Crocs (CROX 1.53%) recently reported revenue and earnings that came in better than analysts' expectations. This partly helps explain why shares are up 23% so far in 2024, outperforming the 4% rise of the S&P 500.

If we zoom out, this shoe stock's performance is remarkable. Crocs' shares have soared 309% and 629%, respectively, in the last five and 10 years despite still being down 36% from their peak price.

Investors might be ready to immediately add the company to their portfolios. But before doing so, it's best to understand what Crocs' biggest risk might be.

It's all about the brand

Crocs operates in a very difficult industry. Selling apparel and footwear is not only extremely competitive because there is a vast number of choices for consumers, but tastes and preferences are also always changing. What was fashionable a decade ago might not be today.

This means that for a business to find lasting success and relevance, it must maintain its brand image. Just look at Nike. It has been a consumer favorite for decades. This is what fashion enterprises should all strive to achieve.

More than a decade ago, Crocs was running into issues due to a glut of inventory and overextending its distribution capabilities. The financial crisis made things worse. An investment from a private equity group in 2013 followed.

But since Andrew Rees, the current CEO, became president in 2014, Crocs has prioritized its brand's standing in the industry. The company today relies heavily on social media and other digital marketing initiatives. Crocs is also known for launching creative partnerships for its flagship foam clogs, helping to drive consumer interest and keep things fresh.

Crocs is currently the sixth-most-popular footwear brand among the Gen Z demographic in the U.S. And HeyDude, the casual shoemaker it acquired in early 2022, was seventh on the list. That's certainly a positive sign.

Investors looking to ensure the brand is well-positioned should pay attention to some key metrics, like average selling prices (ASPs), gross margin, and inventory. Crocs reported a 10% bump in ASPs, a gross margin of 55.8%, and an 18% decrease in inventory in 2023. These numbers are trending in the right direction.

Consider buying

It's true that Crocs is experiencing pressured demand right now, at least when compared to prior years. Sales were up 11.5% in 2023, with estimates for a 4% increase at the midpoint for this year. However, this is due to the uncertain macroeconomic environment and state of the consumer. People just aren't spending like they were a couple years ago.

This business still has a lot of factors working in its favor from a fundamental perspective. Not only is Crocs incredibly profitable, but top-line growth should stabilize over the long term. And management is fully focused on maintaining the brand image, or at least making sure that it doesn't tarnish.

But what should really excite prospective investors is the current valuation. Shares are trading hands at just 9 times trailing earnings. You might assume that such a beaten-down valuation indicates a business that is struggling terribly. This just isn't the case with Crocs.

If we assume that its price-to-earnings ratio rises to be in line with the broader S&P 500's multiple of 23 over the next five years, this adds more than 150% potential upside for shareholders between now and 2029. And this doesn't even include the possible benefits of sales and profit growth. Even incorporating the risk that the brand could fall out of favor, Crocs looks like a smart buy today.