Heightened consumer focus on affordability and comfort throughout the pandemic has propelled Crocs (CROX -1.80%) to new heights. The well-known maker of foam clogs has been booming over the past couple of years. Despite the superb performance, however, the stock has taken a beating.
While it's impossible to predict what Crocs' shares will do in such a short time frame, I think it's extremely reasonable to expect the stock to reach $100 (which implies almost 25% upside from the closing price of $83.38 on March 29) by year's end. Here's why that's possible.
Crocs' business is thriving
In 2021, Crocs' revenue jumped nearly 67% year over year to $2.3 billion. Operating income of $683.1 million was 219% higher than the prior year. And with tiny capital expenditures of only $55.9 million in 2021, Crocs was able to generate more than $500 million in free cash flow (FCF) for the full year. This is truly an outstanding financial profile for a business that gets 80% of its footwear sales from one product, the popular foam clog.
Crocs' strength is easily its powerful brand identity. The company's signature shoe is widely recognized throughout the world (its products are sold in more than 90 countries). And this visibility is constantly bolstered by high-level partnerships. For example, Crocs worked with Kering's luxury fashion house Balenciaga to create a product. And Crocs' shoes made in collaboration with Justin Bieber sold out soon after their release.
Both Crocs and Hey Dude, the company's recent acquisition, were noted as gaining market share in Piper Sandler's Taking Stock With Teens survey from last fall. That's a good sign for the strength of the brand, especially because it is resonating with the young Gen-Z demographic.
Image source: Getty Images.
Looking ahead, management certainly doesn't think the remarkable performance is over, as the leadership team has set huge growth targets over the next few years. By 2026, they believe that Crocs will register $6 billion in annual sales and $1 billion in annual FCF, which includes results of casual-footwear maker Hey Dude.
Quadrupling sales of sandals to 30% of the business, while continuing to deploy a digital marketing strategy focused on using influencers and social media, will help Crocs' prospects. Additionally, further penetrating China, the world's second-largest footwear market, will be another valuable growth lever that management can pull.
To say that Crocs is flourishing right now would be a major understatement.
Crocs' stock is getting hammered
With the impressive recent success of the underlying business, you'd think that Crocs' shares would be soaring. This is far from reality. Since hitting an all-time high of $180.57 on Nov. 12, 2021, the stock has cratered 54%. It now carries a market capitalization of just under $5 billion.
It's extremely difficult to come up with an explanation as to why shares now trade at a ridiculously cheap price-to-earnings ratio of 7.3 (as of March 29). Perhaps investors believe that the recent spike in consumer demand since the start of the pandemic will be short-lived and the brand will go out of favor, proving that it was just a fad.
But as I've discussed in this article, it's looking more like Crocs' success is legitimate and sustainable. I think management is taking all the necessary steps to ensure that the brand remains relevant in a competitive footwear market. Add in a continuation of stellar revenue growth, as well as incredible profitability and cash flow, and Wall Street will eventually apply a higher valuation to the stock.
I think the chances are high that Crocs' shares reach $100 by the end of 2022.
