A new Las Vegas distribution center for Hey Dude can’t open soon enough.
Parent company Crocs cut its second-half outlook for the casual footwear brand it paid $2.5 billion for in December 2021 after Hey Dude’s wholesale revenue performance tanked the brand’s second-quarter revenue growth. Crocs cut Hey Dude’s full-year revenue outlook to an expected range of 14 percent to 18 percent revenue growth, a sizable decrease from the initially expected “mid-20 percent” forecast.
Crocs’ stock got rocked Thursday on the news, falling as much as 16 percent despite a strong overall earnings and sales beat for the perennial celebrity collaborator that saw the company raise its full-year outlook.
A major reason for the decline, according to CEO Andrew Rees, is the ongoing distribution constraints experienced by Hey Dude, which currently distributes from of a small facility in Las Vegas. The company is transitioning to a larger warehouse nearby where it will occupy about 70 percent of the 1.3 million-square-foot space.
Crocs expects to open the warehouse by the fourth quarter and transition Hey Dude to a new ERP system before 2024.
The company expects muted “at-once” orders for Hey Dude—purchases for stock on hand that can be fulfilled immediately—through the rest of 2023 until the transition is complete.
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“That will release a couple of important constraints. One is we’re incurring a lot of extra costs to move goods around, double-handle goods and have goods stored in sub-scale places, so reducing that will alleviate some expense and also some flexibility and ability to react to the business,” said Rees. “It will also give us the opportunity to have a much larger at-once business in the following year. And it will also allow us a little bit more flexibility with some of our major wholesale partners with whom today we’re really trying to do a lot of direct shipments, which can be efficient and cost effective, but are also not very flexible.”
According to Anne Mehlman, executive vice president, chief financial officer at Crocs, the higher overhead and fulfillment costs associated with the Hey Dude distribution network partially offset Crocs’ gross margin improvement of 290 basis points to 58.1 percent, thanks to better ocean freight rates and a move away rom air freight compared to the prior year.
Crocs didn’t expect much from Hey Dude’s wholesale revenue year because the brand is still settling into new wholesale partnerships. In 2022, $220 million in product went to new strategic partners, with $70 million coming in the second quarter, according to Rees.
“This pipeline fill was a very conscious decision in our part to secure self-space, knowing there will be competition in the marketplace,” Rees said.
The brand also saw a slowdown in its Amazon business due to sales on the gray market—in which third-party distributors Crocs had cut ties with are still selling Hey Dude products—which are pressuring pricing. Rees called it a “temporary disruption.”
Skechers opens Canada DC, India and Chile are next
Crocs isn’t the only footwear company growing its warehouse footprint.
Skechers recently opened its first Canadian distribution center in Vancouver, the company revealed in its second quarter earnings call. It now expects to begin shipping out the new facility, as well as Mumbai and Chile before the end of the year. The company is also expanding its 1.6-million-square foot China distribution center.
The Vancouver facility will take some of the heat off the company’s 2.6-million-square-foot distribution center located in Rancho Belago, Calif., which serves all of North America. In the call, Skechers chief operating officer David Weinberg said the California facility is improving delivery times and inventory levels.
Chief financial officer John Vandemore also touched on freight rates, which have “clearly come down.” This is improving gross margins, but the company still has a way to go to recapture margins via freight rates.
“It didn’t materialize fully this quarter,” Vandemore said. “I do think there was some pickup there…But we continue to foresee improvement in gross margins quarter-over-quarter, year over year so that Q3 will be better than last year, Q4 will be better than last year as well.”
Deckers Brands is also seeing lower freight costs. Chief financial officer Steve Fasching said this helped contribute 450 basis points of improvement to gross margins in the company’s first quarter. Total gross margin at Deckers was 51.3 percent, up 330 basis points from comparable prior-year period.