Wall Street is highly pessimistic about the footwear industry today. Most of the biggest players you'd associate with the niche, including Nike (NKE 0.19%), are underperforming the market by a wide margin. Foot Locker (FL 0.23%) has lost over 52% of its value this year, too, as investors worry about its shrinking sales and declining profit margin.
Yet there's another industry competitor that's posting much stronger results. This company recently raised its sales and earnings outlook, in fact, following a solid second quarter. But the stock is down nearly 19% this year while the S&P 500 has increased by 15%. Let's take a closer look at Crocs (CROX 1.53%) and see why investors might want to take advantage of this valuation dip.
Crocs is winning market share
Crocs gave investors a lot to celebrate in its most recent earnings update. Sales crossed $1 billion in Q2, rising 12% year over year after adjusting for currency exchange rate swings. This boost reflected market share gains for both its core Crocs brand and the newly integrated Hey Dude franchise. Growth was especially strong for both segments in the direct-to-consumer business.
One potential weakness worrying investors is that Hey Dude sales to wholesale partners declined 8%. Management reduced the 2023 outlook for this brand, too, while explaining in a conference call with analysts that retailers are being cautious about ordering more inventory given slowing consumer spending trends.
Yet there are other signs of strength for the brand, including strong e-commerce sales. "We remain incredibly optimistic about the long-term potential of the brand," CEO Andrew Rees told investors in late July.
Crocs is boosting margins
Crocs is outperforming when it comes to profits, too. Gross profitability improved by 3 percentage points last quarter to cross 58% of sales. Compare that result to Foot Locker and its 29% margin or Nike and its 44% rate and it's obvious that this business has valuable efficiency and pricing power.
CROX Gross Profit Margin data by YCharts
Again, there was a disconnect between the core Crocs brand and the Hey Dude franchise. Crocs footwear generated a blazing 63% margin in Q2, up 4 percentage points versus last year. The Hey Dude segment's margins were flat at 47% of sales. This gap doesn't mean the $2.5 billion Hey Dude acquisition was a bust. But investors will need to temper their short-term expectations for this part of the business.
Price and outlook suggest value for Crocs stock
Crocs stock still looks like a great value right now. The stock's price-to-sales ratio declined to 1.4 from a 2023 high of nearly 3 times sales. That's a big discount compared to Nike's P/S ratio of 2.9 as well.
And the discount makes even less sense when you consider that Crocs just raised its full-year outlook on both sales and earnings. Despite the weaker results from Hey Dude, overall revenue should now rise by between 12.5% and 14.5% compared to the prior forecast range of 11% to 14%. Operating profit margin is on track to hit 27.5%, up from the previous prediction of 27% of sales.
There's no denying that parts of the footwear industry are under pressure today. Weaker customer traffic at Crocs' retailing partners will mean lower ordering volumes over the short term, as well as potentially weaker profit margins into early 2024.
Yet Crocs is still leading the industry on this key metric, and its direct-to-consumer business is performing extremely well. Patient investors can focus on these broader wins as they hold the growth stock through this time of elevated pessimism in the footwear industry.
