Crocs ($CROX) has shown a remarkable revenue growth of 222% and free cash flow growth of 510% over the last five years, increasing from $1.23 billion in 2019 to $3.96 billion in 2023. But no one seems to notice this impressive run or comment on the performance of the company.
We have posted in our Twitter / X about a good opportunity to buy this overlooked company on April 20th. Since then the stock has been on a good run and is up almost 30%. We have been investing in this company since January when the price was around $90. In this post we will describe our arguments in favor of this undervalued investment.
Business Assessment
Crocs operates a dual-brand strategy with its Crocs and HEYDUDE brands, focusing on both direct-to-consumer and wholesale channels. The company has shown strong revenue growth, particularly in the Crocs Brand, which has benefited from higher average selling prices and increased volume. The HEYDUDE acquisition has also contributed positively, although its growth rate is slower. The company’s gross margin improvements and effective cost management indicate a sustainable business model. Lately, demand in Asia and Europe has been increasing dramatically. This is due to a great variety of designs and better quality compared to cheaper alternatives.
Industry Assessment
The Consumer Cyclical industry, specifically the Apparel – Footwear & Accessories segment, is characterized by high competition and sensitivity to economic cycles. The industry is currently experiencing growth driven by increasing consumer spending on fashion and lifestyle products. Trends such as e-commerce growth, sustainability, and brand differentiation are crucial. However, challenges include supply chain disruptions, fluctuating raw material costs, and changing consumer preferences.
Valuation
All the valuation ratios are screaming ”undervalued”. Based on the provided ratios, the company appears to be undervalued. The low P/E, P/FCF and PEG ratios, suggest that the market may be underestimating the company’s growth potential and cash flow generation capabilities. However, the high P/B ratio indicates that the market has a high expectation of the company’s future performance. Overall, the stock seems to be a good value investment opportunity in the current market context.
Strengths
- Strong revenue growth in both Crocs and HEYDUDE brands
- Effective cost management leading to improved gross margins
- Diversified revenue streams through direct-to-consumer and wholesale channels
- Significant market presence in the U.S. and growing international footprint
- Ability to increase average selling prices and reduce discounting
Concerns
- Slower growth rate in the HEYDUDE brand compared to Crocs
- Exposure to economic cycles and consumer spending patterns
- Challenges in maintaining brand differentiation in a highly competitive market
Long Term Growth
While Crocs, Inc. has a strong financial foundation and favorable market trends supporting its growth, the numerous risks and uncertainties it faces could impede its progress. The growth hypothesis appears more likely given the company’s current performance and market trends. However, it is crucial for Crocs to address the identified risks to sustain long-term growth.
Crocs is well-positioned for long-term growth due to several factors. The company has demonstrated strong financial performance with a gross profit ratio of 55.62% and a net income ratio of 16.24% in Q1 2024. The revenue growth forecast of 7.87% per year and EPS growth of 7.38% per year from 2023 to 2028 indicates a positive outlook.
The company’s ability to innovate and introduce new products, coupled with its strong brand value and global presence, can drive future growth. Additionally, the increasing trend towards casual and comfortable footwear, along with the expansion of e-commerce, provides a favorable market environment. For this growth to materialize, Crocs needs to effectively manage its supply chain, continue to innovate, and maintain strong relationships with wholesale and distributor customers.
Latest Earnings Call Insights
Crocs reported strong Q1 2024 results, with revenue growth of 7% and adjusted earnings per share (EPS) increasing by 16% to $3.02. The Crocs brand saw a 16% revenue increase, while HEYDUDE’s performance was ahead of guidance but faced challenges. The company provided cautious guidance for the rest of the year, reflecting market uncertainties and strategic investments. Through Q&A session the company expressed Continued introduction of new styles and collaborations in China, with plans for further expansion. Plans to buy back stock and pay down debt, supported by strong cash flow generation are also on the horizon.
Conclusion
At this valuation (11.8 P/E), healthy balance sheet and profit margins of 20% for the last full year it seems to be a bargain. In addition, significant growth in direct-to-consumer sales indicates successful marketing and retail strategies. The only drawback we can see is a high competition in the footwear industry and possibility for a consumer to abandon this product due to changing preferences. We are still bullish on this company and think there is still value to be squeezed out of this investment.
If you want to study the full analysis, check it out on our website Value Hunter
