Crocs is a shoe Brand whose sales come, mainly, from their famous Clogs. But the sandals segment is growing consistently, making up for 13% of their current Crocs’ revenue. 

​​I first bought Crocs at the beginning of 2022. By mid-2022, the company had fallen over 70% from its peak. Several reasons were behind this fall, but mainly, the acquisition of HEYDUDE. Also, the market is not giving enough credit to Crocs’ growth history because it is perceived as highly cyclical and fad-prone. The market is not only wrong about Crocs being an ugly shoe, but also they’re misunderstanding the loyalty and stickiness of the brand. 

​Crocs has consistently maintained gross margins in excess of 50%. Their return on invested capital has also been high, although subject to fluctuations. Especially in the latest years, when the company has improved its operational efficiency, not only gross margins have been maintained high, but also ROIC and net margin profits. 

​However, in 2022, the acquisition of HEYDUDE increased substantially Crocs’ debt, which was perceived by the market as dangerous (especially, since it is also considered a cyclical business). The management stated that they would deleverage quickly, which they already have accomplished (even faster than what they expected).  

​Some concerns that affect the stock today are the issues that HEYDUDE is facing. Although the brand has gained 200 basis points of market share in the US, and its gross margins have expanded, the optimization of HEYDUDE’s distribution agreements, as well as their inventory rationalization are punishing the brand’s growth.  

​However, considering that the management is following the playbook they applied after Crocs’ revenue decline from 2015 to 2017, I consider that these issues will be temporary and that 2 or 3 years from now, they will have a strong position in the US, and plenty of field internationally to expand their business. 

Misunderstood business 

Plenty of potential still ahead, especially internationally (outside the US) 

China represents only 4% of their total revenue. Although their clogs are easily recognizable, the company also benefits from personalization through Jibbitz (pieces of plastic that you can stick on top of the shoes).  

​​The company’s revenue is not a fad anymore. Crocs is a well-recognized brand, with loyal and recurrent customers. Through its newer product, sandals, the company diversifies its customer mix. Yes, it has been prone to fads in the past, but those days are gone. The management of the company has done a great job making the company leaner. And the hit they had has made the company widely known. Some people will think clogs are the ugliest shoes ever, but some others love them. Clogs are even a collection object. Crocs are cool. 

Today’s success relies on marketing heavily. Yes, the brand is recognized, but they cannot stop advertising and the management knows it. That’s why they always cooperate with influencers to become viral. And they are doing a great job on that end. The playbook works, and so does the stock

Overleverage fear, long gone 

​​When Croc’s acquired HEYDUDE, their net leverage ratio was over 2.1 times (EBITDA over debt). For a “cyclical” company, it was quite high.  

​However, two years after the acquisition, the company has managed to reduce this leverage ratio to half. In part because of the increase in the EBITDA, and in part because of the debt repayment. Now, the company has resumed its buyback program, which took the PE ratio of the company to over 30 times before HEYDUDE’s acquisition. 

​As of the day of publishing this report, February 24^th, 2024, Crocs’ PE ratio is 9x. This means that, if the company manages to convince the market about its competitive position, the company could easily triple. But that’s a bit optimistic, isn’t it? 

Capital allocation

 Recommitted to buybacks 

​​If we consider how the company aggressively bought back shares in the past, once they reach their leverage goal (which has already happened), we could expect aggressive buybacks. Considering the low PE ratio at which the company trades, it could generate immense value for shareholders

INTRINSIC VALUE OF CROX 

Low PE ratio due to fears on cyclicality, leverage, and HEYDUDE’s issues. Once the time passes, and the dust settles, the company offers great upside. 

In every valuation, you need to make qualitative assumptions to arrive at a quantitative solution. Whether you’re under a DFCF, a multiple valuation, or whatever other method, you need to make assessments of risk, discount rates, terminal growth… 

In this particular case, I think that the business is better than the average. But not crazily, only slightly better. At the end of the day, the company has even better margins than NIKE, so why wouldn’t be think that? 

Also, the company has generated high ROICs almost every year, and the brand is highly recognized and recognizable.  

On the other hand, we can’t ignore that the company has a significant net debt position. Thus, I can’t think that they’re financially better than the average. But 1.3 times EBITDA is not too much either. So, I just think that their financial risk is average. 

And finally, if we consider that Crocs is intrinsically cyclical, its earnings visibility is worse than the average.  

With all this information considered, as you can see below, and expecting a 10% growth in the future, which I think is not too aggressive, the company should trade at 15 times earnings to be fairly valued. Since the market is applying a much lower PE ratio to the company, we have a wide margin of safety (almost 40%). Thus, the upside if we bought today would be of over 60%.  

I think the prior scenario is conservative. I wouldn’t be surprised to see EPS growth of well over 10% during the coming years, lower debt ratios, or aggressive capital allocation to fuel EPS growth. The upside can be much higher, while the downside looks limited at 9 times earnings. 

But what about comparable businesses? As I’ve said before, Crocs has better margins than Nike. Would it be crazy to see similar PE ratios? Yes, Nike may be slightly less cyclical, but Crocs has better growth prospects ahead. So I wouldn’t be surprised if Crocs manages to have a 30 times PE ratio in the coming years, especially if HEYDUDE grows again and obtains high profitability (which is already done). Thus, by any metric, the company should obtain an upside of between 60% to 300%

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