As the S&P 500 just came off its worst first half of any year since 1970, many outstanding businesses are falling with the broader index. The easy monetary policy by the Federal Reserve has come to an end as central bankers hike interest rates in an effort to curb soaring inflation across the economy. The result is that investors aren't comfortable taking on as much risk as they previously were.
One such stock that has gotten absolutely hammered is footwear brand Crocs (CROX 2.15%), with shares down more than 50% in 2022. However, I believe there are three important reasons this stock will turn things around and bounce back.
NASDAQ: CROX
Key Data Points
1. Crocs is growing quickly
For starters, Crocs has proven that it can grow its business at a rapid pace. A surprising pandemic winner, the company saw its revenue and net income increase 67% and 132%, respectively, in 2021 -- continuing the strong gains they posted in 2020. Consumers were interested more in comfort and affordability when it comes to their apparel choices, which is what Crocs delivers.
Management believes that the business has an extremely bright future, predicting that by 2026 Crocs will generate $6 billion in annual sales (compared to $2.3 billion in 2021). The recent acquisition of Italian casual footwear maker HeyDude should help Crocs achieve this goal by adding another profitable, high-growth brand into the mix.
There are other key expansion areas as well. Crocs looks to quadruple sales in its sandals business over the next four years. Furthermore, in China, the world's second-biggest footwear market, Crocs hopes to continue taking market share. By 2026, the plan is for 25% of overall revenue to come from Asia. Additionally, it hopes to see digital sales grow 25% per year between now and 2026.
2. Crocs has a strong brand
Being perennially successful in the fashion industry is a tough game because consumer tastes and preferences are constantly changing and evolving. And Crocs, which gets the bulk of its revenue (more than 70%) from the sale of a single product, the foam clog, has to figure out how to buck the trend and be successful for an extended period of time.
The business employs an effective marketing campaign that has worked well in recent years to keep the brand strong. Crocs relies on high-visibility collaborations with top celebrities, like Justin Bieber and Bad Bunny; luxury fashion houses, like Balenciaga; and popular consumer brands, like Hidden Valley Ranch, to come up with creative shoe designs that sell out quickly. What's more, leaning on digital and social-media channels is a focus, too.
This strategy has worked financial wonders for Crocs. In Q1 2022, the company's gross margin, measuring the amount of profit a business keeps once per-unit production, manufacturing, and shipping costs are taken into account, was a remarkable 53.7%. That's higher than the likes of industry heavyweights Nike and Under Armour.
3. Crocs stock is cheap
The last and probably most obvious reason that Crocs' shares can turn things around is their incredibly low valuation. As of July 22, the stock traded for a price-to-earnings ratio of under six, significantly below the average multiple of 36 that Crocs has sold for since it went public in February 2006. For a company with high growth and a strong brand, I see no reason for this depressed valuation.
Currently, Crocs' shares are cheaper than Nike and Under Armour, as well as smaller rivals like Skechers and VF Corp. This is despite the fact that Crocs posted a substantially greater sales increase in its latest quarter than any of these other businesses. This disconnect is what investors should focus on now.
Furthermore, if Crocs does hit $6 billion in annual revenue by 2026, management estimates that free cash flow (FCF) should be at least $1 billion. Based on Crocs' market cap of $3.9 billion, the business as a whole is selling for less than four times 2026 FCF. That seems like a ridiculous bargain. It's safe to say that the pessimism surrounding the stock is at an all-time high.
All in all, Crocs has some positive factors going in its favor that should help its stock bounce back eventually. Investors should take notice.
