After a pandemic-fueled surge that helped propel sales 13% in 2020 and 67% in 2021, Crocs (CROX 1.47%) has been facing a bit of a slowdown. Revenue was up just 15% in 2022 (excluding the HeyDude segment, which was acquired in February 2022), and in the latest period (first quarter 2023, ended March 31), it was the same story. Many businesses are seeing similar trends as consumer spending softens due to the uncertain macro environment.
But Crocs has still been an outstanding investment in the past, rising 233% since June 2020. Here's why I think the shoe stock might be a great portfolio addition as we set our sights on the next three years.
Diversifying the business
Any investors who are even remotely familiar with this company would probably know that the foam clog is what has driven financial results in the past. After all, Crocs is almost entirely known for this single product. But the company sells other things too, like sneakers, boots, and socks, which many investors might not know.
Relying on one product for your success is not a good business strategy, especially when it comes to apparel or footwear. That's because consumer tastes are constantly changing, and fashion trends are fickle. To be fair, the foam clog has proven to be extremely popular, particularly in recent years. But the leadership team has made strategic moves to better position the company for sustainable relevance.
As I noted earlier, in February 2022, Crocs completed the purchase of Italian casual footwear maker HeyDude for $2.5 billion. The goal was to bring in another fast-growing brand under the Crocs umbrella, allowing HeyDude to benefit from the larger organization's marketing and distribution capabilities. HeyDude is no slouch, either. Its sales jumped 15% in Q1 2023. And according to Piper Sandler, it's the eighth most popular shoe brand among teenagers.
Diversifying its sources of revenue is exactly what Crocs needs to keep its growth up in the years ahead.
The stock has upside
When the Federal Reserve made it clear that it would hike interest rates to curb soaring inflation toward the end of 2021, the stock started to decline. This is what many businesses experienced with their share prices around the same time. That's because higher interest rates are a headwind for stock valuations. And the market is a forward-thinking machine.
Crocs wasn't spared. Although it has been a winning investment over the years, its shares are still down 37% from their November 2021 all-time high. This means that investors have the opportunity to buy the stock at a price-to-earnings (P/E) ratio of just 11 right now. That's an attractive valuation any way you look at it. It's cheaper than the stock's trailing three-year average P/E multiple of 14.
It's hard for investors to come up with a valid reason as to why shares trade at a discount to the broader market. Crocs is clearly a wonderful company. Its gross margin is better than Nike's and in the same ballpark as that of premium athleisure provider Lululemon Athletica. What's more, Crocs' double-digit sales growth has been superb.
The outlook also seems promising. According to Wall Street consensus analyst estimates, revenue should increase at a compound annual rate of 10.6% over the next three years through fiscal 2025. Management also gave long-term financial guidance last year, when they said they expect annual sales to hit $6 billion by 2026. Getting growth from HeyDude, boosting sales of sandals, and further penetrating China, the world's second biggest footwear market, will be key factors in achieving higher revenue in the future.
Given Crocs' attractive valuation, coupled with its potential for outsized growth, investors are working with the clear ingredients for stellar share-price performance. This stock has the makings of a big winner over the next three years and beyond.
