Crocs Stock: Loved by Consumers, But Not by Investors (NASDAQ:CROX)

If you’re a parent, it’s almost impossible not to notice the abundance of Crocs whenever you go to the pool, the park, or just about anywhere with the kids. This summer my kids wore Crocs almost exclusively and I’m sure many others parents can attest to the same.

Because of this, I decided to dig deeper into this company to see if Crocs are more than just comfortable shoes for kids, I wanted to see if this stock can also be worthy of investors’ attention.

The company

Crocs, Inc. (NASDAQ:CROX) is a global company focused on providing casual lifestyle footwear. The company was founded in 2002 by Scott Seamans, Lyndon Hanson and George Boedecker Jr. The trio aimed to create a comfortable and lightweight shoe. The first Croc shoe, called “The Beach” appeared in 2002. Although many called it Crocs as ugly shoes, the brand’s success speaks for itself as Crocs soon became a public company in 2006.

In February 2022, Crocs acquired the HEYDUDE brand. HEYDUDE is a similar footwear brand that focuses on creating comfortable and causal shoes. Their slogan is “Good to go to.” HEYDUDE and Crocs are the company’s two current operating segments.

In the last quarter, 35 million pairs of Crocs were sold, in addition to 6 million pairs of HEYDUDE shoes. Crocs certainly has beloved products that consumers enjoy. Let’s further discuss the financial performance of the company and their two brands, Crocs and HEYDUDE.

financial

In Q2 2024, Crocs generated approximately $1,112 million in revenue, which represents an increase of nearly 5% over Q2 2023. For Q2, the value of wholesale revenue was slightly higher than direct-to-consumer, by 51% to 49%. Direct-to-consumer revenue rose 10%, while wholesale revenue fell less than 2% compared to Q2 2023.

For the quarter, adjusted gross margin was 64.1%, which is better than 58.1% in Q2 last year. Operating margin was 29.3% in Q2 2024, which was slightly down, as operating margin for the prior year’s second quarter was 30.3%.

These impressive margins led to higher net income for the quarter and YTD, as you can see below:

I also like that the company was able to buy back shares, which helps boost earnings per share. During the quarter, the company repurchased 1.2 million shares for $175 million. The company has a share repurchase authorization of $700 million.

Going back to their balance sheet, Crocs has enough current assets to cover their current liabilities, which is positive. However, the company has a significant amount of long-term debt. However, their debt level has decreased, as you can see below:

In the current quarter, the company repaid $200 million in debt, and management noted that paying down debt is one of the company’s capital allocation priorities for the current year.

In the current quarter, revenue from Crocs accounted for nearly 80% of the company’s total revenue, while the remaining 20% ​​came from HEYDUDE. As you can see below, this quarter’s performance is in line with both brands’ performance in recent quarters:

Let’s dive further into the specifics of each brand.

Crocs

Crocs was by far the better performer of the two brands, as the brand generated $914 million in revenue for the quarter, up 11% year-over-year. North American revenue was up approximately 3% and international revenue was up 22% compared to the second quarter of the prior year. Crocs performed particularly well in China, growing more than 70% on top of triple-digit revenue growth last year.

Management noted that it had some successful partnerships this quarter with Pringles as well as Minions and had success with SpongeBob and Patrick Crocs to celebrate 25 years of SpongeBob.^th anniversary.

The Jibbitz business is also doing well for the Crocs brand, as management noted, “Growth in our Jibbitz business during the quarter was driven by strong double-digit growth in Asia, which was also our largest penetration by geography. Our Jibbitz customer continues to be one of our most valuable customers and we see them buying with higher frequency and average order value.”

Management believes the Crocs brand will grow 3%-5% next quarter and grow 7%-9% for the full fiscal year.

Next, back to HEYDUDE, which isn’t doing as well.

HEYDUDE

HEYDUDE generated $198 million for the quarter, down more than 17% compared to Q2 2023. Management expects HEYDUDE to continue to struggle as it sees revenue decline 14% to 16% next quarter and believes the brand will decline 8% to 10% for the full 2024 fiscal year.

I think it’s fair to say that this brand has underperformed since it was acquired in 2022, however, as Rees mentioned on the Q2 earnings call, management is still bullish on HEYDUDE’s long-term prospects stating: “… I would say we are extremely bullish on the long-term outlook or projections for HEYDUDE, and just as bullish as we were when we bought the brand. We, obviously, in the last few months, it hasn’t worked out the way we hoped, especially here in the US market. And I think I’ve talked at length about some of the things that I think we’ve gotten wrong associated with that. That doesn’t change our long-term view of the brand.”

On the call, Rees noted that the company is focusing on engaging the young female consumer, which will hopefully reactivate the brand. I really like the move to sign Sydney Sweeney as a brand spokesperson, which will hopefully engage this target audience.

Crocs also recently re-hired Terence Riley to help HEYDUDE get back into growth mode. Riley worked at Crocs from 2013 to 2020 and spent the last four years working at Stanley, where he turned the beverage maker into a household name.

management

Andrew Rees is the current CEO of Crocs. Rees joined Crocs as President in 2014 and assumed the role of CEO in 2017. Rees has over 25 years of experience in the footwear and retail industry, having previously held various leadership positions at Reebok.

The company’s CFO is Susan Healy, who just took up the role in May this year. Healy previously held leadership positions at IAA, Inc. as well as Ultra Beauty.

As you can see from these Glassdoor ratings, the company has decent reviews, similar to other retailers like Foot Locker. Most employees approve of the work Rees does, as you can see below:

Most of my readers will know that I am a big fan of organizations with insider ownership. As stated in the company’s recent proxy filing, Rees owns 1.64% of the total outstanding common shares, showing that he has some stake in Crocs.

risks

In the short term, I think there is some risk of lower consumer demand. In its latest earnings quarter, several retailers, including Etsy ( ETSY ) and Wayfair ( W ), noted that consumers were tightening their budgets. Nike ( NKE ) even reported less-than-stellar results last quarter, though I think their problem is partly due to a lack of innovation.

To me, Crocs don’t complement Nike in the same way that On (ONON) or Hoka does, because Crocs are a cheaper shoe for kindergarten, beach days, and other causal occasions. Because of this, I don’t think Crocs would be as affected during times of consumer weakness.

The bigger risk to me is that the HEYDUDE acquisition falls through and the company ends up writing off a substantial amount of goodwill, which would have a significant impact on the company’s profit and loss account. I hope the management can revitalize the HEYDUDE brand, but even if they fail to do so, Crocs will survive because 80% of current revenue comes from the Crocs brand.

ASSESSMENT

As you can see from the rating values ​​below from Seeking Alpha, the overall value grade for Crocs is “B+”:

Since Crocs is an established, profitable company, I think price-to-earnings is the best measure to view this organization.

Comparing Crocs to other top footwear stocks with a relatively similar market cap (although DECK has the largest market cap of the four), Crocs has a lower P/E ratio than all three competitors despite continued profits and of large margins. This leads me to believe that the stock is undervalued.

Using my reverse discounted cash flow model, I entered the latest cash flow figures for the company. I used a discount rate of 10% and a terminal rate of 3%. If you look at analysts’ revenue growth estimates, most expect Crocs to have low single-digit revenue growth in the coming years:

Using a 3% growth rate, which I think is conservative, I arrive at an estimated intrinsic value of over $217 per share:

Conclusion

I think Crocs seems undervalued because the market is focusing too much on the low performance of HEYDUDE.

The Crocs brand is performing very well as the brand has been successful with recent partnerships and is growing internationally, especially in China.

I think HEYDUDE can turn things around and I love that the company rehired Riley because he did an incredible job at Stanley.

Even though the company has more debt than I would like, management’s decision to pay down debt and buy back shares in 2024 is a strategy that I believe will benefit shareholders.

I believe this is not only a beloved shoe for kids, but an undervalued gem for investors. Crocs currently make up a small percentage of my investment portfolio, but I plan to keep adding shares.