Crocs, Inc. (CROX) Q1 2023 Earnings Call

Crocs, Inc. (NASDAQ:CROX) Q1 2023 Results Conference Call April 27, 2023 8:30 AM ET

Company Participants

Cori Lin - Vice President, Corporate Finance

Andrew Rees - Chief Executive Officer

Anne Mehlman - Executive Vice President & Chief Financial Officer

Conference Call Participants

Abbie Zvejnieks - Piper Sandler

Jonathan Komp - Baird

Tom Nikic - Wedbush Securities

Jeff Lick - B. Riley Financial

Jay Sole - UBS

Laura Champine - LOOP

Jim Duffy - Stifel

Mitch Kummetz - Seaport

Aubrey Tianello - BNP Paribas

Hale Holden - Barclays

Operator

Good day, and welcome to the Crocs, Inc. First Quarter 2023 Earnings Conference 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 Cori Lin, VP of Corporate Finance. Please go ahead, Cori.

Cori Lin

Good morning, everyone, and thank you for joining us today for the Crocs Inc First Quarter 2023 Earnings Call. Earlier this morning, we announced our latest quarterly results and a copy of the press release may be found on our website at crocs.com.

We would like to remind you that, some of the information provided on this call is forward-looking and accordingly is subject to the Safe Harbor provisions of the Federal Securities Laws. These statements include, but are not limited to, statements regarding our supply chain challenges, cost inflation, the acquisition of HEYDUDE and the benefits thereof, Crocs' strategy, plans, objectives, expectations, financial or otherwise and intentions, future financial results and growth potential, anticipated product portfolio, our ability to create and deliver shareholder value and statements regarding potential impacts to our business related to the COVID-19 pandemic.

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 the Crocs Annual Report on Form 10-K as well as other documents filed with the SEC for more information relating to 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'll turn the call over to Andrew.

Andrew Rees

Thank you, Cori, and good morning, everyone. I'm incredibly pleased with the strength of our brands, our first quarter results, and our outlook for 2023. The Crocs and HEYDUDE brands continued to be in high demand, which led to strong double-digit revenue growth. Our teams globally are focused on driving brand health, market share gains, and sustainable profitable growth.

Looking at the first quarter of 2023, Anne will review our financial results in more detail shortly, but here are a few highlights. Revenues of $884 million grew 36% on a constant currency basis and grew in all brands, regions and channels. Crocs brand revenues grew 22% constant currency with growth in all regions, and DTC comparable sales grew 19%, Crocs brand North America revenues grew 10% with DTC comparable growth of 12% and wholesale growth of 5%. HEYDUDE brand revenues were $235 million, up 15% on a pro forma basis.

Adjusted gross margins of 54% and adjusted operating margins of 28% were exceptional. Adjusted diluted EPS increased 27% to $2.61 per share. For the third year in a row, Crocs was named as one of the Top 10 most innovative brands by Fast Company. And earlier this week, we published our second annual ESG report, and the first report inclusive of the HEYDUDE brand. In summary, 2023 is off to a great start, and I would like to provide updates on the underlying health of our brands, long-term growth drivers for the Crocs brand and HEYDUDE expansion. Both of our brands are incredibly healthy as evidenced by our results and recent external studies.

The Crocs brand ranked the number two casual footwear brand amongst women and number three among men in a recent L.E.K. study of footwear and apparel brand heat. The Crocs brand ranked as a number six favorite footwear brand among teens in Piper Sandler's Spring 2023 Taking Stock with Teen Survey. The brand strengthened the most amongst male teens increasing mind share significantly compared to prior year. The HEYDUDE brand is gaining momentum in the United States, ranking the number one casual footwear brand amongst women and men in the L.E.K. study. In the Piper Sandler survey, the HEYDUDE brand took the number eight spot up from the number nine spot last spring.

With regards to product innovation, we recently focused on diversifying the clogged silhouette. The Echo franchise, which we launched last year, focused on a more male centric buy, but also inclusive of her has been an early global success. We are driving strong awareness with our typical marketing playbook. We have also innovated with height across many of our styles, such as a Mega Crush and the Classic platform flip and slide. Styles with height resonate particularly well in Asia and helping fuel our success in that region.

Turning to sandals. This category is an important growth initiative for Crocs, allowing us to expand into the adjacent $30 billion global sandal category. We believe our molded technologies, accessible price points, strong go-to-market will allow us to compete effectively in a relatively fragmented market. We are excited by our incredible Q1 sandals performance where revenues grew 65% compared to last year. Growth was robust in all regions and was highest in EMEALA, where sandal penetration was also the greatest. Our sandal portfolio well diversified this year, particularly as compared to last year alike newness following the Vietnam factory closures in 2021.

In our Classic franchise, the two straps on the slide continued to be top selling styles in addition to the newer introduction of the Classic Cozy. New introductions in the Brooklyn franchise including the Buckle and The Flip, as well as the new Mega Crush and Crush sandals, the all terrain sandal and the Echo Slide are also performing above expectations. We are also testing dozens of new styles this year and we will leverage our test of learn and speed capabilities to expand their opportunities in the future.

To drive sandal awareness and acquisition, with a robust marketing calendar this year. During Q1, activations focused on the Classic sandal and the new opening price point/franchise. Recently, the Brooklyn sandal was featured on the Today Show in the best selling fashion finds for Spring Summer segment. Overall, we are pleased with the sandal trajectory. Over the past three quarters with the average growth of over 45% and we are confident the sandal revenues will grow to approximately $400 million this year.

Asia is another important long term growth driver for the Cross brand, as the brand is currently under penetrated relative to the penetration here in the United States. In Q1, Asia revenues grew by 55% constant currency and growth was broad-based. We are particularly encouraged by the green shoots we are seeing in China, where we continue to invest in marketing, newness and digital during the pandemic.

Q1 revenues grew over 110% constant currency in China. The Crush Clog was the only footwear brand to win the 2022 best new products launch award by Tmall. The Crocs brand had the best Q1 growth on Tmall in China, amongst leading footwear and apparel brands. Outside of China, we're pleased with the brand momentum throughout the region, including India, South Korea, and Australia.

Turning to digital, another key Crocs brand growth driver. As the digital marketplace matures and our capabilities grow, we anticipate transitioning some of our retailers business that sits in our wholesale segment, to a direct digital sale, both across.com and our major marketplaces where we will sell directly to the consumer. Global retailers are also clearly attempting to manage their inventories more closely. The combination of these factors we believe will long term be very accretive for both brands as we have more brand control, higher ASP realization, and higher gross margins.

Now to HEYDUDE, we're incredibly pleased with the first year of the acquisition. The financial contribution of HEYDUDE exceeded our expectations with brand revenues of nearly $1 billion, EPS accretion and significant debt pay down in the first year. The foundation is strong as we enter our second year with the brand. With respect to our go-to-market strategy, we've successfully penetrated Crocs’ strategic accounts, which currently represent approximately 50% of HEYDUDE's wholesale business.

We quickly achieved top five casual brand status in North America family footwear accounts such as Rack Room and Famous Footwear. To focus our efforts, we will continue to prioritize these strategic accounts that can elevate the brand's position. We recently took steps to rationalize non-strategic accounts that we're not adequately supporting the brand.

From a product perspective, we introduced several new styles as we test and learn what resonates with the consumer. As we seek to expand the brand beyond the iconic Wally and Wendy, several recent introductions have been in the casual sneaker category. The Karin for Women and the newly introduced Sirocco are top selling styles on heydude.com, and we have early signs of success for the Cody, Conway and Sunapee.

The initial expansion into international is also on track. From a strategy perspective, we plan to go market in the same way as Crocs. Meaning, if we are directing a country with Crocs, we'll be direct with HEYDUDE. This year, we plan to test and learn in EMEALA with a few direct markets, UK, Germany, and the Netherlands, and a few distributor markets. Our efforts began earlier this month when we shipped our first HEYDUDE e-commerce orders out of our Netherlands distribution center and launched on Amazon. We'll continue to provide updates on our progress.

Finally, with respect to the integration this year, we have two significant initiatives underway, namely implementing ERP and building a new distribution center in Las Vegas. We anticipate these to be complete towards the end of the year. Both are significant investments required to support the growth of a billion dollar plus brand. We're excited about the progress we have made and the bright future for the HEYDUDE brand.

In summary, we have tremendous confidence in and clear evidence as to the underlying strength and growth potential of both the Crocs and HEYDUDE brands. We remain cautious relative to the consumer confidence in western markets and anticipate declining traffic patterns through the year. However our sell through for both of our brands continues to be robust and we believe we are benefiting from our democratic price points. Amidst the more challenging economic landscape, we believe we are well positioned to gain share.

I will now turn the call over to Anne, who will review our first quarter financial results in more detail.

Anne Mehlman

Thank you, Andrew, and good morning, everyone. I will begin with a short recap of our first quarter results. All revenue growth rates will be cited on a constant currency basis unless otherwise stated. For a reconciliation of the non-GAAP amounts mentioned to their equivalent GAAP amounts, please refer to this morning's press release.

As Andrew outlined, we had an exceptional first quarter with $884 million in consolidated revenues, representing 36.2% growth. We delivered another quarter of top tier profitability with adjusted gross margin of 54.2%, adjusted operating margin of 27.9% and adjusted diluted EPS growth of 27.3%. I will now detail our revenue highlights beginning with the Crocs brand.

During the first quarter, we sold 30.7 million pairs of shoes, an increase of 19.7% over last year. The Crocs brand average selling price during Q1 was $21, which was up 2.1% on a constant currency basis, driven by fewer discounts in Asia and improved pricing in EMEALA.

ASP declined 0.5% on a reported basis due to unfavorable effects. The addition of HEYDUDE has diversified our product portfolio. For Q1 Clog’s penetration was just over half of our total revenues. The casual silhouettes of HEYDUDE constituted 27% of total revenues and Crocs brand sandals were approximately 12% of total revenues.

From a Crocs brand perspective, Clog continued to exhibit double digit growth this quarter. As Andrew mentioned, sandals an important growth pillar for the future increased 65% in Q1 with growth in all regions. Finally, Jibbitz continues to create excitement and engagement with consumers globally, growing strong double digits from last year.

Now, let's review a few Crocs brand highlights by regions. In North America, the Crocs brand remains very healthy. First quarter revenues increased 10.3% to $351 million. The North America DTC channel for the Crocs brand, an indicator of underlying consumer demand was the key growth driver with DTC comparable sales of 12% on top of 18% comparable sales growth in the first quarter of 2022.

Wholesale revenues increased 6%. The wholesale revenue increase is also evidence that sell-in and sell-out are beginning to normalize, as we had anticipated to occur during the first half. International was again the largest growth driver for the Crocs brand in Q1. As we execute on our long-term growth plan to ignite the brand in Asia and EMEALA.

International represented 46% of Crocs brand revenues in the quarter. Crocs brand revenues in Asia grew 54.8% to $140 million during the first quarter. Growth was broad-based across countries and channels. China and Australia led the growth with revenues growing in excess of 110%, while Southeast Asia markets and South Korea also had exceptional growth.

Crocs brand revenues for EMEALA were $157 million, growing 25.1% with broad-based growth. Momentum has been building in several important markets with Q1 revenues increasing strong double digits driven by the UK, France, and Germany admits a very uncertain consumer backdrop.

Turning to HEYDUDE, revenues were $235 million, increasing 106% compared to the partial period in Q1 2022 and 15% on a pro forma basis. The DTC channel, which is predominantly e-commerce, led the growth with revenues increasing 141.1% versus last year. Digital penetration increased 420 basis points to 30.1%. As Andrew noted, the consumer love for the HEYDUDE brand is exceptional and we remain confident about realizing the full potential the Crocs playbook will have on the brand.

Consolidated adjusted gross margins for the first quarter were 54.2%, increasing 30 basis points from last year. Favorability and freight rates were partly offset by higher product costs, higher end of season clearance, and the addition of the HEYDUDE brand, currency negatively impacted consolidated gross margins by approximately 85 basis points. End of season clearance was more normalized this year, as last year inventory was extremely lean following the Vietnam shutdown.

Before I provide gross margin detail by brand, we will now disclose distribution and logistics costs that are reported within our cost of goods sold. This is to provide greater transparency enabled better comparison of our gross margins to many peers who report these costs in SG&A. For the first quarter, distribution and logistics costs totaled $105.1 million or 12% of total revenues. Excluding these costs, our gross margins are exceptional and are one of the structural advantages of our business model that contribute to our industry leading operating margins.

Turning to the brands. Adjusted gross margin for the Cross brand was 56.3% or 140 basis points higher than prior year. The significant improvement in freight of nearly 600 basis points included reduced airfreight of approximately 450 basis points was partly offset by the impact of higher end of season clearance of approximately 140 basis points, and inflationary cost pressures of approximately 70 basis points, currency negatively impacted margins by 115 basis points.

HEYDUDE adjusted gross margins were 49.6% as we start to a reduction in inbound freight rates. As we noted at year end, we expect HEYDUDE gross margins to sequentially improve over the course of the year, as the effective cost from legacy freight contract that take time to roll through the P&L and higher inventory storage costs in the short-term subside. During the first quarter of 2023, we leveraged consolidated adjusted SG&A 100 basis points, improving to 26.3% of revenues versus 27.3% last year. This improvement was achieved while still investing in talent and marketing for both brands.

Our first quarter adjusted operating income increased 40.8% to $247 million from last year. Consolidated adjusted operating margin increased 130 basis points to 27.9%. Our first quarter non-GAAP diluted earnings per share increased 27.3% to $2.61. Our liquidity position remains strong, as we ended the first quarter with $126 million with cash and cash equivalents and ample capacity on our revolving credit facility. We repaid $41 million of debt in the quarter, reducing borrowings to $2.28 billion. At the end of Q1, adjusted gross leverage was approximately 2.1x and net leverage was approximately 2x. We are confident in our ability to achieve gross leverage under 2x by the middle of this year.

Our inventory balance at March 31, 2023 was $476 million, an increase of 16.8% versus Q1 last year. Crocs brand inventory was $318 million up 10.3% and HEYDUDE inventory was $158 million up 32.6%. Our higher inventory balance reflects higher revenue growth and higher costs within inventory. As we look forward, I would like to share our current outlook for the second quarter and the balance of 2023.

All numbers will be on a reported basis unless otherwise stated. For Q2, we expect consolidated revenues to grow approximately 6% to 9% at current currency rates as we lap a high Q2 wholesale growth rate 2022, related to the Vietnam shutdowns in the prior year. We expect Q2 adjusted operating margin to be approximately 26% and adjusted diluted earnings per share of $2.83 to $2.98.

With our Q1 performance, we are raising our full year 2023 revenue outlook and expect growth of 11% to 14% on a reported basis, compared to 2022, resulting in full year revenues of approximately $3.95 billion to $4.05 billion at current currency rates. Revenue for the Crocs brand, we now expect to grow 7% to 9% on a reported basis. We expect the highest growth internationally driven by robust consumer demand.

For HEYDUDE, we are maintaining our full year outlook of mid 20% revenue growth on a reported basis. As always, we are focused on best-in-class profitability and now see our adjusted operating margin to be between 26% to 27% for the full year. We are raising our adjusted diluted earnings per share outlook to be between approximately $11.17 to $11.73.

In summary, 2023 is off to an excellent start and we look forward to another record setting year.

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, we're incredibly confident in the strengths of the Crocs and HEYDUDE brands, and our ability to drive market share gains and sustainable profitable growth. Our focus remains squarely on navigating current uncertainties and creating long-term shareholder value.

Operator, please 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 Abbie Zvejnieks from Piper Sandler. Abbie, please go ahead.

Abbie Zvejnieks

So just on that 2Q guide, can you just talk about what trends you're seeing maybe quarter to date especially in wholesale? I know you noted that more difficult compare and I guess why you expect a deceleration in Crocs brand revenue and then give it a little bit more color on that? Operating margin year over year decline of about 400 basis points in 2Q and like which buckets we should expect to see that deleverage?

Anne Mehlman

So, your first question on Q2. So, as we guided, we expect consolidated revenues to grow 6% to 9% current currency rates, and that's as we lack a high Q2 wholesale growth rate in 2022 really related to the Vietnam shutdown. So, if you remember back to last year we had a pretty big Q2 because things we had very low inventories in Q1. That's really the shift there. Overall, we don't talk a lot about what we're seeing end quarter, but I will say we're pretty pleased with what we're seeing at a sell-through from both brands in our wholesale channel at this point in time.

And then from a Q2 operating margin perspective, if you also remember back to last year, we had just purchased the HEYDUDE brand and had a lot of time to put investment behind that. So the first piece is SG&A is ramping up quite a bit from last year because we didn't have the SG&A that we have now to support HEYDUDE. And the second piece is that Q2 is a big marketing quarter for us, and so you will see marketing ramps. So, I do expect SG&A to deleverage year over year from a Q2 perspective.

Abbie Zvejnieks

And maybe one more just on the capital allocation strategy, once you hit that two times growth leverage target. I mean, what is your priority on debt pay down versus buybacks, I guess given the share price?

Anne Mehlman

Yes. So, we remitted to hitting below two times gross leverage in Q2, which then gives us flexibility, as you mentioned, to either to both pay down debt and restart share purchases. And we generate a lot of free cash flow and we're committed to doing both. Obviously, debt pay down is very important. Our long term leverage guide is to be below 1x to 1.5x gross. And so and with interest rates the way they are, it makes a lot of sense to continue to pay down debt, but we'll also prioritize buying back shares to make sense from an overall return perspective.

Operator

Thank you. And our next question comes from Jonathan Komp from Baird. Jonathan, please go ahead.

Jonathan Komp

Maybe just a little bit of a follow-up first if I could. Anne, can I follow up and ask about what you're expecting for Crocs D2C performance, largely because there's been a lot of volatile U.S. focused indicators the last couple of months, so any additional color there would be helpful on the D2C trends you're expecting? And then, Andrew, maybe just a broader question on the core clogs business and largely North America focused, are you seeing any signs that the core clogs business should give back some of the volume gains you've had the last few years as you focus more on sandals and other categories?

Andrew Rees

Yes. Let me -- maybe just, I'll hit both of those for you Jonathan. So, if you think about DTC, obviously DTC performance was very strong in both brands in Q1. That was probably a little bit better than we expected. And I would say, look, we're seeing great traffic trends, we're seeing great traffic trends to Crocs stores, Crocs website, and HEYDUDE digital presence. So I think that gives us tremendous confidence, that our brands are in demand and consumers are seeking them out in a single branded environment.

We think those compares probably get harder as the year goes on. We do anticipate consumer softening as the year goes on. I think, we saw a little bit of softening as quarter one went along. So, we're not necessarily baking the same performance we had in Q1 into the rest of our year. I think that's only prudent. And then, from a clog's growth perspective, I would say that's been somewhat of a highlight, right?

So, the way to think about it is we continue to see classic growth around the world as we continue to get classic penetration in many of our international markets. And we're also putting a lot of time and effort into diversifying the clog portfolio. I'd call out in particular the Echo I think many of you have seen that in U.S. retail -- U.S. wholesale accounts. It's performing particularly well here in the U.S. and in fact globally.

And then we've also -- I would also call out some of our height clogs, right? The crush and the mega crush performing particularly well in Asia where HEYDUDE is super important. So clogs continue to be a -- I say a long-term growth story for us, but there is definitely driving more diversification into that core product offering.

Jonathan Komp

Great. And then just one follow-up on Q2 modeling, if I could. Anne should we expect the SG&A growth to be similar or maybe at a faster rate than Q2, any further color there? And then, given that mix and continued improvements in freight should we expect that similarly positive gross margin performance in Q2?

Anne Mehlman

Yes. So I'll start with gross margin. So yes, we expect that gross margin will be up year-over-year in Q2on an adjusted basis. So I think, as we talked about -- we expect to see HEYDUDE improve throughout the year, as we see some of that higher freight rates roll off in inventory. We are comping pretty big air freight spend last year that we don't have this year. So those are all tailwinds from a gross margin perspective.

And I think actually from Q1 perspective, gross margin performed a little bit better than what we expected, some of that was DT CC mix, but also some pullback in discounting and better pricing in our overseas markets. And then from an SG&A standpoint, we do expect, as I mentioned before, SG&A to ramp into Q2. I think Q2 tends to be one of our higher SG&A spend quarter, just given the marketing that we put behind the brand in Q2 into our summer months.

Operator

Our next question comes from Tom Nikic from Wedbush Securities. Tom, please go ahead.

Tom Nikic

I wanted to follow up on HEYDUDE. I know obviously you had exceptional growth in 2022. 15% pro forma in Q1 seems a bit more modest, than what you had been growing in recent quarters, particularly with the distribution gains and getting into new stores and stuff like that, I guess we kind of would have expected stronger growth. Was there anything -- was it kind of parsing out some of the legacy doors that's kind of holding back HEYDUDE growth or anything like that? Just kind of trying to understand the puts and takes at HEYDUDE.

Andrew Rees

Yes. Great question Tom. So I would say, look, there is a lot going around HEYDUDE. So let me try and kind of add a little bit more color to that. Firstly, I'd say, we are super confident in our kind of mid-20s growth rate that we have guided for the brand for the full year. And I would say, as we look at the brand trajectory during the quarter, we are also very pleased with that increasing consumer awareness, both through our broader distribution, but also our marketing efforts. We continue to see tremendous customer loyalty from existing customers.

I think a statistic we have talked about in the past is the average customer has four pairs in their closets and we clearly see when we attract new customers, they buy incremental pairs relatively quickly. So, we see great improvement awareness for the brand. We see consumer affinity and we're pleased with our sell-throughs both on our DTC environment and also in the wholesale environment. As we had talked about in the past, we are constrained, right?

So we are strained with our distribution center and all of our kind of logistics capabilities through this year. So we did anticipate a slowing of the growth at mid-20s guide for the full year and obviously a little bit slower in Q1. We are definitely constrained. We are making significant investments to relieve those constraints, but they won't come online until the back end of the year and probably won't have an effect until next year.

The other thing that's also important to bear in mind, as you look to future quarters is, we had significant pipeline fill. So we opened a lot of big national accounts last year in Q2 and Q3. So when you open a big national account and your pipeline fill 400, 500, 600 doors, that's a significant amount of volume that you don't anniversary the following year. So you've also got to take that into consideration in Q2 and Q3.

And the last thing I'd say, as you did reference it in your question, the closure of the smaller customers, right? So, we're rationalizing our customer base the original owners of HEYDUDE and the agents they use for distribution opened a lot of very small accounts. And we've rationalized a significant number of them.

I think you've seen some of that in the press and that's not a significant drag on the revenue this quarter or for the rest of the year. It's a very small amount of money, but it does mean that we focus all of our time attention on our big leadership accounts, which we think will do a much better job supporting and elevating the brand. So, hopefully that gives you some real color about what's going on with HEYDUDE.

Operator

Thank you. Our next question comes from Jeff Lick from B. Riley Financial. Jeff, please go ahead.

Jeff Lick

Congrats on the quarter. I just was hoping you could give a little more color on China and India, how it unfolded relative to what your expectations were? And then just a little micro question on HEYDUDE, I was just wondering what your data shows in terms of the indexing and different geographies of the country. Obviously, the brand's always been a little hotter in the middle of the country, and I'm just kind of wondering where, what inning do you think it is on the coasts?

Andrew Rees

Okay, Yes. Thanks Jeff. I appreciate it. So, let me start with China and India. I think we prepared remarks. We called out China had over 110% growth in the quarter. Additionally, we called out that the brand. We got an award from Tmall, which we're really pleased to get with the launch of our crush product. There was an award associated with one of the most effective awards, sorry, launches of a new product integrated marketing program that we put together and we saw exceptional growth on Tmall.

And the key part of your question is it a little bit better or worse than we thought, but it's better than we thought, right? So, we've been investing and in China through the pandemic, we've invested in marketing. We've strengthened our team. We really kind of kept our foot on the gas even when the business performance was not what we expected.

And as the country is opening up, the consumer is back out shopping, we're seeing very strong performance really across all our channels, on our own digital channels, on Tmall in the stores that we own and also in our partner operated kind of mono branded franchise stores. So, definitely doing better than we thought and we're really excited because obviously it's a big market and we think that has a lot of future potential.

India also continues to be strong and so, that's a good market, a very good market for us. We continued a very strong trajectory in that marketplace. So, we're pleased with that. And as we think about Asia broadly, we're also seeing strong performance in -- continued strong performance in South Korea and Australia.

Turning to HEYDUDE in the U.S. the pattern that we see, look, this data is not easy to come by. So, I'm going to be sort of qualitative in nature. We definitely see much stronger brand awareness and brand residents in the sort of the heartland of the brand, which is sort of all down through the Midwest, down through Texas into down into -- down into to Florida. That's the heartland of the brand that has the highest awareness that has the highest kind of consumer resonance.

As we've expanded distribution to the coast, we're definitely seeing pretty significant improvements in brand awareness purchasing and brand relevance on the coasts. But it's off a very low base, right? So, the brand awareness on the coast was single digits, mid single digits. It's now a lot better than that, but it's still very low. So, we think we're doing the right things, we think we're on the right path, but that still represents a significant future opportunity.

Operator

We now have a question from Jay Sole from UBS. Jay, please go ahead.

Jay Sole

I might just ask about the HEYDUDE margins. In Q1, you pointed out that the adjusted gross margin was about 49.6 and the operating margin was 32.6. As you work on the ERP implementation in the new distribution center and presumably the DTC percentage of the business increases, how would you expect those numbers to trend going forward?

Anne Mehlman

Yes, so I think, one thing on the distribution center, our distribution center is more of a support from a wholesale side. So we do have some actual a little bit easier time servicing some of our DTC business. It's still hard because things still have to move through that, but we do use some outside three PL support for DTC.

So, I actually expect DTC to continue to outperform for HEYDUDE as well. That's on thee-com side is performing really well and we are opening up a little a few retail stores from an allied perspective for HEYDUDE, this year that will look similar to Crocs. So, we're, Jay pretty excited and pleased from the DTC side for HEYDUDE and Crocs as well.

Jay Sole

Got it. Okay. And if I can ask just one more just to follow up on China a little bit. Obviously huge growth in China this quarter, but can maybe, can you tell us what the China growth was last quarter? Obviously store closures probably impacted that, but or maybe just somehow dimensionalize what the dollar sales were in China this quarter, and sort of what you're really expecting for the year from China.

Andrew Rees

Yes. I mean, I can give you for the year, Jay, I don't really have the quarters, right here in front of me, but I think China for the year grew around 30% last year. That was much more back half weighted because and the way to think about the sort of the impact of the lockdowns in China, they were most severe in Q2, right? So, there were constraints in Q1 but the depth of the lockdowns were in Q2. So China grew up 30% last year round numbers and then obviously this is significant growth on top of that, but the growth was muted in Q1.

Anne Mehlman

Yes. If you look at ‘23 versus ‘21like on a two-year basis, we're still upwards of 85% growth from a -- in a reported, and in a constant it's like 95% growth. So even on a two-year basis, the growth in China is very, very strong kind of taking out some of the noise of the lockdowns.

Andrew Rees

Yes, and we don't break out dollars associated with China. And we're giving you kind of really high growth rates, but I would say the dollars are still way below what we think our potential is. So, we think we've got a long way to go at China.

Operator

Our next question comes from Laura Champine from LOOP. Laura, please go ahead.

Laura Champine

My understanding is that Q2 operating margins are usually better than Q1. When's the last time they were worse? And maybe tell us what's special about, it sounds like it's SG&A expense that's going to push EBIT margin lower sequentially. Can you be more specific about what's driving that?

Anne Mehlman

Yes, so it’s Anne. So I think normally our gross margins are lower in Q1, because of the mix of wholesale in Q1, which is a heavy wholesale quarter, which will hold true this year as well. Q2 will have higher gross margins, really from SG&A perspective. And what's really driving from a Q2 perspective is just again the investment in HEYDUDE.

So Q1, we are still ramping into Q2 from an investment standpoint from a HEYDUDE standpoint as we are adding. So that will be an add to that on the SG&A side for HEYDUDE, but also adding -- we always increase marketing for both brands into Q2, as that's a really important season from a revenue growth perspective and it's a higher DTC quarter.

So, there is more SG&A associated with it. But overall, feel very comfortable with our 26% operating margin still best-in-class, and then raising the year to 26% to 27%.

Operator

Our next question comes from Jim Duffy from Stifel. Jim, please go ahead.

Jim Duffy

Thank you. Good morning. First question is on the guide. You've given us a full year guide by brand. How do you expect the growth splits by brand in the second quarter?

Anne Mehlman

Yes. I think we expect both brands to grow in the second quarter. It's hard to give a guide by quarter things are still lumpy from a quarter perspectives by brand. We feel confident in the overall revenue growth and I think we will see growth from both brands in Q2.

Jim Duffy

Okay. And then can you give us an update on the state of HEYDUDE inventory? Have you cleared through that legacy product that you were referencing in the second half of last year? How do you feel about the current inventory positions for the HEYDUDE brand?

Andrew Rees

Yes. I think we feel good, Jim, about our inventory. And really it's important to kind of focus on two components. One is our in market inventories. I think we are well-positioned in market with good inventories in many of our leading strategic wholesale customers. And our inventory is turning -- is performing well. In terms of the inventory that we hold, I would say, we are in good shape relative to our future growth. So our quantum of inventory we think puts us in good shape relative to future growth and any legacy inventory we are working through pretty quickly. So we feel good about where we are and we think we are on a track record -- on a track trajectory here to get that dealt with pretty quickly this year.

Jim Duffy

Great. Thank you. And then I have a few more, I'll have for the follow-up session, but one last one. Andrew mentioned a little bit of softening as Q1 progressed. You've seen some glimpses of spring weather. Has that brought any lift to the business in recent weeks?

Andrew Rees

Yes. I mean, we don't really come in kind of in season. I would say, look, I think it's been widely reported. March was kind of tough from a weather perspective and that it did impact some of our kind of large national wholesale customers. And so that was clearly an issue I think in Q1. And look, the tax season was not great either, right? So that's the tax refund season when obviously a lot of refunds come out and people typically kind of spend that.

So that wasn't as strong as it's been in prior well. So that's kind of what I was referencing too. I think we have gone through a couple of weeks now with an Easter shift. So I don't think it's crystal clear, what's going on through April. But I think we are pretty confident in the traffic that we are seeing to our mono-branded environment. So we clearly can tell that our brands are very strong.

Operator

We have a question from Mitch Kummetz from Seaport. Mitch, please go ahead.

Mitch Kummetz

Andrew, you mentioned that sandals were up 65% in the quarter. Could you maybe speak to the sell in versus sell through how much of this was shipping in your spring order book versus good performance once that product hit retail or in your own direct channel?

Andrew Rees

Yes, so, in a nutshell, what I'd say is both Mitch, but let me kind of break that out a bit. Yes, you're absolutely right. Q1 is a big selling quarter, especially for sandals both here in the U.S. and kind of on a global basis, right? So, a large amount of that high growth that 65% is wholesale sell in. I would also say that sell-through we've been very pleased with sell through both on our DTC environments and also the sell through. We can monitor with our wholesale customers.

We believe all of the newness that we're bringing to our sandal category is really driving and the marketing we're doing to support it is really driving strong growth in the category. I would also point out that if we looked at the last three quarters, so once we got past the void of newness that we had in quarters one and two of last year, the last three quarters, I think 45% is our three quarter channel growth number. So that is in essence both sell-in and sell--through. So it's really both this is an important growth driver for the Crocs brand and I think we're seeing some real success in this category.

Mitch Kummetz

And then, I guess secondly on the HEYDUDE business. You mentioned momentum and some newer franchise and newer styles. I was hoping you might be able to tell us like what percent of the business is the Wally and the Wendy, and beyond those, like what would be the next bigger styles and how important are those to the business right now?

Andrew Rees

Yes, look, we don't break out the Wally Wendy penetration, but it's large, right? You can see that just going to any of our wholesale customers, you look at our website, the brand is anchored around those core silhouettes, those core silhouettes, Wally and Wendy, really typify what the consumer is looking for in the brand. They typify -- they're easy on and off, they're lightweight, they're comfortable, and they come in a wide variety of materials, styles, and colors.

So give the customer a tremendous diversity and choice, I would say, and they are a large part of the business and will continue to be a large part of the business, us introducing new styles in new areas is by no means trying to back away from the Wally and Wendy. That's super important. But the introductions we've made in -- what I would call kind of this casual sneaker arena have been really successful.

They're still small to date but sell-through is a high and they're performing very well. We think that's important for the brand because that's a very large category if we look at sort of casual sneakers as a very large addressable market.

Operator

Our next question is coming from Aubrey Tianello from BNP Paribas. Aubrey, please go ahead.

Aubrey Tianello

Just one for me. On the gross margin, curious if anything has changed with respect to the full year outlook. I think, you mentioned last call, we should be thinking about 58% for the Crocs brand and then about 55% to 55.5% on a consolidated basis. Is that still the right way to think about it?

Anne Mehlman

Yes, good morning, great question. I think actually it's going to be on the higher end of that. So I would say consolidated, adjusted gross margins, I would expect to be more in the approximately 55.5% that's really supported. We saw better gross margins in Q1 and rolling that through the year really supports that 26% to 27% adjusted operating margin. Justas we saw better freight costs from a HEYDUDE perspective in Q1 as well as better DTC performance and pricing overseas on the Croc side.

Operator

We have a question from Hale Holden from Barclays. Hale, please go ahead.

Hale Holden

The new HEYDUDE silhouettes are pretty exciting. And I was wondering if you could talk about consumer interest in them, because I seem like there are slightly higher price points than the Wally and Wendy and your ability to get incremental shell space at your wholesale partners forum.

Andrew Rees

Yes, so I think, we -- but it's not happened yet. So the short answer is yes, we will get an incremental shell space based on them. But it's not significant yet, right? So, with these new introductions, the way we kind of approach this is we really want to launch them on our own channels. So, really the strongest presentation around Karin, the Cody, the Conway, and the Sunapee, which some of the new silhouettes is on DTC, where they've been performing very well.

There are select kind of leading wholesale accounts that have those. I would say the bulk of the deliveries for those to wholesale will be later in the summer to back-to-school. I would also say look into the future. We had a very strong boot season in the HEYDUDE brand last year. We make a lightweight, I would say, democratically priced, very comfortable boot. It performed very well. That was mainly legacy product and we've done significant updates and improvements for that. And we're very optimistic about our boot season for the back end of this year too.

Operator

And 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

Yes, thank you. I just want to thank everybody for listening in this morning and their interest in our company. We appreciate the questions. Thank you.

Operator

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