While they remain down when measured over the past full year, stock markets rallied so far in 2023. Growth stocks have been some of the biggest winners in this surge, which reflects some rising optimism about short-term economic growth trends.
Crocs (CROX -1.80%) stock has enjoyed bigger gains than most of its growth-focused peers. The footwear specialist's shares have trounced the Nasdaq Composite index so far in 2023, ahead of a major earnings announcement set for late April.
Let's take a look at expectations around that report and whether Crocs stock is a buy today.
Great expectations
Crocs had a fantastic 2022 fiscal year. Sales jumped 54% to $3.6 billion, thanks to strong demand for its core molded footwear products and the acquisition of the "Hey Dude" casual-shoe brand. These gains put the company far ahead of rivals like Nike (NKE -0.74%), which expanded sales at a 19% year-over-year rate in the most recent quarter.
Expectations are similarly bright for the Q1 report in late April. Crocs executives projected in mid-February that sales will rise by between 27% and 30% year over year for the period. Demand should be strong in its direct-to-consumer sales, its international business, and Hey Dude franchise.
Rising profitability is a key pillar of the growth thesis. Shareholders are looking for operating margin to remain near the top of the industry, at about 25% of sales.
What to watch
There are some potential red flags to watch, too. Nike and other footwear peers complained about a highly promotional environment in recent months, which might impact Crocs' margins if demand slows down. This risk is elevated by the fact that inventory jumped recently, rising to $472 million by late December, compared to $214 million a year earlier.
Crocs is also holding lots of debt related to its aggressive acquisition strategy. This debt burden started to fall in late 2022 but remains a concern as interest rates rise. Look for CEO Andrew Rees and his team to discuss their efforts to pay down Crocs' debt in the Q1 earnings update.
Outlook and valuation
Heading into the announcement, Crocs' official 2023 outlook calls for sales to rise by as much as 13% to cross the $4 billion mark. Adjusted profit margin will likely decline for the second-straight year, dropping to 26% of sales from 28% last year and 30% in 2021. Still, hitting that target would keep Crocs in a leading industry position on this key earnings metric.
CROX PS Ratio data by YCharts.
The best news for prospective investors is that Crocs' stock seems cheap, even following its big rally this year. Shares are priced at about 2.3 times sales and 12 times expected earnings. Both metrics are below retailing peers like Nike and Lululemon Athletica.
Crocs doesn't have nearly the same scale and diversity as these companies. And shareholders will take on bigger risks around an earnings decline if a recession develops over the next few quarters. However, growth-focused investors should consider adding the stock to their watch lists. Crocs has a good shot at building on its excellent 2022 momentum this year and likely rewarding shareholders with strong returns along the way.
