Investors sent Crocs (CROX 1.83%) shares lower in the immediate wake of the company's Q1 earnings report. That announcement showed strong demand trends for its footwear brands, along with excellent profitability and earnings metrics.
Yet, the report failed to meet the high expectations that investors had placed on the stock by sending it roughly 100% higher in the year ending in mid-April. On the other hand, the shares are still beating the market in 2023, up 15% so far this year.
With these fluctuating returns in mind, let's look at what investors can expect from here.
Positive momentum
Crocs' Q1 update contained lots of good news about the business. Demand through late March was strong for the core Crocs brand, which expanded by 22%. The addition of the Hey Dude franchise lifted overall revenue growth to a blazing 36% after accounting for currency-exchange rate shifts. For context, Nike reported just a 19% sales increase on that basis this past quarter .
Crocs continued to maintain industry-leading profitability. Gross profit margin was 54% of sales, or roughly even with a year ago, compared to Nike's 43% rate. This gap suggests Crocs isn't feeling the same pricing and promotion pressure that has hurt other footwear businesses in 2023.
Its operating profit margin was a stellar 28% of sales, on par with the record result from the full 2022 fiscal year. These successes provided management with an opportunity to brag about the business as they lifted the 2023 growth outlook. "Our exceptional first quarter results are a testament to the strength of our brands," CEO Andrew Rees said in a press release.
Raising the bar
Management now sees sales rising by between 11% and 14% this year, up from their prior forecast range of between 10% and 13%. Profitability will also be slightly higher than originally expected, according to the new outlook.
For investors, there are still a few issues worth watching. Crocs' debt level is elevated at $2.3 billion, and it will take time for the company to lower this burden. Its aggressive pay-down plan would be complicated by slowing consumer spending although demand trends appear to be holding strong today.
Crocs might also see lower returns from the record marketing spending on tap in support of a flood of new product introductions this year, particularly in the sandals niche.
If the shoe fits
Still, Crocs stock doesn't look expensive today. You can buy shares for 2.2 times annual sales, compared to Nike's price-to-sales ratio of 4 and Lululemon Athletica's multiple of 6. Crocs stock is riskier than these two retailers due to its smaller size and elevated debt.
But Crocs has a good shot at crossing $4 billion of annual sales this year while maintaining industry-leading profit margins and earnings growth. There's room to build on that success, given that the global casual footwear market sits at about $160 billion today.
It won't be easy for Crocs to secure a large piece of that addressable market. But its movement in that direction, including in 2023, would power more positive returns for patient investors.
