Crocs (CROX -1.21%) is a business that likely needs no introduction. Its famous foam clogs seem to be everywhere these days, a fashion trend that was only propelled by the pandemic. While the company's financial performance has been strong, the stock has been on a roller coaster ride in recent years, which has been the opposite of the comfort that the shoes offer.
Despite rising 66% over the past six months, Crocs' stock is still down 30% from its peak, set in late 2021. Here's why investors might want to consider buying it now since it's still well off its all-time high.
Selling at a discount
Crocs has been a ridiculously successful investment if you owned it in recent times. Its shares are up an incredible 663% over the past five years, handily crushing the total returns of the S&P 500 and Nasdaq Composite. In fact, Crocs' return is better than other popular shoe stocks like Nike, Adidas, and Skechers over the same period.
This type of gain might make someone quickly assume that the shares are expensive, but this would be incorrect thinking. As of this writing, the stock sells for a price-to-earnings (P/E) ratio of 14.6 on a trailing basis and 11.3 on a forward basis. For comparison's sake, Nike trades at a current trailing P/E of 35 and the S&P 500 trades at a P/E of 18. This puts the maker of foam clogs in the category of a true value stock.
As its share price rose over the years, so did the company's revenue and earnings. Between 2017 and 2022, revenue soared 247%, with diluted earnings per share (EPS) improving from a $0.07 loss to an $8.71 profit. And operating margins expanded rapidly from 2.1% in 2017 to 25.3% last year. Such impressive performance can only lead to satisfying stock gains -- and that is just what investors experienced.
The future for Crocs
Sure, past success is important because it can provide insights into how a business got to where it is today. But what investors really care about most is what the future holds. In that regard, Crocs' financial outlook is bright.
In 2023, revenue is expected to increase between 10% and 13% versus 2022, according to management. While the flagship Crocs brand is forecast to see single-digit growth, sales at the HeyDude segment are projected to jump more than 20%. Should these forecasts come to fruition, they would represent stellar growth, especially in this economy.
However, management expects adjusted diluted EPS to only increase 2.2% at the midpoint in 2023. Investors should expect margins to remain under pressure from elevated freight and inventory handling costs, and higher promotions.
Investors need to be mindful of near-term challenges. First off, Crocs currently has $2.3 billion in borrowings, compared to $771 million a year ago. With the HeyDude acquisition, the business was forced to raise capital from the debt market. Investors might view companies with excess leverage skeptically in this environment.
Second, because Crocs can be viewed as a discretionary purchase, ongoing elevated inflation might pressure demand in the current year. With a greater share than usual of a consumer's wallet going toward necessities, there is less money left over to spend.
But beyond that, Wall Street analysts are optimistic about the company's trajectory. They see revenue totaling $4.8 billion in 2025, up 34% from 2022. And in 2025, EPS is slated to come in at $12.25. This means Crocs currently sells at about 10 times its 2025 earnings, which seems like a very attractive entry point for prospective investors.
