Crocs Inc

NASDAQ:CROX

Earnings Call Transcript 2021-Q1

[Operator]

Thank you for standing by, and welcome to the Crocs, Incorporated First Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions]

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

[Corinne Lin, Vice President and Corporate Finance]

Good morning, everyone, and thank you for joining us today for the Crocs’ first quarter 2021 earnings call. 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 on the call today are Andrew Rees, Chief Executive Officer; and Anne Mehlman, Executive Vice President and Chief Financial Officer. Following the prepared remarks, we will open the call for your questions.

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

[Andrew Rees, Chief Executive Officer]

Thank you, Corinne, and good morning, everyone. We are thrilled with our Q1 results. The strength of the Crocs brand is exceptional, experiencing growth across all regions and all channels.

In Q1, our global brand momentum continued to strengthen, and we benefited from economy starting to emerge from the pandemic and government stimulus in select important markets. I'm proud of our performance, and I'm incredibly confident in our ability to deliver sustained highly profitable growth.

Highlights from the first quarter of 2021 include for the third consecutive quarter, we achieved record revenues, with first quarter revenues of 460 million up 64% versus prior year. Our Americas business had another tremendous quarter, with revenues increasing 87% and DTC revenues growing 131%.

Our EMEA business has increasing momentum with 49% revenue growth, and Asia showed strong double-digit growth of 26% in the quarter. Digital grew 75% to represent 32% of total revenues.

Adjusted operating income was 126 million, increasing by approximately 100 million, and adjusted operating margins expanded to 27%. Adjusted diluted earnings per share grew from $0.22 to a quarterly record of $1.49. On top of these outstanding financial results, the Crocs brand ranked the highest it has ever been in Piper Sandler Spring Taking Stock with Teens survey.

The strength of our brand remains unabated. We continue to drive brand relevance and consideration through a multifaceted marketing approach that leverages digital and social marketing, celebrity and influencer campaigns and collaborations.

We kicked off 2021 with an award-winning collaboration with French EDM artist, Vladimir Cushman that featured his signature, Skull Mask. To celebrate St. Patrick's Day, we posted a rainbow of Crocs and a pot of Jibbitz across social media and released Lucky Charms Jibbitz that quickly sold out.

In March, we launched a second global collaboration with Justin Bieber and his Drew House brand that confirmed Crocs with socks are indeed better together. And to continue accelerating across brand in China, Justin Bieber sent fans on a mission to locate arcade games in nine cities, giving them a chance to win free Crocs, Drew House plush toys and socks.

We are incredibly proud that our Crocs brand and business has a positive impact on our communities. Most recently, we were pleased to partner with the United Nations Foundation as it launched its 2021 #EqualEverywhere campaign to promote gender equality around the world.

From a Free Pet Health Care program that allowed us to provide comfort to those on the front lines to partnerships with Feeding America, the NAACP, UNICEF and Glad that let the world know, we are all in this together. We have accelerated our mission of everyone comfortable in their own shoes by remaining focused on doing the right thing.

In addition for doing the right thing for our communities, we strive to do the right thing for our employees. We recently raised entry-level wages to an average of $15 per hour for our frontline employees in our U.S. distribution center and U.S. retail stores in recognition of their contribution to the success of the Crocs brand.

We were honored last week to be named to Forbes' Best Employers for Diversity for 2021. We were also recently named to Fast Company's annual list of the World's Most Innovative Companies for 2021 that recognized organizations that not only found a way to be resilient in 2020, but also turn those challenges into impactful initiatives.

Our ability to make a difference also resonates with our consumers, including teams who are socially and environmentally conscious. I'm confident that the strength of the Crocs brand and our mission of everyone comfortable on their own shoes will continue to drive accelerated growth this year and beyond.

Now let's turn to first quarter operating highlights. From a product perspective, we experienced strong growth in our key product pillars: Crocs, sandals and Jibbitz. Sales of clogs were exceptional this quarter, increasing 87% year-over-year, representing 76% of total footwear revenues versus 65% last year.

We continue to experience success with seasonal offerings and trend-right drops such as out-of-this-world and marble prints. At the same time, sandal revenues increased 17% to represent 17% of footwear sales versus 24% last year.

We are very encouraged by our initial results of our sandals that feature personalization, including our Classics Y and the newly-introduced Classic 2-strapped sandal, while we expect clog growth to outpace sandals this year over the longer term sandal will grow faster than clogs. Jibbitz sales continues to be outstanding, more than doubling for the quarter versus last year as global personalization mega-trend continues.

From a channel perspective, global DTC revenues, which include revenues from e-commerce and company-owned retail stores, grew 93%. Both e-commerce and retail had extraordinary performance, and this was our 16th consecutive quarter of double-digit e-commerce growth.

Digital, which combines e-commerce that has reported in DTC and e-tail that is reported in wholesale, grew 75% to represent 32% of our first quarter sales compared to 30% last year. Digital remains our top priority, and our digital presence remains a competitive advantage relative to other footwear brands.

Our wholesale channel, which includes brick-and-mortar, e-tail and distributors, grew 50% versus prior year, fueled by growth in all segments. E-tail and out top 20 brick-and-mortar accounts experienced exceptional sell through. Distributers had the highest growth as they replenished inventories in preparation for a strong 2021.

With our continued momentum, we remain focused on positioning our brand for long-term sustainable growth. After careful consideration, we recently decided to prioritize wholesale partners who are aligned with our brand strategy and desired positioning in the market place.

As such, we began to culminating select North American relationships, a strategy many major brands have also used to maintain strong marketplace health. Looking forward, we will remain focused on our strategically important accounts comprised of leading e-tailers, sporting goods and family footwear and specialty footwear retailers.

Our record revenues in the first quarter were achieved despite challenging global logistics that impacted many industries around the world. We are not immune to these challenges, with blockage of the Swiss Canal and significant bottlenecks in West Coast ports leading to delays. Global Logistics are expected to remain congested, and we are being proactive as possible.

Our new EMEA DC in the Netherlands has opened, and the transition is running smoothly. The expansion of our U.S. DC is also proceeding as planned. These investments will support our competitive advantage in digital and our future growth.

Finally, profitability was exceptional as we achieved record quarterly adjusted operating margins and record quarterly adjusted EPS. We are incredibly optimistic about the balance of 2021 and have substantially raised guidance for the year.

Before I turn the call over to Anne, I want to express my gratitude to the entire Crocs organization for their dedication to our brand and to our communities. I'm proud of how they have executed as a team and the results that we have delivered for our employees, our customers and our shareholders.

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

[Anne Mehlman]

Thank you, Andrew, and good morning, everyone. I will begin with a short recap of our first quarter results. For a reconciliation of the non-GAAP amounts mentioned to their equivalent GAAP amounts, please refer to our press release.

Our first quarter results were extraordinary, fueled by all regions and channels, we delivered record quarterly revenues. Profitability was outstanding as we expanded gross margins, leveraged SG&A and increased earnings per share. First quarter revenues came in at $460.1 million compared to $281.2 million in the first quarter of 2020, a 63. 6% increase or 60.5% on a constant currency basis.

We sold 25.9 million pairs of shoes, an increase of 51.5% over last year's first quarter. Our average selling price during Q1 increased almost 8% to $17.64, with the increase attributable to increases in DTC revenue as well as fewer promotions and discounts. As we have shared previously, we look at our brand positioning market-by-market and in Q1, realigned pricing on certain products in select markets globally.

Now let's review our results by region. As Andrew mentioned earlier, the Americas had another exceptional quarter, with revenues at 276.4 million, up 87. 1%. DTC growth of 131.3% was phenomenal.

Strong traffic conversion and ATV as well as store closures last year contributed to triple-digit growth in both company-owned retail stores and e-commerce. Wholesale growth was 59. 4% as high sell-through more than offset challenging logistics.

In Asia, Q1 revenues were $82.6 million, up 26.2% or 20.1% on a constant currency basis from last year's first quarter. DTC increased 20.6%, while wholesale grew 28. 6%. Digital revenues grew 60.1% and penetration increased significantly from 24.4% to 30.9%. We saw balanced growth across most of our key countries. India revenues were standout, increasing triple-digits Distributors also returned to growth, albeit at a slower rate.

EMEA revenues increased 48.8% or 41% on a constant currency basis to $101.1 million, with growing brand heat offsetting any global logistics disruptions. DTC revenues increased 29.2%, with e-commerce strengths driven by higher traffic and ASPs, partially offset by retail declines due to COVID-19 closures.

Wholesale revenues grew 52.7%, fueled by strength in e-tail and distributors. Our EMEA business overall continues to benefit from our focus on digital commerce, which represented 41.8% of EMEA revenue this quarter versus 38.2% last year.

Our first quarter adjusted gross margins were 55.2%, up 720 basis points from last year's 48%. Currency favorably impacted margins by approximately 100 basis points, while the majority of the improvement was driven by fewer promotions and discounts, channel mix and supply chain efficiencies.

Our adjusted SG& A improved to 27.9% of revenues versus 38.7% in last year's first quarter. The decrease in adjusted SG&A rate is a result of strong sales growth and operating leverage. We realized significant leverage even as we continue to invest to support our strategic initiatives.

Our first quarter adjusted operating income increased nearly fivefold to $125.7 million versus $26.4 million last year, with robust operating profit growth in all regions. Adjusted operating margin rose from 9.4% to 27.3%, benefiting from gross margin expansion and SG&A leverage on strong sales growth.

For Q1, we recorded $24.2 million of income tax expense, with an effective tax rate of 19.7% versus 40.9% last year. First quarter non-GAAP adjusted diluted earnings per share increased to $1.49 compared to $0.22 a year ago. Our liquidity position and balance sheet remains strong. We completed the quarter with $255.9 million of cash and cash and equivalents.

In addition to $499.7 million of borrowing capacity on our revolver in March to opportunistically take advantage of historically low interest rates, we issued $350 million in 4.25% senior unsecured notes due 2029 and used a portion of proceeds to repay the balance on our senior revolving credit facility.

During Q1 and excluding the impact of the final ASR share delivery that we entered into in Q4, we repurchased 600,000 shares for $50 million at an average price of $76.95 per share. This month, the Board approved an increase to our repurchase authorization, such that $1 billion remains available today for future repurchases.

Inventory at March 31, 2021, was $196.5 million, up from $195.8 million in the first quarter last year. Inventory was lean throughout Q1, and we ended the quarter with higher in-transit inventory due to global logistics challenges.

Turning to the future, I would like to share our current outlook for the second quarter and full-year 2021. For Q2, we expect revenue to grow approximately 60% to 70% and adjusted operating margin to improve to between approximately 21% and 23%. Strong growth is expected in all regions as brand momentum continues and we anniversary some COVID-related closures that were most prevalent in the second quarter of 2020.

Barring a reversal in the pandemic recovery trend, we expect 2021 revenue to grow between 40% and 50%. As revenue grows, we expect to be able to leverage SG&A, leading to adjusted operating profit margins of approximately 22% to 24% for 2021.

We now expect our underlying non-GAAP tax rate to be approximately 20%, which is higher than previous guidance due to greater-than-expected profit in our U.S. business. Our GAAP tax rate will also be approximately 20%, which is lower than previous guidance due to the release of additional valuation allowances following greater-than-expected profit in our international businesses.

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 will turn the call back over to Andrew for his final thoughts.

[Andrew Rees, Chief Executive Officer]

Thank you, Anne. Consumer demand for the Crocs band remains exceptional as you can see from our first quarter results and our increased guidance for 2021. We have a tremendous momentum in our business, and we are excited about the long-term future of our brand.

Operator, please open the call for questions.

[Operator]

[Operator Instructions] Your first question comes from the line of Erinn Murphy from Piper Sandler.

[Erinn Murphy, Piper Sandler & Co.]

Great, thanks good morning and really incredible job to the whole team there. I guess my first question is on what you are seeing currently at wholesale between sell-in and sell-through and I was pretty surprised by how lean inventory was, but you still have incredible Q2 guidance. So could you just talk a little bit about kind of the balance between the two right now? And then maybe, Andrew, can you share a bit more about kind of the timing and maybe of the strategic pullback at wholesale, what type of account should we expect that you are kind of pulling back from? And how is that kind of contemplated in the full-year guidance?

[Andrew Rees, Chief Executive Officer]

Great, a lot of questions there, Erinn. No, a pleasure, pleasure. So from a wholesale perspective, look, we are seeing very, very strong sell-out, right. So we continue to see strong sellout, we have seen that strong both quarter. Frankly, it was also strong last quarter.

In terms of sell-in, that is also strong. As you can see in our kind of revenue growth from a wholesale perspective, 50% growth is very, very strong, particularly strong in North America. That is affected by shipping delays. There are a great deal of logistics issues around the world, as I'm sure you are well aware of, but net-net, we are still able to achieve that growth, and we are able to keep our wholesale partners.

Certainly, in stock, probably not in stock to the degree they would like to be, quite frankly. From a timing of an overall inventory balances, yes, the inventory balance is relatively flat from last year, but don't forget that was an elevated position.

So if you compare it to end of Q1 2019, I think that will be about a 50% growth in inventory, right? So as you look at inventory relative to future guidance, we still believe we are in good position to meet the guidance that we have provided.

In terms of the actions and the work that we have done with wholesale partners, that is really in the broader context of our marketplace management. So if you think about earlier this year, we instituted MAP pricing on select styles here in the U.S., and we are really focused on making sure that we have a healthier long-term marketplace, particularly for our core classic product which is obviously the backbone of our brand.

And so we made the decision to pull back from certain wholesale partners. I would say these are generally partners who didn't feel like they were consistent with our future strategy. And I think it is really in the context of our broader marketplace management strategy that we are working through and with that, all put us in a great place for the future.

[Anne Mehlman]

And just to clarify, the 50% inventory for - is Q2 balance versus Q2 2019.

[Erinn Murphy, Piper Sandler & Co.]

Got it. No, I appreciate that. And then just my second kind of question is around pricing increases. We picked up at the end of March; you were taking pricing here in North America in the core classic. It feels like the messaging was a little bit different, Andrew. I think earlier around ICR, it seemed like you guys were kind of tapped out at where pricing could be here in North America, so I guess we are a little surprised to see that. So curious what you are seeing kind of post the pricing actions and then what percent of your higher guidance today contemplates this pricing increase? Thank you.

[Andrew Rees, Chief Executive Officer]

Yes. So let me let Anne address what percent of - the proportion of our guidance that is impacted by the pricing increase. But before we do that, yes, in terms of the pricing impact, yes, it takes some pricing increases this quarter, classic and I would say derivative and related products. We have a lot of products that ladder together, so we moved actually quite a few products. That was really based on what the impact the market-by-market around the world.

It was here in the U.S. that were also highlighted within other markets around the world as well. The impact of those price changes will take anywhere between six to nine-months to flow through to our overall financials.

As we look at pricing, we are really looking to make sure that we: a, number one, given incredible value to our consumers, that is the first thing that we are focused on; the second thing that we are looking at is appropriately matching supply and demand, and we really felt they can have an opportunity to take some pricing action.

We think that pricing action has been well received. We monitor that closely in our DTC channel. We also monitor closely with our wholesale partners, so we feel like it has been well received. But we will continue to monitor as time goes on.

[Anne Mehlman]

Yes. And then just on the guidance piece. So I think, obviously, the increase in guidance does reflect the pricing increases that we took, but it also just reflects the increasing brand momentum because our branch continues to accelerate. I think we have really seen the over-performance in Q1.

We expect a strong Q2. And then we have more visibility into the back half, and so that really is the reason for the increase in guidance. I think that we have gained more confidence now that markets are reopening globally. And the health of the U.S. consumer is obviously continuing to improve, which seems to have been supported by governments -.

So I think it is a mix of those pieces. In addition to that, we also have evidence that the brand trajectory and EMEA was up almost 50% in the quarter is following what we have seen in the U.S. So it is a mix of price, but it is also volume. So it is a mix of both of those from a guidance increase perspective on the revenue side.

[Erinn Murphy, Piper Sandler & Co.]

Thank you both and I will hop in. thanks so much.

[Andrew Rees, Chief Executive Officer]

Thanks Erinn.

[Anne Mehlman]

Thanks Erinn.

[Operator]

Your next question comes from the line of Jay Sole from UBS. Your line is open. Please ask your question.

[Jay Sole, UBS Investment Bank]

Great, thank you so much. I want to ask about sandals. I think I heard you mention that sandals grew 17% in the quarter. Can you talk about if - how you view that result, were you pleased with that? And what signs did you see that give you confidence that you see long-term growth potential in sandals to help you capture bigger market share in that $30 billion global category?

[Andrew Rees, Chief Executive Officer]

Yes. We saw a lot of signs, Jay, that were very encouraging. So I think we were very pleased with the 17% growth. It is obviously behind our clog growth. And as we said earlier in the year, we do expect sandals to grow less quickly than clog this year. But over the long-term, we expect sandals to be a higher-growth category than our underlying clog business.

The signs that we saw that were particularly encouraging, I would say, number one, personalization, so the Jibbit-able or the personalizable sandals that we released last year and this year continue to do extremely well. So classic slide we released last year that is really strengthening this year. The 2-strap classic and that we released this year has had a very strong kind of initial introduction.

So personalization of sandals is definitely working really well with our - for consumer, and so we are very pleased by that. In addition to that, I would say the reintroduction of some major franchises that we launched last year into the sort of the core of the pandemics so Brooklyn to Luke and Monterrey, as we have reintroduced them this year a few new colors, but frankly, a lot of the same products are also doing really well.

So if you look at the combination of personalization, you look at our other core platforms, we feel really optimistic about sandals. And as we look to the future, you mentioned in your question [indiscernible] global addressable market - so I’m confident about the future it this category.

[Jay Sole, UBS Investment Bank]

Great, Andrew. That was real helpful. If I could ask you 1 more. The brand relevance just to continue to increase. Can you just talk about what some of the key drivers were some of the key actions that you took in the quarter that continues to drive the incredible momentum behind the brand right now?

[Andrew Rees, Chief Executive Officer]

Yes. I think in a nutshell, I would say it is probably three things: it is product, marketing and marketplace management, right. So number one, I think we continue to deliver to the market, fresh and innovative product, right and first and innovative for us can be as simple as the right color and the right graphic.

So we have some of our new colors in classic definitely trend right, definitely in sync with whether the consumer is performing well. Graphic is performing well, so that is an innovative product and as we already talked a little bit about, sandals. I would say marketing, the integrated marketing program, our use of celebrities, our use of collaborations, our use of social media, amplifying that around the world, both here in this country.

But also, frankly, in China and all parts of the world has been really important and then increasingly, our marketplace management efforts here in the United States and in our key overseas markets, where we are being very thoughtful about where our product shows up, how it is priced, what supply we put into the market so that we maintain a really profitable business for us, but frankly, also a very profitable business for our wholesale and distributor partners as well.

[Jay Sole, UBS Investment Bank]

Got it. Thank you so much.

[Andrew Rees, Chief Executive Officer]

Thanks Jay.

[Anne Mehlman]

Thanks Jay.

[Operator]

Your next question comes from the line of Jonathan Ops from the Crocs. Your line is open. Please ask your question.

[Jonathan Komp, Robert W. Baird]

It is Jon Komp from Baird. Just if I could start 1 follow-up on the pricing question, I know you mentioned labor and some wage increases. There has been maybe some questions about resin input costs, too. So is there any sort of inflationary offset for the pricing you have taken? And any thoughts on updated targets for gross margin for the year?

[Anne Mehlman]

Yes. So good question. We are seeing a little bit of inflation, as we talked about. I think the biggest pressure right now is really on grade, both on the inbound and outbound side. We also anticipate some labor cost pressures. So in key manufacturing origins, we haven't seen that yet, but we do anticipate that coming.

And also in our DCs, as Andrew tapped in his prepared remarks, we did actually raise some salaries and wages there. So our input costs are a small percentage of our overall product costs, but we are seeing higher commodity costs due to supply and demand imbalances. That is also a little bit of an offset.

And I will say, we have incorporated all of that into the guidance perspective. And our gross margins, we do expect to be up year-over-year, and you can see that kind of coming through as you sign in Q1, so we do expect to have good gross margins for the year.

[Jonathan Komp, Robert W. Baird]

And just 1 more clarification, I don't know if Asia Pacific was mentioned for pricing at all, if that market recovers, would that be something you might look at beyond 2021 or any thoughts there on the geographic reach of the actions you have taken so far?

[Andrew Rees, Chief Executive Officer]

Yes. So we have taken some pricing trends in Asia already, Jon, in some of our core markets, so some of that was done this year already. But I do think in the future, there is potential for price as the brand continues to strengthen in key Asian markets.

[Jonathan Komp, Robert W. Baird]

Okay. Excellent and then just one broader question for me. I know, at some point, we will be having a broader discussion during an Investor Day, but when you think of this year's performance and the new guidance to get back to low to mid-20% adjusted operating margin, how should we think about the broader context of this performance and is there anything that you see this year setting sort of a high or unattainable bar going forward or do you think there is good opportunity to maintain and grow margin looking ahead?

[Anne Mehlman]

Yes. So obviously, we haven't given long-term guidance. I think we are incredibly optimistic about what we are seeing in the brand. As we have kind of talked about the pieces, we think gross margins are largely sustainable; we have done a lot of work around that.

And then from an SG&A perspective, we have always said we have less been able to leverage the increase in volume because our business model is created that way. So we think those pieces won't change, but we will obviously look forward to putting out some longer-term guidance at the back half of this year during an Investor Day.

[Jonathan Komp, Robert W. Baird]

Understood, I just look forward to that. Thank you.

[Anne Mehlman]

Thanks, Jon.

[Operator]

Your next question comes from the line of Sam Poser from Williams Trading. Your line is open. Please ask your question.

[Sam Poser, Williams Trading LLC]

Parts of pretty much everything has been answered, but I will try to - number one, the closures, you mentioned that those retailers that you have decided to shut down do not fit your long-term plans or the way the brand was being presented. Can you tell us what that expectation is and what that is that you want from these partners? Do they all have to be large retailers now or is it digital, is it brand presentation, digital abilities and so on and so forth within those retailers that you decided to close?

[Andrew Rees, Chief Executive Officer]

Yes. I mean, I think - so I think the way I would probably answer that, Sam, is I say, look, there are certain categories of resellers that we have real stronger ability. We have been really clear about that over some feedback yet. So I really clarify a period of time.

So e-tail, sporting goods, family footwear and large specialty chains, we are fundamentally partnered by retailers are going to win in the long-term, and those are formats that we think make sense to consumer over the long-term.

In addition to that, we are looking to make sure that we are well in place in strategically important more retailers whether they are Tier zero influential accounts or regional accounts that have strong penetration in the local markets.

We are less interested in undifferentiated small players that don't have particularly good service levels or in-store standards and potentially are taking advantage of some, I would say, digital distribution that we don't think is accretive to the brand. So it is really kind of putting resources, putting our time and energy behind just the retailers which we think are going to be strategically important in the future.

[Sam Poser, Williams Trading LLC]

Thanks. And then given the port - the supply chain delays and so on, is any and you mentioned some of the cost increase would go to help your - some of those logistics. Does some of this price increase will go to possibly air trading goods to play catch-up so you can service some of these businesses better as you await product to come in that is on the water right now?

[Anne Mehlman]

Yes. Yes, that is absolutely right. I mean I think we are very, I would say, focused on not using airfreight ever possible, obviously, especially given air freight costs are even more elevated than what we have seen in the past. But we will selectively airfreight goods in order to get them in quicker, particularly where we are really lean. So we have been doing that that is incorporated in our guidance. We still expect gross margin. So yes, part of the price increases will offset some of the airfreights that we will need to use.

[Sam Poser, Williams Trading LLC]

And then lastly, China, you talked about you expected China to come - really turn the corner for next year. Is there anything happening there, any changes there, any improvements you are seeing there that are better than expected that might make some of that happen this year?

[Andrew Rees, Chief Executive Officer]

I would say from a China perspective, Sam, we are definitely on track. Look, we feel really good about the plan we put in place. We are tracking into that plan, all the KPIs by channel and make a lot of sense and we are right where we should be.

So I would say is broadly on track. I would say a few things we were really pleased with the Justin Bieber launch in China that went exceptionally well. He resonated, and the activations that we did resonated probably had one of the fastest sellouts and we looked at our sell-out time across the globe.

We are certainly getting some traction in social media in China with some of the things that we are doing and trying to be innovative. I would say our partner transitions are going well. The new concept stores that we both in are clearly resonating, and personalization is at the forefront of those stores. So I think we are definitely on track. I wouldn't say that we are going to see faster acceleration this year.

[Sam Poser, Williams Trading LLC]

Thank you very much and continued success.

[Andrew Rees, Chief Executive Officer]

Thank you, Sam.

[Anne Mehlman]

Thank you, Sam.

[Operator]

Your next question comes from the line of Susan Anderson from B. Riley. Your line is open. Please ask your question.

[Susan Anderson, B. Riley Securities, Inc]

Hi good morning, nice job on the quarter. I'm curious in Europe if you have seen the retail part of things or the wholesale stores to sequentially improve into April as it sounds like things are starting to open up there and then also if you could talk about maybe which markets are still shut down for you in Europe?

[Anne Mehlman]

Sure. Yes. We don't comment on inter-month movements and kind of during the quarter. But I will say from a Europe perspective, one of the best things about our EMEA business is actually very high from a digital penetration standpoint.

So even though most of our stores in Western Europe were shut down in Q1, we still saw a really strong trajectory both on our retail platform and on our own e-commerce, so driving that 50% growth as well as distributors in Europe as we have seen pretty market improvement in some of our distributor markets in India.

And so obviously, we are seeing things kind of vary from an opening up perspective there, but again, we don't have that many retail stores in Europe, so the underlying trajectory that is driving EMEA is really the digital side of things.

[Susan Anderson, B. Riley Securities, Inc]

Great that is helpful. And then if I could just add a follow-up on the collaboration front. I'm curious if there is any, I guess, quantitative details around new customers coming in as you do these collaborations and I guess, just drawing buzz to the brand and driving excitement with existing customers and then also on the sandal front, I'm curious if there is any plan to do any collaborations with the sandals to kind of drive excitement around those products?

[Andrew Rees, Chief Executive Officer]

Yes. Let me start with the last piece because that is easy. It is yes, absolutely. We will see a number of collaborations in 2021 that are focused on sandals. So yes, I think that is definitely coming and I think really important. And I would also say some of our super high profile collaborators will be on the sandal for the rest of the year.

In terms of new customers and us, et cetera, from the collaborations, it is really a combination, and I would say each one is unique, right and actually design that way, right. Some are designed to have an opportunity to attract new customers, acquire new customers, and the mechanism of releasing these collaborations does allow you to capture the customer iteration for those new customers and be able to market them in the future.

And some of them are designed to be more, I would say, maybe controversial is not the right word, but more kind of interesting and buzz-worthy. So it is really a tapestry that we try to put together, and so it really works from both perspectives.

I think one other thing that you would note in 2021, we will do more international collaborations. We have already released a number internationally, and we will do far more internationally, both in Europe and in Asia this year. And I think you may have noticed on Sunday night that Quest Love was also wearing one of our shoes on the Red Carpet at Oscars.

[Susan Anderson, B. Riley Securities, Inc]

Yes. Great. That is very helpful. Good luck the rest of the year.

[Anne Mehlman]

Thank you.

[Operator]

Your next question comes from the line of Mitch Kummetz from Pivotal Research Group. Your line is open. Please ask your question.

[Mitchel Kummetz, Pivotal Research Group LLC]

Hi thanks for taking my questions. Anne, you mentioned that part of the uptick in guidance is just a better outlook for the back half. And just I want to kind of run some numbers back of the envelope, it looks like for the back half, you are looking for about 30%-ish sales growth, which is not as strong as the first half, but on a two-year basis, it looks like it is 70% plus which is actually stronger than the first half. And so I'm hoping you could just tell us what gives you the confidence in that is because the brand is becoming more of a back-to-school brand because expect big things for lining clogs in the fourth quarter? And if is there anything on the visibility side that you can sort of support that what you are seeing in the fall order book? Just anything there would be helpful.

[Anne Mehlman]

Yes. I mean, again, I think, Mitch, we are really seeing that growth momentum continuing to accelerate both in the U.S. and overseas which is really exciting for us. I think our distributor business and the Asia, while still down for material reasons is starting to increase again, our EMEA distributor business is positive. So we are seeing all those really good signs.

Obviously, we had huge direct-to-consumer outperformance in Q1 which is our smallest direct-to-consumer quarter, so that really gives us confidence. And I think we do have more back half visibility as well as just seeing how the U.S. consumer is responding to stimulus and other things and what they are reopening. I think all of those things lead us to believe that, that trajectory only continues to accelerate. So we -this as the confidence to raise our guidance. We are really pleased with that.

[Andrew Rees, Chief Executive Officer]

Yes. From a product perspective next week, no, we are definitely optimistic about lifecycle because it is an important paper brand. And so that does help support our business in the back half.

[Anne Mehlman]

And then finally, the pricing increases will actually flow through the revenue as well as margins. So those were also incorporated into the updated guide.

[Mitchel Kummetz, Pivotal Research Group LLC]

Okay. And then is there any way to isolate the impact of stimulus on the quarter and when you think about - it was something that occurred really, I guess, a little bit in January, but then more so in March, and that is continued into April. Do you think stimulus should be equally beneficial in the second quarter is the first quarter? Or is it weighted more towards one or the other, do you think?

[Anne Mehlman]

I'm not sure about we did more towards the first and the second quarter, but we definitely saw an impact. I mean I think it was pretty clear and from what I've been reading, it looks like others have as well. So certainly, the consumer seems quite buoyant right now in the U.S., and we definitely saw an impact from stimulus.

[Mitchel Kummetz, Pivotal Research Group LLC]

Okay. And then lastly, Andrew, on sandals, you mentioned, it sounds like the slide, the personalization side of sandals is really what drove the quarter. But then you also mentioned the reintroduction of some franchises like Tulum and Brooklyn also did well. I'm curious if you can maybe speak to the trajectory of the sell-through that you are seeing there. I would guess that January and February probably weren't great months for those kinds of franchises. I wouldn't think that maybe the sell-in on the order book was that great there, but now we are getting into the warmer months, and things like bellbottom denims trending again, that is good for wedges. Anything that you are seeing there kind of on the trajectory side that would speak to your confidence in those more fashion franchises as we get further into the sandal season.

[Andrew Rees, Chief Executive Officer]

Alright. So there is quite a lot there. So what I would say probably is, look, sandal delivery and the quantum of sandal sales absolutely increases if you go from the back end of the first quarter into the second quarter, right. That is just kind of the natural seasonal cycle. So we are certainly seeing more deliveries, and we are certainly seeing the business accelerate.

I would say the personalize that was, frankly, did well out of the gate - and I think one thing that we are seeing in some components of the sandal business, particularly slide and potentially the 2-strap, it is pretty seasonal. That consumer that is wearing it is wearing it with and without sock depending on the season. So we are seeing that be more seasonal in the future, and we think in the future, we think the sandal overall sales of business probably is a little less seasonal than it is.

I would say, and 1 thing in addition I would say is, in the quarter, I think the new introductions like personalized and the reintroduction of clogs drop, they were both components in terms of the driver of the business. It wasn't just strong based on the personalized sandals, both did well.

[Mitchel Kummetz, Pivotal Research Group LLC]

Okay. Alright, thanks good luck.

[Anne Mehlman]

Thank you.

[Operator]

Your next question comes from the line of Laura Champine from Loop. Your line is open. Please ask your question.

[Laura Champine, Loop Capital Markets LLC]

Thanks for taking my question, it is really about operating expense leverage and especially, how are you planning your sales and marketing expense this year to support that very strong growth that you expect?

[Anne Mehlman]

Yes. It is a great question. So we are obviously pleased to leverage SG&A, and we talked about that on the last call that we would leverage SG&A. Q1 was probably a little bit lower from an SG&A standpoint just because our marketing usually kicks off - our marketing campaigns really start off in Q2, so we do expect that to increase as well as we have increased some wages for our frontline employees, and we will continue to invest in our key initiatives, right, that we have laid out, so that is sandals, that is China, that is digital and then relative product and marketing. And we will see those costs start to layer in throughout the year because the big focus is obviously investing to support our growth for next year as well.

[Laura Champine, Loop Capital Markets LLC]

Got it. So is it possible to give sort of a range of sales and marketing expense increase year-on-year or to talk about how it layers in seasonally?

[Anne Mehlman]

I definitely think it all, again, increase in Q2, so if you kind of - last year was a weird year, so I kind of throw that one out and go back and look at 2019 and kind of think about how SG&A kind of walks from a quarterly spread, and I think that will help, because we definitely expect it to increase quarter-over-quarter, and we do expect to invest in marketing. So we will continue to see that increase, and we can go back and look at our historical marketing costs to have been right around just under 7% of SG&A for revenue, sorry, yes.

[Laura Champine, Loop Capital Markets LLC]

Got it. Thank you.

[Operator]

Your next question comes from the line of Shin Anand from Stifel. Your line is open. Please ask your question.

[James Duffy, Stifel, Nicolaus & Company, Incorporated]

It is Jim Duffy from Stifel. Great execution, no doubt a lot of hard work behind this. I want to take a step back with this in mind, I'm hoping you guys can talk more about the infrastructure to support the growth. You have outlined sightlines to a $2 billion business this year. That is a big jump in just two-years from about 740 million. Can you talk about scaling manufacturing capacity to support this, have you taken on any new partners and I know you have the new distribution centers, are there any gaps in the infrastructure that are of particular focus as you look to support that higher revenue run rate? And then I'm curious, as you exit the year, are you still playing catch-up on infrastructure and you feel the infrastructure is in place to support further growth?

[Andrew Rees, Chief Executive Officer]

Yes. Good question. Thanks, Jim. So we have really been investing in our infrastructure now for about 2/3 years, right. So substantive investments last year, we are making substantive investments this year. Those capital investments for us are really going into our DC. So as a reminder, we opened new DC in Dayton, Ohio. Two-years ago, we expanded that last year. We will further expand that next year, right.

We have opened new DC in the Netherlands that is now open. We are transitioning our operations from old one to a new one through the remainder of the year, and that is a substantial increase in terms of capacity. So we also transitioned last year to a new DC which is a [3PL] (Ph) in Japan, et cetera.

So for us, we are making, I would say, some pretty significant investments, expanding capacity and also expanding efficiency and effectiveness with the use of automation. So I think we feel good about that. But frankly, as we continue to grow in these rates, we will continue to need to make those kind of investments. But we have, I think, a good plan for that.

From a sourcing and manufacturing perspective, we have some phenomenal partners. We have major partner groups in Asia that have very significant resources. They have opened new facilities, they have expanded existing facilities, and we will continue to do that in the future. And we are in conversations also with a couple of significant new partners as well.

So we feel really confident in the partner base that we have and our ability to work with new partners in potentially new regions for manufacturing. So we feel like we are in a good place. As you know, we do try to run our inventory fleet, right. We think managing working capital, getting high working capital efficiency and keeping inventories lean such that the marketplace is not - goods is actually a really important component brand management.

[Anne Mehlman]

And if I could just add on the SG&A side, Jim, I think when you think about how we are supporting the growth, we are definitely adding in one of the investments. We will be adding headcount across our key areas and our key initiatives in order to support this growth, and that will obviously is included in our guidance for our operating margins this year.

[James Duffy, Stifel, Nicolaus & Company, Incorporated]

Great. Very helpful answer. Building on that, any challenges with staffing to support any of this additional capacity or are you finding ready availability of labor?

[Andrew Rees, Chief Executive Officer]

I would say no, not really. Look, we are hiring quite a few positions because obviously, you need to add positions to - and I would say that is across a broad spectrum of functions. But what we are finding is our brand not only is in demand from the consumer perspective, it is very apparel feeling to in place there.

They are excited by the trajectory of the business. They are excited by a lot of the things that we are doing from a management perspective. And I think generally, they are getting great feedback from our employees since it is a great place to work. So we are attracting a lot of really phenomenal employment.

[Anne Mehlman]

Yes. And we have been recognized. I think Andrew said in his prepared remarks, by Forbes for inclusivity as an employer. And then I think we are also recognized as one of the best midsized employers. So that is that is branding perspective.

[James Duffy, Stifel, Nicolaus & Company, Incorporated]

Outstanding. Keep up the good work, guys.

[Andrew Rees, Chief Executive Officer]

Thank you.

[Anne Mehlman]

Thank you.

[Operator]

Your next question comes from the line of Sam Poser from Williams Trading. Your line is open. Please ask your question.

[Sam Poser, Williams Trading LLC]

Just a quick two follow-ups. Number one, how much bigger on a percent basis do you expect the marketing spend to be in Q2 and Q3, I guess, versus Q1 and versus 2019 as a percentage?

[Anne Mehlman]

So I would take the way to think about marketing is take it as a percentage of our revenue. So if you take our revenue guidance and use our marketing percentage historically, it is going to be about right. We might expand that a little bit, things are going well, but that is kind of how I would think about that, Sam.

[Sam Poser, Williams Trading LLC]

Can you just remind us what that is?

[Anne Mehlman]

Yes, it is almost 7%. So if we run around 6.8% of revenue from a marketing standpoint.

[Sam Poser, Williams Trading LLC]

Thanks. And then lastly, the gold shoe we saw the other night was that something you guys made or something stylists did? And will we see that as part of the line?

[Andrew Rees, Chief Executive Officer]

Unclear whether it would be part of the line. It is something that we made in collaboration with the stylists.

[Sam Poser, Williams Trading LLC]

Okay. Thanks very much - continued success.

[Andrew Rees, Chief Executive Officer]

Thank you very much.

[Operator]

There are no further questions at this time. You may continue.

[Andrew Rees, Chief Executive Officer]

Thank you very much. I just want to thank everybody for joining us all today and their continued interest in Crocs. So thank you very much. Have a great day.

[Operator]

This concludes today's conference call. Thank you for participating. You may now disconnect.