What happened
Shares of popular clog and sandal maker Crocs (CROX -2.76%) have been on a severe downtrend so far this year. The stock dropped 18.4% in February alone, according to data provided by S&P Global Market Intelligence. That, along with a further decline to start March, brings the year-to-date drop to almost 40%.
So what
The stock's retreat in the most recent month came as the company reported its fourth-quarter and full-year 2021 results on Feb. 16. While the report detailed an excellent year for Crocs, some additional expenses are anticipated in the near term, which had investors spooked. But longer term, the company just added a new catalyst for growth with a $2.5 billion acquisition, and management still sees strong sales growth continuing.
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Now what
Crocs completed a strong year in 2021 with fourth-quarter revenue growing about 43% over the prior-year period. For the full year, revenue soared to a record $2.3 billion, representing a 67% year-over-year increase.
But investors began to get nervous in the fourth quarter after Crocs announced the $2.5 billion acquisition of privately held competitor Hey Dude. After a sharp run-up in Crocs' share price in 2021, taking on new debt for this acquisition seemed to trigger some profit-taking. The company is funding the $2.05 billion cash portion of the acquisition from a new term loan facility. The balance is going to the founder of Hey Dude in the form of Crocs shares.
Strong demand and profitability helped Crocs shares more than double in 2021. Operating income soared 219% as operating margin jumped 1,410 basis points to 29.5% for the full year 2021.
The company used some of the cash it generated to buy back $1 billion worth of shares in 2021. But it entered into a $2 billion term loan facility and borrowed another $50 million under an existing credit facility to fund the Hey Dude purchase. And in its guidance to investors for first quarter 2022, Crocs sees adjusted operating margin of only 22%, in part due to added air freight expenses. Added costs overall will lead to a drop in operating margin to about 26% for the full year 2022, the company said.
The Hey Dude acquisition closed in February, and investors will now be watching to see if that provides a new catalyst for sales growth. For now, a combination of additional debt and increasing expenses have investors selling the stock after the large 2021 gain. If those added costs end up being just a short-term headwind, and Hey Dude helps keep demand strong, the recent decline in the share price could provide a good entry point for long-term investors.
