In late December, it was announced that Crocs (CROX -1.59%) would purchase privately held footwear brand HeyDude in a $2.5 billion cash-and-stock deal. "With the acquisition of HeyDude, we are thrilled to add another high-growth, highly profitable brand to our portfolio," said Crocs CEO Andrew Rees in a press release. "We believe HeyDude's casual, comfortable, and lightweight products are aligned to long-term consumer trends and are a perfect fit for Crocs," he continued.
Crocs currently has a market cap of $7 billion, so this is a major deal. Will HeyDude take Crocs to the next level? Or does the potential acquisition signal that Crocs' main product, the seemingly ubiquitous foam clog, is no longer viable to drive sustainable growth over the long term? Let's try to find the answer.
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HeyDude adds diversification
Crocs has no doubt been thriving ever since the pandemic started. In its third quarter (ended Sept. 30), revenue soared 73% from the year-ago period. And that's after seeing sales skyrocket 93% in the second quarter. The business carries an incredible gross margin of 63.9% and a profit margin of 24.5%. Pleased investors have driven the stock up tenfold since March 2020.
Adding HeyDude into the fold brings a level of diversification that I think Crocs now desperately needs. In the most recent quarter, 82% of Crocs' footwear sales came from its popular foam clogs. A heightened focus by consumers on comfort, especially as they spend more time at home, has shone a spotlight on Crocs' flagship product.
Looking ahead, however, Crocs needs to also generate revenue from other items. HeyDude seems to be the answer. The company is projected to register sales of $570 million this year and $700 million to $750 million in 2022. And based on Rees' comments above, HeyDude is already producing healthy profits.
Crocs' management thinks that HeyDude brings the combined entity's total addressable market to $160 billion. According to Piper Sandler's fall 2021 Taking Stock With Teens survey, HeyDude was one of the top fashion brands gaining market share among the Gen Z demographic. It ranked No. 8 in the survey, up from No. 54 two years ago. Crocs also made the list.
Even if we exclude the impact of the HeyDude acquisition, Crocs' management team firmly believes that the business is on the path to reaching $5 billion in annual sales by 2026. That would be more than double the $2.25 billion that was forecast for 2021. The goal is for sandals, whose revenue increased 15% in the latest quarter, to jump at least fourfold in five years. Including the surging growth of HeyDude only adds upside to future sales, profit, and free cash flow. And this has the potential to boost shareholder returns.
It might be time to buy this booming footwear brand
Crocs has definitely been a top stock to own, soaring some 60% over the past 12 months. But historically, the brand has fallen in and out of favor with consumers, making it hard for investors to gauge whether a durable competitive advantage is present. Management recognizes that depending heavily on a single product is not a sustainable strategy. I think HeyDude will ultimately make Crocs a stronger company.
Crocs' stock tanked 12% immediately following news of the deal, demonstrating how shortsighted I believe Wall Street is. Investors should consider the stock, trading at a forward price-to-earnings ratio of just 12, as a screaming buy right now.
