Where Will Crocs Stock Be In 1 Year?

Crocs' (CROX 1.53%) stock is up nearly 70% over the past 12 months as the footwear maker impressed investors with its robust growth in a tough macro environment. Its acquisition of the Italian casual footwear brand HeyDude for $2.5 billion last in February 2022 also significantly boosted its sales over the past year.

But even after that massive rally, Crocs' stock still looks cheap at 11 times forward earnings with an enterprise value of just 2.5 times this year's sales. It's also still trading more than 30% below its all-time high of $180.57 from Nov. 12, 2021. Should investors consider Crocs to be an undervalued play that will soar even higher over the next 12 months?

Image source: Getty Images.

More than a passing fad

Crocs is best known for its namesake brand of foam clogs and sandals. When Crocs went public in 2006, many of its critics dismissed its shoes as a passing fad.

But between 2006 and 2020, Crocs' annual revenue rose from $355 million to $1.39 billion, representing a compound annual growth rate (CAGR) of 10%. Its net income grew at a CAGR of 12%, from $64 million to $313 million.

In 2021, Crocs' revenue surged 67% to $2.3 billion as its sales accelerated in a post-pandemic market. That growth was driven by a 49% increase in the total number of shoes sold, a 12% gain in its average selling prices, and a 64% jump in direct-to-consumer (DTC) revenue, which accounted for 49% of its top line.

In 2022, Crocs' revenue soared another 54% to $3.6 billion. However, that growth was mainly driven by its acquisition of HeyDude, which accounted for a quarter of its top line. Excluding HeyDude, Crocs' brand revenue rose 15% to $2.7 billion.

If we look back at Crocs' quarterly reports over the past year, we'll see its top-line growth accelerated significantly after it acquired HeyDude, but the acquisition and integration also compressed its adjusted gross and operating margins.

Data source: Crocs. YOY = Year over year.

Crocs also took on more than $2 billion in new debt to finance the HeyDude deal, which boosted its total liabilities from $1.5 billion in 2021 to $3.7 billion in 2022. In response, Moody's and S&P both downgraded Crocs' debt.

Yet Crocs believes those near-term sacrifices are worth it for the long-term gains. Management expects HeyDude to generate mid-20s sales growth in 2023, and for the casual footwear brand to strengthen its appeal among younger shoppers while deepening its penetration of the northeastern U.S. and coastal regions.

However, Crocs management expects the namesake brand's revenue to only rise by 6% to 8%. During the fourth-quarter conference call, CFO Anne Mehlman attributed that slowdown to "some conservatism" regarding the macro environment in the U.S. and Europe.

Crocs expects its total revenue to rise 10% to 13% in 2023 as it laps the HeyDude acquisition, and for its adjusted operating margin to drop from 28% to 26%. Analysts expect its revenue and adjusted earnings per share to rise 12% and 3%, respectively.

Will Crocs' stock head higher over the next 12 months?

Crocs is still growing much faster than many other footwear makers in this challenging market. By comparison, analysts expect Nike and Skechers to generate 9% and 8% sales growth, respectively, in their current fiscal years. Nike and Skechers also trade at 30 and 15 times forward earnings, respectively, which suggests that Crocs is undervalued relative to its industry peers with its forward price-to-earnings ratio of 11.

But Crocs could also struggle to trade at a higher multiple as long as its revenue growth is decelerating, its margins are contracting, and its debt levels remain elevated. Therefore, I believe Crocs' downside should be limited over the next 12 months. But it probably won't start beating the market again until the macroeconomic situation improves, its year-over-year growth stabilizes, and it proves its acquisition of HeyDude will drive its long-term growth.