Wall Street can be brutal when sentiment turns negative on a formerly high-flying stock. That's especially true when interest rates are rising, or when fears increase about a recession on the way. Both of these concerns are on top of investors' minds right now, and they've contributed to a sharp price decline for shares of Crocs (CROX 1.53%).
The footwear manufacturer's stock price is down 20% in 2023 compared to an 11% boost in the S&P 500 to date. That's a discount that investors should consider compelling.
While there are some challenges ahead for Crocs' retailing business, this is one growth stock that's likely to stroll back into Wall Street's good graces in the coming years.
Crocs is winning with footwear fans
There was a lot to like in Crocs' latest earnings results. Sales of $1.07 billion in the most recent quarter were up 12% year over year after adjusting for currency exchange rate swings. Growth was strong in the core U.S. market and in the Asian Pacific market into mid-2023.
The Crocs brand is winning market share and is finding room to branch out into complementary molded footwear products like sandals and additional clog layouts. Management raised its 2023 outlook in late July and is looking to cross $4 billion in annual revenue this fiscal year.
CROX Operating Margin (TTM) data by YCharts
Profit margins are also impressive. Crocs converted nearly 30% of sales into operating profits. Executives recently hiked the short-term outlook here as well. Compare the current 27.5% target with Nike (NKE 0.19%), which is generating a profit margin of closer to 17% of sales.
The warning flags for Crocs
It hasn't been all good news with the business, though. Crocs is seeing weaker demand from wholesalers for a few products like its recently acquired casual footwear franchise, Hey Dude. Retailers aren't committing to hold a lot of inventory right now due to weaker consumer spending trends, and that factor is pressuring the short-term outlook.
Hey Dude sales growth was just 3% year over year last quarter and margins were much weaker than they were for the Crocs segment. While management remains bullish about Hey Dude's prospects, Wall Street isn't thrilled to see softer results here so soon after Crocs acquired the shoe franchise for nearly $3 billion. The company is chipping away at the debt it took on to fund that purchase, but there's still about $2 billion remaining on its books today.
Why buy Crocs' stock?
The challenges referenced above seem to be fully baked into the stock price. Crocs shares are trading for just 1.4 times sales and less than 10 times earnings right now. Compare those P/S and P/E valuations to Nike's, which are a much steeper 2.9 and 29, respectively.
Sure, Crocs isn't nearly as established as the athletic footwear giant. A pronounced pullback in the industry would likely hurt its business to a larger extent than Nike's. And it is certainly worth watching the Hey Dude segment's sales and margin trends for signs that the brand is less valuable than management thought it would be when they announced the acquisition in late 2021.
But Crocs stock hasn't earned the 18% stock price haircut it has taken this year. The business is highly profitable, generates ample cash flow, and is producing industry-thumping profit margins at a tough time in the retailing world. The cyclical downturn won't last forever, and when it ends investors will be happy to have this growth stock in their portfolios.
