Crocs, Inc. (CROX) presents a compelling case of a company grappling with the dual narrative of a thriving core brand and a struggling acquisition. The company’s recent stock performance reflects this dichotomy, with a 27% decline over the past six months, largely attributed to the underperformance of the HeyDude brand, acquired for $2.5 billion in 2022. Investors are understandably concerned about HeyDude’s inability to meet growth and profitability expectations, creating a drag on the overall company valuation. However, the current market sentiment might be overlooking the inherent strength of the Crocs brand and the potential for a significant upside if HeyDude’s performance stabilizes or improves. With a forward price-to-earnings ratio of just 8, Crocs appears undervalued, especially considering the robust performance of its core business, which generates the vast majority of the company’s profits. The market’s focus on HeyDude’s struggles seems to be overshadowing the positive trajectory of the Crocs brand, creating a potential opportunity for value investors.
The core Crocs brand remains the driving force behind the company’s financial performance, accounting for approximately 80% of the total business. This brand continues to exhibit strong growth, with an expected 8% year-over-year revenue increase projected for 2024. This positive momentum, however, is being offset by the significant decline in HeyDude’s sales, which are projected to decrease by 14.5% for the year, significantly impacting the company’s overall growth forecast, which stands at a modest 3%. The contrast between the two brands is stark, with Crocs demonstrating consistent growth and profitability, while HeyDude continues to grapple with challenges in capturing market share and achieving profitability. Despite the overall drag on revenue growth caused by HeyDude, the underlying strength of the Crocs brand suggests that the current stock valuation might not accurately reflect the company’s long-term potential.
Despite the challenges posed by HeyDude’s underperformance, Crocs maintains impressive profitability, boasting a Q3 operating margin exceeding 25%, a remarkably high figure for the footwear industry. This compares favorably to industry giant Nike’s operating margin of 11% in the same period. This robust profitability allows Crocs to actively manage its balance sheet and return value to shareholders through strategic initiatives like debt reduction and share buybacks. In 2024, the company has already repaid $248 million in debt and repurchased $326 million worth of shares, highlighting a commitment to enhancing shareholder value despite the headwinds from HeyDude. This prudent financial management further underscores the potential undervaluation of Crocs stock, considering the strong cash flow generation from the core business.
A deeper dive into Crocs’ Q3 2024 results reveals a mixed picture. While total revenue increased by a modest 1.6% year-over-year to $1.1 billion, this was driven primarily by a 7% growth in the Crocs brand, which offset a 17% decline in HeyDude sales. Adjusted earnings per share saw a significant jump of 10.8% to $3.60, partly due to the share repurchase program. Adjusted gross margins also expanded by 220 basis points to 59.6%, demonstrating the continued strength of the core Crocs brand’s profitability. However, operating expenses, particularly selling, general, and administrative costs, increased by 19%, highlighting the ongoing investments required to support both brands. Furthermore, Crocs demonstrated impressive growth in key international markets, including China, where the brand achieved over 20% growth in Q3, showcasing its resilience and potential in diverse global markets.
The longer-term perspective on CROX stock reveals significant volatility. Over the past three years, the stock has experienced substantial swings, with returns of 105% in 2021, -15% in 2022, and -14% in 2023. This volatility stands in contrast to the more stable performance of broader market indices like the S&P 500. This historical volatility underscores the market’s sensitivity to both the positive momentum of the Crocs brand and the negative impact of the HeyDude acquisition. The erratic stock performance makes it clear that investor sentiment is heavily influenced by the fluctuating fortunes of both brands, highlighting the need for a more nuanced understanding of the company’s intrinsic value beyond short-term market reactions.
In conclusion, Crocs presents a complex investment thesis. While the underperformance of HeyDude has undoubtedly weighed on the stock’s performance, the underlying strength of the core Crocs brand, its robust profitability, and the company’s proactive capital allocation strategy suggest a potential disconnect between the current stock price and the intrinsic value. The market’s focus on the challenges with HeyDude seems to be overshadowing the positive trajectory of the Crocs brand. The current valuation, with a low forward P/E ratio, could present an attractive entry point for long-term investors who believe in the resilience of the Crocs brand and the potential for future growth, especially if the company can address the challenges facing the HeyDude acquisition. The ongoing growth in key international markets like China and India further strengthens the case for long-term potential, despite the near-term headwinds.
