When thinking of potential investments in the apparel or footwear industries, Nike and Lululemon Athletica likely to come mind. Nike has certainly long dominated the industry, while Lululemon is a fast-growing premium competitor. And they both have their own investment merits.
Without question, however, Crocs (CROX 1.53%), a much smaller rival, is a shoe stock that needs to be on your radar if it isn't already. The unstoppable business just reported another strong quarter. And this momentum makes its shares look like a screaming buy right now. Let's take a closer look.
Recapping the quarter
During the three-month period that ended June 30, Crocs generated revenue of $1.1 billion, a quarterly record for the company. And adjusted diluted earnings per share (EPS) came in at $3.59. Both of these figures were up 11% year over year, and they exceeded Wall Street estimates.
Revenue growth in the direct-to-consumer channel, which includes company-operated retail stores and e-commerce, was impressive, rising 19.5% for the Crocs brand and 29.7% for its HeyDude line on a year-over-year basis. This benefits the overall business because it raises brand visibility while preserving margins, things that could diminish through wholesale channels.
Management was so impressed with the latest results that it raised guidance across the board. Revenue for the full year is forecast to come in above $4 billion, with a 27.5% adjusted operating margin and adjusted diluted EPS of between $11.83 and $12.22. That's definitely an encouraging sign for shareholders, especially at a time when macroeconomic uncertainty remains elevated.
Key competitive advantage
The most important factor working in Crocs' favor is its strong brand recognition. Piper Sandler, an investment bank, conducted a survey earlier this year asking teenagers what their favorite brands were in a range of different categories. When it came to footwear, Crocs and HeyDude were the sixth- and eighth-most-popular, respectively.
The success of the brand from a financial perspective is evident in the company's Q2 gross margin of 57.9%, which is higher than Nike's. That gross margin was up meaningfully from a year ago. The leadership team cited lower freight costs as an important reason for the improved profitability.
The challenge for any apparel or shoe company is remaining relevant over the long term. If the past few years are any indication, Crocs is doing a fantastic job at keeping consumers engaged and interested in its products. Innovative collaborations with other consumer brands, as well as celebrities, are working wonders to maintain the brand image.
Growth and valuation
The brand should only strengthen as Crocs executes its long-term growth strategy. Management is focused on continuing to grow sales of Sandals line, which it views as a $30 billion global opportunity. The company expects Sandals' revenue to increase 29% in 2023. Having a lower dependence on the popular foam clog is a good idea to diversify revenue streams.
And unsurprisingly, Asia -- and China in particular -- remains a huge opportunity, where growth was much faster than the overall company's. Crocs brand revenue in China soared in the triple digits in the latest quarter.
"I think historically, from a size perspective, we said China was about 5% of the Crocs revenue base," CFO Anne Mehlman said on the Q2 2023 earnings call. "And obviously, our longer-term growth for that as we expect it to grow up to be about 10%, which would be a $500 million kind of base."
Wall Street thinks Crocs can increase its revenue at a compound annual rate of 10% between 2022 and 2027, with EPS rising at a 17% annualized clip. While it's always a good idea to take these projections with a grain of salt, that optimism is still a huge vote of confidence for investors.
For a rapidly growing business that also possesses tremendous profitability, the valuation is incredibly attractive. Crocs shares currently trade at a forward price-to-earnings ratio of just 9.2. This makes the stock an easy addition to anyone's portfolio.
