They compete in the same industry, but there are huge differences between Crocs (CROX -1.80%) and Nike (NKE -0.74%) as stocks. Crocs shares bring the potential for much faster growth over the next few years, potentially with expanding profit margins as well. Nike delivers more stability and lower risk on account of its much wider global sales footprint.
But which footwear specialist is the better buy for investors today? Let's dive right in.
Finishing strong
Both companies finished fiscal 2022 on a strong footing. For Crocs, that meant a blazing 65% sales increase in Q4. Sure, most of its revenue gains came from the acquisition of the Hey Dude casual footwear brand. But Crocs still managed a 19% boost in its core Crocs brand for the 2022 year.
"Consumer demand for the Crocs and Hey Dude brands has been exceptional," CEO Andrew Rees told investors in mid-February.
Nike's latest results were more mixed. Sales growth was a strong 19% in fiscal Q3 thanks to high demand in places like North America and Europe. But Nike had to cut prices in many product lines as consumers became more selective. Gross profit margin fell by 3 percentage points, in fact, to 43% of sales. Crocs' comparable figure is comfortably above 50% of sales.
The outlook
Investors are expecting Crocs to continue edging past Nike in these key operating and financial metrics. Sales are projected to rise by as much as 13% in 2023, while Nike's sales are expected to expand at closer to 10%. Crocs' efficient production and marketing process should allow profit margin to land at a blazing 26% of sales, too, or about 10 percentage points higher than Nike.
NKE Operating Margin (TTM) data by YCharts
The gap on this core metric likely helps explain why Crocs shares have performed so much better over the past full year. But investors must pay up for that higher earnings outlook, which might be threatened by slowing economic growth. The stock is up more than 60% since early April 2022, compared to Nike's 8% decrease.
The better value
Crocs stock still doesn't seem expensive based on traditional valuation metrics. Investors are paying just over 2 times annual sales for the business compared to Nike's P/S ratio of 3.8. The same story holds for earnings, where Nike is valued at a premium of 35 compared to Crocs' 15.
There are a few good reasons for the valuation gap, even though Crocs is growing more quickly and is much more profitable. First, the company has a much smaller sales base that leaves it exposed to bigger declines, should a recession strike key markets like the U.S.
Second, Crocs has a much higher inventory today, partly thanks to the Hey Dude purchase, whereas Nike spent several quarters doing the difficult work of reducing inventory to line up better with demand trends. Looking forward, then, investors could risk falling margins and shrinking earnings power with Crocs during an industry downturn. Nike shares are less exposed to this risk. The molded footwear specialist also carries lots of debt because of its aggressive acquisition strategy.
Most investors will prefer Nike stock here, as the global footwear giant is highly likely to thrive through any selling environment that develops over the next few quarters and years. If you're looking for a riskier growth stock, though, Crocs has excellent momentum and a long runway for growth as it aims to cross $4 billion of annual sales in 2023.
