Crocs, Inc. Second Quarter 2021 Earnings Call July 22, 2021

Crocs, Inc.

Second Quarter 2021 Earnings Call

July 22, 2021

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Crocs, Inc. – Second Quarter 2021 Earnings Call, July 22, 2021

C O R P O R A T E P A R T I C I P A N T S

Cori Lin, Vice President, Corporate Finance

Andrew Rees, Chief Executive Officer

Anne Mehlman, Executive Vice President and Chief Financial Officer

C O N F E R E N C E C A L L P A R T I C I P A N T S

Jonathan Komp, Robert W. Baird & Co.

Erinn Murphy, Piper Sandler

Mitch Kummetz, Pivotal Research Group

Samuel Poser, Williams Trading

Susan Anderson, B. Riley FBR, Inc.

Jay Sole, UBS

Steven Marotta, C.L. King & Associates

Laura Champine, Loop Capital Markets

James Duffy, Stifel

P R E S E N T A T I O N

Operator

Welcome to the Crocs, Inc. Second Quarter 2021 Earnings Call.

Please be advised today’s conference is being recorded.

I would now like to hand the conference over to your speaker today, Corinne Lin. Please go ahead.

Cori Lin

Good morning, everyone, and thank you for joining us today for the Crocs Second Quarter 2021 Earnings

Call.

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Earlier this morning, we announced our latest quarterly results, and a copy of the press release may be

found on our website at crocs.com.

We 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 potential impacts to our business related to the

COVID-19 pandemic. Crocs is not obligated to update these forward-looking statements to reflect the

impact of future events.

We caution you that all forward-looking statements are subject to risks and uncertainties, described in the

Risk Factors section of our Annual Report on Form 10-K. Accordingly, actual results could differ materially

from those described on this call. Please refer to Crocs’ Annual Report on Form 10-K as well as other

documents filed with the SEC for more information relating to these risk factors.

Adjusted gross margin, income from operations, operating margin and earnings per diluted common

share are non-GAAP measures. A reconciliation of these amounts to their GAAP counterparts is

contained in the press release we issued earlier this morning.

Joining us today on the call today are Andrew Rees, Chief Executive Officer, and Anne Mehlman,

Executive Vice President and Chief Financial Officer. Following their prepared remarks, we will open the

call for your questions.

At this time, I’ll turn the call over to Andrew.

Andrew Rees

Thank you, Cori, and good morning, everyone.

Our Q2 results were exceptional, as we continue to see strong demand for the Crocs brand globally. Our

confidence in the strength of our brand is also reflected in our raised 2021 guidance. Looking beyond this

year, we are announcing that the Crocs brand will have net zero emissions by 2030. We will erase our

already low emission footprint per shoe and enable us to provide comfort without carbon to our fans

worldwide. I’m excited for our future, and I’m confident we can deliver sustained, highly profitable growth,

while having a positive impact on our planet and our communities.

Turning to the highlights in the second quarter of 2021, revenues nearly doubled versus prior year to

$641 million, an increase of 79% from 2019. Revenue growth was strong across all regions, with the

Americas up 136%, and on a constant currency basis, EMEA up 53% and Asia up 27%.

Sandals, one of our long-term growth pillars, grew by 57% in the second quarter and 38% for the first half.

Digital sales grew by 25% versus prior-year, and an impressive 99% versus 2019, to represent 36% of

revenues. DTC grew 79% versus prior-year, and 86% versus 2019, to represent 52% of revenues.

Adjusted operating income more than doubled to $196 million, and adjusted operating margins expanded

to a record of 31%. Adjusted diluted earnings per share increased by $1.22 to $2.23. Underlying these

incredible results is the iconic brand we have built.

To continue to fuel brand relevance and consideration globally, we leveraged digital and social marketing,

influencer campaigns and collaborations. We were the first footwear brand to market an augmented

reality experience on TikTok, with our hashtag #GetCrocd challenge, featuring try-on sandals and clogs

with Jibbitz. Globally, this drove over eight billion views and over one million uses of the hashtag.


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We also generated buzz when Balenciaga, on their spring 2022 runway, featured our second

collaboration together, comprised of a knee-high rain boot and a Croc Madame stiletto.

Global collaboration highlights include London-based skatewear brand Palace; in Russia, great music

brand Little Big; in Japan, highly influential retailer BEAMS; and in South Korea, world-famous ramen

brand Nongshim.

Finally, in the U.S., we have re-introduced our Free Pair for Healthcare initiative during National Nurses

Week, where we gave away 50,000 pair of Crocs or work shoes to frontline caregivers. We’re proud of

the brand we’ve built, and especially pleased with the initiatives, such as Free Pair for Healthcare that

enable the Crocs brand and business to have a positive impact in our communities.

This week, we announced our next step in having a positive impact on our planet, our commitment to

becoming net zero emissions by 2030. Our inherently simple approach to design, the materials we use

and how our shoes are manufactured means that our classic clog already has a low carbon footprint of

only 3.94 kilograms of carbon per pair. We’re taking it a step further with our plan to achieve net zero

emissions through sustainable ingredients and packaging as well as responsible resource use. We

anticipate our consumers will be as excited as we are about our commitment to having a positive impact

on our planet.

In addition to reducing our environmental footprint, our comfort journey will increasingly include uplifting

our communities and creating a welcoming environment for everyone, rooted in a culture of transparency

and accountability. This week we launched a new Brand Purpose section of our Crocs.com site and a

new ESG section of our investor site to share our progress. I encourage you to review the content that we

will discuss in greater detail at our upcoming Investor Day.

Now let’s turn to second quarter operating highlights. We’re very excited by the growth we have seen in

all key product pillars: clogs, sandals and Jibbitz. Clog sales were outstanding, increasing 101% year-

over-year to represent 74% of total footwear revenues versus 68% last year. We continue to innovate and

are encouraged by the initial results of our new platform and seasonal colors and prints. Sandal sales

were a standout, increasing 57% for Q2 and 38% for the first half, driven by our classic slide and classic

sandal that both feature personalization, as well as Brooklyn and Tulum franchises.

In addition to this strong growth, we’re very pleased that in our global brand study sandal consideration is

now in line with that of clogs. Given the strength of clogs, sandals represented 20% of footwear sales for

the quarter, versus 23% last year. As we have shared, while we expect clog growth to outpace sandals

this year, we anticipate that over the longer-term sandals will grow faster than clogs.

Jibbitz sales were once again exceptional, more than tripling for the quarter versus last year. The global

personalization megatrend continues, and Crocs fans enjoy the experience of shopping for charms in our

retail and wholesale stores.

From a channel perspective, global DTC revenues, which include revenues from e-commerce and

company-owned retail stores, grew by 79%. Retail had extraordinary performance, with traffic and

conversion up significantly from more normalized second quarter of 2019. E-commerce performed well,

and this was seventeenth consecutive quarter of double-digit e-commerce growth.

Digital sales grew 25%, on top of an elevated 2020 compare, to represent 36% of our second quarter

sales compared to 56% last year and 33% in 2019. Digital remains our top priority, and we continue to

invest in our customer experience globally to retain our competitive advantage relative to other footwear

brands.


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Our wholesale channel, which includes brick-and-mortar, e-tail and distributors, grew revenues by 112%

versus prior-year and 71% compared to 2019. Our focus on strategically important accounts, comprised

of leading e-tailers, sporting goods, family footwear and specialty footwear retailers, led to a strong

growth in all sub-channels globally. Our top (inaudible) brick-and-mortar accounts and distributors were

standouts as they rebounded from the depths of the pandemic. Finally, profitability was exceptional as we

achieved record quarterly adjusted operating margins and record quarterly adjusted EPS.

While we remain incredibly optimistic about our business and have substantially raised full-year 2021

guidance, as we emerge from the pandemic, global logistics remain challenging and volatile. In addition,

we’re increasingly seeing COVID spikes in some of our primary manufacturing countries and are

concerned about the short-term impact of potential factory closures on supply. We have attempted to

incorporate both the additional expense and the potential supply disruption into our guidance that Anne

will review.

Before I turn the call over to Anne, I want to thank the entire Crocs organization. These results are a

reflection of their hard work and dedication to the Crocs brand. I’m excited for our future and look forward

to achieving our commitment of net zero by 2030, creating a more comfortable world for us all.

With that, Anne will now review our financial results in more detail.

Anne Mehlman

Thank you, Andrew, and good morning, everyone.

I’ll begin with a short recap of our second quarter results. For a reconciliation of the non-GAAP amounts

mentioned to their equivalent GAAP amounts, please refer to our press release.

Our second quarter results were exceptional. We delivered record quarterly revenue on broad-based

growth across all regions, channels and product pillars. Profitability was best-in-class as we expanded

gross margins, leveraged SG&A and increased earnings per share. Second quarter revenues came in at

$640.8 million compared to $331.5 million in the second quarter of 2020, a 93.3% increase, or 88.4% on

a constant currency basis.

Growth was 78.5% versus the second quarter of 2019. Year-to-date revenues exceeded $1.1 billion, an

increase of 68.1% versus the first half of 2019. We sold 29.1 million pairs of shoes, an increase of 78.8%

over last year and 52.7% versus the second quarter of 2019. Our average selling price during Q2

increased 8% to $21.84, with the increase attributable to less promotional activity and higher pricing as

well as favorable product mix, including increased sales of terms per shoe.

The Q1 price realignment we took on certain products in select markets globally have been successfully

adopted, and as evidenced by our growth, have not hindered demand.

Now, let’s review our results by region. As Andrew mentioned earlier, the Americas had another great

quarter, with revenues at $405.7 million, up 136.4%. DTC growth of 128.1% was outstanding, driven by

retail. Higher traffic, combined with anniversarying significant store closures last year, contributed to triple-

digit growth in company-owned retail stores and more than doubled versus 2019. Digital penetration was

30.9% in the second quarter, compared to 30.7% in 2019. Wholesale growth was at 149.3% versus prior-

year and 140% versus 2019.

In Asia, Q2 revenues were $126.8 million, up 35.5%, or 27.1% on a constant currency basis from last

year. DTC increased 10.8%, while wholesale grew 76.5%. Digital revenues grew 17.1% versus prior-year

and 40% versus 2019. Digital penetration also increased from 31% in 2019 to 40.5% this year. South


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Korea continued to exhibit strength, while several other countries in the region remained impacted by the

pandemic.

EMEA revenues increased 63.1%, or 52.6% on a constant currency basis, to $108.3 million, with grown

brand heat offsetting any global logistics disruption. DTC revenues increased 29.2%, with e-commerce

strengths driven by higher traffic and a return to growth in retail as stores reopened. Wholesale revenues

grew 82.6%, fueled by broad-based strength in e-tail, distributors and brick-and-mortar. Our EMEA

business overall continued to benefit from our focus on digital commerce, which represented 52.5% of

EMEA revenue this quarter, versus 40.3% in Q2 2019.

Second quarter adjusted gross margins were 61.8%, up 660 basis points from last year’s 55.2%. The

majority of the improvement was driven by price increases coupled with fewer promotions and discounts,

offsetting pressure from elevated freight rates. Currency favorably impacted margins by approximately 90

basis points.

Our adjusted SG&A improved to 31.2% of revenue versus 33% in last year’s second quarter. The

decrease in adjusted SG&A rate is a result of strong sales growth and operating leverage. We invested

approximately $60 million versus the first quarter to support our strategic initiatives: digital, sandals, China

and marketing. We will continue to make investments this year to support the long-term trajectory of our

business.

Our second quarter adjusted operating income more than doubled to $196.5 million versus $73.8 million

last year, with robust operating profit growth in all regions. Adjusted operating margin rose from 22.3%

last year to 30.7% this year, benefiting from gross margin expansion and SG&A leverage on strong sales

growth. For Q2, our underlying non-GAAP effective tax rate was 24.7%, excluding a one-time benefit of

$175.4 million. The income tax benefit and decrease in our GAAP effective tax rate were driven primarily

by the realization of deferred tax assets, which were previously subject to evaluation allowance.

Second quarter non-GAAP adjusted diluted earnings per share increased to $2.23 compared to $1.01 a

year ago. Our liquidity position and balance sheet remains strong. We finished the quarter with $197.9

million of cash and cash equivalents and $386.4 million in borrowings, and have ample liquidity, with

$454.7 million of borrowing capacity on our revolver.

In Q2, we executed a $300 million ASR, which resulted in the repurchase of 2.9 million shares at an

average price of $103.79 per share. We expect to generate significant operating cash flow and to

maintain a strong balance sheet. We will continue to prioritize investment in the business to support our

future growth. We will also continue to be opportunistic with respect to our capital structure and our

capital returns.

Inventory at June 30, 2021, was $209.1 million, up from $146.8 million in the second quarter last year.

Inventory was lean throughout Q2, and we ended the quarter with higher in-transit inventory due to the

continuation of global logistics challenges.

Turning to the future, I would like to share our current outlook for the third quarter and full-year 2021. As

Andrew mentioned, global logistics remain volatile. Due to the lack of visibility, we have provided

guidance with potential supply chain disruptions and additional expense in mind. For Q3, we expect

revenue to grow approximately 60% to 70% and adjusted operating margin to expand to be between 24%

and 26%. Strong growth is expected in all regions and all channels as brand momentum continues.

Given our extraordinary first half performance and confidence in the momentum of the Crocs brand, we

are raising full-year 2021 guidance. We now expect 2021 revenue to grow between 60% and 65%. At the

midpoint, growth in the second half is anticipated to be 49% versus 2020 and 100% versus 2019. In


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addition, we expect adjusted operating margins to be approximately 25% for the full-year 2021. While we

expect to leverage SG&A long term, we plan to invest in the back half of this year to support future

growth. We now expect our underlying non-GAAP tax rate to be approximately 23%, which is higher than

previous guidance due to greater-than-expected profit in our U.S. business.

We look forward to sharing our long-term growth algorithm at our upcoming Investor Day on September

14.

In summary, we delivered outstanding revenues and profitability that exceeded expectations while

strengthening our balance sheet and investing in our future growth.

At this time, I’ll turn the call back over to Andrew for his final thoughts.

Andrew Rees

Thank you, Anne.

Before we open the line for Q&A, I want to acknowledge that Doreen Wright is retiring from our Board of

Directors after a decade of service. I want to express my gratitude for all of Doreen’s many contributions

and wish her all the best in the future.

I also want to thank our talented team around the world, without which these results would not be

possible. The Crocs brand remains incredibly strong, as evidenced by our second quarter results and our

increased guidance for 2021. We’re incredibly excited for the future, which now includes achieving net

zero emissions by 2030 and having a positive impact on our planet.

Operator, please open the call for questions.

Operator

Your first question is from Jonathan Komp with R.W. Baird. Your line is open.

Jonathan Komp

Yes, thank you very much.

I wanted to start off, when you think about the second half guidance, given the raise to the full-year

revenue, and I think you highlighted there’s an embedded acceleration to 100% growth at the midpoint

versus 2019 for the second half. Can you just maybe share more detail on what you’re seeing, maybe

across channels and geographies, to support your confidence in that two-year acceleration from here

yet?

Andrew Rees

Thanks, John. I’ll give you a bit of color and then pass it over to Anne to give you some more specifics.

Yes, we remain incredibly confident in the trajectory of the brand. Obviously, we’ve had a very strong first

half, very strong Q2, and as we look across all of our channels, we really see strength in all our channels.

Maybe I’ll start with retail, where we had really exceptional growth. Our stores have reopened this year.

We’ve seen significant increases in traffic; we’ve seen significant increases in conversion. Our retail

stores, both here in the U.S. and also particularly in Korea, performed really well. Digital is performing


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well; we highlighted the 99% comp over the 2019 numbers. And digital is both our own e-com and in

addition to e-tail.

Then from a wholesale perspective, again, our wholesale channel is performing well. I think we called out

in particular our brick-and-mortar, our leading 20 brick-and-mortar accounts and our distributors. Our

distributors, we kept fairly lean on inventory last year through the pandemic; we didn’t want them backing

up on aged inventory. As they’re emerging, they are replenishing and I would say very bullish about the

future of the brand. I think we’re confident on all dimensions.

Anne Mehlman

Yes, I think that’s exactly right, and I can just add a little color by region as well. We saw Europe, EMEA

growth is almost 53% constant currency in the quarter, so really good to see some international growth

coming on strong. We expect those trends to continue. Asia also returned to growth on a two-year basis,

which is great to see. We expect all of our regions to contribute to those growth factors in Q3 and Q4.

Then obviously, we have some visibility on our order book that supports all of this growth that we’re

guiding.

Jonathan Komp

Okay, that’s encouraging and very helpful. Maybe secondly then, when you think about the supply chain

ability to keep up with that growth, can you just share more, given your outsized exposure to Vietnam

from a sourcing perspective? Can you just share more of the current state of the environment there and

the key factories? And then you mentioned having embedded some impact in the second half, so maybe

you can give a little more color with what’s embedded in the expectations.

Andrew Rees

Yes, and that’s a great question, it’s probably one of our key concerns. As you look at global supply and

logistics, look, it’s been extremely challenging for the last 12 months. We’ve been living with this for the

last 12 months and performed as we have performed in the last 12 months given that.

And let me break those two pieces apart. One is global logistics, which is containers, freight time, etc.

And just to kind of give you a perspective, I would say transit times from Asia to most of our leading

markets are approximately double what they were historically. But that’s been the case for some time,

and we’re expecting to live with that. We’ve also seen elevated freight costs, some in the first half of the

year and we’re expecting to see more in the back half of the year. We’ve embedded that expense into our

projections.

I think what’s different now is the COVID spikes that we’re seeing in, I would say, Southeast Asia and

particularly Vietnam. Our expectation is that we will see some temporary factory closures in the next

quarter as Vietnam battles COVID. They unfortunately don’t have access or the ability to administer the

amount of vaccine that we have in this country, so really, they’re left with lockdowns and being judicious

about how people interact. We do expect temporary factory closures, which will obviously impact supply.

But with that, we’ve embedded that in our guidance, in terms of really trying to make sure that we’re

confident in the amount of inventory that, A, we have on hand and, B, what we have in transit, and we feel

really comfortable with where we are, given those uncertainties.

Jonathan Komp

Okay, thank you very much.


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Operator

Your next question is from Erinn Murphy with Piper Sandler. Your line is open.

Erinn Murphy

Great, thanks, good morning, and really great quarter.

I guess, Andrew, for you, on that last point on Vietnam, can you just remind us how big Vietnam is as a

percent of your overall sourcing and just how quickly you can move into other regions if some of these

rolling lockdowns continue?

Then, I guess bigger picture on APAC, could you share a little bit more about what you saw in China in

this quarter? How did the consumers respond to 618 and any other kind of key initiatives as you refocus

that region for growth?

Andrew Rees

All right, I’ll let Anne talk about Vietnam and the factory base to start with and let me pick up China.

Anne Mehlman

Hi, Erinn.

As you know, we manufacture a significant portion of our products in Vietnam. We don’t release the

overall percentage, but it is the most significant manufacturing geography for us, supplemented by China,

Indonesia and a couple other places around the world, but Vietnam is our most significant from that

perspective.

Andrew Rees

Yes, and I think the ability to move out of China—yes, we have absolutely some ability, we have some

spare capacity—sorry, the ability to move out of Vietnam. We do not have some spare capacity other

places, but it’s not enough to make a wholesale change.

Then in terms of China trading, look, I think we were really—let me kind of go back up to Asia first and

then come down to China. We were really pleased with our Asia performance during the year, during the

quarter. Obviously we grew nicely, even on a constant currency basis. There was some currency that

helped the headline number; but on a constant currency basis, we grew nicely at 27%. That was despite

some significant COVID impacts around Asia when you think about India, when you think about the state

of emergency in Japan and also the lack of travel in Southeast Asia and the current spikes that you’re

seeing.

In terms of China, I think we’ve talked extensively about the repositioning plan that we have in place. I

would say we think it was a really good quarter in China. We executed really well against all of the

dimensions of that repositioning plan, including elevating and enhancing our marketing, trading on

midseason festival, so we feel really good about the performance in China. We, I think, are set up well,

I’m very confident about accelerated growth in ’22.

Erinn Murphy


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Great, that’s great to hear. Then, maybe if you could speak a little bit more about the goal you established

last night to get to net zero by 2030. I guess our question is, what percent reduction are you committing to

versus just using offsets to net out the rest? I was just curious on some of the commitments internally to

get there. I mean, this is well ahead of most footwear companies that we benchmark, so just really, I

mean, fantastic job to put this up already.

Andrew Rees

Great, thank you, Erinn. We appreciate that.

What I would say, look, we’ve been working on this for some time, and we’ve been working on this from a

number of dimensions. One is sourcing and working with, I would say, a major chemical company as a

partner to identify the potential for sustainable ingredients that go into our products, so deriving our

Croslite foam from sustainable ingredients, and we have identified a solution to that that we feel very

comfortable with. We’ll be focused on scaling that solution over the coming years, which is really one of

the key factors in terms of lowering our overall footprint.

But we’re also looking at it from lots of different angles. From a packaging perspective, I think one thing

that we’ve done for years is really not ship our product in packaging. We don’t use shoeboxes, so 85% of

our product ships without a shoebox, but we think we can do even better there, but also looking at

sustainable energy that we would use in our facilities, including some of our factories, as well as reuse.

As we look at the whole carbon footprint and all of the key components that go into that, obviously we

start from a great place with a very low carbon footprint on our classic clog at 3.94 kilograms of carbon.

We will be posting that on our website here very shortly, and we will also be measuring the footprint of all

of our other products over time and releasing that information. We want to be really transparent about

this.

In terms of the future goals, yes, part of it is offsets, but we will be making a substantial reduction in our

actual carbon footprint in and of itself. We’re not ready to disclose that at this stage, but we’ll talk much

more about that in our September Investor Day, so we do have some significant internal goals around

that.

Erinn Murphy

Great. Then just last one, Anne, for you, just the Capex guidance for the year moved from $100 million to

$130 million, to $80 million to $100 million. What was the difference in the change? Is there anything in

terms of supply chain investments that you pushed out, or was it another investment? Thanks so much.

Anne Mehlman

Yes, no, we’re very committed to sell to the investments we’re making around our supply chain. It’s really

just timing of costs this year, so it really has nothing to do with that, it’s just really more around timing.

Erinn Murphy

Super. Continued success, thanks so much.

Andrew Rees

Thanks, Erinn.


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Operator

Your next question is from Mitch Kummetz with Pivotal Research Group. Your line is open.

Mitch Kummetz

Hi, yes, thanks for taking my questions, and congrats on the quarter.

Andrew, if I heard you correctly, you made the comment that sandal consideration is now comparable to

clogs. Help me understand how meaningful that is, and maybe what you can do is—is there any way you

could provide context around that in terms of what that consideration was a year ago or two years ago

versus clogs, just so we understand what it means to be comparable?

Then also, I don’t think you were saying that next year you’re going to sell as many sandals as clogs, but

what could that mean going forward in terms of the growth of the sandal business for consideration and

now to be at the level that it is?

Andrew Rees

Great, thanks, Mitch. I’m glad you picked up on that.

Yes, so we think, actually, it’s very important. What we mean by that is, when we measure brand

consideration with our consumers, we run obviously a consumer brand study every quarter to try and

assess where our consumers are, one of our key questions is consideration for the clog, consideration for

sandals, etc. I would say historically, the sandal consideration number has been a fraction of the clog

consideration number; that’s what we’re known for. That’s what most consumers would consider

purchasing a Crocs item, they would first consider a clog.

We think it’s very meaningful that the sandal consideration has risen over time. It’s risen because of the

marketing we’ve done behind it, it’s risen because of some of the new products that we’ve brought into

the market, particularly those that are personalizable. I think it’s very meaningful.

In terms of what does it mean in the future for revenues. No, we’re not saying that sandal sales will be

equivalent to clog sales in the future, but I think it gives us a lot of confidence in that sandal trajectory that

we’ve been talking about, and we saw it again here in Q2, but it gives us a lot of confidence in that growth

strategy that we talked about.

Mitch Kummetz

Got it, okay. Then, Anne, just a quick one for you. As I kind of work my model, given the quarter and the

guide, I kind of back into a Q4 operating margin of 16% to 17%; hopefully my math is correct. That’s down

from Q4 last year, obviously down from the run rate that you’re on. I’m just kind of curious, why is that not

higher? Is that based on some of the investment that you’re making on the SG&A side? Does that reflect

some of the supply chain issues that you’re kind of anticipating going forward? Can you maybe address

that?

Anne Mehlman

Yes, so we didn’t guide specifically for Q4, so just reiterating that we said approximately 25% for the year.

I think the biggest things in the back half are really around we’re going to continue to invest in SG&A,

particularly in marketing. Marketing expense was up this quarter about $26 million. (Audio interference)

will continue, as we talked about on our last call, we’ll continue to invest in marketing, and our marketing


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expenditures for the year will be just a little over 7% of revenue. That will accelerate, continue to

accelerate through the back half, and we will continue to invest for the future to support our future growth.

Then from a margin standpoint, we will have some margin pressure, although for the back half, margins

will be up; gross margins will be up over last year. We will have some pressure, just based on what we

talked about with logistics and freight and kind of the overall logistics environment. Those two factors are

combining to put to our guide of approximately 25% for the year.

Mitch Kummetz

All right, thanks and good luck.

Operator

Your next question is from Sam Poser from Williams Trading. Your line is open.

Samuel Poser

Thanks, everybody.

I’ve got a couple. I want to follow-up on Mitch’s question. Can you hear me?

Anne Mehlman

Yes, hi, Sam.

Samuel Poser

Okay. Hi. I just want to follow-up on Mitch’s question regarding the fourth quarter just by asking, with the

incremental marketing spend that you’re pushing in, how much incremental marketing as a percent, or

however you want to talk about it, was there in Q2, and how much of those incremental sales can you

attribute to it? How much incremental marketing is built into the balance of the year, and what kind of

sales lift are you attributing to that within the guidance?

Anne Mehlman

Okay, let me try to parse that. From a marketing perspective here today, I believe marketing’s up about

$28 million, $26 million of that was in Q2, so obviously the majority of that incremental spend year-to-date

was in Q2. We’ll see much of the same type of spend in order to get to that approximately 7%, you can do

the math, a little over 7%, in the back half of the year.

Some of that is performance marketing, as you mentioned, which is variable, which supports e-com,

which is a little bit more transactional. The rest is at brand, so it’s hard to equate how much of the

increased revenue is actually related to that marketing. But what we do know is that our marketing is

incredibly effective, and when you look at things like brand surveys, we see those trending in the right

way, sandal consideration. We know that in order to support our growth long term, we need to continue to

spend into that. I think it’s really less about what the incremental is that is contributing to this year and

more about what the incremental is going to contribute to our future.

Samuel Poser


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Okay, I’m going to come back to it. I’m not arguing that you shouldn’t be spending the money. What I’m

saying is, how much of the near term—my question is, I believe that, because even the brand marketing

and the other has helped to drive a lot of your strong results this quarter, that my question is—and I would

assume based on the marketing, your marketing percent of sales given the results, were less than what

you anticipated they would’ve been in Q2. Is that a fair statement, based on the guidance you gave and

the money you spent?

Anne Mehlman

Was our marketing percentage less than what we planned for Q2? I’m sorry, I don’t—can you just…

Andrew Rees

Well, yes, no...

Samuel Poser

(Multiple speakers).

Andrew Rees

You’re saying that—look, if we had a sales acceleration above what we expected, did the marketing come

in low? No, I think I would say no to that, because a lot of our marketing is very variable, can be planned

in a very short period of time, even some of our brand marketing. We can lean into events or lean back

from events, especially around social media. We calibrate that very closely, so I wouldn’t say it was less

in Q2 than we expected.

Look, I think our strategy’s really clear. We have a great marketing strategy. We have, I think, a really

effective team who are doing some incredible work, so we’re going to continue to spend to ignite

consumer interest in the brand, that’s clearly working. As Anne said, we don’t look at what is the

incremental in the year; we think about it from a multiyear trajectory.

Anne Mehlman

Yes, and I think again, and one piece of that too is that, if you look at our results, our 10-Q will be out a

little bit later, but if you look at our results by segment, I mean, you can see that we actually took some of

the increases that we were having in the U.S. and investing that overseas, particularly in our Asia market.

We can do that within the quarter.

Samuel Poser

All right. Then, how much of your inventory, the current inventory on your books, is in transit right now?

Anne Mehlman

We don’t break out the in-transit versus what’s on hand, but it’s significant, and it’s up significantly year-

over-year. Much of the increase of our current inventory is actually sitting in transit. That’s been pretty

consistent all year, as we’ve just been working through logistics, and as Andrew talked about, really, our

longer freight cycle times.

Samuel Poser


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How much of your product that is made for the—how much of the product that you need for the full year is

already produced? By that I’m asking, how much of the production needed I guess for the next six, eight

months is made, and how much of that is—what percent may be impacted by the issues in Vietnam?

Anne Mehlman

Yes, it’s a good point, Sam. The majority of our product for Q3 is obviously—Q3, you have your product

in, so there is some for Q4, but obviously it increases as you go out and increase your time span.

Samuel Poser

All right, thank you very much and continued success.

Anne Mehlman

Thanks, Sam.

Andrew Rees

Thank you.

Operator

Your next question is from Susan Anderson with B. Riley. Your line is open.

Susan Anderson

Hi, good morning. Let me add my congrats on an amazing quarter.

I was wondering if you can maybe talk about your thoughts on promotions as we look forward and the

impacts on gross margin levels. I’m curious if you think there’s still room to pull back on promotions, and

also how you’re thinking about price increases. Are there more planned for the back half or 2022?

Thanks.

Andrew Rees

Yes, so I think, look, we’ve been very proactive in terms of pulling back on promotions through the year.

Is there further room? I would say some but not significant. I would say there was, particularly in maybe

some of the Asian markets, we’ve got a little bit of opportunity to continue to pull back as the brand heat

starts to accelerate in those markets. But I don’t think that’s significant going forward. We’ve done a lot. If

you look at our U.S. website, it’s essentially been non-promotional all year long, etc. As you look at our

stores, also essentially non-promotional.

If you talk about price increases, yes, there are some price increases that we’re planning in ’22. Those

have already been communicated. I would say they are stronger outside of the U.S., particularly in EMEA

and again in Asia, as we look to manage price value in given markets. As we said, we always look at the

price of the product relative to competition, relative to the brand heat in that particular market, so there

are some price increases that will flow through in ’22. But I would say, they are also dramatically less

significant than the moves that we made this year.

Susan Anderson


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Okay, great. Then, maybe if you could talk about your thoughts on back to school; are there any early

reads that you could talk about or how you expect it to play out this year?

Then I’m curious for this fall, if there’s any new products that you’re expanding on, such as maybe your

boot offering, similar to what you’ve done in sandals?

Andrew Rees

Yes. I think we’re very optimistic about back to school, I would say, but early reads are strong. As we look

at—obviously there’s some parts of the country that go back. Now as we look at the performance in those

markets, we’re seeing a trajectory that we really like, so we’re very optimistic about back to school.

Obviously it was very strong last year, coming out of the lockdowns of the pandemic. We feel very

confident in our ability to anniversary and grow from that basis.

I would also point out, as you look at our seasonality, the growth in back to school and the strength of

fourth quarter: a lot of our seasonality that was historically in the business has really smoothed out, so we

can be incredibly profitable each quarter of the year.

In terms of new products in the back end of the year, I would say particularly exciting is Fuzz, our lined

products. It’s been growing, been building now for about three/four years, but we don’t feel like, in any of

the prior years, we’ve really capped the full potential of that. We think Fuzz, both in the clog but also

some new exciting Fuzz products that will come out more broadly, will be important in the back half.

Susan Anderson

Great, thanks so much. Good luck on the rest of the year.

Andrew Rees

Thank you.

Operator

Your next question is from Jay Sole with UBS. Your line is open.

Jay Sole

Great, thanks so much.

Andrew, can you talk about the allocation model that the company’s implemented over the last quarter or

two, and just talk to us what the benefits have been to the brand and to the operations overall?

Andrew Rees

Yes, let me start off by saying these benefits are significant and really important, and the allocation model

is one part of a sort of multipronged approach to really manage our brand at wholesale. Obviously,

price/promotion in our DTC channels we can control explicitly.

At wholesale, we really have to look at things like MAP pricing, which we instituted on some of our key

lines earlier this year, and also allocation that we provide to our key wholesalers. What we’re trying to do

there really is manage the amount of inventory that’s in the marketplace on our most important key styles

and also provide differentiation between our wholesale partners so that they’re not competing head-to-


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head, which will allow them to trade more at full price and our brand to show up how we want to show up

for consumers.

I don’t think it’s anything new as you kind of think about the industry. I would say it has been an important

shift across as we’ve adopted what I might consider best-in-class brand management practices. I would

say, I think they’ve been incredibly well received across the industry. I’m sure there are the occasional

wholesale partner that would like more product; in fact, there are probably quite a few that would like

more product, but this is an important part of managing the brand.

Jay Sole

Understood. Maybe just a follow-up on that in the context of 136% growth in the Americas this quarter,

which obviously is a phenomenal result. Can you give us a sense of how you’re able to drive that kind of

growth and move to an allocation model? What would sales growth have been had you supplied inventory

maybe the way you had a year ago or two years ago?

Andrew Rees

Yes, I don’t think we know the answer to that question, because, as you point out, 130% sales growth is

phenomenal. In short, what allowed that to happen is really consumer demand. Consumer takeaway is at

that level or ahead of that, frankly. We’re not stocking the channel, we’re keeping the channel pretty much

where we like it and in a very healthy place. It’s really consumer demand, consumer takeaway, and that’s

as a result of product innovation and all of the marketing that we do.

In terms of what it could’ve been, we don’t know, and probably not that relevant because I think we’re

really comfortable with where we are.

Anne Mehlman

Yes. I think it really supports our profitability as well, if you look at our 8% ASP growth in the quarter. It’s

hard to say how much of that is directly related, but it supports our wholesalers out the doors and

obviously our ASPs as well.

Jay Sole

Got it, and then maybe one more if I can. I think, Andrew, you mentioned some price increases are

coming next year. Given the MAP pricing, given some of the price increases that have happened, how

high can prices go? How do you think about the brand and the brand positioning relative to price in terms

of where the ultimate opportunity lies?

Andrew Rees

Yes, I think that’s a good question, and just to reiterate, the price increases I referenced are really outside

the United States. One thing that we’re very conscious of is the consumer value that the brand provides.

This is a very democratic brand. We serve a lot of consumers, both from highly affluent to much less

affluent, and we never want to be in a place where we’re turning consumers away because our product is

too expensive in their mind and not providing the value that we think it provides. We’re very careful about

pricing so that we don’t push too far. I think we’ve got that balance, I think, about right at this point. We’re

giving the consumers incredible value, as well as obviously attracting the value that we think the brand

deserves and the marketing and product innovation deserves, obviously providing a great return to

shareholders.


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Yes, that’s something that we’re very conscious of, it’s very, very important to the brand and its future

trajectory, and the price increases I talked about for the next year are mostly outside the United States.

Jay Sole

Got it, that’s super helpful. Thank you so much.

Operator

Our next question is from Steven Marotta with C.L. King. Your line is open.

Steven Marotta

Good morning, Andrew, Anne, and Cori.

Anne, can you talk a little bit about how much channel mix was a factor in the second quarter gross

margin delta and how much that will be a factor in what is the gross margin guidance for the year?

Anne Mehlman

Yes. Channel mix from a year-over-year perspective was actually helped, a little bit, margin because retail

was so strong. From a gross margin standpoint, retail is very high. From an operating margin, as you

know, we’re rather agnostic.

If you think about, from a quarter-over-quarter perspective, Q1 tends to be our highest wholesale

percentage quarter, so certainly from a quarter-over-quarter perspective you can see gross margins

accelerate Q2 to Q1 because of that channel mix.

Then for the year, I wouldn’t say that it’s the biggest impact; the biggest impacts sitting around our margin

are really pricing, pull back of discounts and promotions, as well as product mix, increase in our Jibbitz

business as well as clogs are very favorable, and then we had a little bit of currency in there. Those were

somewhat offset by increased freight pressures as we talked about but still supporting overall higher

margins for the year.

Steven Marotta

Very helpful. Thank you.

Andrew Rees

Thank you.

Operator

Your next question is from Laura Champine with Loop Capital. Your line is open.

Laura Champine

Thanks for taking my question.

I know you’ve answered a lot of questions on pricing so far, but I may have missed it; did you give the

growth mix units versus price in the quarter? A couple other ones on pricing. As you look to raise prices


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next year in other regions, are they just coming up closer to America’s pricing, or will there still be a

significant differential? Then third on pricing, how much of a price increase do you need to take to hit your

environmental goals with what I presume is a higher cost, more environmentally sound material?

Anne Mehlman

Great, well, let me answer your first question, and then I’ll turn it over to Andrew to talk about price

increases.

From an overall perspective, our units were up, our pairs sold were up 78.8% and our ASP was up about

8%. Then, as far as the overall pricing and outside of the U.S., prices outside of the U.S., they don’t

necessarily—it depends on the product, don’t necessarily, and depending on currency, tend to be higher

than in the U.S., which is why we have an opportunity in some of our markets to align pricing.

Andrew Rees

Yes. I would say if you look at pricing outside the U.S., look, it’s really dependent on, I would say, the

market, the competition and the brand heat in that market. There are international markets where we’re

actually at a premium to the U.S., and there are others where we’re at a slight discount. I would say

broadly, yes, it’s more coming in line with where we are positioned relative to competition and relative to

consumer demand. I think that, in terms of the genesis of your question, that’s what we’re trying to do.

That’s the driver.

In terms of the incremental costs associated with some of our ESG efforts, yes, I think we feel like we’ll

talk a little bit more about that in our Investor Day in September, but we’ve incorporated that into our long-

term business planning, and I think it’s best that we kind of cover that in that context.

Laura Champine

Got it. I guess a follow-on. Obviously your Asia-Pacific growth is accelerating, but I am curious, when I

look at your pricing, whether that is slowing your growth down in China, or do you think that it’s still just

about finding the right partners in that market?

Andrew Rees

Yes, I would say very clearly we do not believe pricing is slowing our growth down in China. We think

we’re priced appropriately in China. As we look at the repositioning plan, it’s about the partners, it’s about

our marketing investment, it’s about our e-com business, so no, we don’t think it’s about pricing.

We think it’s a lot of different dimensions. As I mentioned to Erinn’s question earlier, we feel really

confident about the trajectory of that and how it positions us for next year.

Laura Champine

Great. Great quarter, guys, thank you.

Andrew Rees

Thank you.

Anne Mehlman


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Thank you.

Operator

Your next question is from Jim Duffy with Stifel. Your line is open.

James Duffy

Thanks, good morning, terrific execution, and congratulations to the team.

Guys, I want to ask about infrastructure. You’ve been very thoughtful about investing in infrastructure, but

the volumes have just been huge. I’m curious, once the product is in the U.S. or other regions, are there

bottleneck points or throughput challenges to delivering on demand? And can you speak to areas of

investment to support additional growth into 2022?

Andrew Rees

Yes, really thoughtful question, Jim. We don’t have any current bottlenecks in our infrastructure. I would

say there are many bottlenecks in the global logistics chain, whether it be Long Beach, whether it be rail

out of Long Beach, whether it be availability of trucking, the list goes on. As we look at our ability to

process goods, whether it’s through our warehouse or through our cross-dock facilities, we can process a

very high volume of goods and certainly have no concerns for ’21 into ’22. You might note that we’re

significantly expanding our U.S. DC; again, that will be open later next year. We are also—we have

moved to our new DC in the Netherlands, and with that we’ll be up to full operation again by the end of

the year. It’s in partial operation across the two facilities today but working really well.

In terms of longer-term investments, absolutely, as we continue to grow the business at these rates or the

rates we anticipate to continue to grow the business, we will continue to make investments in our

infrastructure in the U.S., in EMEA and some of our key Asian countries as well.

Anne Mehlman

One just note overall in the context, we’ve actually seen quite a lot of efficiencies from our U.S.

distribution network this year, and that is showing up in our margins, and we call that out as supporting

our overall gross margin level. We’re really pleased with that.

James Duffy

Great. Yes, those investments have proved very prescient. Andrew, can you talk about the tone of

business with Asia distributors, the glide path to recovery in that business, what you’re seeing there?

Andrew Rees

I think that’s a big unknown, I would say, and that’s not happening this year period, not in our prospects or

in our guidance. Those Asian distributors that you’re right to point out, they can be significant; there’s

large populations in those countries that we serve and highly dependent on tourist travel, and that’s just

not going to happen. I guess if you were to ask me when, I think it’s late next year before people start

traveling to those countries, and that’s kind of how we’re thinking about it.

James Duffy

Okay, great. I look forward to connecting with you guys at the Investor Day.


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Andrew Rees

Thank you.

Anne Mehlman

Thank you.

Operator

We have a follow-up question from Erinn Murphy with Piper Sandler. Your line is open.

Erinn Murphy

Great, thanks.

Just one follow-up for me. On the buyback, I think you fully exhausted your existing authorization this

quarter. Any thoughts on upping that in the near future?

Anne Mehlman

I think we have almost 700 million left on our existing buyback authorization.

Erinn Murphy

Okay, got it. Maybe I’m mistaken. Thank you so much.

Anne Mehlman

Thank you.

Operator

We also have a follow-up question from Sam Poser with Williams Trading. Your line is open.

Samuel Poser

Hi, I have three quick ones, just about looking forward with the gross margin.

You talked about mix from a product perspective, but do you expect the channel and geographic mix to

continue to help you? Secondly, if you can give us some color on upcoming collaborations. Third, if you

can discuss how inventory at retail, both in your own stores and your wholesale partner stores, is looking

right now relative to the demand you’re currently seeing.

Andrew Rees

All right, Sam, let’s hit those in reverse order.

Retail, inventory at retail, I think, look, the way we think about Q2 is I think we were not in an optimal retail

inventory position in our own retail or even our wholesale partners. It’s better than it was at the end of Q1,


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but it’s certainly not optimal. When I say optimal, I’m looking at out-of-stocks and weeks of supply. We

think that’s an opportunity for the future.

What was the second one, Sam?

Anne Mehlman

Collabs.

Andrew Rees

Collabs, great. Collabs, we have a very strong pipeline of collabs. We talked a little bit more in our

prepared remarks about all the different things that are going on; I know you track those closely. But I

would say, we have a very full pipeline through the end of the year and increasingly have a very full

pipeline for next year.

Anne Mehlman

Yes, and then on gross margins here, and we do expect channel mix, as I mentioned a little bit earlier, it

will help, but the biggest drivers of gross margins for the year are really related to the pricing actions that

we’ve taken, the continued pullback in promotional strategy, and then a little bit of currency. We expect

currency to be about 70 basis points roughly for the year, at current currency rates, and all of those

combined. Then as I mentioned as well, we have some efficiencies in our DCs, and some of those are

offset slightly by increased freight rates.

Gross margins will be up for the year. Those are the major drivers. And Jibbitz.

Samuel Poser

Thanks very much.

Anne Mehlman

Thanks, Sam.

Andrew Rees

I think that’s all of our questions and we’re out of time. Really appreciate everybody’s continued interest in

the Company, and thank you very much for attending this morning.

Operator

This concludes today’s conference call. Thank you for participating.


Crocs, Inc. Second Quarter 2021 Earnings Call July 22, 2021

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