This Company Is No Croc

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Business is on a roll for Crocs Inc. (Nasdaq: CROX)!

The company’s namesake Crocs shoe brand saw second quarter 2022 sales increase 19% year over year.

Chart: Crocs' Annual Revenue

That’s impressive considering that 2021 was a stellar year for the company.

In fact, 2021’s annual revenue far and away beat any figure that Crocs had previously recorded, thanks to Crocs’ acquisition of the new Hey Dude brand, which went on to post explosive 96% growth in the second quarter of 2022.

But while Crocs’ sales are growing rapidly, Crocs’ share price (like those of many companies) has had a tough go in 2022 – down half from its peak in November 2021.

It all begs the question: Does Crocs represent a good value today?

Blowing Competitors Out of the Water

Consensus analyst estimates for Crocs’ earnings per share is $10.15 for 2022.

With a share price of $78 as of this writing, Crocs shares are trading at a price-to-earnings (P/E) ratio of only 7.7.

That ratio seems especially low for a company growing the way Crocs has over the past 18 months.

It isn’t often that you can buy growing companies for single-digit P/E multiples.

But there’s more to like here…

Crocs’ namesake shoes are made from a single ingredient – ethylene-vinyl acetate – which keeps manufacturing cheap and simple.

As a result, Crocs has the fattest manufacturing profit margins in the entire footwear industry, consistently blowing competitors out of the water.

Chart: Crocs Is Outperforming Competitors - Gross profit margin

Those fat profit margins are generating a terrific amount of free cash flow (which I define as cash flow from operations minus capital expenditures). It’s exactly what you want to see from a business.

Last year alone, the company brought in more than $500 million in free cash flow.

However, there is one concern with Crocs…

It spent $2.5 billion acquiring the rapidly growing Hey Dude shoe brand in February 2022.

I don’t mind the acquisition. In fact, I quite like it. It provides Crocs with some diversification, and Hey Dude is an exciting brand and a good fit for Crocs’ business.

Plus, Hey Dude has massively outperformed the expectations of $700 million in revenue for 2022, and Crocs is now expecting $1 billion in revenue from Hey Dude this year.

What bothers is me about the acquisition is that Crocs funded it almost entirely by taking on debt.

In doing so, Crocs has turned its decent balance sheet into one that carries more leverage than I’m comfortable with.

Chart: Crocs' Quarterly Long-Term Debt

Management has acknowledged that this is an unacceptable amount of debt, and it plans to use free cash flow to quickly pay down this acquisition-related debt.

I have faith that Crocs can execute this plan. But personally, I don’t like owning companies that carry a lot of debt and sell a rather faddish product.

With anything fashion-related, you are really rolling the dice when you leverage up your balance sheet.

If either the Crocs brand or the Hey Dude brand falls out of favor with the consumer, this company could get caught wrong-footed with far too much debt.

There is considerable upside here if the brands keep performing, but the elevated risk level keeps me from getting too bullish.

Because of the leverage on the corporate balance sheet, I’m rating Crocs shares as “Slightly Undervalued.”

Valuation Rating: Slightly Undervalued

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Good investing,


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