In 2022, Crocs Inc. (CROX, Financial) set a personal record with sales surpassing $3.5 billion and earnings per share of $8.71. The impressive 54% surge in top-line growth was fueled by the acquisition of the HEYDUDE Brand, which further added to Crocs' overall performance during the first quarter of this year. HEYDUDE’s sales rose nearly 105% year over year to $235.4 million. Crocs purchased the shoe brand for $2.5 billion, and it seems like it has paid off so far.
Crocs designs, manufactures and markets shoes for men, women and children under its namesake brand and now the HEYDUDE brand. The company is well-known for its unique, casual footwear, which is often characterized by a distinct, clog-like design and a proprietary foam resin material called Croslite. Once considered ugly but comfy, the shoes proved popular regardless, going on to become trendy and then iconic.
Company history
Crocs was founded in 2002 by Scott Seamans, Lyndon "Duke" Hanson and George Boedecker Jr. The first model produced by Crocs, the Beach, was unveiled in 2002 at the Fort Lauderdale Boat Show in Florida. I was actually at that show, but didn’t buy any of the 200 pairs sold at that time. The shoes were initially intended as footwear for boating, with their nonslip tread and waterproof material. They also became popular among health care workers, chefs and others who needed comfortable shoes for long hours on their feet.
The company went public in 2006, and despite facing criticism for the aesthetic design of their shoes, Crocs has managed to maintain strong sales numbers. In fact, during the beginning of the pandemic, Crocs saw a significant surge in demand as consumers favored comfortable footwear for home use.
Apart from its classic clog design, Crocs also produces other shoe styles including flip-flops, sandals and loafers. Moreover, the company has also pursued a number of collaborations with famous artists and brands to create limited edition footwear, helping the brand maintain its popularity and relevance.
Brand and durability
Crocs is a globally recognized brand, and its clog-like shoes are almost instantly identifiable. This visibility and recognition is a significant advantage in the crowded footwear market. The proprietary Croslite material used in Crocs footwear provides a unique selling point while also making the shoes lightweight, comfortable and water-resistant, which are appealing traits for many customers.
The company's flagship product, the Crocs clog, is highly customizable with “Jibbitz” charms. This allows customers to personalize their footwear, which can create a more engaging shopping experience and promote brand loyalty. Crocs has collaborated with high-profile celebrities and popular brands to release special editions of their shoes, creating buzz and driving sales.
Post Malone has had multiple collaborations with Crocs, each time releasing a unique design that often sells out quickly. Also, Justin Bieber partnered with Crocs for a limited-edition release under his clothing brand, Drew House, and rapper Bad Bunny collaborated with Crocs for a glow-in-the-dark clog design that sold out almost immediately. Not a bad trio to have promoting your shoes.
Looking through the financials
When it comes to the company's finanicals, let’s start with the bad news first. Crocs has a lot of debt, $2.25 billion long-term, and not a lot of cash, $125 million. That has prompted plenty of sellers to jump on the bandwagon with nearly 11.5% of the float sold short. However, the company generated $616 million in net income last year, well within an acceptable range to pay down debt if needed. More importantly, most of this is new debt which helped Crocs acquire the HEYDUDE brand, a purchase that is already growing super fast year over year and should pay for itself long-term.
Speaking of long-term, Crocs has consistently increased its top and bottom line numbers while maintaining very high profitability. For example, the company generated $623 million in gross profit on nearly $1.2 billion in revenue during 2013, a 52.2% margin. It only pushed $10 million down to net income. Jump ahead five years and in 2018, the had $50 million in net income on $1.1 billion in sales at 51% gross margins. And, in the last 12 months, Crocs has started to really grow on the top line with revenue approaching $3.8 billion with a 16% net profit margin. Seems like Crocs is finally hitting a stride.
Adding to that, the company has bought back almost 30% of its shares in the last decade, so shareholders could reap the benefits of accelerated price appreciation.
Prospects
The company's prospects for 2023 seem promising in my view. As integration costs linked to HEYDUDE diminish in the upcoming quarters, pressure on the bottom line is expected to ease. Analysts on Wall Street estimate earnings per share of around $11.53 in 2023 and north of $13 in 2024. These estimates are accompanied by revenue growth projections of $4 billion this year and $4.40 billion next year. Crocs has beat estimates every year since 2017, so these numbers could be even higher.
More importantly, fast forward 10 years, people will likely still be buying Crocs. And, I believe there is still room where the shoes could still rise in price, further boosting the company’s top and bottom lines. Furthermore, Crocs has a strong online presence with more than 10 million followers across social media. The HEYDUDE acquisition will likely go a long way to spurring growth this decade.
Conservatively, if the company only does half as well by 2033 as it did since 2013, sales could double. If the margins remain the same, Crocs could be earning over $1.2 billion in net income. Couple that with only a 15% decrease in total shares and the earnings could be north of $23 a share by my estimates. The stock currently trades at 10 times forward GAAP earnings, a discount of 400 basis points from the sector median; however, even with that calculation, my price target still comes out to $230 per share.
