Crocs' (CROX 1.53%) main product is its classic plastic clog. The fashion has gone in and out of style over the years but has generally remained a desired shoe choice because of its simplicity and comfort.
In an effort to boost growth, however, the company bought Heydude, a company that makes slightly more formal slip-on shoes. The rubber is only now hitting the road, so to speak. It remains to be seen how good a fit the new shoe brand will prove to be.
Crocs took a classic approach with this acquisition
Crocs' February 2022 acquisition of Heydude is really pretty basic from a retail perspective. A comparison will help explain what's going on. In 2018, General Mills (GIS -0.77%) bought Blue Buffalo. General Mills is a large consumer staples company with a portfolio of iconic food products. Blue Buffalo was its way to get into the pet food category.
Image source: Getty Images.
However, the really important piece of the puzzle here is that Blue Buffalo was largely found in specialty shops. It was only just beginning the process of entering mass merchandise outlets, like grocery stores. General Mills, with a well-established distribution network in the mass-merchandise space, simply had to plug Blue Buffalo products into its system. That alone resulted in robust growth for the acquired pet-food brand.
This is what Crocs has done with Heydude, and the early results were pretty impressive. For example, the company reported that second-quarter 2022 sales of the Heydude brand rose 96% year over year. That was the first full quarter that the new brand was in the portfolio. That strength continued through to the first quarter of 2023, when Heydude sales increased 104%, though that figure is biased higher because it is compared to the period in which Crocs owned the brand for only part of the quarter.
At this point, the low-hanging fruit has been picked, and upcoming results will be key.
Now the hard work starts for Crocs
In the second quarter of 2023, Crocs provided a number of bullet points at the top of its earnings release to summarize its performance. One of them was that Heydude's DTC revenue grew 29.7%. That sounds great, but DTC stands for "direct to consumer." That's a different metric from the revenue growth figures it was highlighting up until that point.
When you read deeper into the release, you find that Heydude's overall revenue growth was a slim 3%. Yes, that growth was driven by the DTC segment, but 3% is a sharp decline from the high-double-digit figures (and even triple digits) the company was able to achieve in the first year it owned Heydude -- only this is hardly shocking if you step back and look at the big picture.
Crocs was able to achieve a huge initial growth rate because its distribution system was larger than Heydude's. It just pushed the new brand into the places that already sold Crocs, and not Heydude, based on its existing relationships with retailers. But now that this has been done, Crocs needs to work harder to expand the new brand. That will mean things like keeping on top of fashion trends and promotional advertising. These are also business basics, but they are now going to come to the fore.
Right now, Crocs as a brand has seen something of a resurgence, so investors are probably going to look less kindly on the meager growth of Heydude. In the first quarter, Crocs, a much larger brand, grew sales by 13.8%, multiples of the 3% Heydude achieved. However, Heydude gives Crocs a style of shoe that is more traditional and can provide an offset should the company's plastic clog go out of style again. That could prove very beneficial even if Heydude doesn't see the same kind of growth in the future that has in the recent past. It can act as a ballast of sorts.
Watch the Heydude brand
It's too soon to call the Heydude acquisition a success or a failure. However, it has most certainly reached a point where basic business execution will be more important. Even then, a slow-growing brand could be a net win if demand for the Crocs brand hits another weak spot. Either way, Crocs investors should pay close attention to Heydude starting now, because it is only at this point that anyone will be able to tell just how well, or poorly, Crocs handles an expanded lineup of shoe offerings.
