Crocs, Inc. (NASDAQ:CROX) released its second-quarter results, and the stock fell 11% on the results. Let’s look at some of the key talking points.
Wall Street often forgets, or worse, deliberately ignores, that the stock market is not a proxy or proxy of the real economy. This disconnect between the two is a discussion on which many studies have been conducted. A case in point is Crocs’ stock price relative to its economic performance. In relative terms, the Crocs has underperformed the S&P 500 (SPY) by 35% year-to-date. Compare this to the following (emphasis added):
We believe the footwear market contracted in the US for the first half of 2022 and may fare slightly better globally, but we believe it has been flat at best. As for the flat-to-down market, currency-neutral Crocs brand sales were up 20% for the first half and consolidated sales were up 52%, driven by the acquisition of HEYDUDE. As you can see, both Crocs, Inc. and the Crocs brand are gaining significant market share.
As for the Crocs brand, we will continue to gain market share… as evidenced by our own brand metrics which are very strong and key industry studies. When we combine brand awareness and relevance with a very democratic price point, we believe the brand is well positioned to thrive when The consumer is looking for convenience and value.
While the NPD report mentioned above by Andrew (and specifically mentioned by Anne) is only accessible via subscription, here is a link to a press release for most of the data – broadly consistent with the companies’ comments.
The above bodes well for the discussion of the macro environment and is therefore the reason for the large drop after earnings. Management has called for a slightly lower reading of less than 100 basis points per second for all line items and the market has responded by discounting the same protection as negative EPS prints.
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Current economic issues are not specific to Crocs and therefore no further comment is required, but management’s rationale for this guidance is provided below.
Given the uncertainty about the future macroeconomic environment and consumer behavior, we plan to grow the Crocs brand more slowly in the near term. We believe consumer confidence in the US and key European markets will continue to weaken over the course of the year as higher interest rates and higher food and energy inflation weigh on consumption. On the other hand, we see very strong growth internationally. We do not see similar pressures in some of our international markets.
on their ability to reduce costs
In the second quarter of 2022, we leveraged the consolidated, adjusted SG&A of 610 basis points, which improved to 31.2% versus 25.1% of last year’s revenue. Non-recurring SG&A expenses for the second quarter were $8 million, including $6 million for HEYDUDE integration costs, primarily in marketing and staffing, while an additional $42 million was invested over the prior year, resulting in a Leverage of 610 basis points was achieved.
The Asian market was identified by Andrew et al. repeatedly presented as opportunistic (see bands Q4 21 and Q1 22). It has also been identified as one of the key incentives where the board has guided management (emphasis added):
Our incentives and management compensation program remains as it was in the past. And it requires specific growth strategies, whether digital, whether sandals, Be it Asia.
Currently, Crocs consolidated sales are 15.1% for Asia with the two largest shoe markets, China and India. Please note that the recent decline is due to Crocs’ large exponential growth in the US, which has not been reciprocal in Asian markets.
Management continues to signal Asia’s entry into the North American market through a similar playbook, which has been extremely successful.
Our proven playbook drives growth in South Korea, India and Southeast Asia. And we are very happy about the green shoots that we see in China.
On the development of Asia and its drivers (emphasis added):
The Crocs brand in Asia had sales of $149 million in the second quarter, or an increase of 27.6%. Strength in this area has been led by distributors in India and Southeast Asia, With more than twice the turnover compared to the previous year, In Southeast Asia, distributors benefited from the COVID reopening and a partial return of tourism to the region. This momentum was partially offset by the slowdown in China due to the COVID lockdown. H1 results for Asia were strong for two straight years, posting 25.5% growth this year, on top of 24.3% growth last year.
The acquisition of HEYDUDE has proven to be a successful acquisition quarter after quarter. As the economy changed course over the new year, shares of Crocs fell ahead of its S&P 500 peak on Jan. 4 on takeovers. As I have mentioned in previous notes, management’s ability to be disciplined with capital, as evidenced by their rare goodwill (pre-acquisition), is a testament to their ability to effectively grow HEYDUDE internally. (In my previous note on this acquisition and market inefficiencies.)
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On short-term sales targets
While we’re not ready to outline long-term prospects, we believe they are significant and will easily meet our near-term goal of $1 billion in sales.
on margins and synergies
HEYDUDE’s adjusted gross margin was 47.1%. HEYDUDE recorded higher inbound freight rates compared to last year and we have acted quickly to take advantage of Crocs freight contracts which we expect will improve gross margin in the second half of the year.
on expectations vs. reality
It wasn’t really clear to us to what extent we could be supplied at short notice. I’d say it’s done, it’s going to be a lot better than we thought
where can I do something wrong
- Management may not be able to meet its goals – which I believe it has revised as conservative territory – and therefore causes the market to lose confidence in the brand.
- HEYDUDE Crocs may not realize synergies primarily from their distribution and delivery channel. This could lead to a drop in sales along with wholesale weakness due to a potential consumer pullback due to a slowing economy.
- Inflation could last longer than expected and therefore consumer spending will continue to change.
- It may all just be a fad – the shoe is back in fashion – the shoe will be out of style again.
Overall, Crocs has released a good report. Sales grew, margins held up relatively well, and the growth prospects have never looked better (in the long run — always). There are short-term headwinds that present good buying opportunities, and the market can always provide investors with this opportunity.
Management was able to increase market share in a contracting environment plagued by fears of recession and inflation. These have historically been a strong deterrent to the footwear industry, but consumer behavior suggests Crocs may be an anomaly to that expectation. Continued double digit growth in Asia and HEYDUDE will continue to enable growth in the medium to long term.