Crocs Inc

NASDAQ:CROX

Earnings Call Analysis

Q4 Exceeds, 2024 Outlook Shared

The company surpassed Q4 expectations with consolidated revenues of $960 million, a 1.5% increase led by the Crocs brand, and a robust adjusted operating margin at 24.1%. Adjusted diluted earnings per share rose by 10% to $12.03. Debt was reduced by $277 million with a 38% decrease in Heydude inventory. The 2024 outlook includes a 3% to 5% revenue growth, with Q1 revenue estimated to be down 1.5% to up 0.5%. The full year Crocs brand growth is forecasted at 4% to 6%, with Heydude expected to improve throughout the year.

Company Overview and Brand Strength

The company has reported a year-over-year improvement in brand awareness, now at 32%, which is still comparatively low but is balanced by high brand love and affinity. Strategic changes have been made in how the company engages with the wholesale channel, resulting in increased gross margins and healthy inventories. With a focus on optimizing full price sell-through, particularly in digital channels, the company is set to return to a full market position in the latter half of 2024, which should normalize sell-in and sell-through metrics.

Market Dynamics and Brand Performance

The company's Heydude brand has experienced a significant reduction in wholesale revenues by 28%, mainly due to strategic rightsizing efforts and a challenging wholesale environment, impacting the DTC channel as well. Despite these challenges, the Heydude brand is expected to be in a better position exiting the first half of 2024, particularly with e-commerce ASPs up 15% in Q4 2023, demonstrating success in the brand's pricing strategy and inventory management.

Financial Health and Profitability

In Q4, adjusted SG&A was 31.6% of revenues, a deleverage of 430 basis points year-over-year. Full-year adjusted SG&A also deleveraged by 200 basis points to 28.7%. Increased investments in marketing, talent, and infrastructure are the main drivers of these changes. The adjusted operating margin slightly declined as a result, but the company still maintains robust profitability with a Q4 adjusted operating margin of 24.1% and an adjusted EPS of $2.58, a moderate dip from the prior year.

Guidance and Future Outlook

For Q1 2024, consolidated revenues are forecasted to be slightly down, with Crocs brand revenues expected to grow between 6% to 8%. The full year outlook remains at 3% to 5% growth, with efforts concentrated on international markets contributing to expected growth in Crocs brand revenues by 4% to 6%. The company is also gearing up to improve its gross margins across the enterprise. Investments are planned in capital expenditures, estimated to be around $120 million to $130 million to support this growth.

Brand Specifics and Regional Highlights

Growth has been reported across the North American market, reflecting an 8.3% rise on a constant currency basis for the year and 3% growth in Q4, demonstrating the Crocs brand's solid performance. SG&A dollar growth is anticipated to be higher in the first half of 2024 due to continued investments from the previous year, with investments channeled mainly into marketing and technology for both Crocs and Heydude brands.

Long-term Aspirations Adjusted

The company has revised its long-term target of reaching $5 billion in revenue by 2026. This reassessment is due to several external factors, including having to exit the Russian market and the impact of currency fluctuations. While the $5 billion target by 2026 is now deemed unrealistic, the company is focused on pursuing growth in a profitable and sustainable way, which may take a bit longer but is expected to continue delivering substantial shareholder returns and value creation.

Earnings Call Transcript 2023-Q4

[Operator]

Good morning, and welcome to the Crocs Fourth Quarter 2023 Earnings Conference Call.

[Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Erinn Murphy, Senior Vice President of Investor Relations and Corporate Strategy. Please go ahead.

[Erinn Murphy, analyst]

Good morning, and thank you for joining us to discuss Cross Inc. fourth quarter and full year results. With me today are Andrew Rees, Chief Executive Officer; and Anne Mehlman, Executive Vice President, Incoming Brand President and current Chief Financial Officer. Following their prepared remarks, we will open the call for your questions, which we ask you to limit to 1 per caller.

Before we begin, I 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 our strategies, plans, objectives, expectations and intentions, including our financial outlook. These statements involve known and unknown risks uncertainties and other factors, which may cause our actual results, performance or achievements to differ materially. Please refer to our annual report on Form 10-K and other reports filed with the SEC for more information on these risks and uncertainties and certain financial metrics that we refer to as adjusted or non-GAAP are non-GAAP measures.

A reconciliation of these amounts to their GAAP counterparts is contained in the press release we issued earlier this morning. All revenue growth rates will be cited on a constant currency basis unless otherwise stated. At this time, I'll turn the call over to Andrew Rees, Crocs Inc.'s Chief Executive Officer.

[Andrew Rees, executive]

Thank you, Errin, and good morning, everyone. Thank you for joining us today. 2023 was a record year for the Crocs enterprise, and we're starting off 2024 from a position of strength. Our teams are focused on continuing to drive market share gains and sustainable profitable growth. We ended the year strong, delivering better-than-expected fourth quarter.

Let me start by sharing a few highlights from the full year of 2023. Total revenues grew 12% year-on-year to almost $4 billion, driven by 19% direct-to-consumer growth at the enterprise level. Crocs brand revenues surpassed the $3 billion mark, increasing 14% versus last year. Heydude revenues were approximately $950 million and delivered over $200 million in operating income. We expanded our gross margins and once again delivered industry-leading margins with adjusted operating margins of almost 28%, exceeding our guidance. We grew our adjusted diluted earnings per share by 10% versus last year to $12.03. Our strong cash flow generation allowed us to repay $666 million of debt and we resumed our share repurchase program during the year. Finally, we're pleased to see that Crocs Inc. achieved the #20 spot on Fortune's 2023 top 100 fastest-growing companies.

Before I provide strategic updates by Brand, I want to speak to the recently announced executive transitions. Michelle Poole, Crocs Brand President, will be retired from the company. following a distinguished 32-year career in the footwear industry, the last decade of which had a tremendous impact on Crocs. Michelle will remain in her role through early May and transitioned to a special adviser through early 2025. In keeping with our succession planning, I'm pleased to promote our current CFO, Anne Melman, to Crocs brand President. Many of you had the opportunity to work closely with them and now she brings a strategic and consumer-focused commercial lens to our leadership. I have strong confidence in our commercial acumen, deep knowledge of the Crocs business and global mindset. Ann will remain CFO until a replacement is named an active search for her successor is already underway.

Moving on to our performance against our key strategic pillars, starting with the cross brand. We continue to invest in our Crocs brand through our socially led digitally first marketing playbook and product innovation, naming a few of our accomplishments this year. Our marketing wins ranged from creating high to mainstream moments, including the [ Misco ] Yellow boot, Aespa, a K-pop brand that featured our StompLineClug, and we ended the year unveiling our [ Meda ] clog the perfect friend to Lightning McQueen. Complex, a leading culture publication set at best. Crocs cannot stop going viral in 2023. We celebrated our most successful Croctober yet fueled by the spin inspired Crocs carve boot that sold out in 24 hours. We were awarded collection of the Year by Footwear News for the Salehi Bambi Times Crocs Polex Clog partnership. Moving on to product. Innovation and ongoing diversification remain important areas of focus. While we've had great success creating consumer moments through partnerships and collaborations -- our core franchises are our fundamental growth engines and all 3 of our product pillars: clogs, sandals and personalization, grew double digits in 2023.

Crocs grew 12%, supported by solid growth in both our core Classic as well as new clog franchises, fueled by height and product innovation. Channel surpassed the $400 million mark, growing 29% versus last year and now makes up 13% of our Crocs sales mix. We gained market share across our 4 saddle segments that we prioritized every day, style, Sports Street and adventure. Beyond the revenue milestone, the sandals category brings diversification not only to our overall product mix, but to our customer mix. In 2023, consumers that purchase sandals on own e-com channels were new to the brand. These consumers shop more frequently, carried a higher average order value and purchase multiple silhouettes. Our sandal consumers skew more female versus our other buyers. Our Jibbitz business grew 17% to over $0.25 billion, making up approximately 9% of our total mix. We continue to view personalization as a mega consumer trend and see opportunity to further grow Jibbitz penetration in 2024, notably through improved wholesale execution, deeper international penetration, and increased speed to market.

We're elevating our franchise management capabilities and have built several sustainable multiproduct platforms, including the Echo, Brooklyn and [ Crush ] to name a few. Each of these franchises catered to unique customer groups and diversified wearing occasions. The [ ECO ] franchise, which has developed a breadth of products across clogs, sandals, boots and now sneakers is bringing in a largely male explorer consumer. In fact, 71% of consumers who shopped our Echo franchise on our own e-comm channel in 2023 with new consumers. We're becoming faster and more agile, and we see opportunities to further capitalize on these attributes in 2024. In the fourth quarter, we tested slippers in 4 colorways and we're able to get to these to market 60% faster than our normal product cycle. This test sold out in 2.5 weeks, and we're building this into our full line to 2024. We're expanding our speed-to-market capabilities across other areas of our product portfolio, including emerging new franchise such as the Getaway assortment. As we think about distribution, I'm pleased by the broad-based growth of the cross brand for the year.

For 2023, North America grew 8% and international grew 23%. In fact, fourth quarter represented our 12th consecutive quarter of strong double-digit growth outside of North America. Globally, South Korea and the U.K. grew double digits on Australia and China each grew triple digits. While we reported a record revenue in China, it still only represents 4% of revenues, underscoring the untapped potential we have in the region. We continue to see our organic plan base in China grow as evidenced by our tag known as [ Don Man ] or Clogs followers. We now have 70 million Doman hashtags on red, highlighting the consumer engagement and excitement for the brand. Three weeks ago, I had the opportunity to visit several of our Tier 1 countries in Asia alongside our broader leadership team. It is evident that the brand's trajectory is taking hold across the region. The Asian consumer is embracing personalization at a rate higher than other parts of the world. Another anecdote that gives me confidence broadly in our international growth agenda is at South Korea, our most established market in the region carries the highest market share of any discrete market globally. It is one of the best representations of our core strategies across clogs, sandals and personalization. This strong market position highlights the potential upside of opportunity across our other international markets.

The Crocs brand has entered 2024 with momentum. From a product perspective, we expect to deliver more height for her, street for him and drive personalization at scale. We expect sandals to continue to gain as a percentage of sales, driven by newness as we relaunched the Classic Sandal 2.0 and scale our recently introduced Getaway sandal franchise. From a sustainability perspective, I'm incredibly pleased to announce that we achieved our 2023 goal to reach 20% bio-based Crocs light material across our portfolio. A significant milestone on our journey to 50% bio-based Crocs lite by 2030. We also saw promising results in our pilot shoe recycling program that we launched in late October, and we now plan to expand this initiative to all stores. We will share more on these and many other initiatives in our midyear comfort report.

Turning to Heydude. We generated almost $950 million of revenue and over $200 million in operating income in 2023. This year had its share of learnings, but I'm very confident that the Heydude brand benefits from the lightweight, comfortable, easy on enough and value remain top of mind with consumers. While our brand awareness significantly improved year-over-year, reaching 32% in the second half. It is still low by any global brand standard, but our brand love and affinity are high. As we talked about in our third quarter call, we made a number of strategic pivots in September, which impacted our sell-in within the wholesale channel, curtail small and nonstrategic accounts and focus our efforts around improving full price sell-through in digital. We're pleased with the initial impact of our decisions as evidenced by improved gross margins and healthy channel inventories and expect sell-in and sell-through to normalize as we move throughout the second half of 2024 and prioritize returning to a full market position.

In the fourth quarter and on a full year basis, we gained market share among our key strategic accounts, underscoring our confidence in the brand's underlying demand with consumers. In 2023, the Heydude brand gained approximately 200 basis points of U.S. market share versus 2022 in the casual fashion category according to [ Secarna's ] retail tracking service. During the first quarter, the Heydude brand had some big moments with -- due perfect as the face of a happy [indiscernible] holiday programming, leveraging our consumer insights -- we know that 50% of our buyers give Hay dues as gifts, and we saw evidence of this during the fourth quarter. Looking forward, we plan to create consumer moments through scaling our collaborations and partnerships. We recently collaborated with active Chase Stokes from the popular out-of-bank Netflix show to launch the [ Walmer. ] Later in Q1, we'll be expanding our collegiate program to more schools during March Madness to deepen consumer engagement. From a product perspective, during the fourth quarter, our icons, the Wally and Wendy were top sellers. Our Bradley boot rounded out our top 3 selling sales overall with exceptional sell-through as consumers responded to its compelling price point, life weight and attractive styling despite a soft overall industry boot season.

Once again, our seasonal Ugly sweater Christmas styles with standouts. As we move into 2024, we're focused on continuing to invest in core and expect the Wally and Wendy franchises to remain the lion's share of our offerings, driven by newness and color, graphic and heights. We will capitalize on our successful sneaker franchises, including the Carina and Sirocco, and build on our fashion boot offering in the fall. We're taking a focused approach to how we allocate inventory by account and expect to see more evidence of account and channel segmentation as we move throughout the year. From a distribution perspective, we're in the early days of implementing our outlet retail strategy for the Heydude brand, leveraging Croc's successful retail playbook. On the Heydude side, we opened 5 outlet locations in the second half and have been pleased with the results thus part. We plan to open up 30 outlet stores in 2024 spread throughout the year. For context, retail is roughly 1/3 of our North American business for the Crocs brand and is highly profitable.

Turning to wholesale. While our spring order books are down versus last year, as we discussed on our November call, we expect sell-in and sell-through to normalize as we move throughout the back half of the year. As it relates to international, we remain in test mode in a few direct markets in Europe as well as in several distributor markets, leveraging the success of the Crocs Brown playbook. This will lay the groundwork to expand its new international markets in the next 2 to 3 years.

We're coming into the year from a position of strength. While there are question marks around the global macro backdrop and the broader consumer health, I'm confident in our brands, our people and our purpose and are looking forward to another year of outsized share gains, industry-leading profitability and top-tier cash flow generation. Anne will now review our financial results in more detail.

[Anne Mehlman, executive]

Thank you, Andrew, and good morning, everyone. I'm very pleased by our fourth quarter results, which exceeded the high end of our guidance across all metrics. We generated $960 million in consolidated revenues growing 1.5% over last year led by the Crocs brand. We delivered top-tier profitability with adjusted gross margin up 240 basis points to 55.7%, adjusted operating margin of 24.1% adjusted earnings per share of $2.58, ahead of our guidance of $2.05 to $2.35.

Our strong profitability and focus on net working capital enabled us to repay $277 million of debt in the fourth quarter. We also repurchased $25 million of stock in the fourth quarter at an average cost of $86.34 per share. As discussed earlier in January at the ICR conference, we made a change to our segment reporting that will now be reflected in our 10-K. Our reportable operating segments will now be the Crocs brand and the Heydude brand. We plan to continue sharing our progress against our strategic growth pillars, key country callouts and channel dynamics. Turning to the Crocs brand in the fourth quarter. Revenues were $732 million growing 10% relative to prior year, driven by strong DTC growth of 12% and wholesale growth of 7%. Brand ASPs were up 12% to $26.76 led by both channel and product mix, higher international pricing and lower discounting. The brand sold 27 million pairs of shoes, a decrease of 1% to Q4 last year or up 5% excluding the impact of the termination of our African distributor.

For the year, the brand sold 120 million units, up 3.5% versus last year and ASP growth of 10%. Now let's review the Crocs brand highlights by country and channel. In the quarter, North America revenues of $471 million were up 3% from 2022 as strong DTC growth of 7% was partially offset by a 5% decline in wholesale. The decline in wholesale revenues reflect a full quarter of impact from our [ retail ] distribution model change, partially offset by double-digit growth in our brick-and-mortar wholesale. Crocs brand in the fourth quarter was led by international with revenues up 25% driven by DTC, which grew 37% in the quarter against 2022. In fact, all 6 of our Tier 1 markets grew in the fourth quarter. China, India, Japan, South Korea, the U.S. and Western Europe. As Andrew noted, 2 of our countries grew triple digits for the year, Australia and China. China was a record revenue year, ending the year at $120 million. In Western Europe, we saw strong double-digit growth in the U.K. and France, while Germany ended the year flattish despite a tough macro backdrop.

Turning to Heydude. Revenues were $228 million down 19% from last year, but ahead of our guidance. During Q4, the brand sold 7.4 million pairs of shoes, a decrease of 18% from last year as we lapped pipeline fill and as we took decisive actions to reduce channel inventories. Heydude added average selling price during Q4 was roughly flat to last year at $30.65. Relative to Q3, our e-commerce ASPs were up 15% as we pulled back on price matching online. We continue to make progress against great goods cleanup and expect to be in a substantially better position exiting the first half of 2024.

Wholesale revenues were down 28% from Q4 last year. as we lap 2022 pipeline fill, rightsized our nonstrategic wholesale accounts and faced a more challenging wholesale environment. The DTC channel contracted 9% as we forfeited sales for better pricing and margin. Consolidated adjusted gross margin for the fourth quarter was 55.7%, up 240 basis points from last year as freight was a key tailwind for both brands. Crocs brands adjusted gross margin was 59.5% or 340 basis points higher than prior year. The increase in adjusted gross margin is attributable to approximately 240 basis points of freight tailwind, increases in international pricing and favorable promotions and customer mix, partially offset by negative currency impact of 100 basis points. Heydude brand adjusted gross margin for the quarter was 45.5% came in better than expected. The margin decrease of 170 basis points from Q4 2022 was driven by excess distribution costs and product mix. This was partially offset by reduced rates and storage costs.

Our Q4 adjusted SG&A at 31.6% of revenues deleveraged by 430 basis points compared to prior year. For full year 2023, adjusted SG&A deleveraged 200 basis points to 28.7%. The significant increase in adjusted SG&A rate for the quarter and the full year is attributable to continued marketing investment, talent and infrastructure to support future growth and durable market share gains. Taking these drivers together, our fourth quarter adjusted operating margin declined 190 basis points to 24.1% compared to 26% for the same period last year. In Q4, the company recorded a onetime GAAP tax benefit of approximately $112 million, primarily related to the closing of our Heydude activity in Hong Kong and the related transfer of our intellectual property.

Fourth quarter adjusted diluted earnings per share decreased 2.6% to $2.58 when reflecting our non-GAAP tax rate of 19.6%. For the full year, our adjusted diluted earnings per share increased 10% to $12.03. We ended the year with clean inventory on our balance sheet and in the channel. Our inventory balance on December 31, 2023, was $385 million, a decline of 18% against this time last year. The Crocs brand inventory balance was $281 million, down 7% from last year and roughly flat to Q3 2023. Heydude inventory was down 38% from last year to $104 million and down 6% versus Q3. We ended 2023 with a strong liquidity position comprised of $149 million of cash and cash equivalents and $570 million of borrowing capacity on our revolver. Through strong cash flow generation and diligent management of net working capital, we have reduced total borrowings to $1.7 billion and our net leverage to approximately 1.3x. Since acquiring Heydude in February 2022, we have repaid $1.2 billion in debt and resumed our share repurchase activity in the second half of 2023.

On a full year basis, we repurchased $175 million of stock at an average price of $104 per share. Our strong liquidity position and best in cash flow generation will enable us to continue to pay down debt and buy back stock in 2024. In February, we successfully refinanced our Term Loan B and achieved a 75 basis point reduction in borrowing rate from [ SOFR ] plus 3% and to [ SOFR ] plus 2.25%, with no change to our leverage covenants or maturity date. Now turning to the future, I would like to share our current outlook for Q1 and then full year 2024. For Q1, we expect consolidated revenues to be down 1.5% to up 0.5% at year-end currency rates, with the Crocs brand growing between 6% to 8%. We expect Heydude revenue to be down 20% to 23% as we lap pipeline fell from last year and given our aforementioned spring order book trends. We expect adjusted operating margin to be approximately 22% and adjusted diluted earnings per share of $2.15 to $2.25. For the full year 2024, we are reiterating our revenue outlook of 3% to 5% growth, assuming year-end currency rates.

For Crocs brand revenues, we expect to grow 4% to 6% with growth led by international. For Heydude brand revenues, we continue to expect growth to be flat to slightly up. In terms of shaping, we expect Heydude sales trends to improve throughout the year. We expect gross margin improvement over 2023 at the enterprise level. We expect stable Crocs brand gross margins and expect Heydude gross margin to be up for the year as we start to realize the benefit of our newly opened Las Vegas DC and our planned ERP implementation. We expect to reinvest these dollars into brand accretive and strategic SG&A investments resulting in consolidated adjusted operating margins for the year of approximately 25%. Following our tax structure changes for full year 2024, we expect our underlying non-GAAP tax rate, which approximate cash taxes paid to be approximately 18% and GAAP tax rate of 21.5%.

We anticipate non-GAAP diluted earnings per share to be approximately $12.05 to $12.50 in 2024. This range incorporates our recent tax changes in Term Loan B refinancing, but does not assume any impact from potential future share repurchases. We also expect to incur $10 million of onetime charges, primarily in the first quarter related to the completion of our distribution and logistics projects for Heydude. To support growth for both brands, we expect to invest approximately $120 million to $130 million in capital expenditures in 2024 and continue to expect best-in-class cash flow generation. At this time, I'll turn the call back over to Andrew for his final thoughts.

[Andrew Rees, executive]

Thank you, Anne. Crocs, Inc. had a record-breaking year in 2023. As we move into 2024, we are on the offense and proactively making the decision to invest incrementally in our business to set ourselves up for continued durable market share gains while delivering top-tier total shareholder returns. At this time, we'll open the call for questions.

[Operator]

We will now begin the question-and-answer session. [Operator Instructions] Our first question will come from Tom Nikic of Wedbush Securities.

[Tom Nikic, analyst]

I wanted to ask about Heydude. I know you gave some of the reasons why we should expect better performance from Heyduede over the course of the year, but -- it seems like you're kind of digging yourself into a pretty big hole in Q1 and you kind of need pretty significant amount of reacceleration the remainder of the year. I guess, kind of the confidence in that reacceleration stem from order books or like feedback you've gotten from wholesale partners? And I guess, just on the wholesale front, I think, obviously, last year was a much choppier year than you had expected for the Heydude brand. And I guess like one of the wholesale partners seen lately that's gotten more comfortable to help drive that reacceleration in the Heydude brand that you're expecting.

[Andrew Rees, executive]

Yes. Thanks, Tom. Yes. I think I'll hit the start of this, then Anne can pick it up at the end with a few sort of points around how we think the year will play out for Heydued. So I think the first thing you've got to do is you've got to separate sell-in from sell-out, right? So yes, I absolutely -- you can see that the Heydude brand has been choppy from us from a sell-in perspective. And didn't play out as we thought it would during the full year. And you heard us on our Q3 call, talk about how we're going to pivot or how we pivoted some of our kind of strategic actions. But if you kind of step all the way back, to sell out and the consumer takeaway that we see for the brand because that is what our wholesale partners experience, right?

So I think we can see a few things that are very, very clear. The underlying sellout for the Hydro brand has been strong, right? It is a top-performing brand for many of our wholesale partners, and it ranks highly in their brand stack. The Heydude brand during 2023 gained market share in the fashion casual category, actually substantial market share, we believe, based on the SCANA data about 200 basis points. So it was one of the larger market share gains, and that's in terms of consumer takeaway. And then we can also see that our underlying DTC business.

Now we've changed some pricing strategies and dynamics in our DTC business, which is causing us to give up some revenue but also to drive higher margins. So in essence, what we see is we kind of read through to the consumer that we are selling more pairs to more consumers and gaining market share. And so that's kind of the important read. Now we acknowledged that in the back half of '22, early part of '23, we put too many pairs into the market. So we sold more in than we should have done. We also have gone through the process of cleaning up our account base because I think we had too many accounts with too much inventory kind of competing against each other. So I think we've got real clarity on who our strategic partners are. And I would say, as we talk to those strategic partners, and frankly, you've heard from a number of them, those that are public, they are really bullish on the brand. So that's kind of what we see from a consumer lens.

I think the second piece I'd say that drives trajectory for the business is before I hand it over to Anne, is that outlet business, right? So we opened up those 5 outlet stores in the back end of last year. We're very pleased with the performance of those stores and will open more this year. And as you go through the year, the cumulative revenues and profit that you get from those stores is substantial, and we'll continue to build that business in the future and the sort of benchmark we gave you to kind of get your head around it with the retail business for Crocs North America is about 1/3 of the total business. So it's very substantial, and we think that exists for Heydude too.

[Anne Mehlman, executive]

Yes. And Tom, just to give you a little context on the shape in a little bit more detail. So embedded in our full year guidance of flat to slightly up for Heydude. We are assuming that wholesale right now is down for the year in our guidance. although we do assume it improves every quarter throughout just as we look at the trajectory. In Q1, we would expect a similar channel dynamic to what we saw in Q4 and then we really start to see the benefit of retail contribution start to impact us in Q2 and beyond.

So I would say '24 is really about from a wholesale perspective, focusing on sell-out as Andrew mentioned, making sure we have the right inventory in the market and letting that really be a pull market and wholesale revenue will be what it is, and that's incorporated into our guidance.

[Tom Nikic, analyst]

A quick follow-up on Heydude.Just where -- sorry if you mentioned this during the prepared remarks, if I had missed it, but where are we at in terms of cleaning up the gray market and all that?

[Andrew Rees, executive]

Yes. I think we're making great progress. We see substantial dips in the gray market from sort of earlier in '23. We're not done yet. We think it will take through the first half of '24 to complete that, but certainly solid progress.

[Operator]

The next question comes from Jonathan Komp of Baird.

[Jonathan Komp, analyst]

I want to ask about Crocs North America. Could you just share your current thoughts on the health of the business? Any thoughts on the trajectory in 2024 here and maybe include with that Jibbitz in your view there? I know you mentioned penetration increases for the year.

And then just one separate question, more for Anne. As we think about the margin guidance for the year. It looks like you're implying pretty significant SG&A deleverage for the Crocs brand. I want to just see if you can give any more color there, if that's the case and further give detail on what's driving that?

[Andrew Rees, executive]

Yes, John. So I think the Crocs brand continues to be very well positioned in North America. Obviously, it's our largest business, and it is a scale business. We have substantial market share were well penetrated from a wholesale perspective, from a retail perspective and from a digital perspective. But we do see -- we're very happy with the performance of the Crocs brand in the market in '23. We see -- we are very positive, I would say, indications of continued support from our wholesale partners.

We have a strong pipeline of product innovation that we'll bring to market. We have a strong pipeline of licensed products, collaborations that we'll bring to market during the year. In fact, I was spent mostly yesterday afternoon reviewing new products. So super excited about that. So I think the brand is well positioned. I think it also does -- and if you rightly call out, we do think we have incremental penetration opportunity for Jibbitz. We see the consumer dynamic with personalization being incredibly positive. As you saw in '23, it grew above the overall growth of the business and gain penetration -- we think we see opportunities in the wholesale market where, look, it is a more difficult product to display and sell in the wholesale market, but we have some creative solutions that we'll be testing and rolling out. We also are bringing the time lines in Jibbitz dramatically so that we can respond to, I would say, kind of social trends much more quickly. So we're super excited about using personalization to create ongoing consumer engagement.

[Anne Mehlman, executive]

Yes. And just as a reminder, that North America in 2023 grew 8.3% on a constant currency basis and 3% in Q4. So pretty good results out of the North America scale Crocs business. I think from an SG&A perspective, as we talked about we are going to invest some of our margin improvements in SG&A this year. We think it's really important. And that goes for both brands. Just to give you context, we do expect higher SG&A dollar growth in the first half versus the second half because we're still anniversarying some larger investments on both brands that we made in 2023.

So SG&A growth is up mid-20% in both Q1 and Q2. So just something to keep in mind. And I -- why we're not going to guide specifically from a both brand perspective on investments, the investments that we're making across the board are really on the marketing side. [ Talent ] in both brands on Crocs, it's really focused on our international markets, which we expect to drive the growth this year. And then on Heydude, some of that is related to our outlet store investment. And that's the biggest pieces and then some technology associated with both brands.

[Operator]

Next question comes from Rick Patel of Raymond James.

[Rakesh Patel, analyst]

Congrats to Anne on the new role and all the best to Michelle on your new chapter. Just wanted to ask a question about the long-term potential for growth. So with total revenues being guided up 3% to 5% here, -- how should we think about the potential to hit $5 billion of revenue by 2026. Just hoping you could add some color on the building blocks there.

[Andrew Rees, executive]

Thanks, Rick. And I assume you're referring to the $5 billion for crops that we guided some years ago?

[Rakesh Patel, analyst]

Correct.

[Andrew Rees, executive]

Yes. Okay. So yes, because I think -- so a number of years ago, we guided, we thought that the fact the Crocs could be a $5 billion brand. And I think at that point, we set out -- we thought that could happen by 2026. I think where we are today is we absolutely still firmly believe the Crocs is a scale business, the cross brand and can easily be $5 billion. And we look at the pillars that we're using to drive that growth, which is Asia, digital, clogs, sandals and personalization, and we see really kind of solid progress against all of those pillars.

In fact, I would say more than solid progress. We've seen sort of incredible progress over the last several years against those pillars. I think quite a few things have changed since we provided that guidance around global supply chain. We had to pull back out of Russia because of all the issues that you're well aware of. And frankly, currency as well cost us about $200 million in top line. So I don't think that it's realistic to achieve the $5 billion by 2026. But -- and so we're really focused on driving continued growth in a profitable and sustainable way. and probably take a little bit longer. But I think it still drives incredible shareholder returns and value creation for shareholders. And in terms of operating margins, this will be the first year, I think, we're deviating from the or projecting to deviate from the 26%. We still think the operating margins for our company are in the mid-20s, but will not be every single year above the 26% mark. We think it's very prudent to invest incremental dollars from time to time to create the capabilities that allow us to grow in the future. So on with you a perspective in the long term.

[Operator]

The next question comes from Abe Zogenix of Piper Sandler.

[Unknown Analyst]

Just on the Crocs brand, are there -- is there any color you can give on quarter-to-date trends? And the crop being guided to 6% to 8% versus 4% to 6% for the year. What are you seeing that gives you confidence in that number? And does that assume just the continuation of trends that you're seeing so far? Is there any improvement contemplated in getting to that 6% to 8% for the quarter.

[Andrew Rees, executive]

Yes. I think -- obviously, we got a bit of a brand color and can give us some of the more specifics. I would say it's a continuation of the trends from last year basically. We see -- we don't give a lot of in quarter color. But if you think about some of the big drivers that have really been propelled in the brand, so Asia and international growth has been super important. We see cloud growth and Jibbitz growth from a product perspective, important. And as you know, we have visibility to bookings. So we feel real confident around our wholesale bookings. And we see we see solid sell-out for the brand. So I'd say it's continuation mostly.

[Anne Mehlman, executive]

Yes. And just January, we don't really comment on trends in our quarter, but January is a very small piece of our overall quarter when you think about it is pretty immaterial for us as a business.

[Unknown Analyst]

Got it. That's helpful. And just one follow-up, more of a housekeeping question. Since you've changed the reporting segments, is there any way you can tell us kind of what 4Q would have looked like under the old reporting segment?

[Anne Mehlman, executive]

Yes. So as we did change our reporting segments. So our new reporting segments are Heydude brand and Crocs brand as we think that reflects how we should look at the business. So as reported, North America grew 3% in Q4. International grew 25%, led by Asia Pac, which was up 36% and Emilia was up 16%. And -- for the year, operating profit dollars across all regions increased double digits versus prior year, and the strongest growth came from Asia and Emelia. So this will be the last time we'll give the information as our segments have now changed, but that gives you some -- a full year picture.

[Operator]

The next question comes from Jim Duffy of Stifel.

[Jim Duffy, analyst]

Hope you guys are doing well. Two questions. First, can you speak to the outlook for international markets, specifically, which are the markets you're excited about for '24? Certainly, China is on that list? Are there others that you would highlight? And likewise, in the international landscape market, do you expect to be more challenging?

[Andrew Rees, executive]

Yes. Absolutely, Jim. So I think let me start with the sort of highlights. China is probably top of the list, as you rightly pointed out. We've kind of a multiyear investment effort and focus on China and really thrilled that they've started to pay off in 2023 with triple-digit growth, so essentially doubling the business during that year from a top line perspective. Obviously, it improved dramatically from a bottom line perspective as well. But we're just getting started in China, right? So 4% of our overall revenues, if you look at sort of other global brands, the benchmark of sort of Greater China is substantially higher than that, maybe 4 to 5x higher than that.

So I would say second -- we're seeing great trajectory in parts of Western Europe, particularly the U.K., we're probably on a 2- to 3-year very strong growth trajectory in that market. And it's also an important market for influence across the European marketplace. We're seeing a strong trajectory in France also. I would say thirdly, North Korea -- sorry, South Korea here has been a very steady growth driver for us. And I think I mentioned in my prepared remarks, is actually when we isolate our countries around the world is our highest market share performance even above the United States, but we've seen future opportunities, continued growth opportunities in South Korea.

Australia has performed very strongly. We've seen a real turnaround in the business there. And so those are probably the highlights. I think the more challenging markets, Japan remains a slightly more challenging market I think we're shifting focus to that market because it is a large market, and we do anticipate growth in the future, but we've got some work to do. And I think we're very, very optimistic about India in the long range, and we're putting substantial investments into that market a little bit like we did around China, but there are a number of kind of short-term issues around sourcing that are creating some, I think, some headwinds in the very short term. But I think in the long term, India will be a big success.

[Jim Duffy, analyst]

Very helpful. Andrew. And soon, you'll be above the fray on questions like this, but I do have a question on the tax rate outlook. It came in a little bit lower than I expected. Is that reflective of geographic mix of the profit pools, I guess, what I'm after here is that a sustained -- do you view a structurally sustainable tax rate? Or is there a onetime dynamic related to that?

[Anne Mehlman, executive]

Yes. Thanks, Jim. Yes, I'm very excited to turn [ tracking ] over to tax -- tracking back over somebody else. But I think our tax rate -- so at the end of Q4, we moved our had IP from Hong Kong, where we don't have operations to Singapore and Netherlands. And that created that onetime benefit of $112 million that we backed out for the purposes of adjusted EPS. So you could have a better idea of our true underlying tax rate for the current year. That does have underlying benefits for this year. So that's how we get to the 18%. So it reflects some geographical mix, but also just the restructure in our tax structure. Right now, we're saying we think 18% is right for this year. I would still use 20% long term, and so we have a better picture going forward.

[Operator]

The next question comes from Chris Nardone of Bank of America.

[Christopher Nardone, analyst]

Can you talk about the underlying assumptions in your outlook for the relatively stable gross margins for your core Crocs business this year? I'm just trying to understand what would be holding that back from expanding on the mid-single-digit growth. And if margins do come in better, are you expecting to spend against that strength? Or will you allow some level of flow through to the bottom line this year?

[Anne Mehlman, executive]

Yes, that's a great question. So obviously, we're really pleased with our cost gross margins for the year, they expanded nicely after what was a tougher 2022 on some -- we had some significant freight tailwinds. We think that's pretty normalized at this point. So we think that just given all of the puts and takes, you've got currency, you've got freight, you've got mix from a channel perspective, pricing and product mix. We think that at about where we were last year is a fairly good place to be.

So on revenue growth, that's not necessarily -- we tend to see margin expansion on revenue growth as your operating margin because you leverage your SG&A. This year, we've made the conscious decision to those dollars and really invest as India talked about, we're investing in India and some of our other international markets as well as talent and really focused on that long-term sustainable growth. If we exceed what we said, if we have good investments, we will make the call whether we should continue to invest for the long term or let that flow through to an operating margin perspective.

[Christopher Nardone, analyst]

Got it. That's very helpful. And then just as a quick follow-up. Can you provide an assessment of how the Red Sea disruption is impacting your business today? And just trying to gauge what you're underwriting for freight rates this year in your initial full year margin outlook.

[Anne Mehlman, executive]

Yes. So right now, from a Red Sea perspective, we're really seeing an impact from our -- it's mostly our EMEA business at this point, and we're seeing a couple of weeks delay. Overall from a shipping time perspective, we haven't seen a material change to our freight rates at this point. So I would say I don't know what's going to happen this year. Obviously, we don't know how this is going to play out. But at this point, it's not it's not been a material impact to our business.

[Operator]

The next question comes from Jeff Lick of B. Riley Financial.

[Jeffrey Lick, analyst]

I'd extend my congratulations on incredibly well-deserved promotion and increase in role. Andrew, I was wondering if you take a step back and look at 2019 as a starting point where in North America was $640 million at the Crocs brand and international was $590 in. Obviously, there's way more people internationally than in the U.S., and I think there's an argument to be made that the Crocs brand might even resonate a little better with certain countries and populations than the U.S. So I'm just wondering if all the things that you had done leading up to the pandemic, customization, social influencing the speed to market with distribution.

Obviously, you did that in the U.S. first. If you use the U.S. as a kind of a leading indicator I'm wondering kind of where you're at, like what you're seeing internationally? And do -- would you disagree that international should be at least as big, if not bigger, than the U.S.? And then I guess the critics might say, well, "Gee, the U.S. is going to come back "-- that obviously hasn't happened. I was wondering maybe you could speak to like what people are missing as to -- if anything, the U.S. has accelerated, just the dynamics between the U.S. and international, what you could give us there?

[Andrew Rees, executive]

Yes, I think like honestly, Jeff, I think it's a great way of thinking about it, right? So just to sort of paint the picture for everybody. What we saw, the Crocs brand really started in flat in the U.S. marketplace -- sort of late '18 into '19 and then grew dramatically through the pandemic. I think a lot of people outside of the company kind of put that down to, well, that was the pandemic and people we're happy to wear Crocs at home, but they're not happy to where Crocs when they're back out in the real world, right?

So I think at this point, hopefully, that has proven to be incorrect in that people are happy and excited to work Crocs out in the real world. And I think what's happening there is we're engaging in the consumer. We're excited in the consumer with innovative new product with a high comfort product with a high-value product with a product that can be personalized in many different ways, and it's pretty exciting and the customer is engaged in it. So that's grown that business dramatically. We've seen that trajectory repeated in a number of our international markets. So if we look at markets like the U.K., we saw probably in our third year of very accelerated growth. So we're seeing that trajectory play out. And so -- and then as I highlighted an earlier question and Anne, in our prepared remarks, we actually have the highest market share in the Korean marketplace as of today. So even above the U.S. So that's to your point around there might be some places in the world, whether Crocs brand actually resonate even better than in the U.S., easy on and up being a kind of key component there where culturally, there are many markets where people take their shoes off when they go into a building or go into somebody's home.

So I think that's a viable thesis. We're not guiding the international business, just to be clear, then be bigger than the U.S. business. I mean, I think when we did our $5 billion plan, we were pretty clear that a lot of our growth will come out of Asia and that international will be super important. And you've seen that in the last like 6 quarters, the international business has grown very strongly. So we can [ concur ]

[Operator]

The next question comes from Sam Poser of Williams Trading.

[Samuel Poser, analyst]

I have 2. For Anne, can you talk about the evolving demand planning, especially with the Heydude brand in order to get to the pull model that you're working towards? And how that is working within the Crocs brand and how you and your new role intend to make that work further work.

And then for Andrew. Andrew, you talked about it in the prepared remarks about promoting Anne to this position. Could you just expand on why she is -- you went through a long process here. It wasn't quick from what I gathered. But can you sort of go into sort of some more nuanced discussion of why she ended up being the best person for the job in your view?

[Andrew Rees, executive]

You mean [indiscernible] awesome.

[Samuel Poser, analyst]

Other than I'll let answer the first question.

[Anne Mehlman, executive]

Andrew is thinking of a good answer for you, Dan now getting up. So yes, so on the demand planning front, so for both add and from a crack perspective, we have key account planning. We look very thoughtfully at our big accounts, and we plan strategically what sellout is and then that obviously drive sell-in. As we talked about on Heydude, a couple of the key differences we were making. And remember, when we bought have, we didn't really have the infrastructure in place. So these are new tools and skills that we're implementing. We worked really hard to do that last year. So we're also looking at making sure that, as Andrew mentioned, that we have the right product in the right accounts and that we're thoughtful about seating product in the right place and also depth -- and where we put things.

So we're really focused on, as you mentioned, letting it be a pull model. And if we are a little bit short on some things, and it sells out fast, then that's great and that's more demand for next year. So that's kind of how we're thinking about it. That's how we think about it existing on the croc side.

[Andrew Rees, executive]

Great. So your second question, so look, I mean my flippant answer is important, right? Like we have great confidence in our both the knowledge of the business, the commercial acumen, her understanding of kind of the consumer trends beyond her abilities as a CFO. So that's important. I would say this transition is part of the succession planning that we've been doing for some time. We do it for all of our senior leaders. We do that in conjunction with the board, as you'd expect. And we have a very thorough process around this. So it's definitely something we take very seriously, and we think this is this Michelle is retiring and we wish in well. I mean, she's done an amazing job. And as I also said in my prepared remarks, she's been doing this in the foreign industry for a long time and have some other things that she would like to spend a bit more time doing. So I think it's a very natural transition and very well planned.

[Samuel Poser, analyst]

And just I have a quick follow-up for Anne. It was somebody else's question about comfort that the dude business would grow in the back half of the year. How much of the sort of the way this looks like it's going to flow is retailers and you overreacted put too much product into the marketplace at the beginning of last year, given sort of the way things were in the middle of this year when they were writing spring, retailers over -- probably overreacted and may not have written enough. And now they're sort of seeing what's going on and then that's starting to normalize as the orders move throughout the year. Am I thinking about that correctly?

[Andrew Rees, executive]

I think mostly Sam. Yes, that's mostly a very thoughtful understanding of the marketplace.

[Operator]

Next question comes from Abry Tanello of BNP Paribas.

[Unknown Analyst]

I wanted to follow up on Crocs North America. You mentioned changing the distribution model with Amazon. Could you maybe give a little more detail on what's changing, how those changes flow the P&L and also what the time frame is for that?

[Anne Mehlman, executive]

Yes, great question. So as we talked about in our third call, I think kicking a step back, really at the highest level globally, we are trying to have more brand control in global marketplaces where our brand is sold. So we talked about marketplaces that's on a digital front and those PBMs on or others. And so the best way to do that is for us to sell directly to the consumer on those marketplaces. So it's a direct-to-consumer sale versus a wholesale sale. So the dynamics of how it flows through the P&L, it's a higher gross margin, higher SG&A, higher revenue. But it's really not that's not the focus point.

The focus is just controlling our brand and how consumers -- how it shows up to the consumer and making sure that we provide a consistent and best experience for our consumer. I would say this distribution model perform has been performing in line with our expectations, these changes. And so we will expect to continue down the path this year.

[Operator]

This concludes our question-and-answer session. I would like to turn the conference back over to Andrew Rees for any closing remarks.

[Andrew Rees, executive]

I just wanted to express our sincere appreciation for everybody joining us today and their interest in our company. So thank you so much, and have a great day.

[Operator]

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.