Is Crocs stock still a buy?
The market began to recognize the value of shoe companies again in the fall of last year.
As I assumed in November, crocodile (crocs 0.52%) Stocks ended up being incredibly cheap. Love it or hate it, the foam clog company’s stock price is up more than 60% in the past six months. Management is working to get the business back on track after experiencing some problems at casual footwear brand HeyDude, which it acquired in early 2022.
By certain metrics, Crocs stock is still cheap, assuming the company can return to growth this year. Let’s take a look at the latest news and what it means for investors.
HeyDude is still a big deal
Crocs acquired the HeyDude brand in early 2022 for $2.05 billion in cash (financed by debt) and issuing new stock to HeyDude’s founders. It marked a transformative move that added a high-growth, emerging footwear business expected to generate more than $700 million in sales by 2022, complementing Crocs’ iconic status among its many loyal fans.
Things started out well, but by 2023 it became clear that HeyDude had overextended himself. There was (and still is) too much inventory floating around. Crocs executives are actively reducing the number of retail partners and approved digital distribution channels.
As a result, HeyDude’s 2023 revenue was $949 million. While this is a significant increase over HeyDude’s sales at the time of the acquisition, it ultimately pales in comparison to the smaller casual lifestyle brand’s massive performance in 2022. HeyDude generated $986 million in sales in 2022, including the months prior to the acquisition, far exceeding Crocs’ original forecast.
The pain isn’t over yet. In 2024, management expects HeyDude’s sales to be “moderate to slightly higher.” Stimulating sales growth with healthy profits is a top priority. Management expects to be able to increase HeyDude’s adjusted operating profit margin, which will help return the company’s overall margin to 25% in 2024, compared to 22% last year.
Can the Crocs brand stay in business?
Meanwhile, the company’s foam clog division had another stellar year in 2023, with Crocs brand total sales up 13% to $3 billion. In its forecast, management took a conservative stance, guiding for 4% to 6% sales growth for the brand in 2024.
Clearly, at least for now, this is no longer a growth business as consumers around the world continue to relax their discretionary spending. Expansion into new regions such as Asia and into new product categories such as sandals is limited in the current economic climate. So why has the stock price soared in recent months? Revenue growth.
Even taking into account the new shares issued to acquire HeyDude a few years ago, Crocs has achieved record highs in earnings per share (EPS) and free cash flow per share (FCF). On an adjusted basis (excluding non-recurring items), EPS is expected to increase by up to 4% in 2024, excluding positive gains from share repurchases.
Data from YCharts.
Of course, don’t expect too much about share buybacks just yet. Crocs still needs to pay off its long-term debt balance. As of the end of 2023, it was $1.64 billion (but this was down from $2.3 billion a year earlier).
In any case, with the stock currently trading at 11x trailing-12-month EPS and 10x FCF, Crocs stock looks much more fairly valued than it did last fall. I am content to keep my position. But before I look further, I’d like to see signs of a return to growth at HeyDudes, especially in late 2024.
