Great. Good morning, everyone. Welcome to Baird's 46th Annual and 2025 Global Consumer Technology and Services Conference. I'm John Comp, the senior analyst covering the active lifestyle sector, and very pleased to have a company joining us for the sixth consecutive year, Crocs, with us to kick off the conference today. I couldn't think of a better company to help us kick off here. I think every consumer in the world likely knows the Crocs brand. From a company perspective, the company now operates a multi-brand portfolio, with the Crocs brand selling more than 125 million pairs globally every year, and the HEYDUDE brand selling more than 25 million pairs globally every year. With me today, I have CEO of the company, Andrew Rees, and I'm going to turn it to Andrew to kick us off here.
Thank you, John. Pleasure to be here. Before I get started, our lawyers have requested I make a few brief statements, so let me get those out of the way, then dive in. We'll make some forward-looking statements that are not historical facts. These statements are subject to risks, and you can review more information, including our risk factors in our SEC filings. This conference, or this session, is being webcast, and a replay can be found on our website following this event. To get us started, maybe just a few things to give everybody a little bit of context. I'm sure a lot of people in the room are very familiar with Crocs.
As we contemplate what I think is a pretty fluid and dynamic environment from a consumer perspective, also from a cost perspective, I think one thing I'm extremely proud of, I think Crocs is demonstrating tremendous resilience and will continue to demonstrate tremendous resilience in the ongoing environment. That resilience comes from a number of things. Number one, we're diversified in terms of brands. We have two brands, both Crocs and HEYDUDE, which we believe are extremely well positioned relative to footwear trends, relative to consumer trends, with a great deal of emphasis on the value that they offer, the comfort that they offer, easy on and off, and a high level of personalization. We're also extremely diversified.
We're extremely diversified from a sourcing perspective, with sourcing across a significant number of companies, sorry, significant number of countries, that gives us mitigation to any potential tariff and sourcing risks. We're also diversified in terms of where we sell. We have a reasonable concentration here in the U.S., but we have a high level of business coming from markets outside the U.S., in Europe, the Middle East, Latin America, and Asia. I think we see our greatest potential for growth, especially within our Crocs brand, coming from outside the U.S. Our financial performance over the last five years has been extremely strong, as you look at our sales growth, as you look at our levels of profitability and cash flow. If you look at that historically, I think there's a perception that Crocs potentially is a more volatile company than it is.
If you look at our historical financial performance, it's extremely robust. That performance, financial performance, allows us, very importantly, even in an uncertain environment where we are absorbing some headwinds, to fully invest in all of the growth that we see in the future, continue to strengthen what is already a strong balance sheet by paying down incremental debt and buying back our stock as a mechanism of returning cash to shareholders. I would note over the last 10 years, we bought back in excess of 25% of our flow. I think the other thing that's critically important, I think, is our management team has historically and continues to be extremely proactive. In an uncertain environment, we've moved quickly in the last six months to control costs, reducing our SG&A and overall cost base by at least $50 million on a forward-looking basis.
As I think about this kind of environment, it's extremely important for a company like ours to control inventory. If you control inventory, you don't get forced into making trade-offs that are undesirable for the long-term success of the brand. I think we've got a long track record of controlling inventory and running inventory turns that are in excess of four times. I think one of the things that I talked about on our last earnings call is I would rather miss a sales opportunity than have excess inventory in this kind of environment and be able to ensure that we maintain high margins and we can continue to invest for future growth.
In closing, I think the profile of our company, the resilience, its diversification, and the experience and track record of our management is a company that you'd want to own in this kind of environment. I would highlight that I myself am one of the top shareholders, often in the top 10, depending on the makeup of our shareholder base. Our board and management team continue to be large shareholders of the company. We're heavily invested in making the right decisions for our brands, for the future of our company, creating shareholder value, not necessarily this quarter or next quarter, but for the medium to long term. That's consistently our perspective. Hopefully that kind of sets the stage a little bit, John. I look forward to discussing some topics.
Yeah, thanks for that intro. I know you mentioned strength and leadership in your management team. You've been bolstering some of the brand level leaders and just recently named Terrence Riley into the new role, EVP and Chief Brand Officer. Maybe just start there, since it's topical, to highlight those changes and what that means for the company.
Absolutely. Many of you might know Terrence or know of Terrence. Terrence Riley was our Chief Marketing Officer at Crocs about five years ago. He subsequently left and went to Stanley, the drink company, not the tool manufacturer, where he really led a, I would say, dramatic explosion of that brand. We managed to lure him back about a year ago, and we put him in the position of HEYDUDE brand president, where I think he's done an outstanding job. We are really seeing some, I would say, some clear benefits from his leadership and inspiration within the HEYDUDE brand. Recently, we decided to move him over to be Chief Brand Officer. This allows him to have purview over the marketing function for both brands. Terrence's brilliance and secret sauce is marketing. He is connected very closely to consumer culture.
In some cases, he's, I think, driving and creating some aspects of consumer culture. He's very dynamic and creative. We are looking forward to him. We think that's the highest and best use of Terrence relative to our overall company. We are looking forward to him having an impact over both brands. I would say he's brimming over with ideas. I would also add that under him, there will be dedicated, there are dedicated Chief Marketing Officers for each brand. I think one thing that Terrence said recently, which really resonated with me, he said, "I have two daughters. One of them is my favorite, and they both think they're my favorite.
I like that. That's a good overview of the changes there. I won't comment on the favorite child. Maybe talk more to lead off here about 2025. You mentioned a dynamic cost and sales environment. You reported on May the 8th. A lot has changed since then. Just maybe start by talking about how you plan the year, how you're navigating the current environment.
Yeah. I think there are multiple sides to that question and multiple sides to our business. When I think about our US business, and I'll get to our international business in a second, we planned that very cautiously. We believe that the consumer, and I'll start on the consumer and the revenue side, and I'll get to the cost side and the tariff piece in a second. We believe the consumer is already acting cautiously. I think you hear some things, always people say the consumer is relatively resilient. Some people say they're acting cautiously. We believe they're acting cautiously. If we look at casual footwear, even in Q1, casual footwear, the market for casual footwear overall expenditures was down mid-single digits. That is not typical. The footwear market has been a very resilient and robust market over a 20-plus years period of time.
That is not typical. I would say it is pretty clear in our sector, and I would say a lot of related sectors, that companies are starting to pass price increases through to the consumer in a variety of ways, whether it be absolute price increases, reduction in discounts, reduction in, or increases in net price, if you like, through a variety of different mechanisms. I think in an environment where the consumer is uncertain about what their future looks like, and they are going to probably be incrementally cautious as they start to experience more increases in price. We have planned that way. We believe it is the best way to plan.
Back to my sort of opening comment related to inventory, if you plan higher sales and buy the inventory to achieve those sales and then do not make those sales, you just get backed up in inventory and you end up liquidating that inventory. I would rather be in the opposite mode, which is short of inventory and chasing it and elevating price. We have also made a decision, particularly here in the U.S., to protect the long-term future of our brand. We have already taken actions on net price. We have looked at discounting. We have looked at our positioning in the marketplace and strengthening that. We would rather make more margin, have more money to invest in marketing and engage in the consumer and bring in the consumer into our brands than discounting or lowering price and be short of margin and not be able to invest.
The second piece I just mentioned, that's not the same internationally. There are markets internationally, particularly some in Western Europe, which we think are a little conservative or a little tight. There are markets globally that are doing really well that are not affected particularly by some of what's going on here in the U.S. Those markets we are leaning into as much as we can. You can see that particularly the Crocs brand, which is our biggest international player at this point, experienced, demonstrated strong growth internationally in Q1, and we think that will continue. Flip into the cost side. Sorry, this is a long answer, John.
It's a big topic right now.
In our Q1 earnings, we try to give some understanding of the range of potential tariffs. I think we said at a 10% extra tariff on the rest of the world, we were looking at about a $45 million incremental cost. At the then elevated China rate, which I think was plus 135%, we were looking at about $130 million in incremental costs. Obviously, there's been a substantial amount of conversation and changes since then, particularly with China coming down. I would say right now we're somewhere in that range. Honestly, I think it's impossible to predict where we end up. I'm not going to play that game. We'll just see what happens. What we can do is we can manage our price. We can manage our SG&A.
We can manage our distribution costs and make sure that we flow as much money to the bottom line.
Maybe just one follow-up. Thinking about pricing, you talked about net increases in pricing through reducing discounts. Just any broad thoughts on absolute price increases and how the Crocs brand and HEYDUDE brands are thinking about that?
Yeah. I mean, I think, look, the point of view that we took is, one, we did not really want to lead this charge. So we are a substantive company and we have substantive brands, but we are a long way from market leaders. I think the market leaders have been super clear, as I expected them to, that they will increase prices. I am not going to name the names. I think you all follow this. We have seen a number of the very large players be really clear that they are going to increase absolute prices starting later this year. Probably, I think the majority of those will come into effect just given the wholesale cycle in Q1 of next year. We will plan to follow suit. We are going to be very focused around which products in which markets to try and make sure that we are careful and strategic.
Great. Maybe talk a little bit for a while here about Crocs and thinking about the core market, core U.S. market, the core clog silhouette. Could you maybe just talk about how relevant the clog silhouette is today? And then where do you see some of the growth opportunities, lesser penetrated categories?
Yeah. So just to set the stage when answering that question, we have three big platforms in Crocs, as you know, which is clogs, sandals, and personalization, which is our Jibbitz. I would say in the U.S. market, the clogs business or the clogs silhouette is extremely well penetrated. As you mentioned in your remark, almost everybody has a pair. Everybody's kids have a pair. They have multiple pairs. We think that's well penetrated. We do not think we're going to see high growth out of the Crocs silhouette. I think it remains extremely relevant. We continue to drive innovation into that category with new styles. In fact, starting in 2026, we're bringing back our Croc Band, which was a, if you can envision just the clog with the band around the side.
We de-emphasized it a number of years ago because we wanted to focus on the classic. We're bringing that back in a meaningful way across the globe. Historically, that's been a huge product for us. I would say that's different internationally. The clog, and particularly the Classic Clog, which is the iconic product that you can all envisage in your minds, still has a lot of penetration opportunity in many very large international markets, including China, including India, including Southeast Asia. I think if you add up those markets, you're talking about 3 billion people. A huge market. Sandals, which is a category we've been focused on for some time now, is actually showing really strong performance. We talked about it at Q1 earnings. I think we're having a really great sandal season, both here in the U.S. and really strong performance overseas.
Jibbitz, which is our personalization vehicle, is, I think, about, we talked historically about being around 8% of our sales, obviously extremely high margin. We see the personalization trend continue to be super strong around the globe.
Just to follow up, I know you're coming back from Dubai recently with some of your global partners. When you think about international for Crocs, where are you seeing some of the pockets of strength?
Yeah. I mean, I think they're pretty broad-based. As we look internationally, we have a few markets where we think we have our fair share. We kind of think about it as the Crocs brand today has about a 2.5% market share here in the U.S. If I look overseas, if I look internationally, there's a couple of markets where we're already at that. I look at the U.K., I look at South Korea, and I look at Australia. Those are three markets that we're already at or above that market share. I look outside of those three, and I think about China, I think about India, I think about Southeast Asia, the Middle East, and Latin America, and other major countries in Western Europe, France, Germany. Our market share is about a quarter of our target market share.
Those are huge markets, big populations. We have a lot of penetration opportunity. That penetration opportunity exists within our direct markets where we operate directly, like Germany, France, and Japan, where that means we have our teams on the ground. We run a wholesale business. We run a digital business, and we run our own retail. That also exists, as John referenced, with our distributors. We use distributors around the world in markets that we think are perhaps a little bit risky. There is critical social nuance in the market, or they are a little bit small for us to put resources on the ground. That distributor base has really strengthened over the last several years. They are typically family-owner-operated businesses. They are very tied into the markets. They typically operate several brands in the market, have some leverage in the marketplace. They are super excited about their future growth.
Great. Maybe one more topic for Crocs. You have been giving more airtime to social commerce lately. Crocs brand has had incredible success on TikTok. Just maybe share more about why the brand's been successful and how that's contributing to the business.
Yeah. What John's referencing is the Crocs brand is the number one brand on TikTok Shop. TikTok opened TikTok Shop here in the United States, I think in October. Literally just a few months ago, we've been the number one brand on TikTok Shop, number one footwear brand on TikTok Shop since then. In fact, HEYDUDE is number three. Why? A couple of reasons. One is we've been selling on social platforms in China for a number of years now, as have other brands. I think we're very adept in understanding what the benefit of that is and how to do it well and how to do it successfully. What we see is a very strong sales performance. I would say it's probably exceeded our expectations and exceeded TikTok's expectations. Very high margins and high full-price selling.
As we analytically measure the impact of that on our other channels, both digital, other digital channels, wholesale, and our own retail, we can see a very clear correlation and impact. I kind of think about it as marketing that you get paid for. We actually had a meeting two weeks ago with TikTok. They are obviously rolling out TikTok Shop, as you would expect, to a whole host of countries across the world. We will partner with them to be one of the leading brands in that effort. We are very excited about it. We think it is very meaningful for our consumer. We think we have a competitive advantage.
Yeah, that's great. I should mention for the audience in the room here, session3@rwbear.com. If you want to work in a question, I'll get it up here on the iPad. I do want to turn to HEYDUDE. And Andrew, maybe you could talk more about where the brand stands today after some repositioning and cleanup work, and then obviously some green shoots you've seen with the DTC growth and average selling price increases. Maybe an update.
Yeah. I think, yeah, we're really excited about those. We've had, I think, two very strong quarters for HEYDUDE, where we felt like we've exceeded, frankly, our expectations, how we planned the business. That strength has come from DTC, as Jonathan mentioned in his question, both digital and the stores that we open. I think we're just a little over 50 predominantly outlet stores now here in the United States that perform extremely well. They both give us revenue, margin, profits, but also give us a vehicle in a somewhat more fashion-orientated business to close out styles that didn't resonate with consumers. I think it performs an important dual function. I would say the wholesale business still has some work to do. You can see in our underlying business that we are doing that work, but we're not done yet.
I think as I look at the inventory makeup in our wholesale, we will continue to work closely with each of our wholesale partners to clean up existing inventory and really ensure they're making good purchasing decisions going forward. I think we will also be cautious with the HEYDUDE brand relative to the uncertain economic environment. We do not want to get in an adverse inventory position again. We want to make sure that we're in great shape. I would say I am pleased with some of the steps we're making internationally with HEYDUDE. As I look at particularly some of the distributors we're talking about with Crocs, some of the same distributors also operate HEYDUDE. They're making, I think, some very coherent investments in distribution in their markets that are showing also strong signs of early success. Small, but we're pleased.
I think we've still got a little bit of work to do on HEYDUDE, but I would say we are super confident in the brand, in the consumer reaction to the brand, the new product. As we looked at sort of the new product that we put together both for the fall of this year and for the spring-summer season of next year, I think we're very confident in that. Also, we've made some interesting and meaningful market investments already this year. We'll continue to make some in the back half of the year. We're very confident. I would say HEYDUDE today, I think many of our investors are disappointed. I would emphasize that it is an $800 million-ish brand. That's a top 10 global casual footwear brand. There aren't many that are that size. It remains extremely profitable.
We're very happy. We see a strong growth runway ahead of us.
Great. Maybe going back to the topic of profitability. Back in February, really for the first time, maybe I think there was a line in the sand around the EBIT margin that you expected to deliver 24% going forward. A lot's changed since then. You aren't guiding for the year currently. How should investors think about your discussion about protecting margin and navigating the environment?
Yeah. I mean, obviously, we've withdrawn guidance for the year. Unclear when we'll get back to that, to be frank, if the environment continues to be this dynamic. I think what you can be incredibly confident in is the attitude, perspective, and the decisions that we make as a management team will continue to protect gross margin, control costs, and deliver very high levels of profitability. If you look back over the last five years, our EBIT levels and cash flow generation, frankly, has been kind of second to none in our industry. We're extremely proud of that. That's a critical part of our strength that we will continue to reinforce going forward.
Maybe just to follow up one more point on the margin. I know a few weeks ago in early May, you outlined $50 million of incremental cost savings. Maybe just to clarify, is that an ongoing run rate basis that you expect to achieve that level of savings this year? Any further insight to where you're cutting back versus not cutting growth investment?
Right. Yeah. I think that is intended to be run rate by the time we get to the end of the year. Where does that come from? I think it really comes from three big buckets. There was a series of efficiencies that we're able to extract from our kind of distribution and logistics capabilities. There were some headcount reductions. We did reduce some headcount. That is already completed. It was also just rationalization of other expenditures, whether they be sort of IT expenditures or whether they be monies that were paid to vendors for certain services, sometimes eliminating some of those services, sometimes renegotiating those services. I think it was a pretty careful prune of what we're spending and why we're spending it.
I would say we've maintained and actually within that increased investment in what we perceive as critical growth drivers for the future, such as one we already discussed, which was enablement of TikTok Shop in a significant number of countries across the world later this year. Those were maintained and increased. We think it was a very thoughtful and productive exercise.
Great. Maybe turning to cash flow. You touched on it to start, but maybe just share more how you and the board are thinking about the cash generation and how you're using the cash, which has been pretty prolific.
Yep. Number one is we always start with the investments we want to make for growth. From a cash perspective, those are not huge. Our manufacturing, we do not have to invest in manufacturing. I know there are some brands in the industry that do do their own manufacturing. We do not do our own manufacturing. It is all with partners. All the capital that goes into manufacturing is provided by those partners. Those are long-term partners, and we have long-term relationships with them. Where does the cash go? It really goes into stores where we are opening stores, but that is relatively modest. It goes into, I would say, discrete distribution and logistic investments and IT investments. Those are the three places. The stores, obviously, we believe will typically generate incremental revenue and profit. The D&L investments we are making usually reduce costs.
The IT investments obviously give us a sustainable technology platform that allows us to function efficiently and cost-effectively and hopefully drives growth in the future. That is modest. That typically, I think that is just over $100 million this year. That is pretty modest relative to the amount of cash we generate. We have then two leftover priorities, which is one, continue to strengthen balance sheet. Our net leverage is a little over one today. I think we have talked about it being between one and a half as our target. I think in an uncertain environment, we will continue to pay down some debt, particularly so that we are in a really, really strong balance sheet perspective. Obviously, return a lot of cash to shareholders through stock buybacks. I think you saw us do $60 million of stock buybacks in Q1.
We'll continue to sort of throttle the pedal between share buybacks and debt pay down as we go through the year and frankly into the future.
Great. I've got time for one or two last ones. Maybe I'll just throw one out. I've noticed on the app lately for Crocs, there's a new category, the EXP line. Is that anything you're willing to share a little more about?
I can talk a little bit about that. Obviously, Crocs is a very democratic brand. We sell at a sort of $50-$60 price point for the clog. Sandals are typically less than that. There are some markets around the world that are extremely affluent. I was in Dubai last week. That is one of them. That is also in key cities around Asia. There are lots of places where there is a very elevated consumer that is looking for elevated product with more innovation. The EXP is a line of shoes where we are going to do two things. We are going to experiment and look to bring in new product categories where we think Crocs has a license to play in the future. That might be the sneaker category, casual sneakers, not performance sneakers.
We also elevate our existing product through additional treatments, materials, et cetera. We provide more exclusive product. For example, we did a collaboration recently with Swarovski, the crystal company. It took a while to get put together. We had a shoe that sold for $1,200 and was sold out within the week. We had a second tier shoe that sold for $600 and also sold out and was extremely well received. There is a consumer there for that elevated product. We want to make sure that we are serving that consumer.
That's great. I'll end just by mentioning management will be available in the Rockefeller Foyer for a brief breakout session. If everyone could join me in thanking Andrew and the team for joining us.
Thank you.