Crocs Stock (NASDAQ:CROX): Unstoppable and Undervalued
Stock Analysis & Ideas

Crocs Stock (NASDAQ:CROX): Unstoppable and Undervalued

Story Highlights

Crocs has managed to retain impressive growth momentum while remaining exceptionally profitable. The company should end the year on a high note, set to report record adjusted EPS. Combined with shares appearing cheap, the stock’s upside appears compelling.

Crocs (NASDAQ: CROX) has historically attracted limited investor interest, but with its results continuously improving, it appears it’s high time for Wall Street to give the stock another look.

Personally, I have been an investor in Crocs for a couple of years now, and I couldn’t have been more pleased by how well the company is run. The stock’s violent correction during the first half of 2022 was certainly startling, but with Crocs retaining remarkable growth momentum and very juicy margins, shares have been gradually recovering.

Crocs’ lasting growth and elevated profitability become particularly impressive when considering that bears have consistently supported the case that Croc’s success has only been the result of a temporary cultural trend, which would eventually fade. Yet, Crocs’ brand strength seems to become increasingly relevant in the world of casual fashion.

In my view, Crocs’ financials and prospects appear the best they have ever been. Further, shares remain cheap. Therefore, I remain bullish on the stock.

Crocs’ Vigorous Revenue Growth Momentum

Crocs’ thrilling momentum lasted well through Q3, with the company reporting revenue growth of 63% to $985.1 million on a constant-currency basis. Speaking about momentum, this figure implies an acceleration in revenue growth from Q2’s 55.6%, which discredits the bears’ case, attributing Crocs’ growth to a transient fashion trend.

Specifically, in Q3, the Crocs brand grew 19.9%, once again powered by robust DTC (direct-to-consumer) comparable sales growth of 18.2%. The mismatch in the growth of the Crocs brand against the growth in total revenues is due to the recently acquired HEYDUDE brand, which continues to exceed expectations. In fact, the remaining HEYDUDE revenues of $269.4 million imply a massive 87% year-over-year growth rate.

Industry-Leading Profitability Prospects 

Besides Crocs retaining a strong sales momentum, the company has managed to remain exceptionally profitable, especially since its industry peers are currently seeing their bottom lines compressed due to inflationary pressures. The company’s adjusted operating margins, including both Crocs and HEYDUDE, remained quite elevated, coming in at 27.9%. Additionally, Crocs’ adjusted EPS landed at $2.97, rising 20% compared to the prior-year period.

You may recall that given the HEYDUDE acquisition, this was supposed to be a year of rising expenses due to the underlying integration costs and higher interest expenses due to the debt used to fund the acquisition. Thus, seeing 20% growth in the per-share figure just seals the deal in terms of how efficiently the company is run.

Increased profitability during the first year of the HEYDUDE acquisition also points to the idea that as the company scales further and the actual integration is completed, it’s quite likely that we will notice adjusted operating margins surpassing 30%. Every shoe manufacturer in the world would be envious of such high margins.

For perspective, Nike’s (NYSE: NIKE), Adidas’s (OTC: ADDYY), Skechers U.S.A.’s (NYSE: SKX), Steven Madden’s (NYSE: SHOO), and Shoe Carnival’s (NASDAQ: SCVL) gross margins in Q3 stood at 44.3%, 49.0%, 47.0%, 41.2%, and 38.4%, respectively. In comparison, Crocs’ Q3 gross margins landed an industry-leading 55%, despite the company’s inferior operating scale.

Looking to End the Year on a High Note

Based on the company’s Q3 and year-to-date results, management boosted their previous outlook. Management now expects full-year revenues to be in the range of $3.455 to $3.520 billion, implying growth between 49% and 52% compared to last year.

Management is also aiming for an adjusted operating margin between 26% and 27% and adjusted EPS to be between $9.95 and $10.30. At the midpoint, this represents year-over-year growth of 21.7%, on top of last year’s adjusted EPS growth of 158%.

Is CROX a Good Stock to Buy, According to Analysts?

Turning to Wall Street, Crocs has a Moderate Buy consensus rating based on two Buys and three Holds assigned in the past three months. At $100.25, the average CROX price target is in line with the current stock price.

Takeaway: Analysts May be Too Conservative

Analysts appear conservative with the stock’s investment case, projecting limited upside ahead. Nevertheless, I believe that Crocs’ numbers speak for themselves, as the shoe manufacturer is showing top and bottom-line growth that is unparalleled to its industry peers. Management’s optimism is also quite encouraging, and the fact that Crocs is about to achieve another year of record profits following last year’s inflated figures is utterly impressive.

Trading at just 9.9x the midpoint of management’s adjusted EPS guidance, I think that Crocs shares continue to be trading on the cheap, despite recovering recently. Considering buybacks are set to resume in 2023 once the elevated leverage following the HEYDUDE acquisition normalizes, the stock’s upside should be much stronger than what Wall Street analysts suggest.



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