When you think of the footwear industry, names like Nike and Adidas probably come to mind. Their global appeal, bolstered by high-priced endorsement deals with superstar athletes, is apparent. But a lesser-known business in the space, Crocs (CROX -2.74%), is registering fabulous growth that even the industry giants would be jealous of. Investors should take a look.
Here are five things you need to know about this booming stock.
1. Products and geographies
In the most recent quarter, 82% of Crocs' revenue came from its popular clogs, up from 72% in the same period last year. Although this is the company's bread-and-butter product, management wants to grow its sandals business, which represented just 13% of sales, going forward. Rounding out the product offering are Jibbitz, small customizable charms that consumers can purchase to attach to their Crocs.
Accounting for 72.8% of the business, the Americas segment is not only the largest but also the fastest-growing (up 94.5% year over year in the third quarter). The Europe, Middle East, and Africa and Asia-Pacific regions each represented just over 13% of overall sales.
The leadership team, however, views Asia as the biggest long-term expansion opportunity. By 2026, roughly one-quarter of Crocs' sales are expected to come from the continent.
2. Distribution channels
Like most consumer brands, Crocs utilizes both direct-to-consumer and wholesale channels to move its products. The former, which includes company-operated stores and a website, grew sales 60.4% year over year. The latter, consisting of third-party brick-and-mortar retailers and e-commerce sites like Amazon and Zappos, increased revenue 88.2%. As of Sept. 30, the business had 364 total retail locations open.
Crocs also has a sizable digital presence as 37% of revenue came from this channel. And of the three previously mentioned regions, surprisingly, the Americas has the lowest digital penetration. In five years, management wants half of all sales to come from digital.
3. Marketing strategy
To boost their popularity, Crocs designs its products in collaboration with anyone and anything. Besides working with musical artists like Bad Bunny or Justin Bieber, the company has collaborated with Spanish luxury fashion house Balenciaga, Hidden Valley Ranch, the movie Cars, and even Yum Brands' KFC. There's really a Crocs out there to fit anyone's style and interests, no matter how unique.
In the latest Piper Sandler Taking Stock With Teens survey, Crocs was the sixth-most popular footwear brand, a clear indication this marketing strategy is resonating with younger consumers. Five years ago, the brand was 34th on that list, so this is quite the improvement.
4. Financial metrics
For a company that offers items at an average selling price of just $24.42, Crocs boasts some fantastic financial metrics. Its gross margin of 63.9% far exceeds Nike's 46.5%. And Crocs' 32.4% operating margin is also extremely impressive. The company went from a net loss of $83 million in 2015 to a profit of $313 million in 2020.
In any given year, the business plans to spend approximately 3% of revenue on capital expenditures. Having a simple and easy-to-make product lineup that doesn't require much in the way of innovation or technology affords Crocs the ability to keep this spending low. And this leads to free cash flow piling up. It's no wonder management plans to finish 2021 having repurchased $1 billion worth of shares this year.
5. Growth outlook
To say management is optimistic about the future would be an understatement. Not only do they forecast $5 billion in annual sales by 2026, but by that time, the company should also be generating $1 billion in annual free cash flow. Boosting digital sales, taking market share in Asia, pushing into the sandals category, and continuing to rely on savvy marketing collaborations is the recipe to achieving these jaw-dropping financial targets. Getting to a more balanced revenue mix with the U.S., China, Japan, Germany, and South Korea as its top markets will support this ambition.
Even after skyrocketing nearly 2,000% over the past five years, shares of Crocs still sell at a reasonable 21 times forward earnings. This is in line with the S&P 500, but for such a fast-growing business that's pulling all the right strings to raise its brand awareness and grow its reach long term, the valuation looks attractive.