Okay, we're ready to get started here. Welcome, everyone. Thanks for joining. I'm Jon Komp, Baird's analyst covering the active lifestyle sector. Very pleased to be joined by Crocs and CFO, Patraic Reagan. Welcome.
Great. Thanks, Jon.
Crocs, as many of you I'm sure know, is a company that generates roughly $4 billion of annual revenue from the iconic Crocs brand as well as HEYDUDE. The company's been focused on improving marketplace health and really leaning into product and marketing and beginning to show the fruits of those efforts, especially in the direct-to-consumer channel. Patraic is EVP and CFO, joined Crocs last September.
That's right.
Came from SharkNinja and had a long career before that at Nike.
That's right.
Welcome again, Patraic. I want to start off and really talk about the actions the company has taken starting the second half of 2025 to really reduce inventory risk and start to position the company for product and marketing that's now hitting in the D2C channel. Maybe just lay out the current landscape for the company.
Sure.
We'll go from there.
Yeah. First of all, Jon, thanks for inviting me in and nice to see everybody. Let me start with, in response to your question, the second half of last year was a really important time in the period of our company in terms of setting us up for future growth. For those of you who might not be as familiar with the story, we were at a point in time where we had a little bit too much inventory in the marketplace, and we had to take some short-term, painful decisions to make sure that we positioned ourselves for longer-term future growth. We did that with the focus of knowing that as a product-driven company, that we had quite a bit of new innovation coming in the first part of 2026 for both of our brands.
That kind of level set us in terms of what we needed to do as we turned into 2026. As we've come into this year, what we've been positioning ourselves to do is, number one, being very aware of what's happening from a more macro standpoint. There's pressure on the consumer, although we feel good about our positioning within the consumer space from a pricing standpoint, and a price to value perspective on our product. We also knew that coming in, our industry, footwear, is one that's very competitive, and so our focus on product and innovation always needs to be front and center in terms of what we do. Those actions from last year, that really kind of paved the way to what we're seeing happen in the marketplace in this year.
What we're focused on is really, from a growth-driving standpoint, really a couple things. Number one is, we, as a company, we're known for our Classic Clog. If you close your eyes and somebody says, "Think of Crocs," you're going to view that Classic Clog, 13 hole, which is really our icon. For us, what we're focused on is a couple of things in terms of diversification. Number one is, within the clogs category, which is a growing category globally, we're diversifying within that space. We're the market leader by a pretty significant margin. We drive the innovation. We drive taste in that space. We're really kind of driving continued innovation there. That's one of the reasons why it was so important for us to get the marketplace in a good spot as we turned out at 2025 and into 2026.
The second component is, from a diversification product-wise, outside of the clog business, we're really focused on areas like, for example, sandals, where for the last couple of years, we've been developing our sandals programs, and we're now starting to get to a place where we've got real scale in that. As we go through 2026, we're going to be at a point where we're roughly about a half a billion dollar sandal business across both brands globally. From a footwear perspective, there's not a lot of companies that have half a billion dollars in sales overall. Really from a size and scale standpoint, the innovation that's going on from a product perspective in that space has really been helping to drive growth.
Jon, back to your original question, where we're going, where we're positioned as we turn from 2025 into 2026, it's continued to be driven by focused on innovation on behalf of the consumer.
That's a great way to kick it off, and I know we'll talk more about international too, because I know you're excited on the international side, but maybe sticking with the theme of U.S. and the core Crocs business, maybe just expand a little further some of the changes from a marketing perspective, and then if you're willing to share some examples of the product that's working, and presumably that's in your D2C channel here to start.
Great question. As we think about who we are as a company, number one, at our core, we're a product company, right? As I mentioned, we're very focused on innovation across both brands for our consumer. We feel like we're really well-positioned with some of the products that we're bringing to market. We continue to invest in innovation. It's a priority for us. However, and this is back to your question, Jon, it doesn't do us much good to bring that great new innovative product to market if we're not telling those marketing stories effectively.
What we're doing, and this has been some really exciting work, is we've been on what I would call the cutting edge in terms of digital and social marketing, particularly through some of our marketplace channels as we've been bringing new product to the market and reinforcing who we are as a brand. You can think about this is some of the work that we're investing in, marketplaces like TikTok Shop, and some of the other social selling platforms. We've been the number one selling footwear brand on TikTok Shop for two years. I get the question, "Are you going to remain there?" I'm like, "No, Nike or Adi or somebody's going to come by and just volume-wise be bigger." From an agility standpoint, we're learning, and we're learning quickly in terms of how to engage and communicate with that consumer.
That's been a lot of focus that we've been putting on. We've also, towards the second half of last year, we pulled back quite a bit on our performance marketing spend and investment. For those of you that are familiar with how that works, that's what we call lower end of the funnel. It's expensive way to drive revenue, we've kind of repositioned that into telling more of our product stories and more of our brand stories. That's all happened with a key leadership change that we had in the business is we've brought Terence Reilly back, I think roughly about two years ago, initially, running HEYDUDE.
If you're familiar with Terence and some of his work, you may not be, but probably many of you have got a very expensive Stanley coffee cup or beverage holder, and Terence was really the mastermind of bringing that to life. He worked with Crocs before. He's now back. We're happy to have him, and he's really driving some very focused, and very cutting-edge marketing stories to help us with product.
Maybe to go a little further on the channel performance in North America. Q1 highlighted a pretty big divergence. Crocs direct-to-consumer positive, wholesale is still negative. Just talk about the dynamics across the channels and how that's embedded looking forward as well?
Yeah. I think as we came into the year, again, going back to some of the moves that we made in the second half to make sure inventory was right within the marketplaces, part of what we were really trying to do is make sure that we're positioned well for 2026. As it relates to the channels of distributions that we have, knowing that we are leading through innovation and new product, it was our expectation, and this is what is actually happening, that we would see the acceleration from a consumer standpoint first through our digital and social channels within our D2C business, then within our direct-to-consumer stores. We knew that that kind of ecosystem of direct-to-consumer was going to lead in terms of growth. That's what we saw in Q1.
That's what we're seeing, or that's what we expect to see as we continue to go through the year. We knew that the wholesale channel was going to lag, because that's just how the marketplace works. That's not to say that our wholesale partners are not important. They are critically important to us. We aim, and we leverage our wholesale partners to make sure that we've got our product, both Crocs and HEYDUDE, available to our consumers without friction in terms of having to find us. Wholesale plays a exceptionally important place in how we get that product to consumer. We knew that that was going to be a couple season lag in terms of wholesale partners investing in some of that newness.
We also knew that what we would start to see if we indeed had green shoots in that space was that we would see our at-once business, which is wholesalers being able to make specific smaller orders that would take off before some of the bigger buy investments that they would have, and that's exactly what we've seen.
That's great. Very encouraging. Maybe shifting to international since it's around half of your business.
Right.
I know you're excited. The momentum looks good. D2C was very strong in Q1. Highlight some what gets you excited about the growth in international?
Yeah. I don't know if it's super well-known that half of Crocs' revenue globally comes from international. We've got the beginnings of a very strong footprint internationally. For me, what's exciting is a couple of things. One, the team has done a really good job in terms of planting the seeds of international growth, which I think is, from a business model standpoint, in some of the more developed markets, say, like a France, Germany, U.K., we've gone in owning our business. In some of the lesser developed markets, maybe think Southeast Asia, Latin America, we go in through a distributor model where we partner with a local distributor that knows the market a little bit better. In all those marketplaces, we're still in very much a nascent place of marketplace development.
Just a nice little data point for you all is, China is our second-largest international market, but it accounts for just 4% of our global sales. There's a lot of people in China, there's a lot of feet. Our product plays really well to that consumer. The price is really well-positioned in terms of where we are from a consumer standpoint. We've got a lot of runway internationally with both brands. Crocs is a little bit further advanced in terms of establishing some of those beachheads and kind of leading with product. HEYDUDE was actually a company that was founded in Italy. To date, we have, I think, roughly about $50 million, $60 million in sales internationally for HEYDUDE. We don't really have a presence yet. You can see where that is going to be strategically a step to come.
Jon, coming back to your question, I'm super excited about the international side of our business. We'll see a lot of growth coming from there in both the immediate and kind of midterm.
That's great. Why don't we talk a little bit more about HEYDUDE?
Yeah.
Coming in last fall, your view of the brand, the leadership changes, the state of the business. You've also seen D2C inflect positively there, maybe a rundown of where HEYDUDE stands.
Sure. Yeah. From a HEYDUDE standpoint, I think, again, for those of you maybe not familiar, acquisition that was made three years, I think three years ago, maybe four years ago. Like a lot of acquisitions, there's some growing pains. You kind of straight on after the acquisition, some really strong growth. Now we're in a position where we're kind of right-sizing some of that inventory that's in the marketplace. I think there's learnings around that. Overall, when we look at HEYDUDE, a couple things I'd like to be top of mind. Number one, if we think about HEYDUDE relative to Crocs, HEYDUDE has got a much larger total addressable market, or TAM, in terms of consumer, and so that gives us continued confidence that there is a sizable business there.
Number two is that HEYDUDE, even though we're in the middle of kind of a marketplace adjustment, it's a $700 million footwear brand. Again, similar to my example on sandals, there's not a lot of $700 million brands, so we're already at scale. And we're at scale in a profitable way. HEYDUDE's been profitable from day one and continues to be profitable for Crocs. Then third, I think, where we are right now is, as Jon alluded to, and there's been a few leadership changes. We've brought in a gentleman by the name of Rupert Campbell, a long-term Adidas executive that's driven Adi from a growth perspective in a number of areas around the world. A true inspirational operational leader in terms of marketplace and marketplace management.
He's taken the reins and is driving, also making key investments in that team from a product standpoint, product innovation standpoint, merchandising standpoint, so really kind of building out the core of that leadership team. The third is, within kind of the Crocs HEYDUDE shared service ecosystem, we're really pulling the supply chains for those respective brands more closely together, number one, to gain efficiencies in reference to time and speed to market. With that also comes a significant amount of cost savings and efficiency that help us from a bottom-line standpoint.
Just to follow up on the financial implications for HEYDUDE turnaround. The brand's still declining in revenue, but you guided less of a decline after the first quarter.
Yeah.
I believe you're embedding growth at some point in the second half.
Yeah.
Just confidence getting that brand back to growth, and I won't put you on the spot, but there's some viral elements out there for HEYDUDE today.
Yeah.
Any of that help?
Sure. Yeah, the plan has been kind of a sequential improvement from the back half of last year into the second half of this year. What we've been messaging to investors is that we want the investment community to kind of take stock in that we're doing what we said we're going to do. With HEYDUDE and with some of the stories in Crocs as well, we are doing what we said we're going to do. If you look at the sequential improvement from a revenue perspective for HEYDUDE, we're on a multi-quarter improvement. With that gives us the confidence in the second half that as we guided expectations for the year. We made a clear statement that we would return to growth for HEYDUDE in the second half of the year. That's on track.
The data points and the proof points are out there. We continue to feel exceptionally confident with that. I think Jon's kind of teasing me a little bit here on the virality. We had some fun controversy in HEYDUDE over the last maybe week or so, where our shoes got banned from the, I don't know if it was an international hacky sack tournament.
For those of you who've got kids of a certain age, hacky sack is back in a big way. There's some tournaments going on, and apparently, some of our shoes are designed in a way that give an unfair advantage. We didn't design them like that's just kind of an outcome. We're seizing on the moment in a way that Crocs, Inc. is really good at seizing on viral moments, and it's making a fun kind of play in terms of being banned from hacky sack tournaments. We're just having a little bit of fun with it. It's all really pointed at keeping the brand top of mind for our consumers. It's been a little bit of fun over the last week or so.
I can only imagine the ideas that Terence Reilly is formulating-
Yeah.
for some of the potential there. Maybe spending a minute on the 2026 guidance. Your guidance raise after the first quarter stood out in light of uncertainty, with the Middle East and freight and tariffs and health of the consumer. Just talk about the visibility you have for 2026, the key assumptions, and the confidence to raise the guidance after the first quarter.
Yeah. You're right to say there's a lot going on from a macro standpoint right now. We fully contemplated all of that in terms of our guide. For those maybe not as familiar with the story, some of the headwinds we see in that space are, one, obviously, with the Iranian conflict. We had our distributor stores in the Mid East, many of them shut down, some of them partially operating. We've constrained the flow of inventory into those markets. That has a direct impact, but that was fully contemplated in terms of the guidance that we raised. The second component of that is most all other companies, we're seeing some headwinds from a distribution logistics perspective in terms of fuel prices, both outbound, inbound. Those aren't super significant.
We don't expect them to be super significant from a 2026 standpoint, but we're monitoring it. This, for me, it falls under kind of the work that we have to do. The world isn't getting any less dynamic or less chaotic. These shocks to the system seem to be coming, they used to come once every three or four years. Once every couple of years. Now it seems like they happen every couple of months, if not weeks. From a management team standpoint, we pull that responsibility close to ourselves. We view that as the things that we've got to solve, and not really kind of pine on, "Oh, woe is us. We've got another headwind." We've just got to go out and solve it. That's kind of how we position ourselves from a resiliency and an agility standpoint.
We're really confident that as we continue to go, we don't go forward, we don't know what the next thing is going to be, but we know there's going to be the next thing, and we'll respond to it.
Sticking with margin a bit. I get asked often how Crocs' gross margins are so high, so maybe you could start there about some of the structural gross margin drivers and then really for 2026, you've embedded slight operating margin expansion. Include some discussion around the cost structural changes you've made.
Yeah.
How that's flowing through.
Yeah. For us, our profitability, which is really kind of best in class from a peer set standpoint, it all starts with product and our price to value equation with our consumer. With that and how we're able to engineer, produce at scale our product, we're in a position that we've got really healthy product margins. It kind of all starts there. You heard me earlier in our time together talk about the importance of product innovation. First, important to innovate on behalf of the consumer, but it's also equally as important for us to innovate profitably on behalf of the consumer. We're always obsessing what that price of value equation looks like, and then how that relates to our product profitability. It starts there.
As we look down and through the P&L, there's really three areas that we prioritize from an investment standpoint that we protect. Those are one, product innovation. I've hit that pretty hard, so I won't go deeper into there. The second is marketing. We talked about that a little bit earlier. It doesn't do us any good to tell or develop great product without telling the stories. We've got to educate the consumer in terms of what we're bringing into the marketplace. Very focused on that. The third is continuing to invest in our supply chain. Those three areas are the ones that really get that outsized investment. As we look across the rest of the P&L, that's where we try and are very successful at driving efficiencies to keep our operating margins in a very healthy space.
You see that translate into, obviously, our cash flow generation, which is best in class.
To follow up, I know you took out some costs at the start of the year. Just talk about how those are flowing through, how that impacts your ability to leverage at moderate top-line growth here.
Yeah. Really, two cost-savings initiatives. Well, both kicked off in 2025. Initial $50 million earlier in 2025, and then a second $100 million exercise that was later in 2025 and continues in 2026. Really what it's focused on is just being a leaner, more efficient Crocs. Number one, all of that's been identified and actioned, so that's check the box. The second component of that is that we'll drop some of that to the bottom line. We'll reinvest some of that in the business, and we're also looking for additional opportunities to continue to reinvest. So it's another example of being able to quickly and nimbly adapt to bring a little bit more efficiency into our P&L without sacrificing and actually prioritizing the investment that we make in product innovation, marketing, and supply chain.
Not to save one of the better topics for last, but in the last few minutes, maybe talk about the cash generation, the capital allocation strategy. You're at the lower end of your target net leverage ratio, so how much cash are you going to generate here, and what are you going to do with it?
Yeah. We've got a very powerful cash generation machine, and it starts really with the profitability of our products. This is an area that I don't feel like we get enough credit from an investor standpoint. We're trying to communicate this more effectively. I think what's happened over the years is, over the last few years, a lot of our cash generation has gone to pay down the debt associated with the HEYDUDE acquisition. It was kind of like cash that was being deployed, but obviously, in a way that wasn't really returning value to shareholders at that point in time. We're now in what I call kind of the Goldilocks zone of our leverage. We don't have too much, we don't have too little. I feel really good about where we are as a consumer company with the level of leverage we have.
We're at the lower end of our target of 1-1.5x , so feel great there. What we've been able to do over the last six, 12 months or so is aim the power of that cash generation to truly returning value to shareholders through buybacks. Over the course of the last year, we bought back roughly about 10% of our outstanding shares. We are positioned to be aggressive in the space in 2026. We don't formally guide our buyback program, but we've been aggressively in the space post Q1. It's something that is looking at our stock and personally believing it's a buy and that we're undervalued, we'll continue to be in the space.
Couldn't think of a better way to end.
Okay.
Patraic, thank you.
All right.
I think we covered a lot of ground, and I appreciate you being here today.
Great. Thanks, Jon.
Patraic will be with us over in the Astor Suite for a few minutes afterward for a breakout session. If you could all join me in thanking Crocs, Abby, and Patraic.