Crocs, Inc. (CROX) Q3 2023 Earnings Call

Crocs, Inc. (NASDAQ:CROX) Q3 2023 Earnings Conference Call November 2, 2023 8:30 AM ET

Company Participants

Erinn Murphy - Senior Vice President of Investor Relations and Corporate Strategy

Andrew Rees - Chief Executive Officer

Anne Mehlman - Executive Vice President and Chief Financial Officer

Conference Call Participants

Jonathan Komp - Robert W. Baird

Jim Duffy - Stifel Nicolaus

Abbie Zvejnieks - Piper Sandler

Tom Nickik - Wedbush Securities

Samuel Poser - Williams Trading

Rick Patel - Raymond James

Laura Champine - Loop Capital Markets

Jeff Lick - B. Riley Financial

Operator

Welcome to the Crocs, Incorporated Third Quarter 2023 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [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

Good morning, everyone, and thank you for joining us today for the Crocs Inc. Third Quarter 2023 Earnings Call. Earlier this morning, we announced our latest quarterly results, and a copy of the press release and our slide presentation may be found on our Web site 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 our supply chain challenges, cost inflation, the acquisition of HEYDUDE and the benefits [thereof] (ph), Crocs' strategy, plans, objectives, expectations, financial or otherwise, and intentions, future financial results and growth potential, anticipated product portfolio, and our ability to create and deliver shareholder value. These statements involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. Crocs is not obligated to update these forward-looking statements to reflect the impact of future events, except as required by applicable law.

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 and our subsequent filings with the SEC. 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 regarding these risk factors.

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.

Joining us on the call today are Andrew Rees, Chief Executive Officer; and Anne Mehlman, Executive Vice President and Chief Financial Officer. Following their prepared remarks, we will open the call for your questions.

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

Andrew Rees

Thank you, Erinn, and good morning, everyone. Let me start by welcoming Erinn Murphy, our new SVP of Investor Relations and Corporate Strategy, and by thanking Cori Lin as she transitions to a new role within Crocs and for her dedication to leading Investor Relations over the past three years.

We delivered strong third quarter results, with quarterly revenues over $1 billion, exceeding the high end of guidance, led by double-digit growth in the Crocs brand, partially offset by high single-digit decline in the HEYDUDE brand. I'm pleased by our team's agility as we continue to operate in an increasingly challenging macro environment. We drove strong 18% direct-to-consumer revenue growth at the enterprise level, and once again delivered industry-leading margins with 28% adjusted operating margins. Anne will review our financial results in more detail shortly, but here are a few highlights from the third quarter.

Revenues of over $1 billion grew 6% on a constant currency basis. Adjusted diluted EPS increased 9% to $3.25 per share. Inventory on an enterprise basis was down 24% year-over-year. By brand, Crocs' brand revenues grew 11% constant currency fueled by Asia revenues increasing 29%, North America revenues up 8%, and global DTC comparable sales up 15% with strong full-price selling. HEYDUDE brand revenues were $247 million, with DTC growth of 15% offset by declines in wholesale. During the quarter, we took decisive action around HEYDUDE to maintain price integrity and elevate our marketplace management strategy to ensure long-term brand health. I will elaborate on our strategy in a moment.

I want to start my comments today with our views on the macroeconomic backdrop and the health of the consumer. We are operating with greater uncertainty than we started the year, with persistent inflation, higher interest rates, the resumption of student loan payments in the United States, and escalating geopolitical tensions across the globe. Despite this, our consumer has been relatively resilient, and continues to show up during key shopping events, such as back-to-school, which was strong for both brands. In September, trends softened across the footwear industry, and we are seeing consumers pull back in-between peak shopping events.

Against this backdrop, we're focused on making the right decisions for the health of our brands, keeping a tight control of inventory, and investing behind initiatives to support profitable long-term growth. We believe we are well-positioned in the current economic backdrop, and see our value-orientated price points as a durable competitive advantage.

Moving into our brand highlights, let's begin with the Crocs brand. We continue to see broad-based consumer love for the Crocs brand. In Piper Sandler's fall 2023 Taking Stock With Teens survey, Crocs was the number six favorite footwear brand among U.S. teens, registering a new record-high mind share, with balanced contribution across all genders. With respect to product innovation, our strategy to diversify our clog offering, grow sandals, and leverage personalization is working. We demonstrated double-digit growth in clogs with outsized momentum with our height-orientated offerings, including the Crush and Mega Crush styles.

As we look at our broader assortment, I want to call out the Echo franchise, which has developed into a sizable business across clogs and sandals. We September, we introduced the Echo boot, which is off to a good start. Turning to sandals, in Q3, sandals' revenues grew 6% on top of nearly 20% growth in 2022, and the 35% growth on a trailing 12-month basis. We had a solid back-to-school season for sandals in all three regions, with EMEALA as a standout region in the quarter. In fact, we were the number one sandal and flip-flop brand on Amazon U.K. during the month of August, growing 37% over last year.

Globally, the Classic and Brooklyn remain our leading sandal franchises, followed by the Crush. This quarter, we proactively destocked our Classic sandals as we prepare to re-launch a new version of this franchise in 2024. In Q4, we'll also test the Getaway, our newest sandal innovation. The Getaway is built around our newest proprietary material innovation, known as Free Feel Technology, and will initially come to market with four styles. For 2023, we expect our sandal business to be approximately $400 million.

From a marketing perspective, Q3 had some of our biggest wins to date. In July, our Barbie collaboration, which featured clogs, sandals, and Jibbitz sold out quickly ahead of the blockbuster movie launch, and we restocked the collection twice during the quarter. It was our number one licensed property in the quarter. In August, we dropped our fourth Lightning McQueen adult clog, with a very strong unveil on TikTok, garnering approximately 38 million views, our best-performing TikTok ever. Finally, in September, we launched Shrek globally online and with select retail partners. This launch gathered over 300 million global media impressions, and helped land Crocs as the number three on Hypebeast rankings.

These partnerships, among several others, brought new consumers to our brand and to our social channels. In fact, we crossed the two million follower mark on Instagram in September, and recently crossed the two million follower mark on TikTok. In October, we celebrated our biggest Croctober yet, with a fan-inspired Crocs Classic cowboy boot generating significant buzz, garnering 6.2 billion global media impressions through the month-long celebration, with the boot almost completely selling out globally in a few days. At $120 per pair, this was our highest price point Croctober shoe to date, and gives us confidence in the permission our band has with consumers.

Asia is another important long-term growth driver for the Crocs brand, as the brand is currently under-penetrated relative to the U.S. In Q3, Asia revenues grew by 29% in constant currency. Growth was again broad-based, with strong brand momentum across the region. We've continued to invest in talent in the region. During Q3, we welcomed Carol Chen, our new SVP and General Manager of APAC, who joined us following a 22-year career at Nike.

Drilling down into China, we had another exceptional quarter of growth while Q3 revenues increased over 90% in constant currency ahead of our expectations. Crocs rising popularity in China has created a passionate following with a hashtag known as Dòng mén or crocs followers. We now have close to 60 million Dòng mén hashtags on Red, up from approximately 40 million at the end of Q2.

In the quarter, we had a particularly successful Big Brand Day campaign, which leveraged the introduction of the Siren silhouette, a Tmall first launch. Revenue during this campaign bested our internal targets handily, driven by a traffic and record-high average order value which underscored our strategy to drive quality business through new product introductions. Finally on the sustainability front, Crocs is taking steps to further its circularity ambitions.

With the recent launch of our new Retail Takeback Program piloting this week in 45 of our U.S. retail stores, we are inviting consumers to give all Crocs new life by dropping Crocs in any condition in collection bins at participating stores. Through this effort, Crocs is working to keep shoes on feet for those who need them and keep shoes out of landfills.

Turning to HEYDUDE, I remain confident in the brand health metrics that underscore how beloved this brand is with consumers. This fall, HEYDUDE was the number 7 favorite footwear brand in The Piper Sandler Taking Stock With Teens survey, taking the highest share we've seen to-date. In under-penetrated markets like the northeast, mind share almost tripled among the teen demographic.

Despite a tough footwear backdrop, we are pleased with the performance of our strategic accounts during the back-to-school season. Strategic wholesale now represents 50% of our brand sales mix, up from 39% last year. In Q3, sellout from our strategic accounts was up 28% year-over-year offset by the rationalization of non-strategic accounts. From a product perspective, we are focused on new style introductions that create heat and drive new consumers to our brand while working down our carryover inventory.

During the back-to-school season, top-selling styles included core icons like the Wally Sox Micro in black alongside our updated icons like the Wendy Funk Mono in electric Pink. We also saw continuous strength in our Sirocco Sneaker which rounded out our top-selling styles. In the third quarter, we dropped our second Montreal collaboration with sell-through rates of greater than 60%, attracting an influx of younger consumers to our buyer file.

In September, there was tremendous excitement around our first ever collegiate collection which featured 12 schools alongside several NIL athletes who will act as brand ambassadors. We had strong consumer feedback as several schools sold out of the collection in the first five days. In August, we entered long-term partnership with Dude Perfect, a content group that is known for its humor and iconic trick shots.

Dude Perfect has amassed a powerful social community with approximately 90 million followers across YouTube, TikTok, and Instagram, and believes in coming together in good times, a brand ethos consistent with HEYDUDE. Leveraging our consumer insights that over 50% of our buyers give HEYDUDEs as gifts, Dude Perfect will be the face of a happy holidudes holiday programming.

As I reflect on where we are as a brand, I remain as confident in the long-term opportunities as I was when we acquired HEYDUDE. We believe that the brand's versatility, the products easy on- and off-nature, iconic silhouettes, and the permissions into new categories and regions remain unparalleled. That said, I acknowledge that there has been several growing pains this past year. Some of our own doing and others tied to the macro backdrop.

I want to take the time to share our learnings and our recent actions designed to bring the brand to a healthy pool market. In 2022, we accelerated growth within our strategic accounts. And, we did it fast. The intent of this decision was to build brand awareness and secure a shelf space with our most important retail partners.

We have delivered on both of these goals. As evidenced in our recent brand health tracker aided awareness of HEYDUDE brand in North America is now at 32% in Q3, up from 18% in Q1. That said, we recognize the need to be better around driving effective segmentation alongside new product introductions to sustain this broader customer base. There was also more carryover inventory in our legacy customers than we had expected, which further diluted our offerings.

Year-to-date, we have made considerable progress in cleaning up our inventory and are pleased that our HEYDUDE inventory ended down 41% from Q3 last year. We have also made several key hires over the past 12 months to fortify our efforts in North American marketplace management including hiring a GM of North America, VP of global category and general management, and other talents in product design, wholesale sales, and consumer insights.

We're already seeing the benefits of the augmented team and believe this collective impact will build as we move throughout 2024. As we have talked about on our previous calls, we are anniversarying last year's pipeline fill, which impacted Q3 by approximately $60 million. And we expect it be approximately $50 million headwind in Q4, unchanged from our former outlook. What has changed since we last updated you in July, retailers are more cautious around our HEYDUDE brand and out ones demand was lighter than we previously expected.

For the industry, post back-to-school wholesale market has been soft as consumers have pulled back and footfall has been down double digits. Our HEYDUDE brand, which has limited history with retailers, has seen a more restricted open to buy as we look into the spring season. In sharp contrast, our spring order books for Crocs brands are strong for the first-half of 2024, reflecting the ongoing momentum we see in the Crocs brand.

Taking the environment aside, we made an important pivot to our digital pricing strategy in September. Specifically, we made a decision to stop price matching with the gray market goods that are selling on Amazon, forfeiting near-term sales to prioritize long-term market health. We know it's the right decision for the brand going forward. Already, we are seeing immediate positive impacts with ASP up over $10 on Amazon and the pivot has been acknowledged by a wholesale partners. While this will hinder sales growth in Q4, and possibly into the first-half of next year, we believe this will set us up for a much cleaner marketplace as we move throughout 2024 as well as protect the brand.

Unauthorized inventory levels have improved versus where they were in June and based on our current visibility, we expect Gray market goods to be in a substantially better position in the first-half of 2024. While we are not guiding to 2024, we would expect HEYDUDE wholesale revenues in North America to remain negative through Q2 by in part to macro and impart you to a decision to pull macro promotional activity prioritizing brand health a marketplace management.

Beyond this year, I would like to provide some of the building blocks and how I thinking about HEYDUDE's growth agenda. First, we're adopting an omnichannel approach to drive engagement and meet consumers where they shop. In addition to strengthening our digital capabilities and staying disciplined with strategic wholesale partners, we'll explore brand of creative opportunities.

To that end, were in the early days of developing an outlet retail strategy for the HEYDUDE brand, leveraging Crocs successful retail playbook. We've opened our first outlet locations and expect to have five locations by the end of the year. Second, we're remaining a laser focus on winning with a US strategic wholesale partners to improve segmentation and differentiation.

In 2024, we'll focus on strengthening a family channel partners further tapping into the Sporting Goods channel where we have ample whitespace and elevating our approach with multi-specialty. We also expect to start 2024 with a much cleaner account base having shot at over 50% was 600 accounts during the year. We have also pullback on digital rights for accounts that fall outside of our strategic accounts. Third, International, we have set up a few test markets in Europe, and laying the groundwork to expand in new international markets in the next two to three years. Well, we use an approach that is consistent with our Crocs playbook, go direct to markets where we a direct for Crocs and utilize distribution partners in markets where we are indirectly as Crocs.

In summary, our Crocs brand has never been stronger and we remain steadfast on executing a global long-term strategy. With HEYDUDE, we focus on protecting profitability and elevating market place management even if that comes at the expense of near-term revenues, in an effort to support consistent profitable growth on the long term.

I will now turn the call over to Anne for review our third quarter financial results in more details.

Anne Mehlman

Thank you, Andrew, and good morning, everyone. I will begin with a short recap of our third quarter results. All revenue growth rates will be sighted on cons and currency basis and less otherwise stated. For reconciliation of the Non-GAAP amounts mentioned to their equivalent GAAP amounts, please refer to this morning's press release. We had a strong third quarter with over a billion dollars in consolidated revenue representing approximately 6% growth year over year.

We delivered another quarter of industry leading margins with adjusted gross margin a 57.4%, adjusted operating margin 28.3%, an adjusted diluted EPS growth of 9%. Our portfolio is diversified from a brand channel and geography perspective. On a trailing 12 months basis and in Q3 Crocs brand revenues were 75% of total revenues and HEYDUDE brand revenues were 25%. Channel mix was well-balanced with wholesale revenues representing 53% of TTM revenue and DTC at 40%.

Finally, approximately 33% of total TTM revenues and 40% of Crocs brand TTM revenues were from international market. During the third quarter, Crocs brand revenues were $799 million growing 11% relative to prior year and driven by strong DTC growth with 18.4%. The brand sold 29 million pairs of shoes, a decrease of 4% from last year. The unit declined came almost entirely from our EMEALA region tied to the corrective actions we took last quarter to curtail a significant African distributor that we believe was diverting goods to the US Gray market.

The Crocs brand average selling price during Q3 was $27.25 which was up 15% on a constant currency basis driven by product mix, fewer DTC promotion, international price increases, and channel mix. Within the Crocs brands, Crocs grew double digits and continued to generate demand with newer products such as Echo, Mega Crush and Height in Asia. Kids is also developing into a solid category for the brand and took significant share during the back-to-school season, representing approximately 20% of footwear revenues. Sandals increased 6% in Q3. As Andrew mentioned, sandal growth was lighter in Q3 as we destocked the classic franchise ahead of relaunching an updated line in 2024.

Finally, Jibbitz continues to create excitement and engagement with consumers around the world, growing 15 percent from last year, with growth across all three regions, but particularly strong in Asia.

Now, let's discuss a few Crocs brand highlights by region. In North America, third quarter revenues increased 8% to $481 million. We gained significant market share in a declining U.S. footwear market. North America DTC comparable sales were up 10.2%. Wholesale revenues decreased 1% as double-digit brick-and-mortar wholesale growth was offset by declines to Amazon as we evolve our distribution model on Amazon. This shift negatively impacted unit growth and positively impacted ASP growth in our North America region.

As we look into 2024, we are pleased with the strength of our spring order book for North America wholesale. Crocs brand Q3 revenues in Asia grew 29% to $175 million, and growth was broad-based across countries and channels. Australia led the growth with revenues increasing triple digits, and China grew over 90% versus last year. South Korea and Southeast Asia each saw strong double-digit growth rates in the quarter.

Crocs brand revenues for Amelia were $143 million, up 3% from the third quarter of 2022. This quarter, we saw robust double-digit growth in the U.K. and France. This strength was somewhat offset by Germany, which weakened during the quarter against a tough economic backdrop.

As previously mentioned, we terminated a relationship with a significant distributor servicing Africa in Q2. In Q3, we saw an $8 million revenue headwind from this corrective action, and we expect to see a $13 million headwind in Q4, bringing the year to a cumulative $29 million revenue headwind.

Turning to HEYDUDE, Q3 revenues were $247 million, a decrease of 9% from last year. During Q3, the brand sold 8.3 million pairs of shoes, a decrease of 11% over last year. HEYDUDE average selling price during Q3 was $29.68, a 3% higher than prior year. Its channel mix into DTC and product mix in wholesale was partially offset by double-digit pricing declines on e-commerce.

As a reminder, our average selling price is a basic average and not adjusted for channel dynamics. Wholesale revenues were down 20% from Q3 last year, as we continue to let pipeline fill, and as lower consumer footfall led to retailers seeking a more conservative approach to at-once orders. The DTC channel, which is predominantly e-commerce, led the growth with revenues increasing 15% from last year.

Consolidated adjusted growth margins for the third quarter were 57.4%, increasing 230 basis points from last year, driven by favorability in ocean freight rates and the absence of air freight, as well as lower promotional activity in the Crocs Brand. These were both partially offset by higher overhead and fulfillment costs associated with our HEYDUDE distribution network inefficiency.

Turning to the brands, adjusted gross margin for the Crocs Brand was 62.1%, or 460 basis points higher than prior year. Key drivers of this improvement include 340 basis points from lower freight, fewer year-over-year promotions, partially offset by product mix.

HEYDUDE adjusted gross margins were 42.8%, down 600 basis points from prior year. Approximately 500 basis points of margin headwind came from higher levels of discounting in our digital channels.

Distribution and logistics inefficiencies also remain headwinds. Offsetting these headwinds, we saw lower inbound freight in the quarter. During the third quarter, consolidated adjusted SG&A represented 29.1% of revenues, which is 190 basis points higher than last year, as we invested more in talent and marketing for both brands to support our growth trajectory, and we annualized additional investment for HEYDUDE.

Our third quarter consolidated adjusted operating income was $296 million, an increase to prior year by 8%, and consolidated adjusted operating margins increased 40 basis points, remaining best in class at 28.3%.

Our third quarter non-GAAP diluted earnings per share increased 9% to $3.25. Our continued strong free cash flow generation enabled us to repay approximately $90 million of debt in Q3, reducing borrowings to approximately $2 billion.

At the end of Q3, our gross leverage was approximately 1.7 times, as we ended the third quarter with $127 million of cash and cash equivalents. During Q3, we resumed our share purchase activity and completed $150 million of share buybacks, repurchasing 1.4 million shares at an average price of $107.85. We currently have $900 million remaining on our share repurchase authorization.

We will continue to balance debt repayment and share repurchases and remains committed to our long-term net leverage target of 1 to 1.5 times. Our inventory balance at September 30, 2023, was $390 million, a decline of 24% to last year. Crocs Brand inventory was $279 million, down 14% to prior year, and HEYDUDE inventory was $111 million, a decrease of 41% to prior year.

Inventory turns continue to improve, and we are very pleased with the health of our inventory. As we look forward, I would like to share our current outlook for the fourth quarter and full fiscal 2023. All numbers will be on a reported basis, unless otherwise stated. While we are very pleased by our consolidated results in the first nine months of the year and the standout performance of our Crocs Brand, we recognize our HEYDUDE performance has fallen short of expectations.

As Andrew mentioned, we took actions during Q3 to prioritize longer-term marketplace health. As such, we are reducing our expectations for Q4 in the full-year. For fiscal 2023, we now expect consolidated Crocs Inc. revenue growth to be 10% to 11% compared to 2022, down from the prior range of 12.5% to 14.5% growth and resulting in full-year revenues of approximately $3.905 to $3.940 billion.

From a brand perspective, our expectations for the Crocs Brand remain unchanged at 12% to 13% revenue growth, despite a tougher FX headwind than we previously projected. For HEYDUDE, we are lowering our full-year revenue outlook to up approximately 4% to 6% on a reported basis, down from our prior range of 14% to 18% growth. This translates to a contraction of 4% to 6% on the 2022 pro forma revenues of $986 million.

As always, we are focused on best-in-class profitability. We continue to expect our consolidated growth margins to be greater than 55.5% led by the Crocs brand. Given the confidence we have in our brand's long term, we are making a conscious effort to continue to invest across the enterprise, and we now expect full-year adjusted operating margins of approximately 27%.

Our adjusted diluted earnings per share outlook moves to $11.55 to $11.85, down from our prior guidance range of $11.83 to $12.22. For Q4, we expect consolidated revenues to be between $903 million and $938 million, implying a contraction of 1% to 4% from last year.

Within the brands, we expect Crocs to grow 4% to 7%, and HEYDUDE to be down 20% to 25%. We expect Q4 adjusted operating margin to be approximately 21% and adjusted diluted earnings per share of $2.05 to $2.35.

At this time, I'll turn the call back over to Andrew for his final thoughts.

Andrew Rees

Thank you, Anne. As we look forward, our focus remains squarely on sustaining brand health, investing behind market share gains, and supporting durable revenue and profit growth. I remain confident in our brands, our leadership, and a significant opportunity ahead of us to take share in the casual footwear market.

At this time, we'll open the call for questions.

Question-and-Answer Session

Operator

We will now begin the question and answer session. [Operator Instructions] Our first question comes from Jonathan Komp from Baird. Please go ahead.

Jonathan Komp

Hi, thank you. Good morning. I want to ask first on HEYDUDE. Maybe, Anne, if you could clarify the fourth quarter outlook, just broad expectations for the two channels. And for your strategic accounts and wholesale, are you losing shelf space or what should we make of the reported revenue trend there? And then maybe, Andrew, more broadly for 2024, I want to get your thoughts, I know when you bought the brand you talked about revenue north of $1 billion for 2024. Is that still a realistic possibility or has been pushed out a while? And when you think about the factors to drive sell-throughs, how do you rank orders or the biggest opportunities in the next year?

Andrew Rees

Yes, okay, let me talk about Q4 shelf space. Anne will then give you some updates on the channel expectations for HEYDUDE, and then I'll come back and talk about '24. So, from a Q4 perspective, we don't believe we're losing shelf space. In fact, we're not losing shelf space in our strategic accounts. We have ample evidence for that. We're taking down our sell-in expectations to allow us to lower in-channel inventories. We're doing that in a number of ways; one, proactive cancellation of prior orders so that there's less inventory flowing into the channel. We're also supporting our wholesale partners with some inventory cleanup that includes, so both returns and also some markdown funding so they can clean their inventories in the fourth quarter of this year. The strategic accounts in the Q3 were up 28% in terms of their sellout. And we think they will continue to grow in terms of sellout and the brand will gain share in the fourth quarter.

Anne Mehlman

And then, Jon, for your question on clarifying HEYDUDE growth, so our full-year HEYDUDE guidance on a reported basis is 4% to 6%, on a pro forma basis it's to shrink 4% to 6%. So, that implies that our Q4 growth for HEYDUDE, our Q4 would be negative 20 to negative 25. It's the revenue guide. And then when you think about channels, that's, as we talked about, it's still -- that implies negative wholesale. And then we expect DTC to be slightly better than that.

Andrew Rees

And then from a '24 perspective, last part of your question, Jon, yes, I think we're very confident the brand will be north of $1 billion in 2024. We do anticipate that wholesale sales, which is obviously predominantly North America, will be down in the first part of the year. But we're confident that DTC will be up and, overall, would drive growth for the full-year.

Jonathan Komp

Okay. And is it possible, Andrew, just your thinking today, I know it's early, but in terms of the biggest contributors to the sell-through, whether it's some of the distribution capacity, new products, new geographies, how are you thinking about the biggest drivers as they line up sitting here today?

Andrew Rees

Yes, so I think there's a few things going on. One is, I think, account rationalization. So, as we think off sellout, sellout at our strategic accounts has been strong, as we highlighted the 28% growth in Q3, and I think we published the growth rates that we've seen in prior quarters. So, the strategic accounts, HEYDUDE is performing well with those accounts. We have rationalized a significant number of non-strategic accounts or legacy accounts about 50%, we closed over 600 doors by the time we get to the end of the year. We've also rationalized the digital selling for the non-strategic accounts.

There was a very long list of accounts that historically had the rights to sell digitally. They have all been revoked apart from our core strategic accounts. So, we're doing the hard work to get a significant reset for the brand in the North America marketplace with our wholesale partners. We do anticipate our wholesale partners to plan their overall business pretty conservatively in this consumer environment, both through the fourth quarter of this year and in the first part of next year. And I think we also are very focused on driving improved product differentiation and segmentation across our wholesale partners, with both new product introductions.

I think we feel very confident about the pipeline of new products that we have. And you've seen us start to ramp up the licensing and collaboration engine that we use on Crocs in HEYDUDE, you've seen a couple of those, we talked about it in our prepared remarks, and that will accelerate through the back-half of this year into next year.

Jonathan Komp

Okay, that's very helpful. And then just one, and if I could on the fourth quarter operating margin target, could you just tell me there, are you embedding any change in promotional activity for the Crocs brand in the gross margin there? And G&A, are you changing the expectations at all for the slightly more challenging top line environment here? Thanks again.

Anne Mehlman

Yes, so a couple of things. I would say we're really pleased, overall, with our Crocs gross margins. And we reaffirmed our gross margin guidance for the year. So, we actually think, from a promotional standpoint, year-over-year promotions, we're planning flat to last year. We'll participate in normal promotional periods, but we don't see or anticipate any big change. And then from an SG&A standpoint, we do think it's really important to invest for the future and not try to manage one quarter from a profitability standpoint. So, we do expect to continue invest SG&A, and that's how you get to the overall profitability guidance.

Operator

Our next question comes from Jim Duffy from Stifel. Please go ahead.

Jim Duffy

Well, thank you. Good morning. Wanted to ask a few questions on HEYDUDE, I guess, Andrew, I'll ask you the Monday morning quarterback, the HEYDUDE business, some, you've built a lot of awareness to the brand, generated a lot of cash, successfully paid down a lot of debt from the HEYDUDE deal. If you had to do it over again, what would you have done differently, and maybe would that give us some context for the extent of the marketplace challenge and maybe size to the spring order declines to give us context for that impact? Thanks.

Andrew Rees

Yes, I think that's a question, it's well-framed, Jim. As we look at the brand, we've grown it over 60% from a top line perspective since we've owned it. We've generated over, approximately, $472 million of EBIT since we've owned, it's had strong cash flow, and it's been accretive from day one. So, I think while there are some short-term challenges, it's been a great addition to our portfolio.

In terms of the challenges, I think we've really focused on three key areas. One is getting stronger control of in-market inventory. And I think the rationale here, so the Monday morning quarterback perspective, we sold in a lot of inventory in 2022 into the market. We wanted to penetrate the broad-based national accounts very quickly. And so we wanted to penetrate the broad-based national accounts for two reasons. We wanted to capture the shelf space. We also wanted to leverage the presence of the product on the shelf in the regions where the brand had not historically been distributed to raise brand awareness. I think that's worked extremely well.

We've definitely captured shelf space, and we've raised brand awareness. We talked in our prepared remarks as how we believe the awareness of the brand is now 32% on a national basis, up from 18% earlier in the year. But I think the level of inventory was too high. So, really what we're doing is proactively lowering in-channel inventories and working with our strategic accounts to clean up that inventory and putting them in a strong sell-through and in a more profitable position. That's painful in terms of sell-in, which is what you see showing up in our Q4 guidance and what you see in our anticipated Spring '24 order book.

The second thing is improving segmentation and differentiation such that all of our key customers that may trade, in some cases, in the same mall or in the same center, can continue to grow their businesses collectively. So, as we get a stronger innovation and stronger product pipeline, we believe we can effectively do that. And the third thing is taking control of pricing, particularly in the digital realm. We've talked about when we closed a lot of our international distributors, some of that excess inventory, and I think we didn't have full visibility to the amount of inventory that those distributors were holding. That has started to show up on Amazon, in the grey market. We've seen a lot of price pressure from that. Historically, we had a strategy where we thought we could compete from a price perspective and make sure we captured our fair share that was dragging down overall pricing in the market. So we've pivoted from that perspective, that's given up quite a bit of revenue expectation in the short term, but it's raised our ASPs, raised our profitability. It's obviously much more supportive of our wholesale customers. And we're hoping that Gray market inventory sells out quickly, and we can reset the digital market. So those are probably the three big buckets from a Monday morning quarterback perspective, and we're very confident that those will put us in a great position to continue to accelerate this brand in the long term.

Jim Duffy

Thank you for that. And question just on the HEYDUDE profits pool outlook into fiscal '24, do you still see HEYDUDE gross margin of 50% is achievable in fiscal '24? It looks like the inventories are tight and perhaps maybe even there's less clearance than this year, do you think that the HEYDUDE profit pool be in decline in fiscal '24?

Anne Mehlman

Yes, so first, I want to comment that, I think, inventories for both brands are in really good shape. So I would say that we're very pleased there. And as you mentioned, HEYDUDE inventory was down about 40% of the quarter. We're not ready to guide for next year at this point, but we do expect that HEYDUDE growth margins will improve next year as we have what's ASP pressure from the Gray market as well as we've talked about will have better distribution of logistics as we open up our distribution center in Q1 of next year.

Operator

Our next question comes from Abbie Zvejnieks from Piper Sandler. Please go ahead.

Abbie Zvejnieks

Great. Thanks so much for taking my question. Just on the gross margin, I know you maintain the 55.5% or greater than 55.5% that could still imply some like year over year pressure on the gross margin line item. And since you're not planning for a different promotional strategy at Crocs, can you just help us unpack what would lead the pressure on gross margin on the year over year business?

Anne Mehlman

Yes, so from a pressure on gross margin, I'm not completely sure that I understand the question, Abbie. I think for the overall 55.5 guide that would imply that gross margin for the fourth quarter will be up versus last year for overall consolidated by, I think, a couple 100 basis points. So maybe you can give me what you're thinking through.

Abbie Zvejnieks

Yes, I guess just like what's driving that pressure year over year?

Anne Mehlman

Yes, so we expect gross margins to increase for the year and we expect gross margin to be up for the fourth quarter specifically focused on the Crocs side. Again, that would be helps overall, we've had freight tailwinds all year and more full price selling on the Crocs side, which will be slightly offset year over year from the HEYDUDE side as those gross margins will decline in Q4 as we've seen all year, as we have a subpar distribution and logistics strategy, given where we are and so we can get into next year. But overall we do expect gross margins to be up year over year in Q4.

Abbie Zvejnieks

Okay. Got it, that's helpful. And then just on the HEYDUDE DTC expectations for... And they said it's better than wholesale, but can you just give any color on what you're seeing? I know maybe the pricing controls are impacting that, which is any color like order to date would be helpful.

Andrew Rees

Yes, I mean, I can give a little color. I don't think we're going to give any more specific metrics. From a DTC perspective, we have raised prices, particularly on the Amazon components, which shows up in DTC because it's a 3P model if you remember correct. So we no longer competing with the Gray market, so APS are up. Even in these last few weeks, we can see ASPs up on average $10 a pair, which is obviously very significant. That is given up some market share, the Gray market is taking a little bit greater share in the market. But we think Net-Net with some newness and excitement that will eject into the market that we overall can grow at DTC business.

We also highlighted in our prepared remarks, we will have opened by the end of the quarter five outlet stores, those are proper outlet stores. You may remember we had a number of clearance stores in, I would say, lower quality centers around the country where we were looking to liquidate some of the aged inventory that we bought at the acquisition. We have opened five proper outlet stores that showcase full-price goods at the front of the store, do have some liquidation capability, and also I think, showcase the brand and all of the various components of the brand. So those will also be in the DTC number for the quarter, and that will be obviously, a non-comp component.

Operator

Our next question comes from Tom Nickik from Wedbush Securities. Please go ahead.

Tom Nickik

Hey, thanks for taking my question. I know you've got a lot going on at HEYDUDE domestically, but in the past, you've kind of talked about expanding internationally, given how underpenetrated the brand is there. Do your plans to expand internationally get put on hold now, or do you kind of pump the brakes a little bit, given the challenges that you're seeing in the domestic market?

Andrew Rees

Yes, good question, Tom. In essence, no. We think the brand has significant global relevance. We've talked about in the past we've reshaped the international business. When we bought the brand, their distribution strategy was distributor-orientated, so they had a portfolio of about 35 distributors across the world, most of which were doing a poor job. We've terminated most of those distributors. There are two that continue to do a good job. I think we've highlighted this in the past, the distributor in Italy and the distributor in Spain. Those are both really nice businesses. They do well. They do a great job distributing the brand in the marketplace. And if I think about what is really a U.S.-centric brand, if they can succeed in those markets, those are some of the tougher markets in my view, for a U.S.-centric brand to perform. I think it gives you evidence that the brand can perform well poorly -- sorry, perform well across a broad range of international markets. We are putting some time and effort into, I would say, experiments as we try and understand which are the right markets to penetrate internationally. We know brand awareness is very, very low, but we are putting time, effort, and some resources against that. It will take kind of two to three years, but it does start next year.

Tom Nickik

All right. Thanks, Andrew, best of luck this holiday season.

Andrew Rees

Thank you.

Operator

The next question comes from Sam Poser from Williams Trading. Please go ahead.

Samuel Poser

Thank you all for taking my questions. I want to follow up on Monday morning quarterbacking here a little bit, Andrew. Could you make the argument that you focus much more on supply than on demand as you are selling goods in, and you are shifting to more of a demand-based way you are looking at the HEYDUDE business now?

Andrew Rees

Yes. I would not say it quite like that, but I think, in essence, you end up in the same place, Sam. Yes, we are certainly cutting supply into the wholesale arena to ensure that supply is pegged at or below demand. That is a demand-based environment. I think, as we sold in historically, we did not know where demand was going to be, but I do think we now have a lot more know where demand was going to be, but I do think we now have a much stronger lens on that. Yes, that is a reasonable way of saying it.

Samuel Poser

If you had to do it all over again, would you have grown the business as quickly as you did last year?

Andrew Rees

I probably would have done, but probably would have hoped that we could have had, I would say, stronger segmentation between the accounts such that we could give everybody the opportunities to succeed, and they were not competing against each other. I do think it was important to grab shelf space, which we were able to do very effectively. Obviously, it is not great if you are a public company to have one year of great growth and the next year of flat to contracting growth, but net-net, I think we have put ourselves in a good position from a brand and consumer perspective. I probably would do it, but probably do it in a better way and maybe slightly moderated.

Samuel Poser

Is the Las Vegas Distribution Center up and running now?

Anne Mehlman

Yes, this is Anne. We are mostly through construction, and it will be up and running in Q1.

Samuel Poser

Thanks. And then you talked about the sell-through rates or the sell-through of 28% in your strategic wholesale accounts. But what were the -- how much of that was at the -- how much of that was on sale? I mean, did the ASPs go down to drive that given the gray market and the amount of inventory in the marketplace?

Andrew Rees

The ASPs in the strategic wholesale accounts were actually up over the prior year. They were strong. So that wasn't a sell. That wasn't a promotional. Obviously, there are promotions during back-to-school, but that wasn't more promotional than the year before. The compression on ASPs was really on Digital, on Amazon, and on our own dot-com. So hopefully that answers your question.

Operator

The next question comes from Rick Patel from Raymond James. Please go ahead.

Rick Patel

Thank you. Good morning. I'm looking for additional color on the distribution of HEYDUDE. So can you paint a picture for what HEYDUDE distribution looked like earlier this year, perhaps in terms of number of doors, and where you expect it to shrink to as the brand right sizing goes on? And then as you think about 2024 and leaning into some of the growth areas and higher quality points of the business, where do you see this distribution evolving to?

Andrew Rees

Yes. I think I'd probably go back further than the beginning of this year. What I'd say is when we bought the brand, the brand had about 1,300 points of distribution that was regional and very much orientated towards small mom-and-pop accounts, right?. So of that 1,300 doors, we've closed over 600 accounts, so that's probably more doors than that. But we've closed over 600 accounts, many of them with single doors, but some might have had one or two. And we've really extended the brand into large national chains. And as we kind of think about the HEYDUDE brand, we see the HEYDUDE brand essentially being sold almost everywhere that the Crocs Brand is sold. So I think about the primary chain, we're talking about family footwear, we're talking about sporting goods, we're talking about mall-based specialty, and then I want to say also some sort of super regional chains. So I think we're mostly in the customers that we want to be in.

In a lot of those customers, were all doors, and there are a few of those customers we are partial doors, so we've got expansion opportunity. So it's been a pretty dramatic reshaping above the overall customer portfolio, and I think the future growth comes from a number of things. What comes from some customers extending to a broader proportion of their doors, it comes from a greater share of shelves in some doors, it also comes from accelerating sell-through with that demand perspective that Sam highlighted. So hopefully that answers your question, Rick.

Rick Patel

That's very helpful. Thank you. Can you also talk about what your fourth quarter operating margin expectations are by brand? And then what should we extrapolate from fourth quarter operating margins overall as we think about what the potential could be in 2024?

Anne Mehlman

Yes, so we don't guide fourth quarter operating margins by brand. Obviously, I think it'll be -- we've had strong operating margins in both of our brands. Our overall operating margin guide of 27% remains in its best-in-class. I wouldn't extrapolate Q4 to other quarters. As you said, we're going to invest in SG&A, so that we can continue to support from a marketing perspective and a consumer perspective the long-term growth potential of both of our brands and not manage for a quarter. But I think 27% operating margin overall, I feel really good about that overall.

Operator

Our next question comes from Laura Champine from Loop. Please go ahead.

Laura Champine

Thanks for taking my question. I first wanted to ask more about this guide for Q4 for HEYDUDE, just because it's such a significant downgrade from what we previously expected. If you bucket the change, how much of it is due to decisions that Crocs made to control distribution, and how much of it is something that happened to you, meaning wholesale customers ordering less and this sort of glut of inventory in the resale channel?

Andrew Rees

It's a little bit of both, right? I think what I'd say, as we work with our wholesale customers, I think they're pretty cautious about the way the consumer is reacting right now, particularly post-back-to-school. We talked about that in preparatory marketing. I think that extends well into next year. So, I think they're being cautious. They're looking to buy less inventory and put themselves in a stronger position. It is also proactive cancellations and returns that we're taking to, to clean up inventories for key customers to put them in a much stronger inventory position and a higher profit perspective. And it is also a lower digital selling expectation based on not competing with some of the competitive sources on a price perspective. So we're seeing higher margins, higher ASPs, but less revenues. So it's really a combination of all those factors.

Laura Champine

If retailers who are fairly new to the brand are cancelling orders and repositioning for lower inventories this Q4, what gives you the confidence that this brand can grow in 2024?

Andrew Rees

The sellout that we're seeing, so the consumer takeaway, right, so as we look at our data from our major retail customers both in Q3, which you kind of can see 28% increase in sell-out, and we look at the week-to-week data that we get right now, we are selling more units to the consumer than we sold last year. So the consumer is taking away more goods. The sell-in, which is our revenue, we're right-sizing inventory, but the consumer takeaway continues to grow.

Laura Champine

Got it. And then as we try to shape the year, do you think that Q1 looks like Q4? Meaning, for HEYDUDE, do you think that there'll still be some trend off with revenues down in this 20% range? Or should we see sort of immediate improvement because this is a Q4 issue?

Anne Mehlman

Laura, I don't think we're ready to guide specifically for next year yet. We'll guide during our normal time periods. But we did say that we believe wholesale will be negative in the first-half of next year. But we haven't kind of given shape to that as we work through kind of our spring order books and our expectations.

Operator

Our next question comes from Jeff Lick from B. Riley Financial. Please go ahead.

Jeff Lick

Good morning. Thanks for taking my question. Andrew, I was wondering if you could maybe just opine. It strikes me that HEYDUDE -- the similarities between HEYDUDE and Crocs, there's an awful lot of them. And when you joined Crocs back in the early to mid-2000s, it just seems like there's quite a lot of parallels here to where HEYDUDE is now and where Crocs was then. And I was just wondering if you could kind of talk through your thought process and how you might use that as a blueprint. And then lastly, has the thought that, "Hey, maybe we should just focus on maximizing profitability as opposed to revenue," has that kind of entered into the equation now?

Andrew Rees

So, I would agree and disagree, Jeff. I think that there is a very, very important parallel between the two brands and the work that we did to improve dramatically the performance of Crocs. There are a couple of parallels, right? One was managing the in-market inventories much more closely, which I think we've clearly articulated here that we're really trying to get on top of for HEYDUDE. I think the second is driving brand heat or demand, I think as Sam would say, for the brands through marketing, through limited supply, through licenses, collaborations, and really kind of, I would say, event-driven opportunities to drive the consumers to the brand. And we can accelerate and do more of that for HEYDUDE, which is definitely a parallel to Crocs. I would say way back when in the consumer's mind, Crocs was incredibly cold, right? So I think we just kind of used the Piper Sandler in-survey as a proxy, right? I think back then Crocs was number 38 on that list, right? So Crocs is now number six. HEYDUDE's not number 38. HEYDUDE's number seven, right? So it is a brand that resonates very strongly with a broad base of consumers. So I think that's a huge difference in terms of kind of what we're looking at here.

Anne Mehlman

And then in terms of maximizing for profitability, Jeff, we're maximizing for the long-term health of the brand, certainly prioritizing profitability from a gross margin standpoint, but not maximizing for profitability overall. We think it's really important for us to invest. We made a conscious decision to continue to invest in Q4. We certainly could maximize for short-term profitability, but we don't actually think that gets us the best long-term outcome.

Operator

Due to time constraints, this concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Andrew Rees

Yes. I just want to thank everybody for joining us this morning, and their continued interest in our company. And we wish everybody a happy holiday season when it comes around.

Operator

Conference has now concluded. Thank you for attending today's presentation. You may now disconnect.