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Intro
Since its inception in 2001, Crocs has risen to become a market leader in footwear. Whether you're a fan of their unique, differentiated designs or not, the company has leveraged consumer appeal for comfort in a way that has afforded it strong performance. Investors in Crocs stock have experienced a return on investment of +591% since its initial public offering back in 2006. And Crocs stock is on sale! It's one of the best stocks to buy now. The per share price is about $95 with a forward P/E ratio of only 9. It's also trading down from its 52-week high of $140 and well off of its all-time high of $175 in 2021.
Operating History
Originally created as a boating shoe, Crocs has gone on to use its core design to expand into a number of models. For many, the design wasn't so much the appeal as was the level of comfort and functionality. Based on that, the company gained a core audience of loyalists, including many workers in kitchens, hospitals, and other professions where long-term standing is required. The company went public in 2006, and fourth quarter revenues increased 236% that year to $112M versus $33M the previous year. But Crocs grew complacent within its target audience, and the lack of design caused growth to stagnate. The company was poised to go out of business in 2018.
Rebounding From Stagnation
In 2017, however, Crocs brought in a new CEO that modified the brand's strategy to focus on "clog relevance and sandal awareness." The campaign introduced Crocs to a new generation and Crocs shoes miraculously became recognized as fashionable as well as functional. Crocs went from near bankruptcy to a market leader once again! It went from the 30th most popular footwear brand in 2017 to the 13th most popular footwear brand in just 2 years. During that time, Crocs stock compounded at an annual growth rate of 33.7%!
The company's success is largely founded on its proprietary Croslite material. This is a molded footwear technology that delivers extraordinary comfort. But Crocs has also expanded into other revenue streams such as various accessories for women, men, and children. Consumer demand for the Crocs brand continues to be strong. That demand is fueled by increased marketing investment and its "compelling products."
Financial Analysis
Revenues were $2.3B for 2021, a 66.9% increase compared to the prior year. This increase was driven by higher sales volumes (+46%), higher selling prices, and favorable changes in exchange rates. Revenues grew in all regions and channels versus the prior year. Gross margin also increased to 61.4% compared to 54.1% in 2020. This was mainly driven by increased prices and fewer promotions and discounts, reflecting its competitive advantage in the marketplace. Revenue has grown more than three times in size in the past 5 years.
Profitability metrics, including margins and returns are all favorable as compared to the sector median.
The 5-year trend of Crocs stock below highlights a compounded annual growth rate of 69.8%! This has translated into a 5-year total return of 626%. Crocs stock is now down -27.6% in the past year, but it has also nearly doubled in the past 6 months. Nevertheless, the stock is still considerably undervalued both historically and relative to peers. At only $95 per share now, I view this as a solid money investment opportunity.
Competitive Advantage
The fact that Crocs has been able to raise selling prices without disrupting demand is indicative of its competitive advantage. The company still sold 103 million pairs of shoes worldwide in 2021, which was an increase from 69 million on 2020. The unique design and enhanced product line with various styles and colors is driving its competitive advantage, along with its Croslite proprietary, revolutionary footwear technology. They produce high quality products that are waterproof, breathable, and comfortable.
Consumers are buying style and comfort, and Crocs is leveraging its technology to sustain a long-term competitive advantage. As a result, while the global, athletic, and casual footwear markets are highly competitive, it's very hard to pinpoint any one company that directly competes with Crocs. However, a comparison of profitability versus several key peers is detailed below.
Future Outlook
Crocs is aiming to become a $5 billion company by 2026. This compares to $2.3 billion in 2021, so potentially a doubling in size. Expansion into international markets, increased e-commerce, and the sandal business are all poised to drive revenue growth in the coming years.
Near-term Business Strategy
International sales currently make up about 38%, which is still well below the level of other consumer discretionary companies. This supports opportunity for continued international expansion, which is apart of the company's future business strategy. For example, it's looking to increase market share in China from less than 5% currently to more than 10% long-term. China is the second largest footwear market in the world.
A large part of the strategy to achieve additional growth in China is by growing digital sales. It expects digital sales to constitute as much as 50% of brand revenue by 2026, up from 37% in 2021. According to Zachs Equity Research, the Crocs mobile app and global social platforms have also aided digital sales. The plan is to grow the percentage of digital sales "by elevating consumer experience, personalizing the consumer journey, and investing in capabilities to grow consumer lifetime value."
Long-Term Debt
Debt on the balance sheet is admittedly high at current, with $2.6B in long-term debt and a debt-to-equity ratio of 459%. The majority of this debt was used to finance their recent acquisition of HeyDude, a privately owned casual footwear brand. The acquisition is a strategic finance investment with the expectation of using it to further diversify the Crocs product portfolio under two brands. As a standalone company, HeyDude was expected to reach $1B in revenue by 2024, a goal that's now anticipated to be reached next year. It is a growth driver that will help improve revenues, earnings, and market positioning.
Management asserts its commitment to reducing debt. While the debt-to-equity ratio is helpful, it is not always the best measure of the financial power of a business. A company's assets are never a source of funds for retiring long-term debt unless the company is in bankruptcy. Instead, the ability of Crocs to use its cash flow to service and pay off its long-term debt is fare more important than the assets backing the loan.
Earnings and Cash Flow
First of all, looking at their earnings over the past 5 years, we see a clear upward trend of growth, further reflecting its competitive advantage. After taking into account changes in working capital and other operating metrics, we see that cash flow from operations is also trending favorably.
Crocs is generating sufficient levels of cash flow to cover interest expense, maintaining long-term debt at fewer than five times cash flow. It has already repaid $235M of debt in 2020 and $485M in 2021, and it is using excess cash to pay it down going forward. They've also placed their share repurchase plan on hold until debt is reduced to desirable levels. I expect the company to continue to improve operating leverage as sales grow and operating expenses as a percentage of revenue decrease.
Conclusion
Crocs stock is an excellent investment! Crocs is a growing, high margin company with a strong and durable competitive advantage. With the stock being down -27% in the past year, opportunity is knocking. It's trading at only nine times earnings which is still pretty cheap for a high-margin business that has increased its bottom line by more than ten times in the past 5 years. Crocs stock is currently one of the best ways to invest money.
Crocs has rebounded very well since 2017, and the stock has performed very well to reflect improve operations. I believe it has a high quality management team looking after shareholder interests with strong returns on assets and invested capital. It's very much focused on long-term strategic initiatives. It's got strong fundamentals, great prospects, low valuation, and the stock price has been moving in the right direction for the past 6 months. The stage is set, and there's still huge upside in the stock at current levels.
Disclosure/Disclaimer
The information provided on this site is based on my own personal experience, research, and analysis, and it is not to be construed as professional advice. Please conduct your own research before making any investment decisions. I am not a professional financial advisor, stockbroker, or planner, nor am I a CPA or a CFP. The contents of this site and the resources provided are for informational and entertainment purposes only and do not constitute financial, accounting, or legal advice. The author is not liable for any losses or damages related to actions or failure to act related to the content on this website.
