RFG - Crocs Q2: The Disappointment That Never Was

• The Crocs brand had a record-breaking quarter with revenues at an all-time high of $732 million, up 19.4% on top of 88.4% growth last year.
• The company has continued to use free cash flow to pay off debt.
• Record revenues, more synergies for HEYDUDE, guidance down less than 100bps - Crocs stock drops 11%.

Crocs, Inc. ( CROX ) released their Q2 earnings and the stock plunged 11% on the back of the result. Let's look at some of the main talking points.

The Talking Points

Industry

Wall Street often forgets, or worse, disregards consciously that the stock market is not the or a proxy of the real economy. This disconnect between the two is a discussion of which many studies have been conducted on. Case in point, Crocs stock price relative to its economic performance. In relative terms, against the S&P 500 (SPY), Crocs has underperformed by 35% YTD. Contrast this with the below (emphasis supplied):

We believe that the footwear market in the U.S. shrank in the first half of 2022 and may have done a little better globally, but we believe it was at best flat. In the context of a flat-to-down market, during the first half, constant currency revenues for the Crocs Brand grew by 20% and consolidated revenues grew by 52%, driven by the acquisition of HEYDUDE. As you can see, both Crocs, Inc. and the Crocs Brand are gaining significant market share.

Andrew Rees

Turning to the Crocs Brand, we will continue to gain market share... as evidenced by our own brand metrics and which continue to be very strong, as well as leading industry studies. When we combine the brand awareness and relevance with a very democratic price point, we believe that the brand is very well positioned to thrive when the consumer is looking for comfort and value.

Andrew Rees

While the NPD report alluded to by Andrew above (and explicitly mentioned by Anne) is only accessible through subscription, here is a link to a press release on much of the data - very much in line with the companies comments.

Macro

The above leads well into the discussion of the macro environment, and hence the reason for the large price decrease post earnings. Management slightly guided lower - less than 100 bps - for all line items, and the market has reacted by discounting the security to the same effect as a negative EPS print.

The current economic issues are not idiosyncratic to Crocs, and therefore warrant no further commentary, but management's reasoning for this guide is below.

With uncertainty around the future macroeconomic environment and consumer behavior, we're planning for lower growth in the Crocs Brand in the short term. Our assumption is that consumer confidence in the US and key European markets will continue to soften as the year progresses as higher interest rates and high food and energy inflation slow consumption. On the flip side, we see very strong growth internationally. We don't see some of those same pressures in some of our international markets.

Andrew Rees

On their ability to reduce costs

During the second quarter of 2022, we were able to leverage consolidated, adjusted, SG&A, 610 basis points, improving to 25.1% of revenues versus 31.2% last year. Non-recurring SG&A expenses for second quarter were $8 million, including $6 million of HEYDUDE integration costs, the 610 basis points of leverage was achieved while investing an additional $42 million versus prior year, primarily in marketing and talent.

Andrew Rees

Asia

The Asian market has been portrayed as opportunistic by Andrew et al on numerous occasions (see Q4 21 and Q1 22 transcripts). This has also been identified as one of the main incentives in which the board has guided management with (emphasis supplied):

Our program for incentives and management compensation is very consistent to what it's been in the past. And it does call out kind of specific growth strategies, whether they be digital, whether they be sandals, whether it be Asia.

Andrew Rees

Currently, Crocs' consolidated revenue attributes 15.1% to Asia, which houses the two largest footwear markets, China and India. Please note that the recent decline is due to the large exponential growth in the U.S. for Crocs, which was not reciprocated in Asian markets.

Management has continued to allude to the penetration of Asia through a similar 'playbook' to the North American market, which saw exceptional success.

Our proven playbook is driving growth in South Korea, India and Southeast Asia. And we're very encouraged by the green shoots we're seeing in China.

Andrew Rees

On the growth of Asia and their drivers (emphasis supplied):

The Crocs Brand in Asia generated second quarter revenues of $149 million or 27.6% growth. Strength in the region was led by India and Southeast Asia distributors, with revenues more than doubling versus last year . In Southeast Asia, distributor partners benefited from COVID reopening and the partial return of tourism to the region. This momentum was partially offset by softness in China due to COVID lockdowns. H1 results for Asia have been consistently strong for two years in a row, posting 25.5% growth this year on top of 24.3% growth last year.

Andrew Rees

HEYDUDE

The acquisition of HEYDUDE, has proven quarter after quarter to be a successful acquisition. While the economy has changed directions within the new year, shares of Crocs were tumbling earlier than the January 4th peak in the S&P500, due to the acquisition . As I have mentioned in previous notes, management ability to be disciplined with capital as evident by their scarce goodwill (pre acquisition), is evidence of their ability to effectively grow HEYDUDE internally. (More on this acquisition and the inefficiencies of the market in my previous note .)

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