States. We're a little concerned about the cautiousness of the consumer in in China as well, and we believe it's extremely important in these environments to engage the consumer. So we're upping our marketing investment against Crocs, but we're also meaningfully upping our marketing investment against Hey Dude, where we've obviously, you know, got new talent in place in terms of Hey Dude leadership, and I think we've got some really great ideas and a strong point of view about how we can bring that brand to life.

Operator (participant)

Our next question comes from Jim Duffy of Stifel. Please, go ahead.

Jim Duffy (Managing Director)

Oh, thank you. Hi, Andrew. Welcome, Susan. Susan, looking forward to working with you. With respect to the guide for the remainder of the year, the fiscal Q3 guide, I think, more cautious than most had expected. Can you, Andrew, speak to what you saw across July and key considerations in your outlook for the back-to-school season? And then also perhaps speak to tactical strategies, product flow, and considerations as it relates to holiday.

Andrew Rees (CEO)

Yeah. I mean, thanks, Jim. In terms of sort of inter-quarter, we don't really give any perspective on that. We never have. But what I would say, the consumer is behaving cautiously. We anticipated that, we expected that, as we kind of thought about this year, and that is definitely true. So we do think it's definitely prudent to plan the rest of our year that way, and we've done that from a Crocs perspective. And then obviously, there's a lot going on with the HEYDUDE guidance between Q3 and Q4. I think Susan thoroughly elucidated what that looks like. So it's not really inter-quarter trends that we're calling out, because I note that we really haven't changed our full-year perspective.

Adrienne Yih (Managing Director and Consumer Discretionary Analyst)

We expected this, and have planned accordingly.

Operator (participant)

Our next question comes from Rick Patel of Raymond James. Please go ahead.

Rick Patel (Managing Director and Equity Research Analyst)

... Thank you. Good morning, and great to have you on the call, Susan. For the Crocs brand, can you talk about how the D2C strategy on Amazon may be affecting how results are being reported as you think about wholesale versus direct to consumer? And just given the lumpiness of the results implied in for the Q3, can you provide additional color on what you might be seeing in terms of changes in the trend line for the wholesale channel versus three months ago?

Andrew Rees (CEO)

Yeah. So I think, maybe I'll hit the second bit first, right? So, and I think this a couple of times, but what I would say, and I'm not sure what you... In terms of lumpiness, what are you referring to, Rick?

Rick Patel (Managing Director and Equity Research Analyst)

I'm just talking about the sequential slowing that's embedded in the Q3 guidance.

Andrew Rees (CEO)

Yeah. So I think that's pretty simple, right? So as we think about the first half for the Crocs brand in North America, we had 6% growth, right? Against a market that was approximately flat, so significant market share gains. In the back half, we're guiding the Crocs brand to be approximately flat, right? So that's, I don't think that's lumpiness, but that's a distinct change in first half to second half, and that is due to anticipated consumer softness. So I think that's the piece, and I think that's only prudent, right? We wanna plan our business that way to ensure that we keep inventories clean and fresh in the channel. We wanna make sure that we don't get over-inventoried and are not pouring our cash into inventory versus returning it to shareholders.

Adrienne Yih (Managing Director and Consumer Discretionary Analyst)

So that's, I think, just prudent planning. And then your first part of the question was the Amazon trajectory. Look, I think Amazon continues to be a really important global partner. Our perspective associated with, we wanna be on the marketplaces where the customer shops, that is Amazon in the US and in frankly, many parts around the world. And, you know, we have, you know, we are shifting sometimes, how we manage the marketplace in terms of 1P versus 3P. I don't think that change in terms of where it shows up in our P&L will be phasing out as we go through the back half of this year.

Operator (participant)

The next question comes from Chris Nardone of Bank of America. Please go ahead.

Chris Nardone (Director of Equity Research)

Thanks, guys. Good morning. So regarding your Crocs brand international business, can you discuss where you're seeing some of the momentum and what countries are driving the biggest impact to your back half growth expectations? Then quickly on HEYDUDE International, if you could also remind us what percentage of your business this year will come from outside of the U.S. And then, Andrew, what gives you confidence that you can avoid some of the gray market issues that impacted the brand previously with this newer international rollout? Thank you.

Andrew Rees (CEO)

All right, so three questions there, right? So international for Crocs, right? So, obviously, that is a key driver of our growth, has been for the past, you know, couple of years at this point. And that's really, you know, the fundamental thing that we're doing there is penetrating under-penetrated markets, like in China, for example, like in Australia, for example, and also in parts of Western Europe. So the fundamental driver is that we've got markets around the world that are large and substantive, where the brand is under-penetrated, and we're now able to invest talent, invest marketing, and drive that penetration. The key markets that have been driving growth are China, is our number one, and probably our greatest long-term potential. And we've made substantial investments to enable that growth.

Adrienne Yih (Managing Director and Consumer Discretionary Analyst)

Australia has been also a very strong driver of growth. We called that out a couple of times. I think in the prepared remarks, we referenced China is up 70% during quarter two, which is on triple-digit growth last year. We continue to expect strong growth in China, but we are also calling out the fact that the Chinese consumer is clearly more conservative than they have been in the past. We think our brand is well positioned against that. In terms of other important markets, I would say some of our key Western European direct markets, the U.K., Germany, et cetera, have also performed well, yielding strong double-digit growth. And if you look longer term, we're also super excited about our potential in India, which we think is a rapidly emerging market.

We've made, we're making also very coherent investments in that marketplace. All right, so the other parts of your question are Hey Dude International. We don't break out the percentage that is Hey Dude International in terms of percent of the business. But, I think, and I've talked about it before, what I would say is our model internationally is essentially gonna be mirror Crocs. So we're gonna be direct where Crocs is direct, and we're gonna use distributors where distributors, where Crocs uses distributors. In terms of where we put, I would say, planted flags for HEYDUDE, right? Bear in mind, from a HEYDUDE perspective, we're starting off with brand awareness that is essentially zero in these international countries. We were planting flags in the U.K. We're planting flags in Germany. We're planting a new flag in Australia.

We think that's gonna be a nice market for HEYDUDE. So those are direct markets, and that means that we're opening e-commerce, we're selling wholesale, and we're participating in the market directly, leveraging our Crocs team. The second thing we've done is we've initiated new distribution agreements with a range of distributors, and Susan called out part of our Q4 benefit, is we'll be doing some initial shipments to a range of new international distributors, which we'll get up and running in 2025. Hopefully, that gives you everything you need, Chris.

Operator (participant)

The next question comes from Tom Nikic of Wedbush. Please go ahead.

Tom Nikic (Senior Equity Research Analyst in Apparel and Footwear)

... Hey, good morning, everyone. Thanks for taking my question, and, Susan, welcome aboard, and looking forward to working with you. I want to ask about, on the Hey Dude side, you know, I know obviously, it's got a new brand president, you know, Terence, who obviously is very familiar with the enterprise overall. Can you just talk a little bit about, you know, what, you know, I guess, what Terence, you know, brings to the table for the Hey Dude brand? Like, how he can help, rejuvenate and reinvigorate the brand, and, essentially, like, what part he'll play in, you know, getting, Hey Dude, back to, back to a growth trajectory? Thank you.

Andrew Rees (CEO)

Great. Thank you, Tom. Yeah, look, we're thrilled to have Terence back. It, I would say it's only been 90 days at this point, so, but we're thrilled to have him back. We all loved working with him when he was here initially, and we're all very, you know, impressed by the trajectory he was able to to drive at Stanley, where he was for a period of time while he was not with us. So we're thrilled to have him back. We're also... I would also emphasize, you know, he's leading what we believe is a strong management team within our Hey Dude business. So we're, we think we've got all of the pieces in place.

Adrienne Yih (Managing Director and Consumer Discretionary Analyst)

And in terms of, I think, you know, what he's able to do, he's driving really, I think, three or four key things. One is definitely sharpening the brand's focus on their icon, the Wendy and the Wally. So driving investment, focus, energy, and innovation into the Wendy and the Wally. He is focusing our attention on North America, which is obviously the biggest market, but if we can leverage brand heat in North America around the world, it also gives us opportunities internationally. And he's really shifting the marketing energy and the focus to the female consumer. If we can drive... You know, we believe the younger female consumer drives youth culture.

If we can engage and energize a female, younger female consumer, we know that's gonna spread passion for the brand to a much broader range of consumers and range, and drive the brand overall. And I would say lastly, we're also arming him with significant firepower, right? You know, embedded in our guidance in the back half is an increase in our marketing investment that's substantial. So we will support Terence and the innovation he's able to bring to the HEYDUDE brand and really be able to drive that in the future.

Operator (participant)

The next question comes from Sam Poser of Williams Trading. Please, go ahead.

Sam Poser (Equity Analyst)

Good morning. Thank you for taking my questions. I've got, I have three that I'm gonna merge into one since rather than ask one. Number one, Walmart, how long have you been selling to Walmart.com, or what's going on there? Number two, can you just talk about, you know, promotional activities you saw in the quarter, and then promotional activity you're anticipating in the back half of the year for both brands? And then lastly, how much is lapping Barbie affecting the domestic guidance or in the North American guidance for the Crocs brand, for the back half of the year?

Andrew Rees (CEO)

Got it. Okay, three questions, Sam, right. Number one, we have been present on Walmart.com for several years now. And the, you know, our philosophy is unchanged on this, which is, we believe our brands, particularly the Crocs brand, which is a highly democratic brand, should be represented where the consumer is shopping. Walmart.com is the second largest marketplace in the U.S. market relative to Amazon, as Flipkart is in India. So, we think those are important platforms for the brand to be represented on, but obviously, the product needs to be appropriately segmented relative to the consumer that's shopping on those marketplaces. So hopefully, that kind of answers that question. In terms of promotional activity, what are you getting at there, Sam? What are you trying to elucidate?

Sam Poser (Equity Analyst)

Well, I'm just asking, you know, really, it's more about the U.S. guidance, but I mean, are you seeing... You know, you talk about a weaker consumer, so I'm wondering if you're anticipating needing to get more promotional or, you know, I'm just—how you're looking at the marketplace, and then how do you look towards Crocs and Hey Dude responding to that?

Andrew Rees (CEO)

Yeah, I think. So what I would say is, look, the market is more promotional than it was sort of last year, I would say, and certainly more promotional than it was coming out of the pandemic. I would say it's kind of returning, from my perspective, to what it was pre-pandemic, which is, you know, key promotional periods are super important, and the marketplace gets pretty down and dirty during those key promotional periods. As we've talked about, with an accessible brand, we believe you have to participate in those promotional periods to get your fair share of consumer spending. And we've been doing that, and we'll continue to do that. I'm not sure at this point. We're anticipating an increasing trajectory of promotions in the back half.

Adrienne Yih (Managing Director and Consumer Discretionary Analyst)

That is not the reason for the difference in terms of anticipated growth rate, first half to back half. So I think we kind of see it as status quo, and we see our strategy as status quo. Hope that helps. In terms of your specific question about Barbie, look, it was a nice-performing product, and we really enjoyed the advent of pink being a really great color last year, and we have a lot of color in our brand, so it was great. But the specific Barbie collab and comping that or not comping that is not driving any impact on our business.

Operator (participant)

The next question comes from Laura Champine of Loop. Please go ahead.

Laura Champine (Director of Research and Senior Consumer Analyst)

Thanks for taking my question. It's really about the long-term prospects for HEYDUDE, with kind of a short-term kicker of: when do you think your new leadership there should be able to make a material impact in the growth trajectory of HEYDUDE? But also, how has your experience with HEYDUDE over the last nine months, call it, influenced your thoughts on the long-term growth potential of the brand?

Andrew Rees (CEO)

Yeah, great question, Laura. So, what I would say is we are extremely bullish against the long-term perspective or projections for HEYDUDE. And as bullish as we were when we bought the brand. We, you know, obviously, over the last several months, it has not performed as we had hoped it would, particularly here in the U.S. marketplace. And as we've talked at some length about some of the things that I think we did wrong associated with that, that does not change our long-term perspective on the brand. We think the value proposition that the brand brings to the table, lightweight, comfortable, easy on and off product, that is extremely compelling from a...

Adrienne Yih (Managing Director and Consumer Discretionary Analyst)

To the consumer, that we can make in many different colors, fabrications, flavors, et cetera, with a really effective consumer engagement strategy and marketing strategy, we think has a lot of potential against today's consumers. And really, everything we continue to kinda learn about the brand and the innovation we can bring in certain areas of the product line is reinforcing that. So, I would also note, despite the brand not meeting our current ambitions, it's making an extremely solid contribution to our overall financial picture in terms of revenues, margin, and profitability. But not reaching our ambition for the brand.

I think we're very confident in the team we have in place, the strategy we have in place, that we will be able to reach full ambition for the brand. So I think we're as, in a nutshell, we're as confident and as enthusiastic about the brand as we were when we bought it.

Operator (participant)

The next question comes from Ashley Owens of KeyBanc Capital Markets. Please go ahead.

Ashley Owens (VP and Senior Equity Research Analyst)

Hi, thanks for taking the question. I just wanna touch on gross margins a bit. We've seen some pretty solid expansion in both brands for the first half of the year. Just how should we be thinking about modeling that for the balance, if we're still seeing similar levels of expansion in the back half as we did in the first half? Just any puts and takes you could provide color on would be helpful. Thanks.

Andrew Rees (CEO)

Yeah, Susan will answer this. Yeah.

Susan Healy (CFO)

Great. Hello, Ashley. So at the enterprise level, we expect gross margins to be up for the year-end, for the second half, but not at the same rate as the first half, basically due to the harder compares. So if we kinda look at it brand by brand, for Crocs, we expect it to be up slightly year-over-year, as we start to anniversary some bigger freight gains from last year. And on the Hey Dude side, we're expecting Q3 margin to fully recover when we compare it to two years ago.

Operator (participant)

The next question comes from Mitch Kumetz of Seaport. Please go ahead.

Mitch Kumetz (Senior Analyst)

Yes, thanks for taking my question. Andrew, how is the spring 2025 order book coming together? And do you expect, Hey Dude, North America spring orders to be up or down? And then just as a follow-up to Jonathan's question earlier, Susan, you mentioned the wholesale order shift. Can you quantify that, perhaps? Thank you.

Andrew Rees (CEO)

Yeah, thanks, Mitch. Look, we don't comment consistently on future order books. But I would say, look, we're, you know, we're satisfied with, you know, obviously, as you, as you're well aware, we're out selling, you know, spring 2025 currently. I would say, retailers, as you would expect, are buying somewhat cautiously, given that the current trajectory of the business and what they see for the remainder of the year, that's really a domestic comment. As we look at our Crocs order book, domestically and globally, and the strength of our spring 2025 line, which we're, we're happy with, with where it's at, and, you know, we'll obviously get into 2025, and we'll tell you more about that in the future.

Adrienne Yih (Managing Director and Consumer Discretionary Analyst)

From a Hey Dude perspective, you know, we're excited about the line that we're bringing to the table in spring 2025. We're getting a lot of positive feedback against some of the innovation that's embedded within our product strategy, and we'll plan to support that with, you know, really compelling marketing and drive consumer engagement.

Susan Healy (CFO)

On the specifics about the orders that we shipped earlier last year in Q3, we don't break that out specifically, but that is definitely embedded in our guidance of being down 14%-16%. When you think about the impact that has on the year-over-year compares for Q4, that's part of what's providing that lift that the implied guidance gives you for the full year.

Operator (participant)

Our next question comes from Jay Sole of UBS. Please go ahead.

Jay Sole (Managing Director)

Great. Thank you. Andrew, I'm just wondering if you can elaborate a little bit on the China business. You made a few comments, but China for Crocs brand being up 70% on top of triple-digit growth last year. Can you talk about your progress in that market? Where you're pleased, maybe where there's more opportunity, and what kind of growth do you expect going forward? Thank you.

Andrew Rees (CEO)

Yeah. I think we, you know, we're really. You know, we talked a lot about it over the last 18 months. Yeah, we're really excited by the trajectory that we're seeing in China. At the heart of it, is we've driven, you know, brand relevance. We've made the Crocs brand, and particularly the clog and personalization of the clog, relevant to the Chinese consumer. We've done that mostly through, I would say, digital and social marketing, and, we've really established a very strong platform, in the Chinese market. That's driven strong growth, across our channels, right? That's driven strong growth, very strong growth. I mean, triple-digit growth last year and 70% in Q2, as you highlighted in your question, across channels.

Adrienne Yih (Managing Director and Consumer Discretionary Analyst)

So that's been both digital, so it's, Tmall, Douyin, and, and all the other digital platforms. It's what we, we book as wholesale, which is to, franchise partners that then sell through mono-branded stores. So those mono-branded stores are seeing comp store gains. Those franchise partners are also opening more stores. So, so that's been driving the wholesale growth, and we've had some, you know, modest incremental growth in our retail fleet, where we're focusing on both what we call energy stores in the major metropolitan areas, China, sorry, Shanghai and Beijing, and a couple of other Tier One cities, and also, Tier One outlets, which we think are also important in the Chinese market. So, growth across all channels.

As we look forward, while we're not quantifying kind of future growth expectations, our anticipation is we will see sustained growth over multiple years in the Chinese market. We're still very much underpenetrated relative to the size of the market. And we think that growth will come across all channels, but I think the largest component of the growth will come from our wholesale sales, as our partners open more stores, and we drive more store penetration across the Chinese market. Our anticipation is we'll penetrate sort of Tier 1, Tier 2 cities in the next 2-3 years. We're not anticipating a lot of business below two-tier cities. We wanna really keep the quality of our business high and focused on the, you know, higher demographic portion of the market.

Operator (participant)

Our next question comes from Jim Duffy of Stifel. Please go ahead.

Jim Duffy (Managing Director)

Well, thanks for taking the follow-up. Two quick ones, if I may. With sandals and the more sneaker-like product, what are the important read-throughs on D2C adoption, and how's that translating to wholesale engagement? And then secondly, on capital allocation, cash flow has always been one of the hallmarks of the model. Net leverage now within your targeted range. Is there any shift in priority between reducing leverage and increasing the share buyback? Thanks.

Andrew Rees (CEO)

Okay. All right, so I'm gonna hit sandal and sneakers, and then, Susan can hit capital allocation. So, from a sandal perspective, you know, we've been happy with our sandal performance during Q2. We saw, I think, some strengthening relative to the Q1. That's mainly driven by some of our fashion-oriented sandals. So we made introductions of a couple of new collections that have been performing well. The Getaway, which is a comfort fashion sandal, and the Miami, which is more of a fashion sandal. Those have been performing well, and, you know, we've been kind of chasing some inventory. We've also driven some innovation into the Brooklyn, which has been a longstanding franchise. That's a wedge or elevated fashion sandal.

Adrienne Yih (Managing Director and Consumer Discretionary Analyst)

We've introduced a couple of new models in there that have been performing well, including a personalized sandal, where the consumer can add charms to the sandal to really dress it up. So, we think that's been performing well in our, you know, penetrated markets or our key Tier One markets. And we're confident that sandals continue to drive a long-term growth trajectory for the brand. The sneaker-oriented product is really all about, you know, testing and experimentation. We did introduce the Juniper with Salehe Bembury during the quarter. We highlighted that in prepared remarks. It's small, very, very small, but it's really the sort of pinnacle offering, and we continue to experiment and test a whole range of kind of sneaker-oriented silhouettes.

You know, that's a longer-term strategy, but it's important that we continue to innovate in that arena. Let me hand it over to Susan for capital allocation.

Susan Healy (CFO)

Yes. Jim, you asked about debt paydown and share buyback. I mean, the short answer is we like both, and we're planning to do both in the back half of the year. You know, we're fortunate to have a business with very strong cash flow, and we're also within our net leverage target range of 1-1.5 times, so that gives us the flexibility to deploy capital both ways. In answer to your question, you know, no change at this point to that target. We really like where we are from a cash flow and liquidity standpoint.

Operator (participant)

Our next question is a follow-up from Baird. Please go ahead.

Jonathan Komp (Senior Research Analyst in Apparel and Footwear)

Hi, thank you. Just one more follow-up. I, I wanted to ask a bigger picture question around the philosophy for the SG&A investments. And obviously, this year is a year in which you're planning to grow revenue 3%-5%, and yet you're spending, you know, almost 20% higher as SG&A for the year. So could you just maybe remind us your overall philosophy? And as we look out, is the hope that, you know, these investments drive, you know, faster revenue growth and, you know, any you know, color there in terms of the overall strategy? Thanks.

Andrew Rees (CEO)

Yeah, yeah. Great, great question, John. So obviously, you know, we're starting off—I would say we're starting off from a base of extremely high profitability, right? So, even this year, with that distorted investment profile that you just highlighted in your question, we'll achieve kind of 25.5% of in terms of EBIT margin, an extraordinary level relative to our peers in the industry which we're in. And obviously, that's due to the, you know, very high gross margins we experience on our Crocs brand and also the, you know, the efficiency of our business model.

Adrienne Yih (Managing Director and Consumer Discretionary Analyst)

In terms of philosophy going forward, I think there will be periods of time when we choose to invest in SG&A, both variable and SG&A, because most of our marketing is variable and can be turned on and off at any point in time. And where we will make investments in talent and people, and infrastructure, and capabilities that we think will be important for the future. That the intent of those investments is to support and assure, sorry, support and guarantee... Oh, no, guarantee is the wrong word, but assure long-term growth. So we're trying to build a company and a brand that has long-term growth potential and can continue to grow for many years to come.

I would say there will be periods of time when we distort in SG&A, there will be periods of time when we leverage SG&A. That's kind of how we think about it from a long-term philosophy perspective. Okay.

Operator (participant)

This concludes our question and answer session.

Andrew Rees (CEO)

Look, I just want to say thank you-

Operator (participant)

Okay.

Andrew Rees (CEO)

Sorry.

Operator (participant)

Please go ahead.

Andrew Rees (CEO)

Jumped the gun a little bit there. Thanks, everybody, for their thoughtful questions. Thank you, everybody, for joining us today and their interest in our company. We appreciate it.

Operator (participant)

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