Over the past few weeks, I have been buying shares of Crocs (NASDAQ:CROX) at the fastest pace I remember buying them. This is due to three key factors that have, in my view, shaped Crocs’ bullish case very favorably. Namely, Crocs’ growth remains stellar, with the company set to achieve record profits despite last year’s tough comps. Secondly, Crocs has been hitting its deleveraging targets and has already resumed buybacks. Finally, shares appear seriously undervalued. Hence, I remain bullish on CROX stock.
1. Stellar Growth to Result in Record Fiscal 2023 Profits
Crocs’ trajectory continues to defy expectations, even in the face of challenging comparisons to an outstanding trading period from the previous year. Remarkably, the company is poised to mark yet another year of unprecedented profitability.
Beyond the core and namesake Crocs brand, the parent company is reveling in a resounding victory with HEYDUDE, the cherished Italian comfort-shoe label it recently added to its portfolio. The integration of sales channels and a robust infrastructure have propelled HEYDUDE’s sales to dizzying heights in record time. The most recent financial results stand as a powerful testament to this extraordinary growth story.
The Crocs Brand
In the second quarter, the Crocs brand saw exceptional financial results, with revenues reaching $833 million, representing an impressive 14.9% increase compared to the previous year. This robust performance was primarily driven by a remarkable surge in direct-to-consumer (DTC) sales, which surged by 26.8%.
Notably, the brand successfully sold a remarkable 33 million pairs of shoes, marking an increase of 1.8%. Further, during this period, the average selling price for Crocs brand products stood at $25, experiencing a commendable 12.8% increase, driven by well-executed pricing strategies and fewer DTC promotions on the international stage. Higher average pricing combined with higher sales also demonstrated consumers’ resilient demand for the brand.
A significant highlight of Crocs’ recent accomplishments is its successful foray into the thriving sandals market, presenting an exciting and promising avenue for growth for the company. Sandal sales experienced a substantial 34% surge during Q2, displaying robust growth across all regions and now contributing an impressive 16% to the overall Crocs brand sales.
Equally noteworthy is the continued strong performance of Jibbitz, the charming little accessories attached to Crocs’ clogs and sandals. Jibbitz posted a commendable 13% growth compared to the previous year, gaining traction with a diverse international audience and solidifying its position as a potent revenue generator.
The HEYDUDE Brand
Turning the spotlight to HEYDUDE, Q2 revenues were clocked at a solid $239.4 million, up 2.9% compared to the previous year’s figures. In fact, a remarkable 8.3 million pairs of shoes from the brand were sold in Q2, marking an increase of 3.6% over Q2-2022. While these figures may appear soft, it’s crucial to include the context: Crocs acquired HEYDUDE last year and propelled its sales by a staggering 96% during last year’s equivalent period. Thus, witnessing further growth on top of this substantial boost is impressive.
Of significant note, the primary driver of this growth for HEYDUDE is the DTC channel, primarily focused on e-commerce, which took the lead in boosting revenues, showcasing a substantial 29.7% increase from the previous year. The brand’s digital sales also experienced a commendable rise of 36.6%, while digital penetration surged by an impressive 1,000 basis points, reaching an impressive 41.8%.
Margin Expansion to Result in Record Profits
With both the Crocs and the HEYDUDE brands continuing to grow their sales and achieve operating efficiencies by turning an increasing portion of sales from DTC/digital sales, the company has experienced a significant margin expansion.
Specifically, the company’s gross margin came in at 57.9% compared to 51.6% in the prior year, while its operating margin improved to 29.7%, compared to 25.7% for the same period last year. The combination of higher sales and improved margins nicely set the stage for another year of record profitability.
Accordingly, management raised its prior guidance, forecasting adjusted diluted EPS to be between $11.83 and $12.22 (up from $11.17 to $11.73 previously), implying year-over-year growth of 10.1% at the midpoint and another all-time high.
2. Deleveraging on Track, Buybacks Resumed
Crocs has a strong track record of buybacks. If you have followed the stock for some time, you may remember that Crocs repurchased $1.0 billion worth of stock in Fiscal 2021, a rather significant amount given the size of the company. Management paused buybacks last year to prioritize deleveraging since the company took on debt to finance the HEYDUDE acquisition.
After continuously paying down debt over the past year, the company’s gross leverage target of 2.0x was met (1.8x in Q2), allowing the company to resume repurchases. Hence, in July 2023 (subsequent to the quarter), the company repurchased 0.4 million shares of its common stock for $50.0 million. Therefore, I expect to see repurchases really pick up during the second half of the year.
3. Inexpensive Valuation Points to Strong Upside Potential
I am particularly happy that Crocs has resumed repurchases and even more excited that these buybacks are taking place at a rather inexpensive valuation. This will allow the company to reduce its share count on the cheap, which, combined with its strong underlying financial performance, points to notable upside potential ahead.
Specifically, by utilizing the midpoint of management’s updated guidance, we can see that shares are trading at a (forward) P/E of just 8.1x. I find this multiple extremely appealing, given Crocs’ continuous success and overall growth. On a next-twelve-month basis, the forward P/E stands at under 8x – one of the lowest multiples the stock has traded at in recent history.
Is CROX Stock a Buy, According to Analysts?
Regarding Wall Street’s view on the stock, Crocs features a Strong Buy consensus rating based on seven Buys and two Holds assigned in the past three months. At $152.75, the average Crocs stock forecast suggests 56.2% upside potential.
If you’re wondering which analyst you should follow if you want to buy and sell CROX stock, the most accurate analyst covering the stock (on a one-year timeframe) is Sam Poser from Williams Trading, with an average return of 68.57% per rating and a 63% success rate. Click on the image below to learn more.
The Takeaway
In the ever-evolving landscape of footwear, Crocs has emerged as a true champion. Its stellar growth trajectory, marked by record-breaking profits despite tough comps, showcases a brand that thrives on innovation and expanding markets.
The addition of HEYDUDE to its portfolio, impressive margin expansion, and the resumption of buybacks paint a promising picture. Factor in the undervalued shares (in my view), and the stage is set for remarkable upside potential. Hence, I will continue to accumulate shares rapidly at Crocs’ current price levels.
