There was a lot of good news in Crocs' (CROX 1.53%) third-quarter earnings release. There was also a significant amount of bad news. The breakdown between good and bad was roughly 75% to 25%, which is to say the Crocs brand versus its Heydude brand.
The future could be brighter, though, if the tough love that's being given to Heydude pays off. Here's why Crocs could be a buy for more aggressive investors.
The good and the bad at Crocs
Sales of Crocs branded footwear rose 11% year over year in the third quarter. North America was the weak spot, with sales growth of "only" 8%. Asia grew an impressive 29%, with sales in China up 90% year over year.
That said, international sales only account for around 40% of the Crocs line's revenue, so the U.S. still has the most material impact on performance. But it's hard to complain about the overall results put up by the Crocs brand.
Image source: Getty Images.
The strong Crocs brand performance drove the company's overall sales higher by 6%. Adjusted earnings per share, meanwhile, came in at $3.25, up 9% year over year. In addition, the company paid down $90 million worth of debt in the quarter, bringing the debt reduction since the acquisition of Heydude to $940 million. (Essentially, management has lived up to a promise of a swift debt paydown.) So it was hardly a bad quarter, overall.
But given the 11% sales increase at the Crocs brand and the overall company sales increase of 6%, there had to be something dragging on the business. That was the recently acquired Heydude brand, where sales declined 9%. This business is roughly 25% of Crocs' top line. Basically, after a quick start, Heydude has been sputtering.
That's one of the reasons why shares of Crocs are down over 35% from their 52-week highs.
Crocs is digging into Heydude
To get to the core of the issue, Crocs is a fashion-oriented company with just two main brands. If management misses on the fashion front or customer trends change (and Crocs can't adjust), the entire company could find itself in the doghouse.
When Crocs bought Heydude, it was able to push the brand into its distribution network, which rapidly increased sales. Now that the initial boost is over, the shoemaker is realizing that it needs to get more control over the distribution of Heydude products. That has involved cutting back in the short term with the hope of building a more solid foundation for the long term.
The problem is that things will get worse before they gets better. The reset of the Heydude business resulted in Crocs lowering its fourth-quarter guidance. In what's generally the most important quarter for a consumer discretionary company like Crocs, overall sales are expected to fall 1% to 4%. The Crocs brand is projected to see sales rise 4% to 7%, which is fine, but Heydude sales could fall by as much as 25%.
The weakness at Heydude, however, is largely being driven by management decisions that it hopes will position the brand for longer-term success. For example, during the company's third-quarter 2023 earnings call, management said it would cut out weaker distribution points and work to limit the amount of product that gets sold into the gray market. (This is basically when an authorized distributor sells into unauthorized channels, potentially creating unexpected competition and pricing headwinds).
If these efforts get Heydude back on the growth path, then the Crocs story will become far more compelling.
A lot rides on the Heydude brand
The Crocs brand accounts for roughly 75% of sales at the company, and all third-quarter good news came from there. The rest of the top line is tied to the Heydude brand, and the news there was pretty uniformly bad.
It may just be a bit of indigestion following the rapid growth after that brand was purchased. If that's the case and management can turn the tide at Heydude, Crocs would go from a one-trick pony to a more diversified apparel maker. For more aggressive investors, that could be worth a closer look.
Investors need to recognize the importance of fashion trends to the company's core product and believe that its namesake shoes will remain desirable to consumers. If that doesn't hold true, even a strong Heydude turnaround won't be enough to offset the top- and bottom-line hit.
