I know that many people will scoff at the notion that Crocs (CROX 1.53%) is a top shoe stock. The lightweight, colorful, clog-style shoes evoke polarized opinions from consumers -- some people love them; others don't.
Don't confuse Crocs' shoes with its stock. While opinions about the shoes are subjective, I can objectively say that Crocs stock is top-notch. For evidence, if you invested $10,000 in it 10 years ago, you would have $78,000 today.
Relatively few stocks have outperformed Crocs over the past decade. And there's good reason for its market-beating performance: Profits have skyrocketed. In 2013, the company had operating income of $63 million. In 2023, it had record operating income of $1 billion.
Some investors are worried about growth. But allow me to explain why the company's profitability points to good things ahead for shareholders.
In this case, I'll take the profits
Crocs already reported financial results for 2023 and offered guidance for 2024. According to management's expectations, the company will grow its revenue by only 3% to 5% in the coming year. That's pretty lackluster.
Ideally, investors would have growth and profitability. But in the case of Crocs, its profitability can allow it to still be a market-beating investment because shares are so cheap to start with. As of this writing, the company has a market capitalization of $7.2 billion, meaning shares trade at only 7 times its operating profit.
Now, here's how Crocs' management is using its profits to increase shareholder value: It's paying down debt at a breakneck pace and repurchasing shares, as the one-year chart below shows.
CROX average diluted shares outstanding (quarterly) data by YCharts.
Crocs took on substantial debt when it acquired fellow shoe brand Heydude for $2.5 billion in early 2022. But I'd say it was money well spent. The Heydude brand added nearly $1 billion to Crocs' top line in 2023 as well as $236 million in adjusted operating profit to the bottom line.
Now, management is aggressively paying this debt back down. It repaid nearly $700 million in 2023. And at this pace, the company could be debt-free again in less than three years, which would give more value to shareholders.
Crocs likely won't go so far as to be a debt-free business. In reality, management has nearly paid its debt back down to where it's comfortable and it will simply pay it on schedule from here. Once it turns its attention from debt, management will likely repurchase shares with the same intensity that it paid down debt.
That's a big deal. Management is authorized to repurchase $875 million in stock as of the end of 2023. At its current market cap, that's 12% of shares outstanding. If its shares were more expensive, it wouldn't be able to repurchase that large of a percentage -- that's why its cheap valuation is important to this discussion.
Let's say that Crocs' management repurchases that much of its stock in 2024 (it probably won't be quite that fast, but it's possible). In this scenario, it's like shareholders are receiving a 12% boost to the value of their shares, all else being equal. That's likely enough of a boost to outperform the market average.
Now, here's the kicker: While Crocs doesn't expect much revenue growth in 2024, it expects stable operating margins. This means it expects more than $1 billion in adjusted operating income yet again in 2024. In other words, as long as its business holds steady, investors can expect around $1 billion in annual profits.
When a $7 billion business such as Crocs can churn out $1 billion in profits on a consistent basis, it's not hard to see why this is a big deal for buy-and-hold investors. The longer this goes on, the more Crocs has at its disposal to reward shareholders.
The price is still right for buying and holding Crocs stock today. The company might be taking a breather for growth, but it has built the company in a way that churns out healthy profits with consistency. That can allow this investment to keep compounding from here.
