Here we go again. Wild volatility in Crocs (CROX 1.53%) stock is making a comeback. The shares fell hard following a second-quarter 2023 update that left Wall Street with questions, particularly regarding the company's HeyDude acquisition in early 2022.
Is the positive story surrounding Crocs fading, or are these just growing pains? Here are three things you need to know before considering a buy.
1. The Crocs brand is booming in Asia
As Crocs outlined a couple of years ago, its foam clogs and sandals have made little headway in Asia -- a market where the quirky brand should really excel. Management has been putting in the work to expand its footprint across the Pacific to capitalize on demand for comfortable everyday footwear that doesn't break the budget.
It's still early on, but Crocs is now becoming a hit in this quadrant of the world. The foam shoes and sandals reported a 33% year-over-year sales increase in Q2 2023, or up 39% when excluding the negative effects of currency exchange rates. This in spite of a sluggish economic recovery in mainland China after the lifting of COVID-era restrictions.
With sales in North America also undergoing some pressure (more on that situation below), expansion in the East was the primary fuel for the company's overall revenue growth of 11% to $1.07 billion in the latest quarter.
Even after early successes in pioneering awareness of the Crocs brand, the Asia Pacific region still accounted for just 15% of the company's total revenue in Q2. Suffice it to say, Asia still represents a huge opportunity.
2. HeyDudes' growing pains are here
The big news of the last quarter was HeyDude, the casual footwear brand Crocs paid just over $2 billion for a year-and-a-half ago. As of the end of June, HeyDude sales have doubled from where they were two years ago. However, magnifying glasses came out to focus on the brand's pedestrian 2.9% year-over-year revenue growth in Q2.
It's a situation worth monitoring, but I think this is more noise than it is reason for long-term worry. A year ago, as Crocs was doing the initial work to bring HeyDude into the fold, it took the opportunity to fill its wholesale partners' pipeline with a bunch of HeyDude shoes. As CEO Andrew Rees explained on the earnings call, "there is $220 million in non-comparable [HeyDude] sales last year due to the rapid expansion to major U.S. strategic customers" affecting growth rates.
Now, with consumer activity around the globe subdued as a result of inflation, these partners are striking a cautious tone and trying to reduce inventories. But things are still looking up. HeyDude's direct-to-consumer business in North America (a business Crocs controls directly) was up 30%, and sales of HeyDudes from wholesalers to consumers increased 86% from the year prior.
Chalk it up to short-term noise as Crocs works to right-size the operation of its new shoe brand. HeyDude still looks very much like a long-term growth play.
3. Best-in-class profit margins
The result of consistent growth, especially from the flagship Crocs brand, is that the company continues to build its top-notch operating profit margins after the pandemic and the purchase of HeyDude in 2022. Through the first half of 2023, the operating margin was 28.3% (or 29.2% on an adjusted basis), up from just 22.6% last year (or 28.7% on an adjusted basis).
Data by YCharts.
This is great news, especially given some worry last year that HeyDude shoes sell, on average, for lower margins than their rubbery Crocs counterparts. This company is still putting up best-in-class profits in the shoe industry. Management has been using the influx of cash to pay down debt (taken out to purchase HeyDude) -- $299 million-worth in the first half of this year alone. There's still work to do, though, as the balance sheet is still lopsided with $2 billion in debt offset by only $166 million in cash and short-term investments.
Nevertheless, the company's last quarter was good enough that Crocs raised full-year guidance. It now expects adjusted earnings per share (EPS) to be in a range of $11.83 to $12.22, up from the prior guide for $11.17 to $11.73. Crocs stock trades for just 9 times the midpoint of expected adjusted EPS. As far as I can tell, this long-term growth story isn't fading, but just taking a breather.
