Over the past five years, Crocs (CROX 1.53%) stock has been a huge winner for investors -- surging 665% even after falling 31% from its peak. That's a ridiculous return which crushes the broader market's results by an insanely wide margin. Known for its popular foam clogs, the company is still registering outstanding results at a time when economic uncertainty is surging.
But does this footwear stock still have room to run -- and become a potential multi-bagger for your portfolio, repeating its past success? Let's take a closer look.
Diversifying the product line
In 2022, Crocs was able to increase its sales by 53.7% on a year-over-year basis. And this was on top of a 66.9% jump in 2021. The company's gross margin of 52.3% and operating margin of 23.9% in 2022, although lower than the prior year's figures, are still superb for any business, let alone an apparel company. On the surface, this is a rapidly expanding and profitable enterprise.
But there is one issue that shareholders should monitor. Last year, 77% of the Crocs brand's revenue came from a single product, the foam clog. Now, this isn't necessarily a bad thing on its own. Over the past few years, consumers have been drawn to affordable and comfortable clothing, a trend that might have been spurred by the coronavirus pandemic and the popularity of people working from home. And this has boosted Crocs' prospects, but it does leave the business overly exposed to the success of one item. And if we know anything about consumer behavior, it is that change is a constant.
That's why management, led by CEO Andrew Rees, decided to acquire casual footwear company HeyDude in late 2021 in a $2.5 billion deal. HeyDude is an Italian shoemaker, but its merchandise is popular here in the U.S. According to the fall 2022 Taking Stock With Teens survey conducted by Piper Sandler, HeyDude was the seventh most popular footwear brand among teenagers. For what it's worth, Crocs was number five on this list. That's a pretty good indicator of how strong these brands are, especially with such a valuable demographic that can be lifelong customers.
In order to set Crocs up for lasting success, diversifying the product lineup was essential. The added benefit is that HeyDude gains from Crocs' global distribution and marketing capabilities, and Crocs is better off thanks to a larger potential customer base. In 2022, HeyDude's revenue (post-acquisition) of $896 million was up 54% year over year, far outpacing the 14.9% growth of the Crocs brand.
Mixing value with growth
But one of the biggest risks to keep in mind is that the company faces a lot of competition in the footwear market. There are well-known names like Nike, Adidas, and Under Armour, and there are more direct rivals like Skechers, VF Corp., and Deckers. Moreover, there's a very real possibility that the brand simply falls out of favor with consumers, a constant worry with these types of companies.
As the financials show, however, Crocs' business has posted fantastic growth in recent years, continuing throughout 2022. And management expects revenue of between $3.9 billion and $4 billion in 2023, good for an 11.5% jump (at the midpoint). "We anticipate another record year in 2023 with growth expected to be led by sandals and international for the Crocs Brand and increased U.S. market penetration for HeyDude," Rees highlighted in the Q4 2022 press release.
Looking even further out, it's clear that Wall Street is very optimistic. Consensus analyst estimates call for sales to increase at a compound annual rate of 12.2% between 2022 and 2026, with operating leverage resulting in earnings per share rising at a 19.2% annualized clip over that time. This outlook should please shareholders.
If the growth prospects aren't enough, consider that Crocs' stock trades at a price-to-earnings ratio of just 14. Crocs shares look like a buy because they are selling at such a cheap valuation, and the company is posting outstanding growth and is incredibly profitable. That's a wonderful multi-bagger recipe which should please investors.
