Investors aren't sure what to make of Crocs (CROX 1.53%) stock right now. The footwear specialist looks like a screaming buy on some measures, considering its fantastic growth through early 2023.
On the other hand, potential shareholders would be taking on some significant risks with this stock that just don't apply to industry peers like Nike (NKE 0.19%). These issues help explain why the stock is trailing the market so far in 2023.
With those trade-offs in mind, let's take a look at whether investors should be adding Crocs to their portfolios right now.
Good growth in Q1
The stock fell hard in the wake of Crocs' Q1 earnings update in late April. Yet that announcement showed no sign of weakening operating momentum.
Instead, Crocs reported a 19% sales boost in its core business, roughly on par with the expansion rate that Nike reported a month earlier. Crocs' overall revenue jumped 36% after including the recently acquired HeyDude division.
Shoppers are enthusiastically buying staple footwear products, along with new releases across the product line. "We see a strong consumer response to our new clog and sandal introductions," CEO Andrew Rees said in a late April press release.
Protecting margins
Nike has noted increasing pricing pressures recently, due to a more promotional sales environment. Yet Crocs business isn't being hurt by these headwinds, partly because there's less competition in its niches.
CROX Operating Margin (TTM) data by YCharts.
Gross profit margin rose last quarter, in fact, thanks to rising prices, strong demand, and declining freight expenses. Crocs reported a 54% margin, well ahead of Nike's 43% rate. Operating profit landed at a healthy 27% of sales, making it one of the industry's most profitable companies today.
Risks and value
These financial wins helped convince management to raise its 2023 outlook on both sales and profitability. Yet there are some important risks for investors to consider, including Crocs' exposure to any slowdown in consumer spending trends. Its smaller sales footprint amplifies this risk, and so does the company's elevated debt.
Crocs' debt burden jumped in preparation for the HeyDude acquisition and is currently sitting at about double the rate that management is comfortable with over the long term. For that reason, executives are prioritizing debt repayments over stock buyback spending today. The final key risk is that the HeyDude acquisition fails to deliver the long-term returns that management had when they agreed to buy the casual-footwear specialist for over $2 billion.
The good news is that investors aren't being asked to pay a huge premium for Crocs shares right now. Instead, the stock is priced at less than 2x annual sales, compared to a price-to-sales ratio of over 3 for Nike. Sure, that discount reflects its riskier business and the likelihood that sales growth will slow sharply in 2023, compared to last year's soaring gains.
But investors who don't mind volatility should consider buying this successful growth stock, even as it works to reduce its debt. Crocs' finances are improving, and its sales trends reflect steady market-share gains across its widening portfolio. Continued wins here should power positive returns for patient investors.
