Yet Another Value Podcast - Choice Equities' Mitchell Scott making the case that $CROX is not a fad

Episode Date: August 24, 2023

Mitchell Scott, Founder and Portfolio Manager at Choice Equities Capital Management, joined the podcast to make the case that Crocs, Inc. (NASDAQ: CROX) is not a fad. For more information about Choice Equities Capital Management, please visit: https://choice-equities.com/ Chapters: [0:00] Introduction + Episode sponsor: Stream by Alphasense [1:36] What is $CROX, why is it interesting to Mitchell and $CROX growth story [4:50] What is Jibbitz, patent protection on the product and consumer trends using the product [8:22] $CROX valuation [12:16] $CROX bear case and response [16:44] Why aren't there more Crocs knock-offs [17:40] Is $CROX just a COVID beneficiary and Crocs brand power [22:01] Crocs core customer and fashion/age out risk [25:04] HEYDUDE acquisition, go-forward with management's strategy around the brand, average customer of HEYDUDE shoes, knock off problem and why would one need multiple pairs of them [34:19] How do overcome the bears $CROX worry that Crocs (and other brands $CROX owns) turns out to be a fad [38:45] Why is $CROX the best buyer and owner of HEYDUDE? [41:00] Endgame for $CROX / apparel line in the future? [44:17] Final thoughts on $CROX: shifting HEYDUDE wholesale channel, worry about inventory buildup and this year's earnings Today's episode is sponsored by: Stream by Alphasense Are traditional expert calls in the investment world becoming obsolete? According to Stream, they are, and you can access primary research easily and efficiently through their platform. With Stream, you'll have the right insights at your fingertips to make the best investment decisions. They offer a vast library of over 26,000 expert transcripts, powered by AI search technology. Plus, they provide competitive rates on expert call services, and you can even have an experienced buy-side analyst conduct the calls for you. But that's not all. Stream also provides the ability to engage with experts 1-on-1 and get your calls transcribed free-of-charge—all for 40% less than you would pay for 20 calls in a traditional expert network model. So, if you're looking to optimize your research process and increase ROI on investment research spend, Stream has the solution for you. Head over to their website at streamrg.com to learn more. Thanks for listening, and we'll catch you next time. For more information: https://www.streamrg.com/

Are traditional expert calls in the investment world becoming obsolete? According to Stream, they are, and you can access primary research easily and efficiently through their platform. With Stream, you'll have the right insights at your fingertips to make the best investment decisions. They offer a vast library of over 26,000 expert transcripts powered by AI search technology. Plus, they provide competitive rates on expert call services, and you can even have an experienced by-side analysts conduct the calls for you.

But that's not all. Stream also provides the ability to engage with experts one-on-one and get your calls transcribed free of charge, all for 40% less than you would pay for 20 calls and a traditional expert network model. So if you're looking to optimize your research process and increase ROI on investment research spend, Stream has the solution for you.

Head over to their website at streamrg.com to learn more. Thanks for listening and we'll catch you next time. All right, hello, and welcome to the Yet Another Value podcast. I'm your host, Andrew Walker. If you like this podcast, it would mean a lot If you could follow, rate, subscribe, review it wherever you're watching or listening to it. With me today, I'm happy to have on for the first time, Mitchell Scott. Mitchell is the founder and portfolio manager at Choice Equities.

Mitchell, how's it going? That's going great, Andrew. Big fan of the show. So thanks so much for having me. Great to be here with you today. Hey, thanks for coming on. I'm excited to have you on because I've been bugging you to come on since we met in person almost a year ago now and we finally got you on.

And it's a really interesting one. But before we start talking about that, quick disclaimer to remind everyone that nothing on this podcast is financial advice. Please do your own research, consult a financial advisor, all that jazz. Mitchell, stock we're going to talk about today is Crocs. The ticker is C-R-O-X. I'm sure everyone is familiar with this. This is a really interesting one because, you know, everyone's got a view on it. I will talk about the bear case later. Tons of insider buying recently, it's cheap, but I'm kind of starting to ramble to get out of myself. So I'll just toss it over to you. What is Crox and why are they so interesting right now? Yeah, sure. So, yeah,

great to have the opportunity to talk about it. We try to buy quality companies cheaply, and I think that's what we've got right here. So, you know, long story short, Crocs is basically the most profitable shoewear brand in North America, if not the globe of scale. And along with that, it actually trades at the cheapest valuation of its peers in the space. So there's a lot that goes in there. I've described it as the shoe people love to hate,

and I guess you can describe the stock, is the stock people. Investors love to hate on occasion. But, you know, I think a lot of people send to think it's a fad. And I'm sure we'll go into that at some length, or at least I think we should. But, you know, we've come to a different view here. And I think that explains the valuation, but also explains the opportunity. So let's just start real quickly. I guess the two things that are three things that are probably attracted about Crocs are, one, the insider buying. I mean, The stock has sold off after earnings and you've got literally millions of dollars of insider buying. And you and I were actually responding on an email thread on an insider buy.

And it would be like one would be you and I replying and then the next would be a new insider buy. It was kind of crazy. But the other two things are growth and cheapness. So why don't we just start quickly with the growth story? So like kind of how quickly is Crocs growing? Where are they growing all that type of stuff? Yeah, sure. So I think that's probably an underappreciated element of the story.

And, you know, if this turns out to be a fantastic investment, it'll be because they really ported their playbook that they've been very successful here with in North America abroad. And so where they are today, the sort of traditional North American clog is really a little bit less than 40% of total sales. So they bought, hey, dude, and we'll definitely have to spend a good bit of time talking about that. But that's about 24% of sales. independent of that, they've got a handful of other drivers that are very important to the story. So I think maybe 60% of the sales are U.S. when you count hey, dude, but less than that when you don't count hey dude. So you've got Amelia, Europe, Middle East, Latin America, that's 15, 16% of the revenues, and you've got Asia Pacific. And that is about 15 to 16% as well.

And so both of those regions are currently growing. you know, 20s, 30s, and have been growing fairly steadily each year for each of the last six years. Layer in that, a couple of other sort of product vectors. So they've got sandals they've been really focused on for the last several years, but really are only just now starting to push that and really get traction with that. And then finally, Jivitts. And Jivets are a real big piece of the profitability puzzle that I think some people tend to overlook. Can you just describe? what a jibb it is because before i i would have known it if i seen it but for people who haven't seen it or don't know can you describe what a jibb it is real quickly yeah sure so it's this little charm

right so all the crops that you buy they've got little holes on them and then this is a little charm that you stick in the hole and it can be so one of the really interesting ones they did was a kfc fried chicken like a drumstick and it actually just like the scratch and sniff it actually smelled like chicken uh so that one was a really good one for them but you know star wars themes movie themes, serial themes, sporting team themes, all kinds of just random little things that you find in pop culture show up as gibbets and, you know, people buy them and they put them on their shoe and they're actually very profitable. It's sort of like fast and off selling a screw, you know, it doesn't cost much, but it's pretty important and it's got an high gross margin on it.

Two questions about gibbets that are just popping to my mind. So again, these are the things if you've got a crox, you think if they're classic clog, they've got the little holes in them, And people literally, you know, they release one with Barbie, right? So they were Barbie-themed gibbets that went in the shoes. Two questions on them. Is Crocs the only one who can make gibbets? Or I'm guessing there have to be like a thousand people making knockoff gibbits that go into these crock shoes. They're out there.

They've done a fairly good job of policing this. Can they, so they have it, I guess not patented, but trademarked where they can go on Amazon or wherever somebody would sell a knockoff gibbet and be like, hey, that's our, you can't sell that thing. Yes. Yeah. How do they have that patented? because I could understand how you could not use crox when you're marketing it, but if you were just like, look at this little big pin or something, you know?

I think the enforcement of it can be difficult, right? But, you know, on the bright side, it is, you know, probably somebody selling just something for $5. So it's not a huge, huge market. But it is a good market for crox. This sort of goes back to when they bought it. They actually bought it, I think, in 2007. It's been a very It was kind of an afterthought for a really long time

They spent 10 million bucks on it And ultimately started paying a lot more attention to it In the last kind of four or five years But yeah, counterfeiting there is a risk It's something that they're pretty attentive to But It's also something I could see being really popular So Crocs is making a big direct-to-consumer push

And I could see it being really popular And really like kind of enforcing a moat where Hey, you get somebody on the Crocs app or whatever and then you're pushing new gibbets to them all the time you learn about their personality hey this is a person who like Star Wars Asoka comes out this week

let's push some Star Wars branded Jibbits hey this person bought Barbie I don't know what's the next smash it I guess Barbie everybody watch it I haven't seen it yet but I guess everybody watched it but you could see how you could push it and it could be a draw to get people into the app buying directly from them which is going to be higher gross margin forming that relationship

forming like kind of a sticky thing almost razor razor razor blade us second question on jibbit But do people, I don't have kids yet, but do people, when they wear them, are they changing them in and out every day? Like, I'm going to the Barbie movie today. Let me put a Barbie in. Tomorrow, I'm going to Star Wars. Let me put some Star Wars in.

Or do they kind of wear the same one for a month, two, three, four at a time? It's kind of personal preference, and it's all over the map, right? So, you know, some kids change them out more often than others, and, you know, others don't. So they're really just kind of personal preference. I'm so lazy. I feel like I'd say to myself, I'm going to do it every day, and then I'd never change it. All right. So we talked growth. Then you kind of go to school and you want to show off your new jibbts, right? So there's your sort of counter to that.

So most of the people who are buying croc, actually, let's save that for the bear case. So we've talked growth, right? You've got the Crox brand, the Hey Dude brand, growing nicely domestically, growing 20% plus internationally. So that's your growth. Let's talk valuation. And then I want to spend most of the time actually talking to Bayer thesis because that's really where the crux of the stock is. But we are talking today mid-August. The stock is trading just under $100 per share.

Can you talk to me about the bear thesis or sorry, the valuation for the stock? Yeah, sure. just walked in so I got a little distracted yeah no that's okay uh no well it's trading very cheaply right so the bears seem to be be in control at least of the stock at the moment so it's trading at eight times earnings um and what is it seven or eight times evadat 10% free cash flow yield um so things that have runways for growth that are profitable companies tend to not trade at those kind of valuations so there's obviously an argument here right um so i can sort of kind of talk about a little bit more, you know, what we see happening or we can jump into the bear case, but, you know, that's kind of where it's trading right now. Just on valuation, I would just throw in, and you're welcome to add here, you know, this will become growth-grothy retail and consumer goods brands generate a lot of cash flow. Eventually, this will become a capital allocation story.

We'll talk to, hey, dude, acquisition later, they'll play into capital allocation. But I would just mention it's a six billion-ish market cap. And in July, in their earnings release, they said, hey, we bought. 50 million of stocks and 50 million of stock in July. You run rate that for a full year. That would be we're buying 5% plus of the company every year. It's just I throw that in. Yeah, no, that's right. And they've got a billion dollar authorization on the repo. So that's 15, 16% of the flowed outstanding. And they've bought aggressively two other, two other times in history under basically the same board. So it's kind of in their DNA.

They like to buy shares, especially when they think they represent value. It goes back to So, you know, to me, probably the bear case, you kind of got to go all the way back and maybe we'll talk about it. Maybe if you want to delve into it. But you got to go back to sort of the Blackstone investment and when Andrew Reece came in as president and then ultimately became CEO. But one of the first things they did is they did the pipe, the private investment and public equity. And then they used that and they bought a lot of the shares back and shrank the float dramatically. And then, so that was the first iteration of them with the big buyback. and then they've done that a couple of times since.

And now, a quick word from our sponsor. Are traditional expert calls in the investment world becoming obsolete? According to Stream, they are. And you can access primary research easily and efficiently through their platform. With Stream, you'll have the right insights at your fingertips to make the best investment decisions. They offer a vast library of over 26,000 expert transcripts powered by AI search technology. Plus, they provide competitive rates on expert call services, and you can even have and experienced by-side analysts conduct the calls for you. But that's not all. Stream also provides

the ability to engage with experts one-on-one and get your calls transcribed free of charge, all for 40% less than you would pay for 20 calls in a traditional expert network model. So if you're looking to optimize your research process and increase ROI on investment research spend, Stream has the solution for you. Head over to their website at streamrg.com to learn more. Thanks for listening and we'll catch you next time. It's a board, you know, again, we'll talk you in a second, but I do think it seems quite astute on capital allocation. You mentioned the prior buybacks. If you look at a chart of their share repurchases, I think you were probably the person who shared it with me. But, you know, when the stock's 150, you see all the insider

selling. And then when the stock's 100, you see all the insiders buying. And, you know, you can see different variations of that trade over the past few years, which it's really interesting when you've got a board that's sewn some financial sophistication with their insider buys and sells. They're buying back stock now. They're doing insider buys now. But I'm giving the bear case for you. Let's the bull case for you. Let's turn to the bear case because I think that's really the most interesting thing, right? Everybody can agree this is a nicely growing brand that's trading cheaply. I think the bears would push back on a lot of pieces of what we talked about. We can go any place, but I think the number one place to start would probably be a bear

would say, hey, this is a clear COVID beneficiary. During COVID, everyone wanted to be comfortable. Are they in a better spot now than they were before COVID? Sure, they've got a lot of more people who were exposed. It's a little more socially acceptable to wear your crocs to school or whatever. But I think a bear would just come to you and say, hey, 2019, this was a 50% gross margin business. Today, it's a 60% gross margin business. 2019, 2018, this is an 8 to 12% EBIT margin business. This year, they're guiding to approaching 30% EBIT margins. And the bear would say, look, you fast forward this a year or two.

Everybody who wants a crocs probably already has a pair of crocs. This was a huge COVID beneficiary. As those trends kind of unwind, you're looking at a business that is way over-earning. Their sales have exploded. I think this is coming back. guys are talking eight times this year's earnings. I'm looking out two years from now, and I think two years from now looks closer to 2019 than 20, 22, 20, 23. So how would you respond to that? Sure. And, you know, I hate to sort of piggyback on the thing I said for the last

question. But to me, they are somewhat similar answers in that the company over the last seven years has really become a much, much better company. And so a lot of this goes back to sort of the first things they did in kind of 2014-16. They've got some good slides to it. But they took out 80 million of fixed costs. They shrunk the skew count by half. They shrunk the store count by third. And they had, you know, digital sales were like 10% of the mix. And so now they're 40, 45 and probably going to 50-55. And so those are more profitable sales. You know, to your point about margins. So those major sort of elements in terms of the restructuring, you know, making the company more efficient, more profitable, those things had all been done kind of like 14, 15, 16,

but they didn't really have the sales falling down, you know, and showing up on the income statement at high incremental margins the way that they wanted. And they were growing, but they were really only growing sales, 7, 8, 9%. So there was a huge benefit, particularly in 21, at the top line from you know pandemic goods spending um and but you know good for them they were put themselves in a position to capitalize on it and they did um but you know even independent of that you know the whole body of work i think paints the picture of a management team that's become very adept that meeting their customer marketing and creative and clever ways you know building sort of recurring demands So I think half of the, half the shoe purchases at some point, if you're not counting sort of new growth markets or probably some form of repair replace, so replenishment, right?

So there's that element. And then, you know, we talked about Jivots just a little bit, but Jivis were basically an afterthought. And, you know, I think they're adding somewhere between 500 basis points to the gross margin line that falls fairly neatly down to the EIT line. So, you know, if you compare it to a company like Decker's, what you see is Decker's margins, the two margins, the two companies' margins tend to be on a similar profile, but then there's a separation there in 2020 where Crocs and I think Jivitt's to some degree really drive that separation. Let me ask maybe a stupid question for somebody who follows the company.

And maybe this is the equivalent to saying, hey, Nike makes shoes and sells Air, Jordans for $200, why can't I buy, you know, the Chinese knockoff air, what would a Chinese knockoff of Air Jordan be? Air Judans or something? I don't know. You know, you're replacing the O with the you. But why, why can't like Crocs? Why can't you just buy the cheaper knockoff brand or something? Because I do remember when the first, when the first 2008, 2009, the big spike happened. And they had a lot of trouble with, they were selling crocs and grocery service and stuff. But you could find crocs that were knocked off. You could find crox knockoffs everywhere and replace them.

Why aren't there more like crox knockoffs? Because it's not a hard product to make or copy or anything. Yeah, it's a great question. I mean, there certainly are some that are out there, but they do have some forms of protection. And they're certainly going after people where they're seeing these things pop up in size and scale. So, you know, I think about natives.

I mean, they look, you know, for little kids. they look a lot like Crocs, but, you know, that's, that's part of the deal. You see that time and time again, right? So it's up to the company to be vigilant about that and do, you know, the very best they can to minimize those sales to go after people and enforce that where they can. So, you know, they've got the resources to do that and then they're doing that. So, so that's up to them. And, you know, it's something you always think about, but it's not something that's not on their radar. Just Air Jordans, I was very, replacing the O with the U, but I think maybe it would be Jardons, but neither here nor there.

So let's, Krox, you know, a lot of people would say COVID beneficiary. And I do wonder, Peloton was a huge COVID beneficiary, right? Everyone was buying a bike in 2020 and early 2020. That fell off. Is there something to, hey, Crocs, like, yes, they grew like crazy in 2020, 2021. But as you said, a lot of the repurchases are replacements in 2022. They still grew. In 2020, they're still growing.

Is there something to, hey, they're growing through. through it, they've kind of proven out that they weren't just only a COVID beneficiary? Or would they still be, would the wall be like six months away or something if they were going to run into a wall? That's a great question. I'll talk about this with other investors as well. I mean, you would have thought they would have run into the wall by now, right? So, you know, 2020, 2021, 2002, 2003.

So three comps in a row, they've continued to grow here in North America on kind of the core product. So, you know, even just doing some channel checks recently, the feedback was the same, which is they continue to grow the core product, which is pretty astounding. So there is some repair replace. You know, there are some kids. They get older. Shoes wear out. But they've done a really good job, you know, maintaining relevance and interest with their customer. And then in addition to that, they've got new kind of silhouettes. They've got sandals, just kind of all of these. these little collaborations the way they sort of market the stuff. So Barbie is a decent example. You know, it was a limited run. It was really only available for two days. And, you know,

that was intentional. They wanted limited distribution to capture sort of the imagination and the mind share of their customers. And, you know, not everybody could get them. And that was intentional. So they kind of do that to perpetuate the brand and sales. There was a really interesting quote in their last earnings call where somebody was saying, hey, you guys basically discount once a quarter, you let your retailers discount once a quarter, aren't you training your customers to wait for a discount and then buy the shoe? And they said, we don't see that in the numbers. And, you know, I think that's kind of silly because Apple discounts only on Black Friday or whatever. And nobody said, a lot of people do wait for Apple, but Apple's doing just fine with people waiting

for After Black Friday. But Croc said, hey, we don't see it in the numbers. And even more than that, we train our customers. As you said, when we do a Barbie drop, two days and then it's gone. on. When we do a seasonal drop, when we do some colors drop, you need to buy it then or else it's not going to be there, so you can't wait for a sale. I just thought that was really interesting. And a lot of times that is the sign of real brand power, right? Customers don't wait for the discount because it speaks to them and they really want it. I'll let you come up there and then I've got plenty more questions. Yeah, no, that's exactly right. Look, it's the number one thing I think about too, right? I mean, that's a brand. And so, you know, it's very

difficult to build a brand. I mean, some of these things are sometimes almost historical accidents, right but this brand like if you and me and 10 other people sat in a lab and we all back in 2004 and we wanted to create the most uncomfortable shoe and profitable shoe i don't think in a million years we would have come up with this exact little iteration right but but they did 20 years ago and then it sort of found its way into the culture uh people got really comfortable with it because it is comfortable shoe uh but now there's 20 years of people and they they've sold a billion even pairs of these things. That's a lot. Have you heard the idiocry story? No. Oh, what sort of Crocs investor are you if you haven't heard the idiocry story? So idiocry is this comedy, which is quite

funny. It's about what happens if some average Joe gets frozen and gets frozen for like 5,000 years and he wakes up and the country is just the dumbest country in history. Like everyone has got an IQ of 30. So he's the smartest man on the planet. Anyway, so that's what the that's what everyone is. And, At the time the Eocracy guy was filming, they had a very small budget. And he said, I need shoes that are really stupid. And he went looking and he found this startup brand. He was like, these are the ugliest stupidest shoes I've ever seen. And he had all the actors wear Crocs all the time when he filmed them.

And between filming and releasing, Crocs blew up. And it was the first wave of Crocs. So he's like, nobody's going to get the joke that these are the stupid issues on. Or people are going to think I intentionally chose these. But I was just trying to get something really ugly. So I thought that was so funny. Switching, what, so I think the typical customer these days is quite young, right? Like, teenagers, my imagination.

How much of sales are going to teenagers for the Core Crock's brand? Probably in the neighborhood of 30 to 50. But so I think that's where they started out, right? Over the years, what you've seen is it's become a little bit more widespread. When there's a bolus of people that bought, you know, 10, 12 years ago, they're continuing to buy. So the sort of distribution of the customer set has brought in. Here's my word.

It's popular with teenagers today, but teenagers are fickle, right? Like Abercrombie and Fitch is popular in the 90s for three or four years. But then your teenagers become young 20s, and the teenagers behind them say, oh, I don't want the Abercrombie and Fitch because that's my older brother. That's for the olds.

I get something new. And I worry this wave is not so much COVID beneficiary as it is like this wave of teens and the next wave of teens aren't coming. So you kind of, I guess the question I'm asking is, how much of this is fashion risk or age out risk? Very much. I mean, it is definitely the bare case, right?

And it is first, you know, front of mind for everybody. So, you know, a couple of things I'll say about that. I mean, A, I think we're all looking at this. I think management's also very attuned to this. B, they've been working to broaden their portfolio because of it. of this for a long time. So they've done that. So now, let's say 30% or whatever. So within sort of the crocs mix, some of these are used as garden shoes. Some of them are used as house shoes. And then some of them certainly are worn more stylistically. And so what I would say is that sort

of 30 to 50% of the mix, maybe half of that is the fashion risk, right? So now you're down to 15%. and then that 15% is really what 40% of the whole company sales so you know you're getting into sort of 10% of the top line that's sort of at risk and that sort of framework so you know it's a risk but again they're they're thinking about it they're doing what they can to continue to stay relevant yeah and you know i guess the bet one of the bet you're making is you know i can just think of in the past few years there was the the healy shoes right i guess those might have been a little younger than teenagers but the healy shoes were selling off the charts for two years and then those went away sketchers had the kim kardashian shape-up sketchers and the like and you can see these

in the stock charts too right like the sketchers go up like this or the skip they have the shape-ups and then they've got the really comfortable shoes for i think a little bit older people that joe montana was pitching and they go like this and i guess the bet bears might think hey this is some people think it's COVID or some people think, hey, it's just like Kim Kardashian, Skechers over again, the bet you're making is this is a real brand. And so far, it, you know, it is sustaining. I'll see it. Let's see. Let's go to the other. So late 2021, Crox is on fire, right? The, the business is growing like crazy. They've got the international growth story. They're pitching off tons of cash. They've got the giblets, all this sort of stuff. And then they buy Hey,

dude, for a business that I don't think many people had heard of. I certainly hadn't heard of it. I remember at the time I had some friends who were Bear's Crocs. You're like, look at this. As you said, I think your letter, they just went cross-bine, hey dudes is going from fad to fad-squared in a lot of people's eyes. They pay a big multiple for it. It's a really growthy brand. I think a lot of people looked at that skeptically. And this year, you know, hey dude seems to, not that it's struggling because it is going to grow, but they cut out a lot of what they say are low margin sales.

They're having some ERP integration issues, some inventory, all that. So I think a lot of people look at the hey dude and they say, hey, is management skeptical of the crocs, story by buying Hey, dude. And also, hey, does this reflect strangely on a crox's capital allocation acumen? So I guess I'll just pause there and toss it over to you on the Hey dude front. Yeah. So we'll definitely have to dive into Hey Dude. What's I guess most interesting about this is, and you know, we didn't really get involved in the stock until sort of spring, summer time last year. So sort of post the Hey Dude massacre in the stock. Um, And there was a number of things, just kind of pattern recognition you see in the market from time to time, right?

Like sort of the top of the deal, top of the market, you know, you add leverage, you do it in December. I think they've been out basically telling people that were probably unlikely to do any major deals a week or two before and all sort of the recipes there to create a pretty meaningful decline in the stock, right? Layer into that, the notion that there's a large set of investors out there that, they're looking at that and very plainly see. that as justification that management thinks the crox brand's best days are over right um so all these things sort of dovetail together um and now sort of fast forward to today you know to some degree what's happened is the bear case is kind of flip-flop so uh over the last two three four quarters the crocs brands continued to outperform expectations uh here domestically but also internationally and you know hey dude had very high expectations you know they went from 200 to 500

to 1.1 billion in sales this year basically but then all of a sudden now based on sort of some channel dynamics which we can talk about and now it looks like they're down 3% on the coming quarter so basically it appears if you're not willing to really dig in and try to suss through the the channel dynamics, it appears as though the brand was streaming hot and has come to a scorching hall. So now the bear case is being driven by hey, did. And then to your point

is calling into question management acumen around capital allocation and their ability to do deals smartly. So we can dive into the finer points of each of those. I'll let you pick. No, that's great. I guess I just wonder like how do you think about

the, yeah, I'll just let you dive into, like, how do you think about the hey dude acquisition and hey, dude, go forward what the management's doing? Sure. So, you know, it's another billion dollar shoe brand. And there's really not that many of them. Depends on sort of how you cut it, but there's 10 or 12 in North America or something like that. And so now they own two of them. And, you know, nobody had heard of them.

This is a pretty, it's got a pretty interesting background. It's founded in Italy, making shoes in China, selling them in America. And so then, you know, management paid two and a quarter billion dollars or 15 times EBITDA. So, you know, it's very easy to understand how in a very short term people wouldn't feel very good about that. So, but what are they doing now? You know, there's certainly been some moving parts and maybe everything hasn't gone incredibly smoothly and relative to forward expectations with the integration of the company. but they're putting sort of the Crocs playbook into work here. And it's a pretty good playbook.

It really revolves around being efficient, controlling distribution, managing the inventory and the channel, and then, you know, very savvy digital marketing. I mean, all their marketing spend is 100% digital. And it's, you know, celebrities, hyper-local influencers, and these collaborations. And, you know, they've spent some money. They're moving, hey, dude, into a distribution center in Las Vegas.

They've got some other things going on. There's some channel dynamics we should probably talk about that are, you know, to me, I don't want to say small picture, but they're the worry of the moment that, you know, arguably in six or 12 or 18 months, everybody would look at and say, well, that was maybe not that big of a worry and maybe created a pretty nice buying opportunity. But look, bigger picture, I mean, you know, that's $1.1 billion in sales. does a high 20s out margin that is similarly profitable to crox to crocs the average owner of hey dudes owns four pairs so they've got who is the average owner of hey dudes uh basically everybody

that's on the dude perfect channel and uh we'll talk about that too but you know probably starts in between 12 and 15 and skews up and 40 45 but i would say and primarily male but within that I would say, you know, the real sort of, you know, meat of that curve is kind of the 18 to 35-year-old male. So, just so I texted you, I bought a pair of hey dudes this morning for due diligence. I got them on Amazon. Unfortunately, they didn't come in time for me to hold them up in the screen. But, you know, I think the bear case is my wife got an email saying, hey, you got something on Amazon. She just sent me a screenshot of the hey dudes, and she said, ew.

And I said, it's for podcast research. Anna needs something to walk our dog in. and she just responded again, ew. So, you know, there is the bear case. Though, I've always thought there is something like Crox and Hey, dude, it is something that your typical Wall Streeter would not wear, you know, probably wouldn't be caught dead in. Yeah.

I have always thought there's something to buying stuff that a typical Wall Streeter doesn't understand, wouldn't buy that type of stuff. And Crox and Hey, dude, certainly fall into that category. Very much. There's a bit of a Peter Lynch, leg, legs, leggings element of play here. So and Hey dude, this just might be because, you know, I haven't seen it as much. I don't know why I bought someone on Amazon. We can talk about the Amazon gray market problems they had as well. But I bought my pair on Amazon for I think it was $35 on sale. And it looks like a fine shoe. You know, it kind of looks like a knockoff boat shoe or something. But I do wonder with Hey, dude, even more than Crocs, because Crocs at least it's very visible. It had that big spike. Everybody can recognize a Crocs. When I say, hey, dude, again, it might be because I just don't know it. But why don't they have a. knockoff problem. Like I could find a I think Hoka is very popular. They've got some shoes that look like this. Like why don't they have a knock on off problem? Yeah. So generally it kind of

comes down to the brand, right? Is the brand powerful and you know, does it matter to people if they wear the knockoff or not? So certainly with hey dude, there are competitor shoes out there that look like them. And so that's a problem for everybody that competes in the shoewear business. You know, so nobody's got a, you know, stronghold on the whole entire sheet market. So there are competitors out there for sure. I can see some Chinese knockoffs that are, hey, dude, but dude is D-O-O-D-E. Like, I could see those getting real popular. Hey, H-Mood, yeah.

No, it's certainly something to monitor. But there is a brand there. You know, the average person has four pairs of, the average owner of, hey, dude. It has four pairs of hay dudes. What do you need four pairs of haydudes for? Because they are kind of rubber and quick drying, aren't they? Is it just because you're going out into like muddy field so frequently you need them? Or I guess style, you need blue, black, gray.

It's more the style element. It's also the price point, which allows that. So good people you got your shoes 40% off. But, you know, if they're 60 or 65, which is sort of the average ASP of the retail, you know, can get two or three or four. And if you, you know, people are accessoryizing their shoes these days.

So sneaker heads, what have you, uh, that sort of phenomenon, you know, is probably applying here and that's why people have more than, more than one pair. Let's see.

What else should we, we talk about? Yeah, I think we've hit a lot, a lot of the questions. I guess just when you look at this like, how do you think again, it's tough,

it is tough to disprove a, hey, this is sketcher. Sorry, this is Crocs. They already had one hypergrowth cycle in kind of 07 to 09 that ended in tears when, as we said, they were selling them out of gas stations and everyone had them. And they were basically like buy a pair for $5 and took a long time to remember from that. How do you think bears ultimately kind of, I'd use the term get defeated, but how do you ever climb that wall of worry that this is always one quarter away from a huge rollover, inventories starting to pile up, huge discounting turns out to be a fad? Yeah. That's part of what's in the valuation here today, for sure. But it's just, you know, time and execution, really. And, you know, if they buy back 15% of the float and continue to post double-digit top line growth, that's a tough thing to short, right?

Look, I don't do a lot of shorting. I'm with you, though. I think you, I do hear the, I hear the concerns over cyclicality. inventory, all that sort of stuff, but it's also like, hey, it's eight times price to earnings. It's growing and they're buying back shares. Like, can't we go short? Like, what was the REIT that had all their income was coming from related parties? Like, that seems probably better than an eight times, you know, instant brand name recognition company that, as we've mentioned, you know, people are still buying them, despite it seems like it should be easy knockoff material. People are still buying them. They haven't had that issue. So, yeah, that's what I would say. So I don't want to move.

off the hey dude just yet so a couple of things to think about i mean so the brand is i mean is young most of all these sales they've sold about 100 pairs of shoes so far but you know if you look back to the beginning in 2022 they have basically nil presence in california which you know california's a pretty big state and it's on the coast right roughly the GDP of france so they have no sales in california in a market that arguably would be a good fit for them even now to the this day, you know, five people I talk to in California regularly, none of them still heard of, hey, dude. So there's an opportunity there. You know, another element is some of the marketing that they're doing. They're just now kind of putting into place, kind of some of the

crocs marketing muscle. So they've got some SEC football stuff coming. My understanding is Maybe there's some name, image, and likeness deals with some other trades. Great market for a brand that kind of looks like a boating shoe and his everyday lifestyle brand, absolutely. You went to Clemson, if I remember correctly, right? I do. Hopefully we can get them linked up with the folks at Clemson, too. That would be great.

That's what you need. Like Davo Sweeney wearing a pair of hey dudes on the sidelines. That's what you can need. Yeah. So, you know, it's a marketing agent. It's a marketing company, right? So if they have marketing muscle, a good product, they can continue to drive me. I mean, that's, you know, Nike calls it demand creation,

expense for a recent reason, right? So just last week, they announced this partnership with Dude Perfect. And so that to me seems like something that people are not talking about. It might actually be a real needle mover for the Hey Dude Brand. And so I spent kind of the weekend reading about Dude Perfect and that, I mean, they're awesome. I watch them with my kid. They're super entertaining and, you know, not offensive and like generally fun loving people, right? So good brand ambassadors. But I had no idea how big their reach was. So they have a hundred million subscribers across all of sort of digital social media channels 60 million on YouTube and even more surprising to me than that was half of that 60 million on

YouTube is international so you know ever since hey dude showed up under the crock's umbrella you know I've been wondering kind of asking around people have been thinking like what sort of international legs does this have for hey dude and that's actually pretty decent lens in a way to look at the market, right? I mean, there's arguably 30 million people. I'm not saying that's one for one, right? But even if you just get half of them, right? That's 15 million people that are not thinking about buying hey dudes, that the sell is not thinking about it. I do hear you, but I'll choose. Who is it? Nazex did a collaboration with

Crocs, right? And I'm sure Nazex has like a 100 million Twitter followers or people who listen to it. While I do hear you, I also wouldn't be like, oh, 50 million of them are international, so 25 million of them. Like, I hear you on the brand, but it is tough to recreate like Dude Perfect's YouTube followers to how much. But I certainly hear where you're going. Let me actually switch to something different. So all acquisitions, right, you need to be, there needs to be a reason for you to be the best acquire. And I think one of the reasons people saw Crocs buying, hey dude, for a high multiple is they hadn't seen it before. It was a pretty eye-poppy multiple for a very great.

growthy brand. But I think people also saw, hey, Crox, like, you've got this growth business that you can execute yourself. You know, people were worried, hey, are you just trying to diversify out of a fad? But I think the other is, why is Crocs the best buyer and owner of Hey, dude? And it sounds to me like you think Crocs almost has a mini process where probably not just with Hey, dude, they could go buy two or three more growth brands and probably the Crocs playbook. So more DTC, more marketing, getting direct apps, getting these partnerships going. It sounds like you think this could be almost a mini shoe brand conglomerate, if I'm saying it that correctly. Yeah, I mean, I'm not necessarily advocating for them to go buy another hey, did today.

Let's digest this one, right? But look, all the sort of critical pieces are there. And, you know, I think that's what they were thinking when they bought it. You know, my understanding is it was a PE auction, primarily financial sponsors. And Crox was the only one. They sort of wheezed their way into the auction. and they were the only strategic that saw it, which is somewhat interesting.

So you just think about the distribution channels, the marketing muscle, the know-how, and the brands do have some overlap. I don't want to get too carried away with that, but there is some overlap there. And there's some low price point. There's some commonalities where you can see that, hey, maybe this does make a little sense

for them to be together rather than just any old shoe brand, right? but you know you've got the distribution synergies you've got the marketing synergies and you know it looked like they paid 15 times now it looks like they paid eight times and you know leverage was three and a quarter and now it's 1.7 so they do levered very quickly because they've been able to generate a lot of cash and if i remember correctly what they were saying at the time of the acquisition was hey i know it's a huge number on this year's earnings but this is a brand that's growing 25, 30, 40%, even before we put the Crox playbook and get any synergies off that, you run this forward one year, you get some operating leverage.

Like, this multiple is going to look reasonable really quickly. What do you think the end game for Crocs is, right? So three, five, seven, ten years out, you know, is this a public standalone company that maybe has gone and bought one or two more brands and they're just growing and everybody thinks of Crocs and kind of the same way they think of a Decker's or something? Or do you think it, you know, a sale candidate? to a bigger kind of consumer brand conglomer? Like, how do you think this ultimately plays out?

Yeah, and I've heard both. I've heard rumors around, you know, certainly nothing imminent. I don't mean to suggest that. But like down the road, you know, maybe it makes sense for them to get acquired. Maybe some of the sort of... Who do you think would be in a choir? Like, I don't think a Nike would be an acquire or an Adidas. Like, you know, it's a strange fit to imagine.

Yeah, I don't know. You could see Nike. I mean, you know, they're doing a similar thing with a Jordan brand, right? I mean, the sort of sneaker heads and, I mean, how many average, how many sneakers does the average sort of sneaker head type buyer, probably? I'm not a sneaker head, but my understanding, I mean, you see the people with closets full of sneakers. Yeah, I know, I know plenty of them, and it's not like seven. It's like 17 or 27. So, you know, maybe there's some similarities there. Yeah, maybe Decker. I don't know, but, you know, if they continue to grow and reach. a certain scale. At some point, the buyer pool will start to window down.

So, you know, I don't know. I'm thinking about it mostly from the perspective of this kind of three to five year window. And if they can, they can do what they've set out to do and accomplish sort of the expectations they've set for themselves. You know, that always worries me a little bit, like treat the management plan as the upside plan, right? But they've done a good job of hitting their targets and so you know those targets have some pretty impressive earnings and cash flows yeah i just wonder because you know i guess there is sketchers and deckers which do have like deckers they kind of incubated i think they bought it for a song but they kind of really grew the hookah brand sketchers i don't think

has anything other than sketches at this point but it is rare to have like a one it would be two but kind of like one overarching brand, footwear brand thing. Yeah. Actually, speaking to that, you know, Nike is not just foot fair, right? A lot of it is apparel and stuff. Is there a Crocs apparel business down the road or something like that? Um, I don't know. I like the footwear business.

I like the businesses they have. Yeah. And footwear, to me, is a better business than apparel for a number of reasons. I mean, the margins and then kind of the replacement. It's a little bit less competitive. And at least in these two cases, I think they've got pretty good brands there. Just shirts are pretty tough. I'm imagining a crock shirt with just holes all the way down it or something, you know.

I can see that with some fried chicken jibets on it. I like that. I like that. Yeah, the KFC fried chicken, it's so genius because it happened five years ago. And when I was researching it, it was like the first thing that popped into my mind. And I think they go for hundreds of dollars if you want to buy one. Yeah, that's my understanding. So you've got to buy one eBay for ridiculous prices.

Look, on an acquisition, you know, again, it's this one shoe brand and that is kind of an odd duck, not that there aren't any out there. It is a little bit of an odd duck in the markets, but at the same time, like, if they keep growing like this, they're going to generate a lot of cash and all you need is a lot of cash and you can do really well for your shareholders. And on the acquisition front, you know, I don't know if tape history or whatever it is buying coach, I'm not sure I would have thought of that a few months ago, but there's always buyers for good brands that are growing and throwing off cash flow. And if you're someone else who

sells through Crox's distribution channels, there are going to be a lot of synergies. And whether it's you buying Crocs or them buying you, like there are going to be synergies, reasons to combine that type of stuff. Yeah, very much so. I think you're right. I mean, what you're seeing is sort of in a responsibility of a ton, all these guys are trying to put more good brands under one umbrella so that they can continue to compete. And so, you know, that just, you know, that and sort of the digitization of these channels, I think makes the brands more valuable on a sort of a secular basis. And now, a quick word from our sponsor. Are traditional expert calls in the investment world becoming obsolete? According to Stream, they are. And you can access primary

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So if you're looking to optimize your research process and increase ROI on investment research spend, Stream has the solution for you. Head over to their website at streamrg.com to learn more. Thanks for listening and we'll catch you next time. Anything else we should be thinking about with Crocs? There's a lot to think about. We didn't really talk too much about the gray market

for the hey dude stuff. I think that's somewhat... Because look, I got the Amazon prices pretty cheaply. I think I bought directly from Haydud, but I'm not sure. Let's talk about it because it was kind of critical to the strategy and why the business is kind of slowing down a lot this year. Let's just quickly address the Haydudes, how they shifted the wholesale channel and what the great market is.

Yeah, that's right. So basically, when they bought Haydud, I think Haydud was using only one distributor. Those people that had access to Haydud were really excited to have access to Hayd And then Crocs bought them and then Crocs kind of came in and sort of puts the Crocs playbook on that. And that is different than the Crocs playbook. So it de-emphasized some vendors and merchants and sort of emphasize some other vendors and merchants. What that created was a dynamic. There was a very large sort of sell them last year.

So and the kind of the wholesale channel. So that created kind of a tough comp for them this year, which they're laughing. And so, you know, a handful of extra pairs of shoes out there. But mostly what it did is the people that got sort of kicked out of the network. Some of them are no longer allowed to sell online, et cetera. You know, they were happy to have the hated relationship. And then they're kind of ticked off that they don't have the hated relationship. So, you know, basically they're dumping them all on Amazon for, you know, whatever they think they can get for them.

So, you know, Cox said that they've been putting a stop to that basically over the course of the last two, three, three, four months. So my sense is that we're starting to see at the end of that. There's still maybe a handful of sort of extra shoes out there at some retail channels, but in the context of the business that, you know, online is continuing to grow mid-30s, very healthily. So there's plenty here to suggest that this is kind of a small sort of channel lapping issue and less endemic of a brand that's not as sought after as maybe they thought. And the nice thing you, the nice thing is if your brand's growing 10, 20, 30% online, you eat up all that extra excess inventory real quickly.

Yourself. Yeah, exactly. And so part of the multi-channel offering too is you can, you know, adjust and position it where it can be best suited. So, and again, you know, very underpenetrated in California and some of the other coastal states and internationally as well. so nobody's even nobody's even really thinking

about international sales. So, you know, that's kind of a gray market issue. Last one, and then I'll let you go. And I, look, I know you're not basing this on one quarter of an investment. I never based anything on one quarter,

but it does just kind of strike me as interesting. Dick's sporting goods reported earnings this morning and their stock was down 25%. They had inventory buildup. They mentioned, I remember this was CVS a few years ago. They mentioned,

we're having a lot of trouble with theft. And the reason I really mentioned Dicks, I think they sell some hey dudes and crocs, But the reason I mentioned was because last year Academy, I remember, because I've been watching Crocs for a while, Academy rolled out Hey Dude. And I specifically remember they said, the Hey Dude rollout is the best rollout that we've ever had. I think that was in the Q2-2020 call, if I remember correctly. That's from memory, so I could be wrong. But they said that. And I just wonder, you know, when you see Dix, Macy's Warren this morning, it does seem like retailers are still kind of figuring out their inventory, slowdown, all that sort of stuff. Are you, look, they reported earnings two weeks ago. I hate to say, are you worried about this year's earnings? But are you worried about this year's earnings and kind of an inventory buildup or anything? Yeah, sure. No, great point about Academy Sports.

And that was kind of the same feedback for most of the folks in the channel we spoke with it. It's like, this thing's hot and we really want it and can't get a hold of it. Yes, that is a pattern that we're seeing across retail. They tend to, at least in recent years, all order exuberantly together and then all order cautiously together. rather in unison. And so I think we're seeing a little bit of that here for the back half. Paradoxically or in juxtaposition of that, I think what we're seeing at least from the consumer is that people are spending a little bit more freely in the second half and back to school than they were for the first half. So, you know, that's probably a thing that can sort of

sort itself out. As far as Hey, dude goes, I don't believe they're in Dicks, actually, right now. They did just sign an agreement for Footblocker for 400 of their stores. So still sort of early days there. And again, yeah, I mean, there's obviously concerns about the consumer. But, you know, I think there's enough sort of growth factors in here that management has embedded that they can continue to drive sales. I think we'll wrap it up there then this look this has been a super fast-thitting one it's it's so funny because on one hand you can say as we say to start insider buying eight times earnings buying back shares growing quickly and then on the other hand you can say

this is a fad we've already seen it once before 15 years ago where they're riding a growth wave and then it crashes and yeah it's just a super fastening one but Mitchell scott choice equities tag the twitter account everybody can find them Q2 letter with excellent. Sold out to Celsius a little too early though, but you know, some of us missed the whole run. But Q2 letter was excellent. I really enjoyed it. And I really enjoyed having you on for the first time and looking forward to the next one. Awesome, Andrew. Thanks so much for having me. A pleasure. A quick disclaimer. Nothing on this podcast should be considered an investment advice. Guests or the hosts may have positions in any of the stocks mentioned during

this podcast. Please do your own work and consult a financial advisor. Thanks.