July 18, 2024

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The casual footwear maker Crocs (CROX 4.77%) had high hopes for 2022 as it finalized a $2.5 billion acquisition of HEYDUDE, a competing casual shoemaker. However, its stock is down roughly 50% year to date as the company faces inflationary pressures, supply chain issues, and new balance sheet concerns.
Despite those concerns, Crocs has built a reputable brand that continues to defy fashion critics. Here are three reasons why there’s never been a better time to buy Crocs.
Earlier this year, Crocs acquired HEYDUDE, a competing private casual footwear maker, in a mixed cash and stock acquisition for roughly $2.5 billion. To fund the deal, Crocs took out a new $2 billion loan, ​​drew $50 million under its revolving credit facility, and issued 2.8 million shares (about 4.5% of its shares outstanding) to HEYDUDE’s founder to fund the deal. 
As a result of the acquisition, Crocs’ long-term debt has exploded from about $771 million to roughly $2.7 billion over the past year. And with interest rates continuing to rise, the company will face higher costs if it needs to borrow additional money since its revolving credit line has a variable rate.
Still, if you’re an investor, there’s much to like about the HEYDUDE acquisition. HEYDUDE’s second-quarter 2022 revenue of $232.4 million represented an increase of 96% compared to the first quarter of 2021. Management has guided HEYDUDE to reach $940 million to $980 million in total revenue for the full year. Notably, when Crocs first acquired HEYDUDE, management called for its new brand to cross $1 billion in sales in 2024 — another signal that HEYDUDE is selling better than expected. 
During Crocs’ most recent quarterly earnings report, CEO Andrew Rees highlighted HEYDUDE’s performance and prospects: “The growth of the HEYDUDE brand will continue to be very profitable. Thanks to the simplicity of the product, the ability to drive supply chain efficiencies, and the [selling, general, and administrative expenses] leverage we gain from shared services across both brands.” 
Despite the sell-off in Crocs’s stock, its flagship brand is selling better than ever. For the second quarter of 2022, the Crocs brand sold 32.4 million pairs of shoes, up 11.4% compared to Q2 2021, at an average selling price of $22.39, up 2.5% from Q2 2021. Those transactions translated to $732.2 million in net sales, up 14.3% year over year. 
As for the rest of 2022, Crocs management expects its core brand to deliver $1.27 billion to $1.34 billion in net sales. If those sales come to fruition, Crocs’ full-year revenue would be $2.55 billion to $2.62 billion, or an increase of 14% to 17% compared to 2021.
Like many consumer goods, Crocs faces supply chain issues, which showed up in its Q2 2022 gross margin — a metric that shows a company’s efficiency in converting sales to profits — falling from 61.7% to 57.7% year over year. For comparison, casual footwear competitor Allbirds (BIRD 10.37%) saw its gross margin fall from 56.1% to 36.1% during the same period.
Unlike other casual shoes, Crocs’ “Croslite” material means competitors can’t easily replicate the shoe. And while many fashion critics have laughed at the Crocs brand over the years, there is no denying the brand’s staying power among consumers. 
Despite record revenues, Crocs stock is down 56% over the past year. Its stock looks underpriced compared to its historical price-to-earnings (P/E) ratio — a common metric used to evaluate public companies. Crocs traded at a P/E ratio of about 7.5 as of this writing, well below its three-year average. 
CROX data by YCharts
Additionally, Crocs produces a free cash flow yield — a metric that measures the amount of cash generated from the operations of a company relative to its valuation of about 8%, meaning management should be able to pay down the company’s outsized debt as a result of the HEYDUDE acquisition. 
For comparison, the S&P 500 recently had a P/E of roughly 18 (as of Sept. 23) and a free cash flow yield of 2.04% (as of Sept. 12).
With its impressive sales growth across its core brand and newly acquired HEYDUDE brand, Crocs appears to be a rare growth stock priced like a value stock. Looking ahead, monitor whether management can hit or exceed revenue guidance, maintain gross margins amid supply chain issues, and pay down its newly acquired debt. If it succeeds in those areas, Crocs stock could be a bargain at its current share price.

Collin Brantmeyer has positions in Crocs and SPDR S&P 500. The Motley Fool recommends Crocs. The Motley Fool has a disclosure policy.
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