Crocs, Inc ($CROX)

[Dhop10]

Crocs (CROX) is one of the world’s most recognized manufacturers of affordable footwear for men, women, and children, and most of us have surely seen someone wearing Crocs at some point. My goal is to spark discussion about this company, which is familiar to many in the form of its shoes, but perhaps not as an investment.

Crocs shoes are sold in over 90 different countries, and over 720 million pairs of shoes have been sold. The company’s sales are fairly evenly split between Direct-To-Consumer (DTC) sales and wholesale.

Link to the latest presentation from March 2021: https://s22.q4cdn.com/133460125/files/doc_presentations/2021/03/Crocs_NDR-Presentation_vFF-2021.02.28.pdf

HEYDUDE

What may not be familiar to everyone is that Crocs now owns the HEYDUDE shoe brand.

Crocs acquired the HEYDUDE shoe brand for $2.5 billion, financing this acquisition with a loan ($2.05 billion) and Crocs shares ($450 million). HEYDUDE also has a very strong brand and is popular with consumers. This can be observed, for example, on TikTok and Amazon. Incidentally, 7 of the top 15 best-selling shoes on Amazon are either HEYDUDE or Crocs shoes.

Below is what Crocs’ management had to say about HEYDUDE:

"With the acquisition of HEYDUDE, we are thrilled to add another high-growth, highly profitable brand to our portfolio," said Andrew Rees, Chief Executive Officer of Crocs. “We believe HEYDUDE’s casual, comfortable and lightweight products are aligned to long-term consumer trends and are a perfect fit for Crocs. We intend to leverage our global presence, best-in-class marketing and scale infrastructure to build upon HEYDUDE’s strong foundation and create significant shareholder value. We truly admire the business that founder Alessandro Rosano has built and are honored to welcome the HEYDUDE team to Crocs.”

HEYDUDE founder and Chief Executive Officer, Alessandro Rosano said, "We founded HEYDUDE in Italy in 2008, to develop comfortable, versatile and accessible footwear. We are proud of the brand we built and are honored to become a part of Crocs, a company perfectly positioned to take HEYDUDE to the next level. We have long admired the Crocs business and are excited to have them bring HEYDUDE’s comfort, craftsmanship, and style to consumers globally."

Crocs Executive Vice President and Chief Financial Officer, Anne Mehlman said, “HEYDUDE has experienced incredible growth in revenue and profits over the past few years. HEYDUDE is expected to be immediately accretive to our high revenue growth, industry-leading operating margins and earnings. We expect the combined business to generate significant free cash flow, enabling us to quickly deleverage while investing to support future growth. We are excited about the combination and are confident in our ability to deliver long-term shareholder value.”

When the HEYDUDE acquisition was announced, Crocs’ share price was above $130, and since then, the price has declined. Prior to this transaction, Crocs had aggressively bought back its own shares from the market, and the market liked this. However, own shares will no longer be bought back until the debt level has been sufficiently reduced.

What I like about both of these brands is that both products are customizable and can be made in any way cost-effectively. Management has also clearly indicated that they expect to make HEYDUDE sales more profitable once the products are included in Crocs’ distribution network.

Numbers

(Figures in thousands)

In 2021, the gross margin was 61.3% and the operating margin was 29.5%. These are, in my opinion, truly strong figures.

Q2 2022

Here is a link to the Q2 2022 press release: https://investors.crocs.com/news-and-events/press-releases/press-release-details/2022/Crocs-Inc.-Reports-Record-Second-Quarter-Revenues-Up-51/default.aspx

The company’s total revenue was $964.6 million, an increase of 50.5% compared to the same period in 2021. Such significant growth is due to the integration of HEYDUDE into the figures. Gross margin decreased slightly from 2021 figures, pressured by supply chain issues and exceptionally high air freight costs. Q2 gross margin was 51.6%.

The Crocs brand’s revenue was $732.2 million, growing 19.4% compared to 2021 figures, excluding currency exchange rate effects. Especially strong growth was seen in the EMEALA segment. Crocs’ digital sales accounted for 37.2% of revenue, compared to 36.4% in the previous year. 32.4 million pairs of Crocs were sold, an increase of 3.3 million pairs compared to Q2 2021. The Crocs brand’s gross margin was 57.7%.

HEYDUDE’s Q2 revenue was $232.4 million, an increase of 96% compared to 2021. This also exceeded Crocs’ management’s own forecasts for the HEYDUDE brand. 8.1 million pairs of shoes were sold. HEYDUDE’s gross margin was 32.4%. Management aims to improve this by integrating the products into Crocs’ distribution network. HEYDUDE’s digital sales accounted for 31.5% of total sales.

Forecasts were exceeded, but the share price fell by over 10 percent after the announcement because the 2022 EPS forecast was slightly lowered to a range of $9.50 - $10.30. Management justified this with uncertainty in consumer behavior due to inflation and the global economic situation.

Valuation

I consider Crocs’ valuation to be very low; if management’s EPS forecast hits the lower end of the range, the FY22 P/E is below 8 at this price. Crocs guides for 2022 revenue to be between $2.545 billion and $2.615 billion. If Crocs hits the upper end of its 2022 forecasts ($2.615 billion) and their target for the Crocs brand’s 2026 revenue is $5 billion, this implies approximately 17% annual growth. The company thus offers good and profitable growth with just the Crocs brand.

I believe the reasons for this low valuation are fear of a recession and the large debt incurred from HEYDUDE. However, Crocs can repay the debt with the free cash flow generated by the company. One problem here is that the company will no longer buy back its own shares from the market until enough debt has been repaid. The company wants the gross leverage ratio to be below 2 (it was 2.6), after which they have communicated they will resume share buybacks.

Now I need the forum’s collective intelligence to understand why Crocs is valued at such low multiples and if I am falling into a value trap here. This was not a perfect introduction to the company, and there are certainly things I overlooked, but I hope to spark a discussion about this interesting company.

[Von_Wangell]

Thanks for opening a new thread and for the excellent summary!

Unfortunately, I don’t fly in flocks. On the contrary, my survival strategy is to avoid the masses and dig for food from the hidden depths of distant wildernesses or abandoned wastelands.

But to the point. I happened to buy Crocs last week after reading exactly the things you mentioned. I myself speculated that the biggest reason for the stock collapse has been market players’ severe debt allergy and a very short fuse in this market situation. I even started to consider whether to sell for a quick profit, but decided to keep it for longer and see how the synergies develop. Both brands are very promising, and at least Crocs has a convincing track record.

I have a broadly diversified portfolio, and this company fits well into the category that doesn’t need constant monitoring. My investment is rather small and completely outside my field, so I probably won’t be writing much here, but I will follow the discussion when I have time and wish you good luck with your investment. This would also be an excellent partner for Spinnova.

[Heimo_Vesa]

Oh man, I never thought I’d touch Crocs. It’s quite timely, considering I spent the summer in the Caribbean heat, and Crocs were very popular among the locals there (who knows if they were genuine or fakes). A friend also raved about them when I complained about blisters from shoes and flip-flops.

In terms of specs, it seems like a perfectly decent case. It’s a shame that Nordea got rid of the 1% purchase cap for US stocks, so now I can’t nibble on small tracking positions or buy in installments. The price is still not dizzying, but after last month’s turmoil and the >50% rise seen now, I’m a bit hesitant to take a position when China, Ukraine, monkeypox, inflation, etc., might, in my opinion, spook the markets and encourage those who bought at the bottom to cash in quick profits.

[Anssi2]

One reason for Crocs’ wild share price movements might be that it is listed on Nasdaq for some reason. In light of the numbers, the company is very attractive assuming that current sales or even growth are sustainable, but I personally sold my position before the earnings report and hope to get back in at a lower price if the markets start looking for new lows again.

[Geweth]

Great to finally have a thread about Crocs on the forum. I’ve also been thinking about starting one for a while. Crocs is also the largest holding in my portfolio. Unfortunately, my average price is closer to $70, so after the July rally, I’ve only just started to make a small profit.

Some of my own thoughts:

• The company has succeeded brilliantly in marketing. They launch special collections with influencers and various celebrities, which sell out in minutes. For shoes worth hundreds of dollars, the margins are close to one hundred percent (my own speculation).

• Google Trends search activity has been growing, especially in major European countries.

In 2019, I invested in Pandora as a turnaround story. Trends activity started to pick up in late spring 2019, and in the autumn, the company issued a positive earnings surprise. However, the markets had not priced in the growth in Trends activity, even though Pandora was in the same market cap category as Crocs. Pandora was one of my best picks, and I sold the shares with about a 100 percent profit. The valuation and profitability of Crocs are pretty much in the same class as Pandora was back then.

In my opinion, Crocs is being priced for a clear earnings decline, just as Pandora was at the time, even though search activity does not support this argument. If the trend lasts even until next year, the valuation multiples will likely correct significantly upwards. According to SeekingAlpha, the median forward P/E (GAAP) for its peer group is about 14, while for Crocs it is 9.4. Crocs is also more profitable and has grown more strongly than the median peer.

• Large insider buys. Crocs has had several insider purchases by various executives this year alone. The value of net purchases is in the millions of dollars.

Risks

In Q2, North American revenue grew only slightly, and inventories were also higher than expected due to lower-than-expected demand in North America. Google Trends has already shown a slowdown in the United States. A turnaround in the largest market does not collapse the investment case as other markets grow, but it reduces attractiveness and increases risks.

[niko_naakka]

Can anyone tell me more about Crocs’ situation in Russia? Is there any truth to these stories that they have reopened stores in Moscow?

Značka Crocs čelí výzvám k bojkotu kvůli Rusku - MAM

[Dhop10]

https://finance.yahoo.com/news/crocs-inc-reports-record-third-110000433.html

If we hit the lower end of the forecast, the stock is trading at around 7 P/E. There’s not much to be ashamed of in that result.

[Geweth]

Let’s revive this thread a bit.

What are your thoughts at the current price?

I’ve trimmed my position slightly after the big rally, but it’s still my largest holding. I’ve been crunching numbers in Excel, and it could be a ~$220 stock at its best.

On the other hand, the downside has increased since the fall. However, I still haven’t seen a decline in Google Trends activity. Insiders have also been trimming their holdings somewhat, but these aren’t alarmingly large trades relative to their positions. Multiples are still quite moderate considering the growth rate. The drop in air and sea freight prices is supporting margins nicely.

I think it’s worth being patient here so that significant potential isn’t left on the table. We’ll sell when it starts showing up in Cramer’s picks on CNBC.

[The1]

1. The HeyDude shareholder lockup ends in mid-February. This could very well create strong selling pressure on the stock.

2. Based on Q3, inventory levels are surprisingly high; a cause for concern?

3. With the much-discussed recession coming, how will this affect Crocs? The HeyDude brand in particular is a question mark in a recession, even though it has seen strong growth recently.

4. High leverage is in use; what is the situation with interest payments?

Personally, I’ve made substantial 100%+ returns from this since the market hit hard and didn’t believe management’s forecasts in 2022 after the HeyDude acquisition. But now it no longer feels like such a no-brainer, and I sold a couple of weeks ago for these reasons.

[Blackparta]

A good earnings report from Crocs in my opinion, but at least the pre-market is showing a significant drop of -6.5%.
At the same time, there was a slight guidance raise for the full year:
Adjusted operating margin of more than 25% compared to prior guidance of approximately 25%.
Adjusted diluted earnings per share of $12.45 to $12.90 compared to prior guidance of $12.25 to $12.73. Adjusted diluted earnings per share guidance does not assume any impact from potential future share repurchases.

Second-quarter revenue rose 4% year-over-year → $1,112M
EPS Up 11% to $3.77 and Adjusted Diluted EPS Up 12% to $4.01

Debt is being repaid quickly and shares are being repurchased at the same time:
During the quarter, we repaid $200 million of debt. We repurchased approximately 1.2 million shares for $175 million, and at quarter end, $700 million of share repurchase authorization remained available for future repurchases.

It can be seen from the report that Crocs’ own brand is performing well and Heydude is declining significantly.
This Heydude is the only poor aspect of the report. Crocs brand sales have clearly shifted more towards a DTC model, which by all logic should be more profitable. DTC grew by as much as 12.5% while wholesale grew “only” 6.9% at the same time. Very good development

https://finance.yahoo.com/news/crocs-inc-reports-record-second-110000261.html

[The1]

In hindsight, Crocs paid about 10 times today’s EBIT for HeyDude, which isn’t a terrible price for a brand that performed well in 2022 and 2023. But now that issues have surfaced in 2024, the deal looks expensive. Despite this, management remains optimistic about HeyDude based on the Q&A, which is concerning.

The thesis has changed since 2022/2023. Crocs is no longer growing revenue at double-digit rates, and the P/E is no longer below 8. Now everything depends on a successful turnaround for HeyDude, which seems challenging as the economy slows and consumer purchasing power weakens.

I appreciate management’s transparency, their traditionally conservative guidance, and the company’s top-tier margins. If I could, I would gladly pay a P/E multiple of 15 for the Crocs brand as a standalone company, but HeyDude muddies the waters too much. I still own Crocs, but I’m close to hitting the sell button.

[Blackparta]

@The1

Crocs is no longer growing revenue at double-digit rates, and the P/E is no longer below 8.

I would gladly take a P/E of 8 even if growth were only 2%. A P/E of 8 is not a valuation where any growth has been priced in; rather, it’s perhaps more indicative of a slight decline.

The Crocs brand itself accounted for 82.2% of sales last quarter, with the remaining 17.8% being HeyDude. Of course, it’s not good that HeyDude’s sales are stalling, but its share of revenue is still relatively moderate. Could it be that Crocs is more defensive and HeyDude is more cyclical? I hope it’s just a weak cycle and not that customers no longer find HeyDude worth buying.

[The1]

In 2022, I bought Crocs at a P/E multiple of 6 when the company grew over 50% (HeyDude acquisition included). In the fall of 2023, the company could be bought cheaply again, at a P/E of 7 while revenue grew over 10%. Similar situations can be found in the market all the time, so why settle for a company growing at 2% when the P/E is 8? Yeah, of course, everything depends on the quality of earnings and so on… But I’m not ready to pay an NTM P/E of 9.5 for Crocs based on next year’s analyst growth forecasts of 6%. It’s important to remember that this assumes the EBIT margin remains unchanged, something I strongly doubt in the upcoming economic environment as well as due to the HeyDude challenges.

I could of course be wrong and the HeyDude turnaround will succeed without issues; management said they will invest heavily in this brand. Of course, they won’t admit that the HeyDude acquisition was a total farce. If those 2.5 billion had been used for share buybacks instead, much more shareholder value would have been created. Executing a turnaround is not easy, which is why I prefer to stick with proven winners that aren’t facing operational challenges.

[Blackparta]

@The1

In 2022, I bought Crocs at a P/E multiple of 6 when the company grew over 50% (including the HeyDude acquisition). In the fall of 2023, the company was cheap again, P/E 7 and revenue grew over 10%. There are plenty of similar situations in the market, so why settle for a company growing at 2% when the P/E is 8?

This might be a bit off-topic, but let’s answer anyway.
I meant that 2% growth at a P/E of 8 would certainly make me buy aggressively if I could know for sure that margins hold and could magically know the future return without risk. This would crush the S&P 500 index over any slightly longer time frame.
A much worse near future was priced in for Crocs at around the $80 price point. However, Crocs has performed much better, and luckily I bought it then. It still feels cheap, but it’s not the same kind of screaming buy. The balance sheet is also constantly improving as debt decreases. This lowers the risk, and in my opinion, a slightly higher P/E ratio is justified for this reason.
In many cases where there is a low P/E ratio and growth from the previous year, the company is already in a downcycle, or at least one is expected, or it has a heavy debt burden, or we are talking about potential geopolitical risk, or perhaps all of these. Outokumpu was recently at something like P/E 2 with high growth, but everyone knew it wasn’t sustainable. There is always some fear/uncertainty being priced in, but it can very well be significantly overstated.
If you find a fairly defensive business with a strong balance sheet that delivers double-digit growth and trades at a P/E of 1-10, feel free to give me a tip and I’ll look into it further (no banks).

[The1]

The only difference here is that Crocs management guided for over 40% growth in 2022 and over 10% growth in 2023. The market was therefore pricing in a different future than what management was telling us, so I bought the stock back then because I trusted management. Currently, the guidance for the rest of the year is unfortunately weak, and I suspect the 2025 guidance could be even weaker once it is released.

Over the last 4 years, management’s guidance has at least never disappointed to the downside, so I trust it more than the market. Not all companies dare to provide guidance in the same way, so credit to Crocs for that.

[The1]

@Blackparta

I meant that 2% growth at a P/E of 8 would definitely have me buying like crazy if I could know for sure that margins hold and could magically know the future return without any risk. This would crush the S&P 500 index over any slightly longer period.

Of course this is a no-brainer, but one should always strive for a good “margin of safety.” I try to find companies that grow more than that at a cheaper multiple, like Crocs during the times I mentioned. If the worst-case scenario hits, then maybe I’ll get that P/E of 8 and 2% growth you mentioned, which beats the market return.

[The1]

@Blackparta

If you find a fairly defensive business with a strong balance sheet that delivers double-digit growth and trades at a P/E of 1-10, feel free to tip me off and I’ll look into it (no banks).

If we don’t count Kazakh banks, then Betsson.

[The1]

The problems with HeyDude continue, and the company is investing even more in this turnaround, meaning margins will drop lower than expected for next year. Management seems a bit too naive and they continue to maintain an optimistic stance, but perhaps it’s time to start trusting them soon…

The Crocs brand can now be bought at a P/E ratio of about 12 after yesterday’s drop. The market isn’t pricing in a HeyDude recovery at all, an option that could materialize next year. I might jump back in somewhere between 100 and 110.

[The1]

Management seems to have overestimated its own contribution to success, while underestimating the appeal of the Crocs brand and the impact of the demand surge brought by COVID. Turning HeyDude into a success story will be significantly more difficult than they let on, and the company is investing significantly in it. Currently, I do not trust management’s ability to make sound capital allocation decisions – that trust must be earned back.

Furthermore, I believe they inflated HeyDude’s sales figures in the first quarters after the acquisition in an attempt to counteract market distrust. However, this strategy failed, and management has implicitly admitted it. We also don’t yet know how well Crocs will withstand the effects of a recession. Consumers easily postpone buying new shoes, which will likely pressure margins, which do not seem sustainable in the long run. I might consider reinvesting if the stock price drops further and the P/E ratio is around 6. This would, of course, require more negative sentiment…

[Sijoittaja-alokas]

Below is a good tweet about Crocs, which clearly shows the figures and how certain figures have developed.

https://x.com/Eric4Invest/status/1865803506034319401

And a tweet about the company, which has a few good observations.

https://x.com/WilliamSassoX/status/1863630222479736965