It's not surprising that most individual investors tend to follow the largest companies out there. Stocks like Apple, Amazon, and Tesla attract the most media attention, and therefore, there's lots of public information on them available to anyone interested.
But this leaves smaller stocks, including this surging footwear business, as a potentially lucrative hunting ground for investment ideas. Although Crocs (CROX 1.06%), best known for its foam clogs, is just a $10 billion company today, it deserves much more attention than it's getting.
Image source: Getty Images.
Recent success
Crocs just reported third-quarter financial results that blew past Wall Street's expectations. Shares traded up more than 9% immediately following the announcement, showcasing the positive market reaction.
Revenue soared 73% year over year to reach a record $625.9 million. This was the fourth consecutive quarter with sales growth greater than 55%. The direct-to-consumer (up 60%) and wholesale (up 88%) channels both registered healthy gains. For the quarter, digital sales represented just under 37% of the overall business.
Crocs is exceptionally profitable thanks to a 63.9% gross margin and 32.8% adjusted operating margin in the quarter. These are stellar metrics for any business to have and even more impressive when you consider that the average selling price for a Crocs product is only $24.42. Net income was up 148% year over year.
Because Crocs' famous foam clogs are not difficult to produce, the supply chain and manufacturing challenges affecting the global economy are easier for the company to navigate. "We also have a unique advantage in that we can ramp factory production quickly due to the limited inputs and simple configuration of our products," CEO Andrew Rees highlighted on the third-quarter earnings call. He also pointed out that the classic Crocs shoe has just three components.
Adding more air freight capacity, as well as reducing dependence on backed-up West Coast ports, should alleviate logistical problems over the holiday shopping season and into 2022.
Five-year outlook
In September, the Crocs leadership team held its latest investor day event, which outlined a five-year roadmap for the business. Between 2021 and 2026, annual revenue is expected to increase at a compound annual growth rate of 17% to reach $5 billion. That's more than double the estimated $2.25 billion in sales Crocs will generate this year. And according to management, the business will produce an incredible $1 billion in annual free cash flow by 2026.
To achieve this ambitious goal, the leadership team will focus on boosting digital sales to account for half of all business. Quadrupling revenue from sandals, which is a fragmented $30 billion global market, will add much needed diversity to Crocs' business model, which today relies heavily on a single product. Furthermore, continuing to lean on celebrity collaborations and social media marketing to drive brand recognition should help.
On the geographic front, Asia is forecasted to represent 24% of sales in 2026, a far cry from the 13.4% the entire Asia-Pacific region accounted for in the third quarter. As the world's second largest footwear market, China will inevitably play a big part in these global ambitions. Along with the most populated country on Earth, the U.S., Japan, Germany, and South Korea are viewed as Crocs' top markets -- management believes they can deliver 20% annual growth over the next five years.
Is the stock a buy?
If we look to the popular price-to-earnings (P/E) ratio as a guide, Crocs' stock looks ridiculously cheap (P/E of 13.6) compared to the S&P 500 (P/E of 30.5). And based on what I've outlined above, you can easily make the argument the business is better than the average of the broad index, supporting the idea Crocs is undervalued as of this writing relative to its recent success and growth prospects. Wall Street is also optimistic as consensus analyst estimates call for earnings to grow triple digits from 2020 through 2023.
Adding to shareholder returns is a generous buyback program. Crocs expects to purchase $1 billion of its own stock in 2021. For a company whose market capitalization is below $10 billion, this is remarkable for just one year of repurchase activity. And considering the excellent expansion opportunity for Crocs in the years ahead, having such a shareholder-friendly capital-allocation policy is truly outstanding. At the start of 2022, management will still have $1 billion of repurchase authorization remaining.
Buying Crocs stock could be a comfortable way to boost your portfolio's returns.
