Shares of Crocs (CROX -0.75%), the maker of colorful plastic clogs and other casual footwear, are up 10% following the company's stellar Q3 earnings report. 

While the style itself may be polarizing, the company's performance is inarguable. Skeptics felt that Crocs was merely a 'work-from-home' beneficiary in 2020, but the company defied that logic as shares are up 116% year-to-date in 2021. Since CEO Andrew Rees took the helm in the summer of 2017, shares are up approximately 2000%. Has Crocs reached a high-point here or is this just the start of its journey? While it would be overly optimistic to expect the stock to return as much as it did over the past year on an annual basis, I believe Crocs can continue to be a compound growth story and reward shareholders over the next 5 years. 

Colorful plastic clogs lined up in three rows.

Image Source: Getty Images.

Mastering supply chain issues 

At a time when one can't turn on the news without hearing of supply chain disruptions hampering businesses across all sectors, Crocs seems to have mastered these challenges. On the company's third quarter earnings call, CEO Rees spoke of how the company mitigated supply chain challenges by shifting production from its facilities in Vietnam to China, Indonesia and Bosnia. These efforts were combined with streamlining the number of stock keeping units, or distinct products sold, which helped Crocs zero in on a more focused selection of products available and leverage delivery via air freight to circumvent shipping delays. While none of these solutions is revolutionary on their own, together they constitute an overall solution that worked well in a time when many other companies struggled to address these challenges. 

Crocs posted 73% revenue growth in the third quarter, compared to last year's third quarter, and the company is so pleased with how things are going that it is projecting 2022 revenues to grow by over 20% from 2021. 

Expanding its footprint in Asia

In its earnings presentation, Crocs outlined plans to make growth in Asia a key strategic initiative. Management expects to grow revenue in Asia at a 25% compound annual growth rate over the next 5 years, and for Asia to represent about a quarter of its overall revenue by 2026. This is a good move by the company as China is the world's second-largest footwear market (after the U.S.).

Crocs plans to continue leveraging their successful U.S. strategies, such as celebrity collaborations. Collaborations with high-profile figures like Justin Bieber, Luke Combs and Post Malone brought the company significant publicity in North America over the past two years. All of these collaborations sold out quickly and helped Crocs create some of the scarcity that drives publicity for companies such as Nike and Adidas.

Crocs also plans to leverage digital growth in areas with growing smartphone penetration-sales through digital channels in Asia increased 11% from Q3 2020 to Q3 2021, and have increased 30% as compared to Q3 2019.  

Long-term revenue vision

Crocs has a market cap of just under $9 billion today, trading at a very reasonable 4.5 price to sales ratio on today's revenue. The company has a long-term financial plan to increase revenues to $5 billion (or more) by 2026, which would be more than double 2021's estimated $2.2-$2.3 billion. While this sounds like a lofty goal, management's performance and track record under CEO Rees inspires confidence that Crocs can achieve this growth. With a mix of continued growth in the U.S., accelerated growth in Asia, and the expansion of complementary business segments like sandals, this target is well within Crocs' reach. Sandals are not all that different from Crocs core clog market, so there should be plenty of cross-selling opportunities and synergies to reap in what Crocs views as a $30 billion market. Crocs aims to increase its revenue from its sandals segment by 400% by 2026.

Despite this impressive growth, Crocs currently trades at just 4.5 times sales. Applying the current 4.5 price to sales multiple to the stated $5 billion revenue target would result in a market cap of over $22 billion. This would result in a share price of more than double the current price, and does not account for the market giving a higher multiple to the stock as investors grow to appreciate Crocs as a compound growth story. Given these factors, I think Crocs is a strong buy right now that should continue to provide compound growth for investors over the next five years.