Crocs (CROX -0.52%) might not offer everyone's favorite footwear, but the company has certainly delivered on one important metric for consumer discretionary stocks over the years: The "unique metric." In other words, thanks to its standout product offerings, the kids that loved Crocs in the 2000s and 2010s are growing up, but certainly not outgrowing their love of the foam clogs.
The shoemaker has made a comeback in recent years, and the pandemic seemingly sealed the deal on consumers' preference for comfort and utility. However, despite its strong growth, shares are down some 56% from all-time highs. That's not a reason to ignore the stock, though. In fact, now's the time to ask if Crocs is the next monster growth story in the making.
A strong dollar, inflation, and acquisition expenses take a big bite
Crocs reported year-over-year sales growth of nearly 51% in Q2 2022. However, as all multinational companies have been reporting, a record run-up for the U.S. dollar took a heavy toll last quarter. A strong dollar reduces the value of a sale made internationally when that sale is converted to dollars, and the dollar has been skyrocketing. This is an aftereffect of the U.S. Federal Reserve's interest rate hikes to try and tame inflation. Backing out the effects of foreign currency exchange, Crocs' revenue would have increased nearly 56% in Q2.
Inflation has also been an issue for the company. Air freight shipping expenses have been a particular area of concern called out over the last year. Elevated costs led to a decline in adjusted operating profit margin to 30.1% (versus 30.7% last year). On an unadjusted basis, operating profit margin was 25.7% (30.5% last year), mostly due to integration of the lower-margin HeyDude brand.
But, overall, Crocs did a bang-up job in the second quarter. Profitability on a free cash flow basis should increase going forward as the company digests acquisition costs of HeyDude. The Crocs brand is now expected to notch 9% to 12% full-year 2022 growth, lower than the 20% growth forecast provided before. With Crocs holding onto its massive pandemic-era gains, there's a lot to be excited about regarding the company's new HeyDude lineup.
Get a small, hot shoe brand on the cheap
As of this writing, Crocs stock trades for 8.8 times trailing-12-month earnings, or 23 times enterprise value to trailing-12-month free cash flow. This would be a fair to slightly high price if the Crocs brand were all that there was here. But this isn't just the Crocs brand. HeyDude has been under the company's umbrella since it was acquired in February 2022.
HeyDude sales skyrocketed 96% year-over-year in Q2, making it one of the hottest footwear brands out there and bringing in about a quarter of total revenue in the quarter. Crocs is only just beginning to plug the upstart casual kicks into its distribution channels, and it sees HeyDude achieving $1 billion in annual revenue in 2023 (the expectation for 2022 is HeyDude sales of $940 million to $980 million when including results prior to acquisition).
Besides sizzling expansion, HeyDude is also already highly profitable -- adjusted operating margin was 32.6% on a stand-alone basis in Q2. Of course, Crocs took on a sizable chunk of debt to make the purchase. Total debt stood at almost $2.8 billion at the end of June, leading to interest expense of $33 million last quarter. But given HeyDude's rapid growth and positive impact on the bottom line, this remains a highly promising tie-up between the two casual shoe companies.
The HeyDude brand changes the dynamic for Crocs stock. What would otherwise be a value play suddenly looks like an underappreciated growth stock with tons of upside. It will require some patience, but Crocs could be a monster consumer goods investment to own for the next few years if its primary foam clogs brand maintains steam and HeyDude keeps booming. After the last earnings update, this top shoe stock looks too cheap to ignore.
