What we think about Crocs (CROX)
Crocs in Three Words: Comfortable Leisure Footwear
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Background
Crocs is a global shoe retailer, whose comfortable and inexpensive footwear under the Crocs and HEYDUDE brands sells 150 million pairs and generates $4 billion in sales annually.
Third quarter 2024 revenues were up 2%, but they generated a much more-exciting 11% growth in earnings per share.
The Crocs brand (80% of revenues) is the star of the show, growing sales 17% internationally and 8% direct-to-consumer. Mini-Crocs are now included in McDonald's Happy Meals and a new collaboration with DC Comics with allow for Batman-themed Crocs and shoe charms. China loves Crocs and revenue is growing at 20%+ in the Middle Kingdom. Overall, the Crocs division generated $858 million of total revenue in the most recent third quarter.
But hey, dude -- the other segment of the business needs some course-correcting, HEYDUDE (20% of the business) has been struggling and its revenues fell 17% to $204 million. Crocs probably overpaid for its 2021 acquisition of HEYDUDE for $2.5 billion that hasn't quite yet met expectations. Intended to be a comfortable shoe meant for young consumers, HEYDUDE has instead been ridiculed on social media for "never quite fitting", "not worth $65 a pair", and "looking like boxes of Kleenex." Negative user reviews that end up going viral is indeed a risk you take for anyone targeting this younger demographic.
Crocs believes it's time to double-down on HEYDUDE's branding and has hired American actress Sydney Sweeney in August to be the long-term ambassador of its marketing efforts and to encourage others to be comfortable in their own shoes. This feels like a comfortable first step to getting sales back on track again.
As an investment, Crocs looks very inexpensive. The stock trades today at just 7x trailing earnings and 6.5x trailing free cash flow, and yet has a 70% return on equity. The combination of those multiples imply a disconnect -- the fundamental business is solid; but the market is pricing it as though the company is in a permanent decline. Crocs generated a 20% free cash flow margin during the past year and has been using it primarily to pay down the debt it took in order to fund its HEYDUDE acquisition.
The jury is still out on whether HEYDUDE was indeed a methodical way to unlock shareholder value or whether it was simply a reach for top-line growth. If the consolidated company's new marketing efforts pay off, the inexpensive stock might represent an extremely compelling bargain today.
Crocs certainly believes its stock is cheap and has aggressively been buying back shares. It has reduced its outstanding share count by 17% during the past five years -- from 70.4 million in 2019 to 59 million today -- and CROX's stock has outperformed the S&P by nearly 50 percentage points during that same timeframe.
Recent Company Updates
Crocs initially joined the 7investing Watch List of New Ideas in January 2025.
January 21, 2025: CROX also checks almost all of the boxes of what Tillinghast described as the ideal value investment:
- ✅ Return on equity have greater than 10%. (CROX is 70% (!))
- ✅ Return on invested capital greater than 10%. (CROX is 25%)
- ✅ Free cash flow that is greater than net income. ($940m FCF vs $834m NI TTM)
- ✅ Long term debt divided by EBITDA less than 4x. ($1.4b LTD divided by $1.1b EBITDA TTM = 1.3x)
- X A little bit of insider ownership (CEO Ron Snyder does own 2%; but he also receives excessive stock-based comp and immediately sells most of it)
- ✅ A P/E ratio of less than 23x. (CROX is only 7x)
- ✅ And a company that’s buying back shares. (CROX has reduced its share count by 17% in 5 years)