Up until around five years ago, Crocs (CROX) had been struggling to produce any shareholder value. It faced weak margins, with its iconic Clog shoe being too niche to grow the brand and gain mass appeal.
The company’s transformation began once Andrew Rees took over as CEO in 2017, diversifying Crocs into selling various shoe types, while elevating its iconic Clog shoe.
Since then, Crocs management has triumphantly revived the brand through pivotal marketing and expanding margins, unfastening the potential for shareholders to lastly be compensated for their patience.
This is evident in the stock’s never-ending rally, which has shown no signs of slowing down. Crocs shares have rallied from around $6 in 2017 to the north of $160 this year, as the company’s financials have been ever-improving, with strong fundamentals to support further growth moving forward. I am bullish on the stock. (See Analysts’ Top Stocks on TipRanks)
Strong Margins Drive Profitability Growth
Crocs has been pushing all the right buttons over the past few years, with its top and bottom line expanding by the quarter. In its Q2 results, the company celebrated another quarter of record revenues.
Revenues grew 93.3% year-over-year to $640.8 million, backed by strong demand across all continents. Net income also hit a new all-time high boosted by very strong margins, reaching $319 million, 464% higher year-over-year.
The company has been charging premium prices in its limited-edition shoes while increasing its production capabilities, resulting in growing margins over time.
In fact, even the most prominent companies in the industry likely envy Crocs’ margins. Specifically, Crocs’ gross margin stood at 57.8% based on the company’s last twelve months (LTM) results. These levels are significantly higher than those of Nike’s (NKE) and Adidas’ (ADDYY), despite these industry majors enjoying some of the best production scale capacities globally.
Both Crocs’ gross and net margins are likely to keep expanding as its sales volumes grow. However, there is also another strong catalyst contributing to this expansion, and this is reducing expenses via online sales.
In its latest results, the company posted its 17th sequential quarter of double-digit e-commerce growth. In fact, digital sales increased 25%, comprising 36% of Q2 revenues.
One could argue that this growth metric is weaker than last year’s lofty 56%, but last year’s online sales as a percentage of total sales were lifted following severer retail limitations/closings. In general Crocs is certainly experiencing a long-term trend of digitally completing a higher portion of its total revenues.
Another strong catalyst to Crocs’ strong margins is the brand’s premium pricing, as mentioned before, which should be sustained as the company’s marketing team is turning the Clog into a fashion item.
This is by partnering with leading fashion personalities and brands, aiming at the exclusivity factor. Such partnerships have so far included fashion brands like Balenciaga, which allow Crocs to sell its shoes with a premium price tag attached to its limited pieces.
Overall Crocs enjoys solid fundamentals to sustain high margins as its top line expands further.
Wall Street’s Take
Turning to Wall Street, Crocs has a Moderate Buy consensus rating, based on seven Buys, three Holds, and zero Sells assigned in the past three months. At $175.63, the average Crocs price target implies 34% upside potential.
Disclosure: At the time of publication, Nikolaos Sismanis did not have a position in any of the securities mentioned in this article.
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