Crocs (CROX 1.53%) isn't exactly a high fashion brand, but that doesn't mean its plastic clogs don't have fashion appeal. During the pandemic-related shutdowns the business saw a spike in demand, since comfort trumped looks while people worked from home. But there's another story here that investors should be watching -- Asia.
Crocs' largest market is mature
Crocs generates around 70% of its top line from North America. That's hardly shocking, but it does mean that sales in this region, which includes the core markets of the United States and Canada, has an outsized impact on the shoe company's financial performance. Sales there were up 12.5% in the second quarter of 2023. That's actually pretty impressive.
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Some of that is likely the result of the renewed interest in comfort over style that came with people working from home. Investors probably shouldn't expect that level of growth every quarter, noting that companies are pushing employees to return to the office. That's not to suggest that the interest in comfortable plastic clogs will suddenly fall off a cliff. And yet there is the real possibility that office footwear could be more important than shoes you wear around the house if "working from work" crawls back to pre-pandemic levels.
Even from a fashion perspective, Crocs have fallen out of favor before, and that could easily happen again. A fad is a fad, and fads generally come to an end at some point. Given the size and mature nature of the North American market, it pays to keep a close eye on the varied demand trends in the region.
Asia could be Crocs' future
But what about the other 30% or so of Crocs' business? Roughly 15% or so of revenue came from Europe, the Middle East, Africa, and Latin America. That's a huge chunk of the world stage, but sales in this division were down by 1.5%. It wasn't a huge contributor to the business, though given its relatively modest size it only offset a small portion of the benefit provided by the strong North American business.
The other 15% or so of revenue comes from Asia. The story was completely different there, with sales up a huge 39% in the second quarter. True, you have to temper the excitement by the fact that it is coming from a small revenue base. But if Crocs can keep up that pace of growth, Asia could quickly become a very large market for the shoemaker.
There are some issues to keep in mind. On the positive side, Asia has a massive population. China and India are the No. 1 and No. 2 nations with regard to population. So there's a huge, and likely long-term, growth opportunity for Crocs in the region.
On the negative side, China was facing lockdowns for longer than most other nations. So the demand for plastic clogs could still be benefiting from people staying at home instead of going out into the world. Watch the progress in North America to get some idea of what could happen as China's economy opens back up. Also, China isn't known for providing robust protections around counterfeit products. Plastic clogs aren't that hard to replicate -- so demand could be massive, but Crocs may not fully benefit from it.
Look east when you look at Crocs
Crocs is doing well in its core market right now. But that's probably not the most important region for the company's future. A far larger growth opportunity can be found in Asia. If you are watching Crocs, you need to keep a close watch on countries like China and India. Their massive populations could underpin the next phase of Crocs' growth.
