Crocs’(NASDAQ: CROX) recent performance has been a story of contrasting fortunes, with its flagship brand thriving, while the HeyDude brand, acquired in 2022, has struggled to gain traction. The company’s stock has experienced a 27% fall in the last six months to around $112 (Dec 23). Investors’ frustration with HeyDude is understandable, given the $2.5 billion acquisition’s lack of progress in delivering expected growth and profitability. However, with a forward price-to-earnings ratio of just 8 times next year’s estimated earnings, Crocs’ stock appears undervalued. Considering that the vast majority of the company’s profits stem from its core brand, with minimal contribution from HeyDude, it’s likely that the stock would warrant a higher valuation multiple if not weighed down by HeyDude’s underperformance, given the Crocs brand’s robust revenue growth and margins. Crocs business continues to demonstrate strong overall performance, with a Q3 operating margin exceeding 25%, an impressive metric for a footwear company. In comparison, Crocs’ peer Nike’s (NYSE: NKE) operating margin stood at 11% in the most recent quarter. See What’s Happening With Nike’s Stock?
The big positive is that 80% of the total company’s business is still the Crocs brand. The core Crocs brand is expected to drive 8% year-over-year (y-o-y) revenue growth in 2024, but the company’s total revenue is forecast to increase by only 3% for the full year, due to the underperformance of HeyDude. The company projected HeyDude’s sales to be down 4% to 6% in the fourth quarter and 14.5% for the year, which is worse than the 8% to 10% drop it was previously expecting. That said, Crocs’ management is utilizing its strong profit margins to repurchase shares and reduce debt, having repaid $248 million in debt and spent $326 million on buybacks in 2024 so far, enhancing shareholder value. Separately, if you want upside with a smoother ride than an individual stock, consider the High Quality portfolio, which has outperformed the S&P, and clocked >91% returns since inception.
CROX reported a 1.6% y-o-y increase in revenue to $1.1 billion in Q3, driven by 7% growth in the Crocs brand, which offset a 17% decline in the HeyDude brand. The company also saw a significant jump in adjusted earnings per share, rising 10.8% to $3.60, partly due to the repurchase of 1.1 million shares during the quarter. Additionally, adjusted gross margins expanded 220 basis points to 59.6%, demonstrating the company’s solid profitability. However, operating expenses increased, with selling, general, and administrative costs rising 19%. It should be noted that the Crocs brand achieved over 20% growth in China in Q3, a challenging market for many brands, and also saw strength in Australia, France, and Germany. Looking ahead, Crocs expects China and India to be key drivers of growth.
The performance of CROX stock over the last 3-year period has been far from consistent, with annual returns being considerably more volatile than the S&P 500. Returns for the stock were 105% in 2021, -15% in 2022, and -14% in 2023. In contrast, the Trefis High Quality Portfolio, with a collection of 30 stocks, is considerably less volatile. And it has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics.
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