Whether you personally love or hate its shoes, Crocs (CROX 1.53%) is a great value stock to buy right now. In fact, I'd say it's my top idea in the value-stock category, based on the company's opportunity, the economics of the business, and the price of the stock today.
I believe the market is wrongly interpreting what's going on in Crocs' business, which has led to a 19% year-to-date decline for the stock. But things like this provide good buying opportunities for investors willing to dig a little deeper.
Why Crocs stock is down
Crocs is a shoe stock known for its clogs and sandals. In early 2022, the company acquired fellow shoe company Hey Dude for $2.5 billion. And thus began Crocs' current dilemma: how best to capitalize on the acquisition.
Shoe companies can sell directly to consumers via their own retail stores and e-commerce channels. But they also sell products wholesale to third-party retailers. The Crocs brand is bigger than Hey Dude, which is part of why the acquisition made sense. The bigger Crocs company could take the smaller but popular Hey Dude to the next level.
Crocs immediately elevated Hey Dude by increasing its wholesale distribution. And revenue for Hey Dude naturally skyrocketed. At the time of the acquisition, management had hoped that Hey Dude could reach $1 billion in annualized revenue sometime in 2024. In reality, Hey Dude nearly reached this milestone in its first year of being owned by Crocs.
Hey Dude's revenue growth was fast-tracked in its first year as Crocs increased its distribution. But now, an opposing force is at work. The economy is cooling, and retailers are generally decreasing inventory. Therefore, wholesale revenue for Hey Dude (and Crocs, for that matter) is coming up short because retailers aren't replenishing inventory as expected. And compared to the prior-year wholesale expansion, current results look particularly weak.
In the second quarter of 2023, wholesale revenue for Hey Dude was down 8.4% year over year. And the market is worried. Many believe this is a sign that Hey Dude's popularity is fading, meaning its rise in recent years was just a fad -- for what it's worth, that's a common problem for shoe companies.
But as I've explained, I don't believe that's the correct takeaway when it comes to Hey Dude. Consider that its direct-to-consumer revenue was up nearly 30% year over year in the second quarter, so there's still consumer demand here. Its wholesale drop doesn't appear to be caused by lost popularity but rather just a one-time hiccup due to the timing of its acquisition.
Why Crocs is a good idea today
The aforementioned challenge has contributed to the decline of Crocs stock in 2023. The good news is that shares now trade at a below-average valuation of just 8.5 times trailing earnings, well below the average price-to-earnings valuation of about 23 for the S&P 500.
S&P 500 P/E Ratio data by YCharts.
Not only is Crocs stock cheap, but the business also has economics worthy of investment. The company is guiding for 12.5% to 14.5% year-over-year revenue growth for 2023, which is a respectable growth rate for a stock that's so cheap.
Moreover, Crocs' management anticipates a full-year adjusted operating profit margin of 27.5% this year. Not only is that a stellar margin, it's also really close to its 27.7% adjusted operating margin in 2022. In other words, the company's key metrics aren't disintegrating despite the headwinds. This is a good reason for optimism.
Finally, because its profitability is strong, Crocs has plenty of money to allocate, and it's making good choices. Management took on about $2 billion in new debt to acquire Hey Dude, but it's quickly paying it down, as the chart below shows.
CROX Total Long Term Debt (Quarterly) data by YCharts.
As a result of increasing its debt load so much, Crocs' management paused share repurchases to focus on reducing its debt. But it's paying it down faster than expected. Therefore, share repurchases are set to resume in the third quarter. And it's authorized to repurchase $1 billion in stock, which would be about 18% of shares at the current price.
In conclusion, Crocs stock is clearly cheap. The business is growing. Its margins are holding strong. Debt is coming down. And profits are being returned to shareholders. These are all good things, and this is why Crocs is my top value stock today.
