The stock of Crocs (CROX 5.01%) has increased by about 70% over the past year as the footwear manufacturer dazzled investors with its strong growth in a challenging economic environment. Its sales over the previous year were also greatly bolstered by its February 2022 purchase of the Italian casual footwear brand HeyDude for $2.5 billion.
However, Crocs’ stock still appears affordable at 11 times forecast earnings and just 2.5 times this year’s sales, even after that significant surge. Additionally, the price is currently trading more than 30% below the record high set on November 12, 2021, at $180.57. Should investors view Crocs as an undervalued play with room to grow over the coming year?
More than just a trend
The foam clogs and sandals bearing its name are what Crocs is best known for. Many of Crocs’ detractors brushed off the shoes as a transitory trend when the company went public in 2006.
But Crocs’ annual revenue increased from $355 million to $1.39 billion between 2006 and 2020, a 10% compound annual growth rate (CAGR). Its net income increased from $64 million to $313 million at a CAGR of 12%.
Revenue for Crocs increased 67% to $2.3 billion in 2021 as sales picked up in a post-pandemic environment. This expansion was fueled by a 12% increase in average selling prices, a 49% increase in the number of shoes sold overall, and a 64% increase in direct-to-consumer (DTC) revenue, which made up 49% of the company’s top line.
Crocs’ revenue increased by 54% to $3.6 billion in 2022. But a quarter of its top line, or the acquisition of HeyDude, was the key factor in that growth. Crocs’ brand revenue increased by 15% to $2.7 billion when HeyDude was excluded.
Crocs’ top line growth dramatically increased after it bought HeyDude, but the acquisition and integration also reduced its adjusted gross and operating margins, as can be seen if we review the quarterly reports from the previous year.
In order to finance the HeyDude transaction, Crocs also took on more than $2 billion in new debt, increasing its overall obligations from $1.5 billion in 2021 to $3.7 billion in 2022. As a result, Crocs’ debt was downgraded by both Moody’s and S&P.
But according to Crocs, the short-term losses outweigh them in the long run. The management anticipates that HeyDude will have mid-20s revenue growth in 2023 and that the casual footwear company will increase its appeal to millennial consumers while expanding its market share in the Northeastern United States and coastal areas.
Crocs management anticipates a 6% to 8% increase in revenue for the company’s flagship brand. CFO Anne Mehlman ascribed that delay to “some conservatism” with regard to the economic climate in the US and Europe during the fourth quarter conference call.
As it wraps up the HeyDude purchase in 2023, Crocs anticipates an increase in total sales of 10% to 13% and a decrease in adjusted operating margin from 28% to 26%. Analysts anticipate a 12% and 3% increase in revenue and adjusted earnings per share, respectively.
Will Crocs’ stock increase over the coming year?
In this competitive market, Crocs is still expanding much more quickly than many other shoe manufacturers. Analysts predict that Nike and Skechers will experience sales growth of 9% and 8%, respectively, in their current fiscal years. With a projected price-to-earnings ratio of 11 and Nike and Skechers trading at 30 and 15, respectively, it is apparent that Crocs is undervalued in comparison to its competitors in the industry.
But as long as its revenue growth slows, its margins are falling, and its debt levels are high, Crocs may find it difficult to trade at a higher multiple. As a result, I think Crocs’ decline during the following year should be moderate. But unless the macroeconomic environment improves, its year-over-year growth stabilizes, and it shows that its acquisition of HeyDude will fuel its long-term development, it probably won’t start outperforming the market again.