Crocs (CROX 1.53%) makes what amounts to plastic shoes. The company's recent financial performance strongly suggests they are increasingly popular footwear. That's very good news for shareholders, and the stock has more than doubled in price over the past year. Before you get too excited, however, it might help to take a step back and examine the company's balance sheet a bit closer.
A strong earnings statement
In the first quarter of 2023, Crocs' top line increased by a huge 34% year over year. That figure should be taken with a grain of salt, though. The company acquired the Hey Dude brand in February of 2022, so there's some noise to dig through. For example, Hey Dude is relatively small compared to Crocs, and simply pushing the newly acquired footwear brand into the Crocs distribution network has been a huge benefit. In the first quarter, Hey Dude's sales jumped by 104% compared to the year-ago period (which was only a partial quarter).
Image source: Getty Images.
And yet it would be wrong to use that fact to dismiss Crocs' solid results. Indeed, the Crocs brand witnessed 19% year-over-year sales growth. On just the international front, the shoemaker's sales were up nearly 32%, hinting at an increasing acceptance of the footwear on the global stage. And while direct-to-consumer U.S. sales increased a relatively smaller 12%, that's hardly a number to complain about.
One key issue to remember is the increasingly difficult economic backdrop, including the painful impact of inflation, which left some major retailers with weak financial results. Crocs' ability to shine in a tough market is, indeed, impressive. The company's adjusted earnings per share rose a remarkable 27% year over year.
And then there's the balance sheet
Investors, however, need to look at more than just the earnings statement when evaluating a company's desirability as an investment. And when you look at Crocs' balance sheet, things don't appear nearly as sanguine.
For example, the company highlighted that it was able to pay down $41.4 million worth of debt in the first quarter. But it has $2.3 billion of debt, so that was just a small improvement. These two numbers alone don't actually give you enough context, but some additional figures and comparisons should help.
For example, Crocs' debt-to-equity ratio, a measure of leverage, sits at 2.3 times. That's down materially from where it was a year ago, but still toward the high side of the company's historical range on that metric. It is also multiples of where other footwear companies are showing up, with Nike (NKE 0.19%) and Adidas at around 0.7 times and Sketchers (SKX 11.20%) at just 0.1. Clearly, Crocs has a lot of room for improvement on the balance sheet.
CROX Debt to Equity Ratio data by YCharts
The big takeaway here is that, should Crocs' shoes fall out of favor, as they have before, it probably won't have the same ability to weather the weak spot as financially stronger peers. That's not a small issue, given that Crocs are something of a fashion product. Indeed, its core offering is nothing more than a plastic clog. Yes, the company is trying to branch out with other styles, and by adding the Hey Dude brand. But Crocs is still largely driven by, well, Crocs, given that the footwear style is now synonymous with the brand.
Time for a fix
In Crocs' defense, it doesn't face any material maturities until 2029. So there's time for it to work on solidifying its balance sheet. Investors should watch the progress, noting how much more leverage this company has today compared to peers. Yes, strong financial results are nice to see, as was the company increasing financial guidance, but don't overlook the worrying news on the balance sheet. If the good performance does not continue, the debt situation could quickly become a far more pressing issue.
