Crocs, Inc. (CROX) Q2 2021 Earnings Report, Transcript and Summary

Good day and thank you for standing by. Welcome to the Crocs, Inc. Second Quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Cori Lin, please go ahead.

Good morning everyone and thank you for joining us today for the Crocs second quarter 2021 earnings call. Earlier this morning, we announced our latest quarterly results and a copy of the press release found on our website at crocs.com. We would like to remind you that some of the information provided on this call is forward-looking and accordingly is subject to the Safe Harbor provisions of the federal securities laws. These statements include, but are not limited to statements regarding potential impacts to our business related to the COVID-19 pandemic. Crocs is not obligated to update these forward-looking statements to reflect the impact of future events. We caution you that all forward-looking statements are subject to risks and uncertainties described in the Risk Factors section of our Annual Report on Form 10-K. Accordingly, actual results could differ materially from those described on this call. Please refer to Crocs' Annual Report on Form 10-K as well as other documents filed with the SEC for more information relating to these risk factors. Adjusted gross margin, income from operations, operating margin and earnings per diluted common share are non-GAAP measures. A reconciliation of these amounts to their GAAP counterparts is contained in the press release we issued earlier this morning. Joining us today on the call 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.

Thank you Corinne and good morning everyone. Our Q2 results were exceptional, as we continue to see strong demand for the Crocs brand globally. Our confidence in the strength of our brand is also reflected in our raised 2021 guidance. Looking beyond this year, we're announcing that the Crocs brand will have net zero emissions by 2030. We will raise our already low emission footprint per shoe and enable us to provide comfort without carbon to our fans worldwide. I'm excited for our future and I'm confident we can deliver sustained highly profitable growth while having a positive impact on our planet and our communities. Turning to the highlights from the second quarter of 2021. Revenues nearly doubled versus prior year to $641 million and increased 79% from 2019. Revenue growth was strong across all regions with the Americas up 136% and on a constant currency basis EMEA up 53% and Asia up 27%. [indiscernible] was one of our long term growth pillars grew by 57% in the second quarter and 38% for the first half. Digital sales grew by 25% versus prior year and an impressive 99% versus 2019 to represent 36% of revenues. ETC grew 79% versus prior year and 86% versus 2019 to represent 52% of revenues. Adjusted operating income more than doubled to $196 million and adjusted operating margins expanded to a record of 31%. Adjusted diluted earnings per share increased by $1.22 to $2.23. Underlying these incredible results is the iconic brand we have built. To continue to feel brand relevance and consideration globally we leveraged digital and social marketing, influencer campaigns and collaborations. We were the first footwear brand to market an augmented reality experience on TikTok with a #GetCrocd challenge featuring trial sandals and clogs for [Jibbit]. Globally this drove over 8 billion views and over 1 million uses of the hashtag. We also generated buzz when Balenciaga the spring 2022 runway featured our second collaboration together comprises of a knee-high rain boot, and a croc Malone saleto. Global collaboration highlights include London based gateway brand [indiscernible] in Russia rave music brand Little Big. In Japan highly influential retail Beams, and in South Korea, world famous Ramyun brand nongshim. Finally, in the U.S., we reintroduced our free path for healthcare initiative during National Nurses Week, where we gave away 50,000 pair of Crocs work shoes to frontline caregivers. We're proud of the brand we have built, and especially pleased with the initiatives, such as free pair for healthcare that enable the Crocs brand and business to have a positive impact in our communities. This week, we announced our next step and having a positive impact on our planet; our commitment to becoming a net zero emissions by 2030. Our inherently simple approach to design the materials we use and how our shoes are manufactured means that classic clog already has a low carbon footprint of only 3.94 kilograms of carbon per pair. We're taking it a step further with a plan to achieve net zero emissions through sustainable ingredients, and packaging as well as a responsible resource use. We anticipate our consumers will be as excited as we are about our commitment to having a positive impact on our planet. In addition to reducing our environmental footprint, our comfort journey will increasingly include uplifting our communities, and creating a welcoming environment for everyone rooted in a culture of transparency and accountability. This week, we launched the new brand purpose section of our Crocs.com site, and a new ESG section of our investor site to share our progress. I encourage you to review the content that we will discuss in greater detail at our upcoming investor day. Now let's turn to second quarter operating highlights. We're very excited by the growth we're seeing in all key product pillars, clogs, sandals and Jibbitz. Clog sales were outstanding, increasing 101% year-over-year to represent 74% of total footwear revenues versus 68% last year. We continue to innovate and encouraged by the initial results of our new platform and seasonal colors and prints. Sandal sales were a standout increasing 57% for Q2 and 38% for the first half driven by our classic fly and classic sandal, the both feature personalization as well as and Tulum franchises. In addition to this strong growth we're very pleased in a global brand study. Sample consideration is now in line with that of clogs. Given the strength of clogs, sandals represented 20% of footwear sales for the quarter versus 23% last year. And as we have shared while we expect clog growth to outpace sandals this year we anticipate that over the longer term sandals will grow faster than clogs. Jibbitz sales will once again exceptional more than tripling for the quarter versus last year. The global personalization mega trend continues and Crocs fans enjoys experience of shopping for charm in our retail and wholesale stores. From a channel perspective, global DTC revenues, which include revenues from e-commerce and company on retail stores grew by 79%. Retail had extraordinary performance with traffic and conversion of significantly for more normalized second quarter of 2019. E-commerce performed well and this was the 17th consecutive quarter a double digit e-commerce growth. Digital sales grew 25% on top of an elevated 2020 compare to represent 36% of our second quarter sales compared to 56% last year and 33% in 2019. Digital remains a top priority and we continue to invest in our customer experience globally to retain our competitive advantage relative to other footwear brands. Our wholesale channel which includes brick and mortar, e-tail and distributors grew revenues by 112% versus prior year and 71% compared to 2019. Our focus on strategically important accounts comprised of leading e-tailers, sporting goods, family footwear, and specialty footwear retailers led to a strong growth in all sub channels globally. Our top 20 brick and mortar accounts and distributors were standouts as they rebounded from the depths of the pandemic. Finally, profitability was exceptional, as we achieve record quarterly adjusted operating margins and record quarterly adjusted EPS. While we remain incredibly optimistic about our business and has substantially raised full year 2021 guidance as we emerge from the pandemic, global logistics remain challenging and volatile. In addition, we're increasingly seeing COVID spikes in some of our primary manufacturing countries and are concerned about the short term impact of potential factory closures on supply. We have attempted to incorporate both the additional expense and the potential supply disruption into our guidance to annual review. Before I turn the call over to Anne I want to thank the entire Crocs organization. These results are a reflection of the hard work and dedication to the Crocs brand. I am excited for our future. I look forward to achieving our commitment of net zero by 2030 creating a more comfortable world for us all. With that Anne will now review our financial results in more detail.

Thank you, Andrew. And good morning everyone. We'll begin with a short recap of our second quarter results. For reconciliation of the non-GAAP amounts mentioned to their equivalent GAAP amounts, please refer to our press release. Our second quarter results are exceptional. We delivered record quarterly revenues on broad based growth across all regions, channel and product colors. Profitability with best in class as we expanded gross margins, leveraged SG&A and increased earnings per share. Second quarter revenues came in at $640.8 million, compared to $331.5 million in the second quarter of 2020 and 93.3% increase or 88.4% on a constant currency basis. Growth was 78.5% versus the second quarter of 2019. Year-to-date revenues exceeded $1.1 billion, an increase of 68.1% versus the first half of 2019. We sold 29.1 million pairs of shoes, an increase of 78.8% over last year and 52.7% versus the second quarter of 2019. Our average selling price during Q2 increased 8% to $21.84 with the increase attributable to less promotional activity and higher pricing as well as favorable product mix including increased sales of terms per shoe. The Q1 price realignments we took on certain products in select markets globally have been successfully adopted as evidenced by our growth have not hindered demand. Now, let's review our results by region. As Andrew mentioned earlier, the Americans had another great quarter with revenues of $405.7 million up 136.4%. DTC growth of 128.1% was outstanding driven by retail. Higher traffic combined with [indiscernible] significant store closures last year contributed to triple digit growth in company and retail stores to more than doubled versus 2019. Digital penetration was 30.9% in the second quarter, compared to 30.7% in 2019. Wholesale growth was at 149.3% versus prior year and 140% versus 2019. In Asia, Q2 revenues were $126.8 million up 35.5% or 27.1% on a constant currency basis from last year. DTC increased 10.8% while wholesale grew 76.5%. Digital revenues grew 17.1% versus prior year and 40% versus 2019. Digital penetration also increased from 31% in 2019 to 40.5% this year. South Korea continues to exhibit strength, while several other countries in the region remain impacted by the pandemic. EMEA revenues increased 63.1% or 52.6% on a constant currency basis to $108.3 million with growing brand heat, offsetting any global logistics disruptions. DTC revenues increased 29.2% with e-commerce strength driven by higher traffic and a return to growth in retail and stores reopened. Wholesale revenues grew 82.6% fueled by broadbased strength in etail, distributors, and brick and mortar. Our EMEA business overall continues to benefit from our focus on digital commerce, which represented 52.5% of EMEA revenue this quarter versus 40.3% in Q2, 2019. Second quarter adjusted gross margins were 61.8% up 660 basis points from last year to 55.2%. The majority of the improvement was driven by price increases coupled with fewer promotions and discounts, offsetting pressures from elevated free rates. Currency favorably impacted margins by approximately 90 basis points. Our adjusted SG&A improved to 31.2% of revenue versus 33% in last year's second quarter. The decrease in adjusted SG&A rate is a result of strong sales growth and operating leverage. We invested approximately $60 million versus the first quarter to support our strategic initiatives, digital, sandals, China and marketing. We will continue to make investments this year to support the long term trajectory of our business. Our second quarter adjusted operating income more than doubled to $196.4 million versus $73.8 million last year with robust operating profit growth in all regions. Adjusted operating margin rose from 22.3% last year to 30.7% this year, benefiting from gross margin expansion and SG&A leverage on strong sales growth. For Q2, our underlying non-GAAP effective tax rate was 24.7% excluding a onetime benefit of $175.4 million. The income tax benefit and decrease in our GAAP effective tax rates were driven primarily by the realization of deferred tax assets which were previously subject to evaluation allowance. Second quarter non-GAAP adjusted diluted earnings per share increased to $2.23 compared to $1.01 a year ago. Our liquidity position and balance sheet remained strong. We finished the quarter with $197.9 million in cash and cash equivalents and $386.4 million in borrowings and have ample liquidity with $454.7 million of borrowing capacity on a revolver. In Q2, we executed a $300 million ASR which resulted in the repurchase of $2.9 million shares at an average price of $103.79 per share. We expect to generate significant operating cash flow and to maintain a strong balance sheet. We will continue to prioritize investment in the business to support our future growth. We will also continue to be opportunistic with respect to our capital structure and our capital return. Inventory at June 30, 2021 was $209.1 million up from $146.8 million in the second quarter last year. Inventory was lean throughout Q2 and we ended the quarter prior in transit inventory due to the continuation of global logistics challenges. Turning to the future, I would like to share our current outlook for the third quarter and full year 2021. As Andrew mentioned, global logistics remain volatile. Due to the lack of visibility, we have provided guidance with potential supply chain disruptions and additional expense in mind. For Q3, we expect revenue to grow approximately 60% to 70% and adjusted operating margin to expand to be between 24% and 26%. Strong growth is expected in all regions in all channels as brand momentum continues. Given our extraordinary first half performance and confidence in the momentum of the Crocs brand we are raising full year 2021 guidance. We now expect 2021 revenue to grow between 60% and 65% and the midpoint growth in the second half is anticipated to be 49% versus 2020 and 100% versus 2019. In addition, we expect adjusted operating margins to be approximately 25% for the full year 2021. Well we expected leverage SG&A long term, we plan to invest in the back half of this year to support future growth. We now expect our underlying non-GAAP tax rate to be approximately 23%, which is higher than previous guidance due to greater than expected profit in our U.S. business. We look forward to sharing our long term growth algorithm at our upcoming investor day on September 14. In summary, we've delivered outstanding revenues and profitability that exceeded expectations while strengthening our balance sheet and investing in our future growth. At this time, I'll turn the call back over to Andrew for his final thoughts.

Thank you, Anne. Before we open the line for Q&A, I want to acknowledge that Dorian Wright is retiring from a board of directors after a decade of service. I want to express my gratitude for all of Dorian's many contributions and wish her all the best in the future. I also want to thank our talent team around the world without which these results would not be possible. The Crocs brand remains incredibly strong, as evidenced by our second quarter results, and our increased guidance for 2021. We're incredibly excited for the future which now includes achieving net zero emissions by 2030 and having a positive impact on our planet. Operator, please open the call for questions.

[Operator Instructions] Your first question is from Jonathan Komp with R.W. Baird. Your line is open.

Yes thank you very much. I wanted to start off when you think about the second half guidance, given the raise to the full year revenue. And I think you highlighted there's an embedded acceleration to 100% growth at the midpoint versus 2019 for the second half. Could you just maybe share more detail on what you're seeing maybe across channels and geographies to support your confidence in that two year acceleration from here yet?

Hey thanks John. I'll give you a bit of color and then pass it over to Anne to give you kind of most specifics. Yes, we remain incredibly confident in the trajectory of the brand. Obviously, we've had a very strong first pass, very strong Q2 and as we look across all of our channels we really see strength in all the channels. Maybe I'll start with retail, where we had really exceptional growth. So our stores have reopened this year. We've seen significant increases in traffic. We've seen significant increases in conversion and our retail stores, both here in the U.S. and also particularly in Korea performed really well. Digital is performing well. I think we highlighted the 99% comp over the 2019 numbers, and digital as both our own e-com buzz an additional retail. And then from a wholesale perspective, again, our wholesale channels performing well, I think we call that in particular. Our brick and mortar are leading 20 brick and mortar accounts and our distributors. So distributors, we kept fairly lean on inventory last year through the pandemic. We didn't want them backing up on aged inventory. So as they're emerging, they are replenishing. And I noticed a very bullish about the future of the brands. So I think we're confident on all dimensions.

Yes, I think that's exactly right. And I think to add a little color by region as well. We saw Europe, EMEA growth is almost 53% constant currency in the quarter. So really good to see some international growth coming on strong, and we expect those trends to continue. Asia also returned to growth on a two year basis, which is great to see. So we expect all of our regions to contribute to those growth factors in Q3, and Q4. And then obviously we have some visibility on our order book that supports all of this growth that we're guiding.

Okay, that’s encouraging and very helpful. May be secondly then when you think about the supply chain ability to keep up with that growth, could you just share more given your outside exposure to Vietnam from a sourcing perspective. Can you just share more the current state of the environment there and the key factors on them, you mentioned having embedded some impact in the second half so maybe you can give little more color what’s embedded in the expectations?

I think it’s great question. Sorry one about key concerns. So as you look at global supply and logistics. Look, it's been extremely challenging for the last 12 months, we’ve been living with that for the last 12 months and performed as we have performed in the last 12 months given that and so what different today and let me break those two pieces apart one is global logistics, which is containers, freight time, etc. And just to kind of give you a perspective, I would say kind of transit times from Asia to most of our leading markets are approximately double what they were historically. So but that's been the case for some time and we're expecting to live with that. We've also seen elevated freight costs some in the first half of the year, and we're expecting to see more in the back half of the year. And we've embedded that expense into our projections. I think what's different now is the COVID spikes that we're seeing in our Southeast Asia and particularly Vietnam. And our expectation is that we will see some temporary factory closures in the next quarter as Vietnam battles COVID. They unfortunately, don't have access to or the ability to administer the amount of vaccine that we have in this country. So really, they're left with lockdowns and being congested just about how people interact. And so we do expect temporary factory closures which will obviously impact supply. So but with that, we've embedded that in our guidance in terms of really trying to make sure that we're confident in the amount of inventory that A, we have on hand and B, what we have in transit and we feel really comfortable with where we are given those uncertainties.

Okay, thank you very much.

Your next question is from Erinn Murphy with Piper Sandler. Your line is open.

Great, thanks. Good morning, and really great quarter. I guess just Andrew, for you on that last point on Vietnam. Can you just remind us how big Vietnam is as a percent of your overall sourcing and just how quickly you can move into other regions if some of these rolling lockdowns continue and then I guess, bigger picture on A-PAC could you share a little bit more about what you saw in China in the quarter? How did you how did the consumers respond to [indiscernible] and any other kind of key initiatives as you kind of refocus that region for growth?

All right. I will let Anne talk about Vietnam and factory base to start with, and let me pick up China.

Hi Erinn. So as you know we manufacture a significant portion of our products in Vietnam. We don't release the overall percentage, but it is the most significant manufacturing geography for us. And then as well as supplemented by China, Indonesia and a couple other places around the world, but Vietnam is a significant. And that's effective.

Yes and I think the ability to move out of China yes, we have absolutely some ability. We have some capacity – spare capacity in, sorry, an ability to move out of Vietnam. We do have some spare capacity, other places, but it's not enough to make a wholesale change. Then in terms of China trading. Look, I think we were really let me kind of go back up to Asia first and then come down to China. We were really pleased with our Asia performance during the quarter. Obviously, we grew nicely even on a constant currency basis with some currency that helped the headline number, our constant currency basis. We grew nicely at 27% And that was despite some significant COVID impacts around Asia. When you think about India, when you think about state of emergency in Japan, and also the lack of travel in Southeast Asia and the current space that you're seeing. In terms of China, I think we've talked extensively about the repositioning plan that we have in place, I would say we think it was a really good quarter in China. We executed really well against all of the dimensions of that repositioning plan, including elevating and enhancing our marketing, trading on mid-season festival. So we feel really good about the performance in China and we, I think are set up well and very confident about accelerated growth in ‘22.

Great, that's great to hear. And then maybe if you could speak a little bit more about the goal you established last night to get to net zero by 2030. I guess our question is, what percent reduction are you committing to versus just using offset to net out the rest? So just curious on some of the kind of commitments internally to get there and I'm assuming I mean, this is well ahead of most footwear companies that we've benchmark. So just really, I mean, fantastic job to put this up already.

Great, thank you Erinn. We appreciate that. So what I would say, look, we've been working on this for some time. And we've been working on this from a number of dimensions. One is sourcing and working with, I would say, a major chemical company as a partner to identify the potential for sustainable ingredients that go into our product. So deriving our cross like [indiscernible] from instead sustainable ingredients. And we identified a solution to that that we feel very comfortable with. And we'll be focused on scaling that solution over the coming years which is really one of the key factors in terms of lowering overall footprint. But we're also looking at it from lots of different angles. From a packaging perspective, I think one thing that we've done for years is really not ship our product in packaging. We don't use shoe boxes. So 85% of our product shipped without a shoe box, but we think we can do even better there. But also looking at sustainable energy that we would use in our facilities, including some of our factories, as well as reuse. So as we look at the whole carbon footprint, and all of the key components that go into that obviously, we start from a great place with a very low carbon footprint on our classic clog at 3.94 kilograms of carbon. We will be posting that on our website here very shortly. And we will also be measuring the footprint of all of our other products over time and releasing that information. So we want to be really transparent about this. In terms of the future goals, yes, part of it is offsets. But we will be making a substantial reduction in our actual carbon footprint in of itself. We're not ready to disclose that at this stage. But we'll talk much more about that in our September Investor day. So we do have some significant internal goals around that.

Great. And then just last one Anne for you just the CapEx guidance for the year moved from 130 million to 80 to 100 million. What was the difference in the change? Was there anything in terms of supply chain investments that you pushed out? Or was it another investment? Thanks so much.

Yes, no, we're very committed itself to the investments we're making around our supply chain is really just timing of costs in this year. So it really has nothing to do with that. It's just really more around timing.

Super. Continued success. Thanks so much.

Thanks Erinn.

Your next question is from Mitchel Kummetz with Pivotal Research Group. Your line is open.

Hi, yes. Thanks for taking my questions and congrats on the quarter. Andrew, if I heard you correctly, you made a comment that sandal consideration is now comparable to clogs. Help me understand how meaningful that is. And maybe what you can do is, is there any way you can provide context around that in terms of like, what that consideration was a year ago or two years ago versus clogs just so we understand what it means to be comparable? And then also, I don't think you're saying that next year, you're going to sell as many sandals as clogs. But what could that mean, going forward in terms of the growth of the sandal business for consideration to now be at the level that it is?

Right, thanks. I'm glad you picked up on that. Yes. So we think actually, it's very important. So what we mean by that is when we measure brand consideration with our consumers we run a obviously consumer brands study every quarter to try and assess where our consumers are. One of our key questions is consideration for the clogs, consideration for sandals, etc. I would say historically the sandal consideration number has been a fraction of the clog consideration number that's what we're known for, that's what most consumers would consider purchasing a Crocs item they would first consider a clog. So we think it's very meaningful that the sandal consideration has risen over time. It's risen because of the marketing we've done behind it. It's risen because of the some of the new products that were brought into market particularly those that are personalizable. And so I think it's very meaningful. In terms of what does it mean in the future for revenues? No, we're not saying that sandal sales will be equivalent to clogs sales in the future. But I think it gives us a lot of confidence in that sample trajectory that we've been talking about we started to see we saw again here in Q2, but it gives us a lot of confidence in that growth strategy that we've talked about.

Got it. Okay. And then Anne just a quick one for you as I kind of worked my model, given the quarter and the guide, I kind of back into Q4 operating margin of like 16% to 17%. Hopefully my math is correct. That's down from Q4 last year, obviously down from kind of the run rate that you're on. I'm just kind of curious why is that not higher? Is that based on some of the investments that you're making on the SG&A side? Does that reflect some of the supply chain issues that you're kind of anticipating going forward? Can you maybe address that?

Yes, so we didn't guide specifically for Q4. So just reiterating that we said approximately [indiscernible] of the year, I think the biggest thing in the back half are really around we're going to continue to invest in SG&A particularly in marketing and marketing expense, was this quarter about 26 million. We will continue as we talked about our last call, we'll continue to invest in marketing and our marketing expenditures for the year will be just a little over 7% of revenue. So that will accelerate, continue to accelerate through the back half and we will continue to invest for the future to support our future growth. And then from a margin standpoint we will have some margin pressure although for the back half margins will be up. Gross margins will be up over last year. We will have some pressure just based on what we talked about with logistics and freight, and kind of the overall logistics environment. So those two factors are combining to put to our guide of approximately 25% for the year.

All right. Thanks and good luck.

Your next question is from Sam Poser with Williams Trading. Your line is open.

Thanks, everybody. So I've got a couple I want to follow up on Mitchel's question. Can you hear me?

Yes. Hi Sam.

Okay. Hi. I just want to follow up on this question regarding the fourth quarter and just by asking with the incremental marketing spend that you're pushing in, how much incremental marketing as a percent or however you want to talk about it was there in Q2 and how much of those incremental sales can you attributed to it? And how much incremental marketing is built into the balance of the year and what kind of sales width are you attributing to that within the guide?

Okay, let me try to parse that. So from a marketing perspective, here today, and we are marketing about $28 million. 26 million of that was in Q2. So obviously, the majority of that incremental spend year to date was in Q2, and we'll see much of the same type of spend and in order to get to that approximately, you can do the math, a little over 7%, in the back half of the year, about some of that is performance marketing as you mentioned, which is variable, which supports e-com which is a little bit more transactional. And the rest of that is brands. So it's hard to say, to equate how much of the increased revenue is actually related to that marketing. But what we do know is that our marketing is incredibly effective. And we look at things like brands surveys, see those trending in the right way, see no consideration. And we know that in order to support our growth long term, we need to continue to spend into that. So I think it's really less about what the incremental that is contributing to that year, and more about what the incremental is going to contribute to our future.

Okay, I'm going to come back to it, I'm not arguing that you shouldn't be spending the money. What I'm saying is how much of the near term, my question is, is I believe that because even the brand marketing and the other is driving help to drive a lot of your strong results this quarter that my question is, is, and I would assume, based on the marketing, your marketing percent of sales, given the results were less than what you anticipated they would have been in Q2. Is that a fair statement based on the guidance you gave in the money you spent?

Was our marketing percentage less than what we planned for 2Q? I'm sorry? I don't understand, can you –

Yes. You're saying that look, if we had sales acceleration above what we expected did the marketing come in low? No, I think I would say no to that. Because a lot of our marketing is very variable. And we planned on a very short term, short period of time. Even some of our brand marketing, we can lean into events or lead back from events, especially around social media. So we were very, we calibrate that very closely. So I wouldn't say it was dramatic, it was less than in Q2 than we expected. And look, I think our strategy is really clear where we have a great marketing strategy. We have, I think, really effective team. We're doing some incredible work. So we're going to continue to spend to ignite consumer interest in the brand that's clearly working. And as onset we don't look at what is the incremental in the year. We think about it from a multiyear trajectory.

Yes. And a piece of that, too, is that if you look at our results, our 10-Q will be out a little bit later. But are you looking at results basically I mean you can see that we actually took some of the increases that we were having in the U.S. and investing that overseas, particularly in our Asian market. So we can do that within the quarter.

All right. And then how much of your inventory, the current inventory on your books is in transit right now.

We don't break out the in transit verse is the what's on hand, but it's significant. And it's up significantly year-over-year. Much of the increase of our current inventory is actually sitting in transit. And that's been pretty consistent all year as we've just been working through logistics and as Andrew talks about really or longer freight cycle time.

And how much of your product that is made for the -- how much of the product that you need for the full year is already produced. So by that I'm asking how much of the production needed, I guess for the next six, eight months is made? And how much of that is what percent is impacted by the issues in Vietnam?

Yes. It’s a good point Sam, the majority of our product for Q3 is obviously, Q3 is you have a product and so there is some for Q4, but obviously, it increases as you go out and increase your time span.

Alright. Thank you very much and continued success.

Thank you.

Your next question is from Susan Anderson with B. Riley. Your line is open.

Hi, good morning, let me add my congrats on an amazing quarter. I was wondering if you can maybe talk around about your thoughts on promotions and as we look forward and impacting gross margin levels, and curious if you think there is still room to pull back on promotions and also how you're thinking about price increases? Are there more planned for the back half or 2022? Thanks.

Yes, so I think, look, we've been very proactive in terms of pulling back on promotions through the year. Is there further room I would say, some but not significant and I would say those are particularly in maybe some of the Asian markets. We got a little bit of opportunity to continue to pull back as the brand heat starts to accelerate in those markets. But I don't think that's significant go forward. We've done a lot. If you look at our U.S. website, I mean, it's essentially been non-promotional all year long, etc. So, I think, as you look at our stores also, essentially non-promotional. If you talk about price increases, yes there are some price increases that we're planning in ‘22. Those have already been communicated. I would say they are stronger outside of the U.S. particularly in Asia as we look to, to manage price value in given market. As we said we always look at the price of the product relative to competition, relative to the brand in that particular market. So there are some price increases that will flow through in ‘22. But I would say they are also dramatically less significant than the moves that were made this year.

Okay, great. And then maybe if you could talk about your thoughts on that -- are there any early reads that you could talk about? Or how you expect it to play out this year? And then I'm curious for this fall, if there's any new products that you're expanding on, such as maybe your boot offering similar to what you've done in sandals?

Yes, I think we're very optimistic about back to school. I would say, early reads are strong, as we look at obviously, there's some parts of the country that go back a lot earlier than others. As we look at the performance in those markets we were seeing trajectories that we really like. So we're very optimistic about back to school, obviously was very strong last year, coming out of the lock downs of the pandemic. We feel very confident in our ability to anniversary and grow from that basis. I would also point out as you look at our seasonality the growth in back to school and the strength of fourth quarter, a lot of our seasonality that was historically in the business is really smoothed out. And so we can be incredibly profitable each quarter of the year. In terms of new products in the back end of the year, I would say particularly exciting is as far as our online products. It's been growing, being building now for about three/four years. But we don't feel like in any of the prior years, we've really tapped the full potential of that. So we think for us both in the clog but also as in the new exciting size product that will come out more broadly, will be important in the back half.

Great, thanks so much. Good luck the rest of the year.

Thank you.

Your next question is from Jay Sole with UBS. Your line is open.

Great, thanks so much. Andrew can you talk about the allocation model that the company's implemented over the last quarter to? And just talk to us what the benefits have been to the brand and to the operations overall?

Yes, I think so. Let me start off with saying I think the benefits are significant and really important. And the allocation model is one part of a sort of multi pronged approach to really manage our brand at wholesale. Obviously price promotion in our DTC channels, we can control explicitly wholesale. We really have to look at things like [match] pricing, which we instituted on some of our key lines earlier this year, and also allocation that we provide to our key wholesalers. What we're trying to do with there is, is really is manage the amount of inventory that's in the marketplace on our most important key styles and also provide differentiation between our wholesale partners so that they're not competing head to head. So which will allow them to trade more for price and our brand show up how we want to show for consumers. So I don't think it's anything new. As you kind of think about the industry, I would say it has been a important shift for Crocs as we've adopted, what I might consider kind of best in class brand management practices. I would say, I think they've been incredibly well received across the industry. I'm sure there are the occasional wholesale partner that would like more products, and in fact, there are probably quite a few that would like more products. But this is an important part of marketing the brand.

Understood. Maybe just a follow up on that in the context of 136% growth in the Americas this quarter obviously is a phenomenal result. Can you give us a sense of how you're able to drive that kind of growth and move to an allocation model like what would sales growth have been had you supplied inventory maybe the way you had a year ago or two years ago?

Yes. I don't think we know the answer to that question. Because, as you point out, 136% sales growth is phenomenal. Right? So in short, what allowed that to happen is really consumer demand, consumer takeaway is either level or ahead of that, frankly, right? We're not stopping the channel. We're keeping the channel pretty much where we would like it and in a very healthy place. So it's really consumer demand and consumer takeaway. And that's as a result of product innovation and all the marketing that we do. So in terms of what it could have been I don't think that we don't know and I'm probably not that relevant, because I think we're really comfortable where we are.

Yes, I think it really is important for profitability as well. If you look at our 8% [indiscernible] growth in the quarter, it's hard to see how much of that is directly related, but support our wholesalers out the door. And obviously, our [indiscernible] as well.

Got it. Maybe one more, if I can. I think Andrew mentioned some price increases are coming next year. Given the map pricing, given some of the price increases that have happened how high can prices go and how do you think about the brand, the brand positioning relative to price in terms of like where the ultimate opportunity lies?

Yes. I think that's a good question. And just to reiterate, the price increases, I reference everything outside of the United States. So one thing that we're very conscious of, is the consumer value that the brand provides. This is a very democratic brand. We serve a lot of consumers, both from highly affluent and much less affluent. And we never want to be in a place where we're turning consumers away because our product is too expensive in their mind and not providing the value that we think it provides. So we're very careful about pricing so that we don't push too far. I think we've got that balance, I think about right at this point. We're giving the consumers incredible value, as well as obviously attracting the value that we think the brand deserves and the marketing and product innovation deserves and obviously providing a great return to shareholders. So yes that's something we're very conscious of. It's very, very important to the brand in it and its future trajectory, and the price increase they talked about the next year are mostly outside the United States.

Got it. That's super helpful. Thank you so much.

Our next question is from [indiscernible] your line is open.

Good morning, Andrew, Anne and Corinne. Can you talk a little bit about how much channel mix was a factor in the second quarter gross margin delta and how much that will be a factor in what is the gross margin guidance is for the year?

Yes. So [indiscernible] from a year-over-year perspective wasn't incredibly, it was actually helped a little bit margin because retail was so strong. And so from a gross margin standpoint retail is very is high. From an operating margin as you know, we're rather agnostic. As we think about from a quarter-over-quarter perspective Q1 is our tends to be our highest wholesale percentage quarter. So it's certainly from a quarter-over-quarter perspective, you could see gross margins accelerate Q2 to Q1 because of that channel mix. And then for the year, I wouldn't say that it's the biggest impact. The biggest impact sitting around our margin are really pricing pullback with discounts and promotions, as well as product mix rate increase in our Jibbitz business as well as clogs are very favorable. And then we have a little bit of currency in there. And then those are somewhat offset by increased free pressures, as we talked about, but still supporting overall higher margins for the year.

Very helpful. Thank you.

Your next question is from Laura Champine with Loop Capital. Your line is open.

Thanks for taking my question. I know you've answered a lot of questions on pricing so far, but I may have missed it, did you give the growth mix units versus price in the quarter couple other ones on pricing? As you look to raise prices next year in other regions are they just coming up closer to Americas’ pricing? Or will there still be a significant differential? And then third on pricing, how much of a price increase do you need to take to hit your environmental goals with what I presume is a higher cost more environmentally sound material?

Great. Well, let me answer your first question and then I'll turn it over to Andrew about price increases. So from overall perspective, our units were up, our pair sold were up 78.8%. And our ASP was up about 8%. And then as far as the overall pricing and outside of the U.S. from prices outside of the U.S. they don't necessarily depends on the product or necessarily, depending on currencies tend to be higher than in the U.S., which is why we have an opportunity in some of our markets to align pricing.

Yes. I would say if you look at pricing outside the U.S. Look, it's really dependent on I would say the market, the competition and the brand in that market. So there are international markets where we're actually at a premium to the U.S. And there are others where we're like, discount. So I would say broadly, yes, it's more coming in line with where we are positioned relative to competition, relative to consumer demand. So I think that in terms of the genesis of your question that's what we're trying to do. So that's the driver in terms of the incremental costs associated with some of our ESG efforts. Yes, I think we've we feel like we'll talk a little bit more about that in our Investor Day in September. But we've incorporated that into our long term business planning and I think it's best if we kind of cover that in that context.

Got it. I guess, a follow on a obviously your Asia-Pacific growth is accelerating. But I am curious when I look at your pricing, whether that is slowing your growth down in China or do you think that it's still just about finding the right partners in that market?

I would say very clearly we do not believe pricing is low enough that in China. We think we're priced appropriately in China and we look at the kind of the repositioning plan it’s about the partners, it's about our marketing investment. It's about our e-com business. So no, we don't think it's about pricing. We think it's a lot of different dimensions that as I mentioned to Erinn’s question earlier we are really confident about the trajectory of that and how we're positioned this for next year.

Great. Great quarter, guys. Thank you.

Thank you.

Your next question is from James Duffy with Stifel. Your line is open.

Thanks. Good morning, terrific execution. And congratulations to the team. I want to ask about infrastructure. You've been very thoughtful about investing in infrastructure. But the volumes have just been huge. I'm curious once the product is in the U.S. or other regions are there bottleneck points or throughput challenges to delivering on demand and can you speak areas of investment to support additional growth into 2022?

Yes. Really thoughtful question James. So we don't have any current bottlenecks in our infrastructure. I would say there are many bottlenecks in the global logistics chain whether it be long beach, whether it be rail out of long beach, whether it be availability of trucking, the list goes on, right? But so we look at our ability to process goods, whether it's through a warehouse or through our Crocs dock facilities, we can process very high volume of goods and have certainly had no concerns for ‘21 into ‘22. You might note that we're significantly expanding our U.S. DC. Again, that will be open later next year. And we are also, we have moved to a new DC, in the Netherlands and that will be going up to full operation again by the end of the year. So it's impartial operation across the two facilities today but working really well. In terms of longer term investment, absolutely we will continue to grow the business at these rates or rather rates we anticipate to continue to grow the business. We will continue to make investments in our infrastructure in the U.S., in EMEA and some of our key Asian countries as well.

And one just note over on the cost side, we've actually seen quite a lot of efficiencies from our U.S. distribution network this year. And that is showing up in our margins that we call that out as supporting our overall growth margin level.

Great. The other investments have proved very prescient. Andrew, can you talk about the total business with Asia distributors kind of the glide path to recovery in that business what you're seeing there?

I think that a big unknown, I would say and we're not, that's not happening this year period. Right. So not, not in our prospects or in our guidance. Those Asian distributors, as you rightly point out they can be significant. There's large populations in those countries that we serve. And it's highly dependent on tourist travel and that's just not going to happen. I guess if you asked me when I think it's late next year before people start traveling to those countries and that's kind of how we're thinking about it.

Okay, great. I look forward to connecting with you guys at the investor day.

Thank you.

We have a follow up question from Erinn Murphy with Piper Sandler. Your line is open.

Great, thanks. Just one follow up for me on the buyback. I think you fully exhausted your existing authorization this quarter. Any thoughts on upping that in the near future?

I think we have is almost 700 million left on our existing buyback obviously.

Okay. Got it. Maybe I'm mistaken. Thank you so much.

Thank you.

We also have a follow up question from Sam Poser with Williams Trading. Your line is open.

Hi, I have three quick ones just about looking forward with the gross margin you talked about mix from a product perspective but you expect the channel and geographic mix to continue to help you. Secondly, if you could give us some color on upcoming collaborations. And third, if you can discuss how inventory at retail, both in your own stores and your partnership in your wholesale partner stores is looking right now relative to demand you're seeing, currently seeing.

All right Sam let's hit those in reverse order. So retail inventory at retail I think look, the way we think about Q2 is I think we were not in optimal retail inventory position in our own retail or even our wholesale partners. So it's better than it was at the end of Q1, but it's certainly not optimal. So when I say optimal, I'm looking at kind of out of stocks and weaker supply. So when we've got an opportunity for the future. What's the second one? The [clogs] we have a very strong pipeline of [clogs]. We talked a little bit more in our prepared remarks about all the different things are going on. I know you've tracked those closely. But I would say we have a very full pipeline through the end of the year and increasingly out of a very full pipeline for next year.

Yes and then on gross margins Sam we do expect channel mix Andrew mentioned a little bit earlier, it will help. But the biggest drivers of growth margin for the year are really related to the pricing actions that we've taken, the continued pullback and promotional strategy and then a little bit of currency, we expect currency to be about 70 basis points roughly for the year as current currency rates. And all of those combined and then as I mentioned as well we have some efficiencies in our DCs and then some of those are offset slightly by increased freight rates. So margins will, gross margins will be up for the year. But those are the major drivers in Jibbitzs.

Thanks very much.

I think that's all of our questions and we're out of time. So really appreciate everybody's continued interest in the company. And thank you very much for attending this morning.

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