Athleisure Growth Could Benefit Crocs, But China, Vietnam Are Concerns
Crocs Inc. could benefit from the growth in athleisure footwear, but that doesn’t mean it is out of the woods where tariffs are concerned.
That’s according to UBS softlines analyst Jay Sole. He expects the global footwear industry to have a compound annual growth rate of 5 percent to 6 percent, skewed to sports footwear. Sole said athleisure should continue to drive the category, possibly at an annual 8 percent pace. Other factors driving growth include casualization and the focus on healthy lifestyles.
“We think the trend has extended to casual and comfort styles, likely benefiting Crocs,” he wrote in a research note.
Sole is forecasting Crocs’ margins to fall to 15.5 percent by fiscal year 2029, below the operating margin of 30 percent in fiscal year 2021 but still above the single-digits in the years prior to the COVID pandemic. He expects slower growth in North America to be a contributing factor.
While fashion risk is an ongoing issue to the Crocs and Hey Dude brands, the analyst also believes that U.S. tariffs pose a “fairly meaningful threat to Crocs’ business.”
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Crocs disclosed in December 2021 that it would acquire casual footwear brand Hey Dude in a transaction valued at $2.5 billion, but the latter brand’s performance has been uneven. According to Sole, Crocs continues to work on cleaning up Hey Dude’s inventory with its wholesale channel partners.
Crocs is set to post first quarter earnings on May 8. Sole said there’s a chance the reciprocal tariffs announcement may cause Crocs to lower its fiscal year 2025 earnings per share (EPS) guidance significantly, possibly by as much as 30 cents a share for the year, although that could reach as high as 60 cents.
The positives for the Crocs brand for the first quarter, which ended March 31, include “fairly solid international momentum with the Crocs brand, and favorable brand, channel and geographic mix, offset by negatives that include pressure in the Crocs North American business, marginal pressure in Hey Dude’s wholesale channel, and foreign exchange headwinds.
Sole said first quarter revenue could decrease 2.9 percent year-over-year to $911 million, with North American sales impacted by the shift in the Easter holiday from the first quarter into the second quarter having a “fairly outsized impact on the brand’s wholesale channel” and on its direct-to-consumer (DTC) business. North American sales are offset by solid international sales momentum, rising an estimated 5.1 percent year-over-year to $379 million led by 4.3 percent and 7.7 percent gains in wholesale and DTC, respectively.
“We believe Crocs brand’s demand trends in international markets remain solid,” Sole said. “Thus, we expect further penetration in key markets, including China, India, and Japan, to support the brand’s topline growth.”
The Hey Dude brand’s wholesale sales are expected to decline by 24 percent year-over-year to $102 million due to a softer Spring 2025 order book. DTC revenue is estimated at $61 million, representing a 1.0 percent rise year-over-year.
Sole lowered projections for the company’s sales, gross margin and EPS forecasts earlier this month, following Trump’s disclosure of reciprocal tariffs.
He estimated that 70 percent of Crocs’ cost of goods sold would be subject to tariffs, with the U.S. accounting for 65 percent of the company’s revenues. The analyst estimated that tariffs would drive a 10 percent increase in Crocs’ cost of goods sold if the company took no mitigation measures. Given the magnitude of pressure on gross margins due to tariffs, Sole estimated that Crocs might have to raise prices to offset the incremental costs. Crocs’ average selling price is $26, and he estimated a price increase of 1.7 percent to mitigate the tariff impact on margins.
Vietnam represents Crocs’ largest global sourcing exposure at 42 percent, with sourcing into the U.S. at 50 percent. For China, which now has an elevated tariff rate of 145 percent, Crocs has a global sourcing rate at 37 percent, with sourcing into the U.S. at 35 percent. With the exception of China, Sole is estimating a reciprocal tariff rate cap of 10 percent for the 90-day period they are on hold, reverting to the higher rates Trump noted on April 2 once the three-month pause ends.
The global sourcing rate for Indonesia and India is each at 6 percent, with sourcing into the U.S. each at 3 percent. That’s followed by Mexico at 4 percent and 3 percent, and Cambodia at 3 percent and 2 percent, respectively.
“We anticipate Crocs’ price increases will result in softer unit volumes sold and drive a reduction in the company’s overall revenue growth rate,” Sole concluded. He expects the company to begin experiencing the impact from tariffs beginning in the second half of 2025, since it likely has enough inventory available to support two quarters worth of orders in the U.S.
Crocs ended 2024 with $4.1 billion in revenue, but the Broomfeld, Colo.-based footwear firm estimated just an $11 billion headwind to gross profit due to tariffs in February when it posted fourth quarter and full-year earnings results. At the time, Trump had spoken about reciprocal tariffs, but no one expected the rates to climb as high as he disclosed on April 2.
