I’ve never been a fan of Crocs, Inc. (NASDAQ: CROX), the shoe itself, but I’ve admired the company from a far.
I remember going to the Tanger Factory Outlet Centers (NYSE: SKT) sometime in the summer of 2020 and noticing a line of people standing outside the Crocs store. I was in complete shock.
Personally, I never understood the hype of Crocs.
Even if they were the most comfortable shoe on the market, their aesthetic drives me mad. Their newer design choices aren’t much more appealing, either. But, I am only one person, in a world of billions.
They obviously appeal to many people. In fact, since 2011, Crocs has maintained sales above $1 billion and currently are closer to $2 billion. That means that people keep buying them.
Even amidst the worst health crisis, that our country has experienced in nearly one hundred years, Crocs managed to grow its sales by $155 million in 2020. They are predicted to end 2021 with a growth of $750 million in sales and, if you listen to analysts’ predictions, they are likely to end 2022 with an additional $600 million in sales.
In fact, they’ve been steadily growing their sales for the last 15 years, with no clear sign of slowing down. Maybe that is why their recent acquisition of HEYDUDE® seemed a bit odd.
Outside of their sales decline between 2015-2017, their underlying business has rebounded and has seen double-digit sales growth for the last few years. Analysts expect them to keep churning out a 12%+ sales growth rate for the foreseeable future. So what made Crocs consider an acquisition?
Maybe, management feels that the cyclical nature of their business may impact their growth moving forward. Crocs’ organic sales growth may not end up justifying the hefty valuation that was given to the company at its 52-week high. And with the stock doubling since the start of the year, Crocs may need a proper catalyst to hold its valuation in place.
Enter, HEYDUDE®; a $60 lightweight shoe that produced roughly half a billion dollars in sales for 2021.
On one hand, HEYDUDE® is a perfect fit for Crocs. They are a growing footwear brand that offers “lightweight, comfortable, stylish and affordable” shoes that compete with companies such as All Birds (NASDAQ: BIRD) and UGG® (NYSE: DECK). This gives Crocs the opportunity to grow their market share in an industry that, management believes, has an addressable market of over $160 billion.
Management also expects the combined business to report 2022 sales north of $3.5 billion, making them the second biggest causal footwear brand, in terms of revenue, right behind Sketchers (NYSE: SKX).
On the other hand, Crocs had to finance the purchase with debt. $2.5 billion worth of debt, to be clear. That’s 4 times their 2021 EBITDA…
With most of their excess free cash flow going to pay off this acquisition, questions will obviously rise over the future growth prospects of Crocs.
Its pretty clear that HEYDUDE® will add solid revenue growth to the company’s top line, but what concerns me, and many investors, is their bottom line.
As of their latest earnings report, Crocs reported a 32.44% operating margin, the highest operating margins in the footwear industry. To make things more appealing, their operating margin has been growing, quarter after quarter, since December of 2019.
In a world of supply chain disruptions and rising costs, Crocs has found a way to grow their operating margins in ways that Nike (NYSE: NKE) or Sketchers can only dream of. If they manage to integrate the operating costs of HEYDUDE without affecting their margins, the company may see profits north of a billion dollars by 2023.
You could be buying the stock at 7 times their 2023 EBITDA. Talk about cheap!
I know that calling a $7 billion “foam clog” company, a contrarian play, is somewhat amusing, but, in a way it kind of is. I’m buying the shares, but staying away from the shoes.
#crocs #crox #heydude #stocks
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