CROX – Crocs: Why This Turnaround Story Has Incredible Upside
Crocs, Inc. (NASDAQ:CROX) is a Colorado-based global lifestyle brand that designs, produces, and distributes innovative footwear, accessories, and apparel. Its mission is to provide everyone with comfortable, lightweight, and versatile footwear.
This once uninspired, unloved, and unprofitable company has since become a cash cow with a broad array of exciting product lines with intense brand loyalty and satisfaction. With strong revenue growth and EBITDA margins as high as 30%, rivaling software companies, we believe CROX stock is a Strong Buy due to its strong financial performance, best-in-class margins, and strategic expansion into new markets and e-commerce.
Crocs’ signature product is the Classic Clog, a slip-on shoe made of a proprietary closed-cell resin material called Croslite. Crocs’ footwear products are popular for their durability, comfort, and unique designs. The company also offers a range of accessories, including Jibbitz charms that can be attached to Crocs shoes, and a line of apparel that features the Crocs brand.
The company sells its products through multiple channels, including its website, company-owned retail stores, third-party retail stores, and e-commerce marketplaces. Crocs’ geographic presence is diversified, with operations in North America, Europe, Asia Pacific, and the Middle East.
Crocs has experienced strong growth in recent years, driven by its focus on innovation, marketing, and international expansion. The company has successfully leveraged its iconic brand and strong customer loyalty to expand its product offerings and increase sales. In addition, Crocs has made significant investments in e-commerce capabilities, enabling it to better serve its customers and drive online sales. During the 2020 pandemic, CEO Andrew Rees made the wise decision to pull from physical retail stores and focus on e-commerce as a driver of sales. This bet paid off: as of 2022, e-commerce sales now make up almost 50% of all revenues.
CEO Andrew Rees, Q4 2021 Earnings Transcript:
This year, we invested in our digital capabilities, including in the Crocs mobile app, global social platforms, such as Douyin, and digital talent across the globe. We’re confident these investments and our continued focus will drive digital growth globally over the long term.
Looking forward, Crocs plans to continue investing in product innovation and expanding its global presence. The company has identified key growth opportunities in Asia, particularly in China, where it plans to double its revenue by 2026. Crocs also plans to expand its direct-to-consumer channels, including e-commerce and owned retail stores, to increase its brand visibility and customer engagement. Crocs also plans on focusing on its sandals business, which only makes up $300m of its revenue, as it believes it can be a heavyweight player in the $30B TAM. Overall, Crocs’ strong brand and product offerings, combined with its strategic growth initiatives, position the company for continued success in the global footwear and accessories market.
The Power of Strong Leadership
Despite initial skepticism, the company has undergone a remarkable transformation under the leadership of CEO Andrew Rees, who joined in 2014. In 2014, CROX was drowning. Marketing was lackluster, stores were struggling, and expenses were out of control. By tapping into the power of social and digital marketing, he created buzz for the product by teaming up with influencers such as Post Malone and Vera Bradley. By improving brand relevance, improving channels for e-commerce, and cutting unnecessary expenses, he was able to unlock the untapped potential of CROX. Since Rees took over, the company has become profitable with impressive revenue growth, averaging 26.71% CAGR over the last 5 years, with a best-in-class 5 year average EBITDA margin of 19.64%. CROX has also seen tremendous growth in its share price, increasing an unbelievable 50.57% CAGR over the same 5-year period.
Crocs has exhibited remarkable growth in revenue over the past five years, boasting a CAGR of 26.71% and an average EBITDA margin of 19.64% over the same period. However, it is worth noting that a substantial portion of this growth was achieved in the fiscal years of 2021 and 2022, with the latter year’s growth mostly attributed to the HEYDUDE acquisition. While there remains a risk of revenue growth and EBITDA margins reverting to lower levels, management has repeatedly emphasized that they expect revenue growth to remain in the low teens, with EBITDA margins to stay at least at 26% for the next few years. Furthermore, management has repeatedly emphasized Crocs’ long-term goal is to surpass $6 billion in total revenues by 2026 while maintaining a 26% EBITDA margin. Despite their impressive profit margins, Crocs’ current low 5-year average EV/EBITDA multiple of 15.5x is surprising.
HEYDUDE, what’s that debt?
When analyzing Crocs’ balance sheet, it’s impossible to ignore their significant $2.6B debt, which they acquired in FY22 due to their acquisition of HEYDUDE. The acquisition was initially met with skepticism, as Crocs paid a whopping $2.5B (with $2.05B funded by debt and $0.45B funded by shares) for a company that was only generating $600m in revenue with a low operating margin. This 4x P/S acquisition of a shoe company caused a 13% drop in Crocs’ stock price, as the market punished the management team for their questionable purchase.
However, a year later, the acquisition seems to have paid off for Crocs. HEYDUDE has successfully integrated with Crocs, and the results are starting to show. Although Crocs initially guided for $1B in revenue for HEYDUDE by FY24, HEYDUDE was able to accomplish nearly $1B in revenues during FY22. Going forward, they expect at least 20% YoY growth for HEYDUDE for the next few years, and as they continue to integrate the company, operating margins for HEYDUDE are expected to improve to a long term adjusted operating margin of 26%+. Furthermore, strong cash flow in FY22 has already allowed for a $550M reduction in borrowings from $2.9B in Q1 to $2.3B in Q4. While the debt is a concern, the HEYDUDE acquisition has the potential to be a significant catalyst for Crocs’ growth in the future.
Risks of the Business
While Crocs has shown strong revenue performance and strong EBITDA margins in recent years, as a consumer discretionary product, it is subject to changing trends. While Crocs may be seen as “cool” and trending for now, it is possible for a shift in consumer sentiment to hurt its top-line. Furthermore, the company faces continuous competition from other shoe companies such as Deckers Outdoor Corporation (DECK), Converse/Nike (NKE), and Skechers (SKX). While Crocs has a sizeable advantage over all its competitors, this gap may not last forever. Furthermore, while CROX’s management is extremely bullish on its acquisition, it may still succumb to failure to integrate properly. The long-term outlook for HEYDUDE may deteriorate if management is able to properly execute on future revenue growth and EBITDA margin expansion.
In our bear, base, and bull case scenarios, we assume Crocs’ revenues will continue to grow at a CAGR of 6%, 10%, and 14% over the next five years, respectively. Additionally, we assume EBITDA margins of 20%, 24%, and 26%, respectively, and apply exit multiples of 15x, 17.5x, and 20x to reflect the revenue growth and profitability of each scenario. It is worth noting that our bull case is consistent with management’s repeated guidance.
What is interesting is that each scenario presents significant potential upside for CROX, ranging from 48% undervalued to 346.40% undervalued. Given the current macroeconomic environment, it would be prudent to reduce our expectations slightly to account for potential execution issues in the future while still leaving room for upside. Even if we are wrong, any additional upside would be a welcome bonus.
Our bear case considers the possibility of a significant slowdown in revenue growth and a decrease in EBITDA margins, possibly due to changes in customer loyalty or sentiment or increased operating expenses. Our base and bull cases assume continued expansion and penetration into new markets by Jibbitz, sandals, HEYDUDE, and clogs, and strong consumer loyalty. If management’s forecast materializes as expected, CROX would be undervalued by 346%, giving investors an impressive IRR of 34.88% over the next five years. Not too shabby.
The Bottom Line
CROX has gone through an incredible transformation in the past decade. With CEO Andrew Rees leading the way, CROX has experienced strong growth in recent years, driven by its focus on innovation, marketing, and international expansion. With management paving the way to $6B in revenue by 2026 with strong 26% EBITDA margins, CROX presents investors with incredible upside, as much as 346%, due to its high revenue growth and even higher EBITDA margins. Combined with HEYDUDE, we find CROX to be an unstoppable company, and rate it a Strong Buy.
What are your thoughts on HEYDUDE and CROX? Where do you see this company going in the next few years?