Since June, shares of Crocs have fallen by 34%, but I don't believe the company is necessarily in a worse position now compared to then. The advantage for investors here is that as Crocs becomes more of a value stock, management has the opportunity to buy back shares. This reduces the number of shares outstanding, ultimately increasing the earnings per share for investors.
Earning Overview
Let’s break down some numbers today to see just how quickly the company could buy back stock in 2025. To start, let's examine the stock movement. I'll show a chart of Crocs' drawdowns, which simply indicates how much the stock has dropped from its peak. The last peak was June 17, 2024, and since then, shares have fallen by 34%. Another useful metric is the price-to-earnings (P/E) ratio, which is currently 7.7. This is an attractive value for a company like Crocs, and the free cash flow yield is 15.3%. With these kinds of multiples, investors are likely expecting a decline in revenue, margins, and free cash flow in the future. Otherwise, such a high yield would only make sense for a company in growth mode.
Crocs brand and the Hey Dude brand
Looking at the numbers, there's a clear contrast between two segments of Crocs: the Crocs brand and the Hey Dude brand. The Crocs brand is growing steadily, generating significant operating income — $1.2 billion over the past 12 months. However, the Hey Dude brand, which had $1 billion in sales as of June 2023, has seen a decline to $824 million, and it appears that this downturn will continue. A more positive outlook for 2024 would have seen a turnaround for Hey Dude, but this has not materialized. That said, the Crocs brand is roughly three times the size of Hey Dude, and its continued growth is crucial.
Guidance
Now, let's look at management’s expectations for Q4 and the full year in 2024, according to their Q3 report. They expect Crocs brand revenue to rise by 8%, while Hey Dude revenue is projected to fall by 4-6%. Overall, this means flat to slightly up growth in Q4. Despite the slower growth, they anticipate strong profitability, with earnings between $2.20 and $2.28 per share for Q4, and full-year earnings between $12.82 and $12.90. For a stock trading at around $114.55, this represents good value, especially if the Crocs brand continues to perform well and Hey Dude shows signs of recovery in 2025.
Fundamental Analysis
But it’s not just about revenue; we also need to consider the balance sheet and how the company is utilizing its cash. Here's a look at Crocs' balance sheet, with the gray bar representing the total cash and short-term investments — liquid assets they can use for anything. The company has $86.1 million in cash, which seems reasonable considering the need to maintain a certain cash reserve.
Especially considering their cash flow, which I'll detail shortly, Crocs' debt situation is another important factor. While the company doesn’t have much short-term debt due within the next year, it does carry $1.4 billion in long-term debt. This debt has been gradually reduced, as management has prioritized paying it down—an approach they adopted after acquiring Hey Dude. They’ve committed to reducing debt while also buying back shares when the opportunity arises.
Free Cash Flow
Looking at Crocs' free cash flow, we can see that, over the past year, the company generated $94.34 million in cash flow. They’ve used part of that to pay down debt, while also purchasing stock. Over the trailing 12 months, they’ve repurchased nearly $400 million worth of stock. This indicates an aggressive buyback strategy, alongside their debt reduction efforts.
Inventory
Crocs has faced inventory challenges in the past, particularly during periods of high demand or supply chain disruptions. These inventory issues can affect the company in several ways, such as:
Excess Inventory: If Crocs overestimates demand and produces too many products, they may be left with excess inventory. This could lead to markdowns and discounts, reducing profitability.
Stockouts: On the other hand, if Crocs underestimates demand, they risk stockouts, which could lead to missed sales opportunities and disappointed customers. This is especially concerning for a company that relies on its brand image and customer satisfaction.
Supply Chain Disruptions: Crocs’ global supply chain is vulnerable to disruptions, such as factory shutdowns or shipping delays. These issues could affect their ability to maintain an optimal inventory level, leading to both overstocking and stockouts.
Seasonal Trends: Crocs must also manage inventory in line with seasonal demand spikes. For example, warmer weather may drive more sales, and the company must ensure it has enough product available without overstocking during slower months.
Share Repurchase
If management decides to shift some of the funds previously allocated to debt repayment—which they now consider at a reasonable level—they could be buying back approximately $250 million in stock each quarter. With the current stock valuation of about $6.2 billion, that could equate to buying back 10-15% of the shares outstanding annually. This is where the real upside lies: Crocs is a more solid business than many investors believe. While there will be volatility over time, management’s ability to use their cash flow strategically means they can be very aggressive with buybacks, especially when the stock price is lower. They could have already done this in the fourth quarter, as they have authorization to buy back more stock. If they have been aggressive during this recent drop, it means that investors who hold shares today will own a bigger portion of the company than they would have before these buybacks occurred.
Of course, we still want to see improvement in Crocs' core business, particularly with the Crocs brand, as that will drive the company overall. While Hey Dude’s negative revenue numbers are concerning, they’re gradually improving over time. Essentially, the comparisons are getting easier, and it’s possible that Hey Dude could be a growth business again by the end of 2025. It may not be a high-growth business, but if their strategy plays out well, it could significantly improve the company’s fortunes. With the current valuation, management is able to buy back stock at a very attractive level, which is a major opportunity. Overall, I see a lot to like about Crocs right now: the downside risk seems relatively low, while the potential for upside is quite high if Hey Dude begins to turn around.
In the worst-case scenario, management could repurchase 15% of the shares outstanding annually. While I don’t believe the Crocs brand will go away, brands like this typically go through cycles of growth and decline. In a market where many stocks are trading at 10-20 times sales, Crocs offers a well-known, established brand for just 7 times earnings. This presents a great opportunity to take a contrarian position when the market is overvalued. When the market is high, it’s wise to look for undervalued stocks, and Crocs fits that description for me.
Conclusion
The irony is that I’m content to let management buy back stock, ideally at an accelerated rate at the end of 2024, and continue that momentum into 2025. If the business turns around, there will be even fewer shares outstanding. This is how you can have asymmetric potential with a value stock like Crocs. But I’d love to hear your thoughts on the future of Crocs, especially the Crocs brand and Hey Dude. Those two factors will likely play a major role in determining the stock’s performance over the next year.
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