Earnings season is in full swing, and that means valuable information for investors to digest when it comes to current or potential stock holdings. One earnings announcement I'll be paying close attention to comes from Crocs (CROX 1.47%). The burgeoning shoe maker has been on my watch list, but it hasn't made it into my portfolio because I just can't assess whether the brand has staying power or if it's just a fad.
Is Crocs a stock you should consider adding to your portfolio? If the upcoming financial results are positive, I think this is a no-brainer stock to buy.
Image source: Getty Images.
Is the brand here to stay?
I believe that the biggest risk with owning Crocs shares is that the brand could simply fall out of favor with consumers. Crocs did register declining annual sales in 2015, 2016, and 2017, so it hasn't always been rapid expansion for this footwear brand. Having a whopping 82% of sales come from just one item doesn't allow for much in the way of innovation.
The business certainly benefited from heightened consumer interest in affordability and comfort during the pandemic when people didn't have to leave the house much. But in a world where we're out and about a lot more, Crocs' prospects could take a hit.
So far, no signs point to a weakening of the brand. Revenue growth in each of the past four quarters exceeded 55%. And Crocs' recent purchase of casual footwear company HeyDude is a great sign for shareholders because it shows management's focus on diversifying revenue streams. Going forward, Crocs should be less dependent on the success of a single product, which will help keep the brand fresh and top-of-mind for consumers.
Upcoming financial results
Management expects Q4 2021 revenue to come in at $523 million, a 27% year-over-year jump. While this is much slower than the growth registered in prior quarters, it would still mean about a 63% increase in 2021 sales over 2020's total. That's remarkable, and it showcases that Crocs' strong momentum is still here.
Probably the most important information shareholders should pay attention to on Feb. 16 deals with the current global supply chain. With increased use of air freight and less reliance on congested West Coast ports, Crocs has largely avoided any major disruptions. Plus, the fact that its flagship product, the foam clog sneaker, is so easy to assemble helped the business quickly ramp up production when manufacturing needed to be moved to different countries. Most other apparel businesses don't have this kind of flexibility.
And as it relates to inflation, Crocs' impressive gross margin of 63.9% means that it has plenty of pricing power should input costs rise. "We do have some price increases that we took this year that will flow through into next year, and we're proactively looking at other measures and things that we can do to kind of offset any inflationary pressures," Chief Financial Officer Anne Mehlman highlighted on the Q3 earnings call. It appears as though Crocs is handling the economic environment extremely well.
Sketchers, a competitor to Crocs, recently posted sales and earnings per share that beat analysts' estimates. This bodes well for Crocs' performance during the important holiday quarter.
Current valuation
Even though Crocs' stock has fallen 44% since mid-November, it has still gained an outstanding 1,370% over the trailing five-year period. And the shares trade for a ridiculously cheap price-to-earnings ratio of 9. Top footwear stocks like Nike and Under Armour are much more expensive than Crocs based on this data point, yet they don't come anywhere close to its exceptional growth profile.
It's increasingly looking like the Crocs brand is here to stay, making it an appealing stock to own. Investors will get more insights about this when the business reports Q4 financials on Feb. 16.
