The first time you saw them, you probably did a double-take. Many say they are unfashionable or ugly, and yet, more and more people are wearing them each and every year. Yes, I'm referring to the outlandish footwear made by Crocs (CROX 1.53%), the bright, colorful shoes with crazy designs.
Young people have fallen in love with this storied footwear brand since management invested heavily in celebrity marketing and brand collaborations that led to skyrocketing revenue. But even after putting up strong growth again so far this year, shares of Crocs are down 17% year to date. With the stock trading at a price-to-earnings ratio (P/E) below 10, is now the time to bet big on Crocs stock?
Ugly shoes? Doesn't matter
Crocs was a niche footwear maker for a while, doing around $1 billion in annual sales or less for many years. But then everything changed when Andrew Rees took over as CEO in 2017. Rees employed a two-tier strategy that the company is still implementing to this day. First, Crocs wanted to get its footwear onto the people who can drive shoppers toward the brand: celebrities. Most famously, Crocs has a partnership with Justin Bieber, who is consistently seen wearing the company's shoes. Other influencers from across the board are now sporting the plastic shoes with holes.
Second -- and maybe more importantly -- Crocs has consistently worked with other brands to do trendy collaborations with new shoe designs. For example, today on the Crocs website you can find a Barbie Movie shoe and some Shrek-themed products. These novel designs not only drive repeat purchases from collectors and die-hard customers, but they consistently go viral across social media channels. It is no surprise then to see Crocs exploding in popularity among the younger generation.
The growth in recent years has been impressive. Over the last five years, Crocs revenue is up 263%, hitting $3.89 billion for the past 12 months. A lot of this can be attributed to management's two-tier strategy.
Data by YCharts.
Low costs equate to best-in-class margins
Crocs products are made from a proprietary material called Croslite, which is reportedly odor and bacteria-resistant. But most important to investors is how cheap it is to produce. Even though Crocs sell at a heavy discount compared to traditional brands such as Nike -- an average pair of Crocs might cost just $30 -- the company has much higher gross margins. This has helped to the business drive major margin expansion, even though Crocs is still making heavy investments in marketing. For 2023, management is guiding for adjusted operating margin to hit 27.5%. That's better than what many software companies offer.
Crocs is looking to further expand its margins by driving more of its sales through its direct-to-consumer (DTC) channels, such as the Crocs website. DTC revenue for the company grew 26% year over year last quarter, outpacing consolidated revenue growth of 11%. If this continues, margins should continue to climb higher over time.
Data by YCharts.
Share repurchases are the cherry on top
Crocs stock is cheap at today's prices if you believe the brand's growth is durable. Management expects adjusted earnings per share (EPS) to hit at least $11.83 this year, which gives the stock a cheap-looking forward P/E of 7.6. For comparison, the S&P 500 sports a forward P/E of around 20.
Earnings should only move higher with rising revenue and expanding margins. But the cherry on top will be share repurchases. Crocs has reduced its shares outstanding by around 30% in the last decade, and management plans to further shrink its share count with a recent $1 billion share repurchase authorization. Combine this with strong top and bottom-line growth, and I think Crocs can grow its EPS at a high rate for many years. That makes the stock a great bet at these discounted levels.
