Crocs (CROX 1.53%), known for selling those insanely popular foam clogs, recently reported third-quarter sales of $985.5 million, which were up 57.4% year over year. What's more, the leadership team decided to raise full-year guidance based on these optimistic results. After the announcement, shares popped more than 20%.
How should investors interpret this report that showed strong demand for this top footwear stock? Continue reading to find out if Crocs is a buy right now following its impressive Q3 financial results.
Strong momentum
Crocs was a surprising winner throughout the pandemic as consumers who were spending more time at home searched for comfortable clothing to wear. In 2021, revenue increased 66.9%, a major acceleration compared to the company's growth in previous years. To see sales jump by over 50% in the latest quarter is a welcome sign although Crocs' acquisition of HeyDude, which closed in February this year, certainly helped to boost the top line as revenue in that segment rose 87% versus the prior-year period.
What's impressive about this business is not only its fast growth, but just how profitable it is. In the third quarter, Crocs posted an operating margin of 26.8%. However, the company's gross margin dropped to 54.9% from 63.9% in Q3 2021 due to inflationary pressures and higher freight and inventory handling costs. Further hurting this metric is the fact that HeyDude carries a lower margin than the flagship Crocs brand.
Growth was healthy in all of Crocs' geographic regions, but in the Asia-Pacific market revenue soared 65.5% year over year. And looking at channels, digital sales represented 37% of overall company sales in the quarter.
Crocs remains hugely relevant in an incredibly competitive apparel industry. Credit goes to the business' effective marketing strategy, which relies on various collaborations with celebrities like Justin Bieber and Bad Bunny as well as other digitally focused initiatives. It's working as Crocs is a popular brand among young people. According to Piper Sandler's fall 2022 Taking Stock With Teens survey, Crocs ranked as the No. 5 preferred footwear brand with the Gen-Z demographic, with HeyDude ranking No. 7. That's a good place to be.
In the current uncertain macroeconomic environment, customers might be more inclined to look for better value when shopping for shoes. In the latest quarter, the average selling price of a Crocs brand product was just $23. This low price could lead to steady demand even if the economy worsens in the coming quarters.
In fact, the management team, led by CEO Andrew Rees, is forecasting 2022 full-year sales to be up roughly 50% over the previous year. That's a continuation of strong momentum investors can get excited about.
Looking at valuation
Over the past five years, Crocs stock has produced a superb return of 796%. This absolutely trounces the S&P 500's total return of 65% during the same time period. But with the stock down 30% in 2022, shares trade at a price-to-earnings (P/E) ratio of under 10, which is well below the company's trailing-three-year average.
Crocs' ultra-low valuation implies that the business won't grow much in the future. But this is a flawed assumption. Leadership believes that the company will post total revenue of $6 billion in 2026, up from $2.3 billion in 2021 and $3.5 billion projected for this year. A major catalyst to help achieve this growth will be further penetration of the Asia-Pacific market, and China in particular.
The obvious risk is if Crocs falls out of favor as a result of unpredictable and changing consumer tastes. But as I alluded to earlier, there's no evidence of this happening. Investors should look to open a position in Crocs right now given its attractive valuation, outstanding growth prospects, and strong brand.
