Plastic footwear maker Crocs (CROX) rocked Wall Street yesterday with a fourth-quarter performance that beat estimates on the top and bottom line. Wall Street wasn’t looking for much, so it was a low bar to step over, but it managed to even top its own guidance.
CROX stock soared 24% on the news as the market welcomed the upbeat results, but it still might trip over its laces.
Crocs surprised Wall Street and itself by how well it did in the fourth quarter, bolstered by rising sales in North America and China.
CEO Andrew Rees said, “Our fourth quarter performance exceeded expectations across all metrics led by Crocs Brand growth of 4%, as the North American business outperformed our plan and China growth accelerated from the third quarter.”
Crocs wore a hole in its shoe walking downhill from the all-time high it hit in late-2021 as an ill-advised acquisition of casual footwear brand Heydude for $2.5 billion weighed heavily on its performance. It took on debt to finance the deal and has burned through a lot of the cash on its balance sheet to pay it down.
The company had predicted Heydude could become a $1 billion brand by 2024, and though it came close, it never quite hit the mark. Sales reached almost $950 million in 2023, but declined 13.6% last year.
Fortunately, Crocs' namesake brand has been a fairly consistent grower. Since 2021, Crocs sales are up 42% to $3.28 billion and represent 80% of total revenue.
In the fourth quarter, the business seems to have stabilized. Although Heydude sales were flat year-over-year, analysts had predicted they would fall again. Strength in its direct-to-consumer market helped offset weakness in the wholesale channel.
International expansion could help Crocs as the channel only represents 35% of total revenue. Heydude isn’t available overseas yet, so introducing the brand could bring new opportunities for growth.
There are headwinds, however. Crocs own sales growth rates have been easing. Where it saw 19% growth in 2022, that fell to 14% the next year, and last year they clocked in at under 10%. That was the first time in five years Crocs didn’t see double-digit sales growth.
Heydude sales rose 6% in the year after the acquisition, but fell hard last year. If it can get organic growth going again, it could be a net positive. Crocs is opening more Heydude retail stores for the shoe, which should raise consumer awareness of the brand. But don’t count on it.
Trade tensions could undermine any progress Crocs is making. Some 58% of the materials for Heydude is sourced from China, and though down from 83% in 2023, tariffs could dramatically increase costs.
While the Crocs brand has less exposure at 25%, and it has flexibility in transitioning more manufacturing to its plants in Vietnam, it remains a risk for the company.
Further, Crocs guidance for the coming year isn’t especially robust. For the first quarter, the footwear stock is calling for sales to dip 3.5%, driven mostly by another double-digit drop in Heydude, but also a 1% decline in Crocs sales.
For the full year, the situation isn’t pretty either. Crocs is guiding Heydude revenues to decline between 8% and 10%, worse than its previous forecast of sales being flat to slightly up for the year.
CROX stock, though looks incredibly cheap. Shares trade at 6 times trailing earnings and just 7 times next year’s estimates. Admittedly, Wall Street isn’t expecting much in earnings expansion over the next five years as its long-term outlook only calls for 2% compounded annual growth rates.
That’s markedly different from the 57% CAGR enjoyed over the past five years. And the stock goes for more than 3 times that projected growth, which is expensive.
Yet CROX also trades at 1.5 times sales and a deeply discounted 6 times the free cash flow it generates.
And Crocs does generate a lot of free cash. It spent $551 million last year buying back 4.3 million shares of its stock at an average price of $127.94 per share. With shares trading hands at $110 a stub, a good argument can be made that it overpaid for the buybacks.
However, Crocs also reduced its debt by $323 million to $1.35 billion. That makes its price-to-EBITDA a reasonable 1.4, and as it further whittles that balance down, it ought to free up more cash for additional buybacks.
So, after Crocs big earnings beat, can it still walk the walk? That really remains to be seen. Although it was able to beat expectations this time around, the coming year still looks challenging.
It might be finding its footing once more, but especially after its big run higher yesterday, I wouldn’t be a buyer yet.
