Crocs (CROX 1.53%), the maker of those popular foam clogs, reported revenue of more than $1 billion and diluted earnings per share (EPS) of $2.87 in the three-month period that ended Sept. 30. Both headline figures were up about 6% year over year, a notable slowdown from previous quarters.
In fact, in each of the last 12 quarters (besides Q3 2023), this shoe business registered double-digit revenue growth, a stellar run. I think that track record still makes Crocs a growth stock.
Nonetheless, its shares are down 48% from their all-time high. Investors shouldn't panic, though. This is a company that should be on your radar as a potential buying opportunity.
Looking at the latest quarter
The Crocs brand continues to show strength. Its revenue jumped 12% in the third quarter. The Asia-Pacific region, a key opportunity to expand the business, saw sales increase by over 26%. It was a different story for HeyDude, which was acquired in early 2022. Revenue dropped 8% as wholesalers cut back on orders.
Looking ahead, management actually expects sales to decline 1% to 4% in the current quarter. And the blame mainly rests on the HeyDude segment. "We recognize our HeyDude performance has fallen short of expectations," CFO Anne Mehlman said on the Q3 2023 earnings call. Just three months ago, the leadership team forecast 16% revenue growth for the HeyDude brand for the full 2023 year. Now, the expectation is for a 4% to 6% gain.
HeyDude represented 25% of overall company sales, so the fact that CEO Andrew Rees mentioned that demand trends haven't been as strong as initially expected will put a dent in revenue potential.
On a positive note, the flagship Crocs brand is still humming along. Revenue there is projected to rise 12% to 13% for the full year. This outlook remains the same as before.
It's all about the brand
For a fashion-related business like this one, you might believe that the troubles at HeyDude are cause for concern. But I think that would be a bit premature. For the company to be sustainably successful, it's all about the strength of the brand. And there aren't any signs that point to a deterioration.
According to Piper Sandler's latest Taking Stock With Teens survey, Crocs and HeyDude were the sixth and seventh, respectively, favorite footwear brands among the Gen-Z demographic. That's an attractive competitive position to be in.
To be clear, management will need to do everything in its power to maintain the brand's image in the eyes of the consumer. For any fashion brand, this is absolutely critical, especially given how competitive the industry is. For what it's worth, this business is still incredibly profitable, carrying a gross margin of 55.6% and an operating margin of 26.2% in the most recent quarter.
The uncertain macroeconomic environment, one that's still characterized by elevated levels of inflation, higher interest rates, and fears about a recession, can have a negative impact on consumer sentiment. And this can be a headwind for Crocs, at least in the near term. On the bright side, once the economic backdrop improves and normalizes, the company is in a position to post strong growth again.
Compelling valuation
Perhaps the most obvious reason that investors should look to buy shares of Crocs is the cheap valuation. The shares are currently trading at a trailing price-to-earnings ratio of just 8.7. That's such a low price to pay for a quality enterprise like Crocs, particularly when Wall Street consensus estimates predict EPS to rise at a compound annual rate of 15% between 2022 and 2027.
Of course, it's always a good idea to take analyst estimates with a grain of salt. But it's hard not to be optimistic when looking at the valuation in addition to the potential for solid revenue and earnings gains. Investors should consider buying the stock while it's down.
