fangs (CROSS) designs, markets and manufactures casual lifestyle footwear and accessories for everyone. Crocs has been one of my favorite growth investments over the past two years as the stock has undergone a dramatic transformation over the period. The company gained popularity among consumers, with its previously “ugly” clog shoe penetrating fashion culture.
In the meantime, Crocs has branched out into other types of footwear, while its recent acquisition of HEYDUDE has given it exposure to another growing brand. In my view, Crocs remains well positioned to deliver exceptional shareholder value in the future.
As Crocs shares plunged from their 52-week highs of around $183, I only saw this as a fantastic opportunity to pile up some stock on the cheap. The company’s latest results have once again demonstrated that its continued momentum remains unflinching, while profitability has been strong enough to pay off the debt incurred for the HEYDUDE acquisition quite quickly.
I remain optimistic about the title.
Q1: Starting fiscal 2022 on a high note
Crocs’ first quarter results were very strong, with the company posting revenue growth, including Crocs and HEYDUDE, of 46.7% to $660.1 million on a constant currency basis. The Crocs brand grew 21.7%, driven by strong Direct-To-Consumer (DTC) growth of 19.7% and digital growth of 23.5%.
The most exciting consolidated revenue growth was driven by the recently acquired HEYDUDE brand, as management said it exceeded expectations. HEYDUDE recorded revenue of $150 million from February 17 to March 31, while on a pro forma basis, first-quarter revenue was $205 million, an 81% year-on-year increase. the other.
Adjusted operating margins, including both Crocs and HEYDUDE, were again best in class at 27%. Adjusted diluted earnings per share also increased by an exceptional amount of 37.6% to $2.05, compared to $1.49 for the same period last year. This is quite impressive since the company has incurred additional expenses in order to integrate the HEYDUDE brand into its core business.
As the business grows and with the full integration of HEYDUDE, we could see adjusted operating margins in excess of 30%, which every shoemaker should envy.
To put the company’s margins into perspective, note that Crocs, Nike (NKE), Adidas (ADDYY), Skechers USA (SKX), by Steven Madden (SHOO) and Shoe Carnival’s (SCVL) gross margins in the first quarter were 53.7%, 49.9%, 46.6%, 45.3%, 40.7% and 35.5%, respectively. Thus, Crocs’ profitability prospects remain unmatched compared to those of its competitors, considering that some of them have superior production capacities due to their sheer size.
It is also important to highlight that Crocs growth remains robust across all regions. Thus, the brand is not just experiencing a local phenomenon with sales vulnerable to fading regional trends. Specifically, sales in the Americas increased 19.5%, sales in Asia Pacific increased 22.1%, and Europe, Middle East and Africa increased 26.8% to constant exchange rates compared to the period of the previous year.
Following better than expected results, management raised its previous guidance. They now expect full-year revenue to be around $3.5 billion, down from around $3.4 billion previously, suggesting year-over-year growth between 52% and 55%.
The company still expects the Crocs brand to see revenue growth of more than 20%. The rest of the revenue growth is to be supported by HEYDUDE, whose sales on a pro forma basis are expected to be between $840 million and $890 million.
The company is also targeting adjusted operating margin between 26% and 27% and adjusted diluted earnings per share between $10.05 and $10.65.
Capital Valuation and Return
Amid management guidance, Crocs shares are currently trading at a forward P/E of 5.4. This is a depressed multiple given the company’s prospects for growth and profitability.
Based on consensus estimates, which call for adjusted EPS above the midpoint, the forward PER stands at 5.3. This is one of the lowest multiples the company has ever traded, although it is currently in the best financial position it has ever been.
In terms of return on capital, the stock has a long history of share buybacks. Specifically, since late 2013, the company has repurchased and withdrawn approximately 1/3 of its outstanding shares.
Buyouts have now been put on hold until the company deleverages amid the $2 billion term loan it took out to fund the HEYDUDE acquisition. According to management, buybacks will resume when the company’s net debt/EBITDA is less than 2x. CROX expects to reach this point by mid-2023.
To emphasize how cheap the stock is, assuming redemptions are nearly $1 billion a year (they were $1.02 billion in fiscal 2021), the company would repurchase about 29% of its shares per year at its current price levels. This should be an incredible catalyst for the stock to trade towards a fairer value sooner rather than later.
The Taking of Wall Street
As far as Wall Street is concerned, Crocs has a moderate buy consensus rating based on four buys and three takes given over the past three months. At $95.00, the average forecast for CROX shares implies 70.4% upside potential.
Crocs maintained very strong growth momentum, with the recent acquisition of HEYDUDE further boosting its results. Profitability prospects remain excellent, with potential for improvement as HEYDUDE is integrated.
With stocks trading at a substantial discount and redemptions potentially resuming by next year, Crocs’ investment case looks very attractive, in my view.
Read full disclosure