As consumers searched for footwear with a combination of affordability, comfort, and style throughout the pandemic, Crocs' (CROX -2.89%) business soared. And the momentum hasn't faded just yet.
The maker of popular foam clogs posted first quarter revenue and adjusted earnings-per-share growth of 43.5% and 37.6%, respectively. Management cites strong demand as we look ahead. Crocs' most impressive financial metric, though, might be its 49.2% gross margin. Not only is this figure higher than that of competitors like Nike, Under Armour, Skechers, and Steve Madden, but it also highlights just how profitable Crocs has become.
Investors might want to seriously consider this booming footwear stock that currently trades for a ridiculously cheap price-to-earnings (P/E) ratio of just under 5.
Image source: Getty Images.
Making more on every sale
Gross profit margin tells us how much money the business keeps after having covered the costs associated with production and shipping its merchandise out to stores. Think of expenses for materials, labor, and freight. The higher a company's gross margin, essentially the more profitable it is on a per-unit basis. Gross profit margin can also signal other positive characteristics, like being better able to negotiate favorable terms with suppliers, which can allow the company to raise prices.
For a business that makes and sells shoes with an aesthetically simple design, it's incredibly impressive that Crocs is able to generate such a high gross margin. According to management, the company's famous foam clogs, which represented 80% of its overall footwear sales in 2021, consist primarily of three main components, all of which are not difficult to source or assemble. This keeps manufacturing costs low, but it also allows the company to ramp up production quickly, as it did when its Vietnam factories were closed at the height of the pandemic. Saving time translates to saving money.
And according to Piper Sandler's spring 2022 Taking Stock With Teens survey, Crocs is the sixth most-popular footwear brand among the teenage demographic, up two spots from the last survey. Pair low merchandising expenses with a strengthening brand, and it's not difficult to understand why the company's gross margin is near 50%.
In an inflationary environment, Crocs has more wiggle room to weather the storm of higher input costs. At the same time, it has the ability to raise prices in a prudent and strategic manner, and not because the business is forced to in order to maintain its profitability, a situation that could alienate customers.
Even with a cheap valuation today, the biggest question investors have to grapple with is just how relevant the brand can stay. Is Crocs a fashion craze that will fade away faster than it rose to prominence? Or is it here to stay?
While only time can give us the answer, management's forecasts of $3.5 billion in 2022 revenue (up more than 50% year over year) and $6 billion in 2026 revenue (up 159% from 2021) demonstrate that Crocs is poised to thrive in the future.
