Crocs Stock: Buy, Sell, or Hold?

Whenever a stock experiences significant growth, determining whether the market has already factored it in is prudent. Therefore, let's examine Crocs' current standing and evaluate whether its stock should be considered a buy, sell, or hold.

Growth by acquisition

In Crocs' first quarter of 2023, the company delivered revenue of $884 million, an increase from $660 million, or nearly 34%, compared to the same period last year. While that appears to be incredible growth for a shoe company, it's important to note that Crocs closed on its roughly $2.5 billion acquisition of casual footwear company HeyDude during the middle of the first quarter of 2022.

Therefore, a more accurate year-over-year comparison would be to look at growth for each of the major brands, which still produced healthy results. Specifically, the Crocs brand grew 22% and the HeyDude brand grew 15% on a constant currency basis (a form of reporting that eliminates the effect of currency fluctuations).

CROX Revenue (Quarterly) data by YCharts.

For comparison, competitor Nike's casual shoe brand Converse saw revenue of $612 million, a year-over-year increase of 12%, on a currency-neutral basis for its most recently reported quarter. Additionally, VF Corporation's Vans brand revenue generated $857 million for its most recently reported quarter, a year-over-year decrease of 12% on a constant currency basis. While neither of these brands offers a direct comparison of products, it shows that Crocs is likely taking market share in the causal footwear segment.

Strong guidance for 2023

Management expects revenue to keep expanding -- growing 11% to 14% in 2023. This recent guidance comes after initial guidance of 10% to 13%, meaning results are exceeding management's expectations so far in 2023.

Moreover, management is projecting $11.17 and $11.73 in adjusted diluted earnings per share for 2023 after initially guiding for $11.00 to $11.31.

One reason Crocs is so bullish in 2023 could be its performance in China, where it saw 110% growth on a constant currency basis in its first-quarter 2023 compared to a year earlier. Again, it's important to note that growth is a little misleading due to the HeyDude acquisition in mid-February 2022.

Still, Crocs CEO Andrew Rees recently noted that China is "definitely doing better than we thought, and we're really excited because obviously it's a big market, and we think that has a lot of future potential."

What could go wrong with Crocs?

Anytime you examine whether a stock is a good investment, it's paramount to also research what could go wrong. For Crocs, the bear case comes down to its debt and inventory.

Most publicly traded companies have debt. However, in a high interest rate environment like the one we are currently experiencing, companies can struggle to pay it down. If something were to go wrong and management were to need to borrow additional money, that net debt could swell.

Image source: Getty Images.

In the four years prior to the acquisition of HeyDdue, Crocs' net debt (total debt minus cash) grew 540% from $120 million to $771 million as the company invested in digital sales, China, and its supply chain. Then, to acquire HeyDude, Crocs had to take a $2 billion loan, draw $50 million under its revolving credit facility, and issue 2.8 million shares to HeyDude's founder. The result left Crocs with about $2.7 billion in net debt.

Beyond the initial success of HeyDude, the good news is that Crocs has already paid down that net debt to roughly $2.2 billion. Additionally, Crocs CFO Anne Mehlman recently reiterated the company's priorities, stating that "with interest rates the way they are, it makes a lot of sense to continue to pay down debt."

CROX Net Financial Debt (Quarterly) data by YCharts.

The other issue facing Crocs is its growing inventory -- a sign that some products might not be selling quickly, leading to possible discounting and higher storage costs. At the end of 2023's first quarter, Crocs had an inventory balance of $476 million, representing a year-over-year increase of 17%.

In response, management asserts that last year's inventory levels were "extremely lean" and are "pretty pleased with what we're seeing at a sell-through from both brands in our wholesale channel at this point in time."

To sum up, while Crocs' debt and inventories aren't trending in the right direction, neither metric is entirely problematic.

Is Crocs stock a buy, sell, or hold?

While Crocs stock has soared over the past year, it is still 36% off its all-time high from November 2021. As of this writing, the stock traded at a price-to-earnings (P/E) ratio of about 12. That's significantly below the S&P 500's average of 16, making Crocs appear to be a rare growth stock priced like a value stock.

If Crocs can maintains its strong revenue and earnings guidance for the remainder of 2023, its stock will continue to fit comfortably into investors' portfolios.