Wall Street wasn't thrilled with the latest earnings report from Crocs (CROX 1.53%). The footwear specialist's share prices fell immediately following the late-July announcement that showed slowing growth rates. Crocs also projected declining profit margins in the upcoming quarter, potentially signaling weaker demand trends ahead.
But the overall report was positive, and there were some encouraging signs about the business that investors shouldn't ignore. Let's take a closer look at the results, as well as two green flags about Croc's future some investors might be missing.
Slowing sales for Crocs
There's no escaping the fact that sales trends show slowing. Crocs reported an 11% year-over-year revenue boost following a 34% increase in the prior quarter. But that slowdown is to be expected now that the company has incorporated the HeyDude acquisition into its sales footprint. Growth in the direct-to-consumer segment was especially strong at 27% year over year. In contrast, sales through Crocs' wholesale partners rose by less than 1% year over year.
Still, inventory levels declined, indicating there's no big backup of excess footwear in stores. Executives said the growth results reflected solid demand across the portfolio. "Both the Crocs and HeyDude brands continue to gain share and bring in new consumers," CEO Andrew Rees said in a press release.
Two green flags for Crocs
Two other positive points might have been missed by many investors. For one, Crocs continues to generate industry-thumping profitability. Gross profit margin improved to 58% of sales, in fact, putting it well above shoe-selling peers such as Nike (NKE 0.19%). That rate is approaching the level enjoyed by Lululemon Athletica (LULU 1.31%) and implies significant cost advantages and brand power.
CROX Gross Profit Margin data by YCharts
The earnings strength made its way to the bottom line, too. Operating profit margin held steady at a blazing 30% of sales in fiscal Q2. Nike's comparable figure is in the low teens and Lululemon's is about 22% of sales.
The other green flag is Croc's declining debt burden. Management used some of the excess cash generated this quarter to pay down roughly $300 million of the borrowings it took on to fund the HeyDude acquisition.
As a result, debt levels sit at about $2 billion today and are moving closer to management's target leverage range of between 1 and 1.5 times adjusted earnings. That progress allowed the company to resume spending on stock buybacks, adding another valuable avenue for shareholder returns.
The price is right
The best news is that Crocs' stock valuation doesn't seem to reflect all of this good news. Shares are priced at just 1.7 times sales, near the low for 2023. Nike is priced at 3.4 times sales, for context, and you have to pay nearly 6 times sales for Lululemon.
Sure, Crocs isn't as established as these companies. Its sales and earnings trends will likely be more volatile in the short run, too. But the footwear specialist is generating excellent profit margins, has boosted its 2023 outlook for two consecutive quarters, and is clearing the way for more stock buyback spending ahead. These factors should all support positive returns for investors who decide to add this stock to their portfolios right now.
