Crocs (CROX) designs and produces casual lifestyle footwear and accessories for all. I have previously shared my views on the company, going over why its spectacular transformation over the past few years has positioned Crocs to produce great shareholder value going forward. Crocs is currently enjoying multiple catalysts that fuel its growth momentum, which is more than likely to be sustained.
Crocs continues to report robust results while the company recently announced the acquisition of HEYDUDE, which in my view, will significantly diversify Crocs’ operations and produce accretive shareholder value.
While the stock plunged on the news, I view this as an overreaction, with the market pricing shares cheaply relative to the company’s ongoing growth, margin expansion, and synergies to be unlocked through this acquisition.
Hence, I remain convinced that there are significant gains to be made at Crocs’ current, low valuation levels. I remain bullish on the stock. (See Analysts’ Top Stocks on TipRanks)
The HEYDUDE Acquisition
- Crocs has acquired HEYDUDE, a privately-owned casual footwear brand, for $2.5 billion.
- The deal value will be funded by $2.05 billion in cash and $450 million in the company’s shares.
- The company expects to enter into a $2 billion Term Loan B Facility and borrow $50 million under the existing Senior Revolving Credit Facility to finance the above consideration.
The acquisition is to provide Crocs easy access to the casual footwear market, to diversify its target group and total addressable market. HEYDUDE, actually, sells more online than even Crocs does.
Specifically, Crocs expects at least 50% of revenues to be sourced digitally post 2026. They are now at 37%. Hence, it should be quite uncomplicated to achieve this for HEYDUDE, whose online sales already represent around 43% of total sales.
Management intends to build HEYDUDE into a $1 billion brand by 2024. Also, what I adore about Crocs is its very high margins. HEYDUDE seems to also be featuring sky-high margins, while management expects to achieve even higher growth in this division in the medium term. The acquisition will also be immediately accretive to EPS.
Note that management is to suspend buybacks until it deleverages due to the $2 billion term loan. I had previously cited Crocs’ stock buybacks as a great shareholder value growth driver. While the recent suspension may sound worrying, considering Crocs’ ongoing free-cash-flow generation and HEYDUDE’s accretive results, some napkin math shows it should take around a year for Crocs to drop its net debt/EBITDA below 2x.
This is the threshold from which management expects to reinstate share repurchases. Hence, buybacks should likely resume from 2023, and based on Crocs’ continuous growth in the meantime, the higher profits by then should allow for quite higher buybacks post-2023 than its pre-acquisition levels.
The Stock Is Quite Cheap
For the Fiscal Year 2021, the company now expects revenue growth between 62%-65% vs. the prior year, which according to analyst estimates, should result in EPS of $7.56.
It’s also worth noting that the EPS estimates themselves have continuously been boosted higher following Crocs outperformance, so another beat-and-raise in the company’s upcoming earnings should not come as a surprise.
In my view, Crocs remains the most undervalued stock amongst its industry peers. The stock is valued at 17.5x Fiscal Year 2021’s expected EPS based on consensus estimates, while the company expects to grow at a CAGR north of 20% in the medium term.
Wall Street’s Take
Turning to Wall Street, Crocs has a Moderate Buy consensus rating, based on five Buys and two Holds assigned in the past three months. At $207.29, the CROX stock forecasts imply 57.6% upside potential.
Disclosure: On the date of publication, Nikolaos Sismanis had a beneficial long position in the shares of Crocs Inc. through stock ownership.
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