One of this week's early winners is Crocs (CROX -0.75%). The maker of footwear that's easier on the feet than it is on the eyes jumped 8% higher on Tuesday after posting better-than-expected results for the first quarter.
It seems Crocs doesn't get the respect it deserves as an investment. Its distinctive yet fashionably polarizing clogs are often the butt of a joke, but its investors seem to be laughing all the way to the bank. The stock is a six-bagger over the past five years, including a 46% surge so far in 2024. Let's take a closer look at why Crocs is taking off after this week's financial update.
1. Performance is relative and not absolute
Revenue rose 7% to $939 million during the first three months of this year. This may not seem like an applause-worthy showing, but it's worth noting where Crocs' head was at back in February. Crocs was targeting top-line results between a decline of 1.5% and an uptick of 0.5% for the first quarter. It was a beat of 750 basis points over the midpoint of its guidance.
It's been a tale of two brands for Crocs in recent reports. They both managed to best the footwear maker's earlier outlook even if its HeyDude business is bordering on onomatopoeia based on investor reactions to the segment's performance. HeyDude sales declined a blistering 17% for the quarter, but Crocs was projecting an even steeper 20% to 23% plunge.
The Crocs brand that thankfully accounts for 77% of the sales mix experienced a 16% increase for the quarter. It was another guidance beat, as the initial forecast was just 6% to 8% in top-line improvement. A revenue beat is good. Making it count as you work your way down the income statement is even better.
Image source: Crocs.
2. The bottom-line beats keep coming
Exceeding expectations isn't a secret recipe. It's just hard to duplicate. Crocs has excelled at keeping its product lines popular through shrewd marketing. It has also somehow kept Wall Street pros in the dark as to its true earnings power.
Three months ago, Crocs was calling for earnings per share to clock in between $2.15 and $2.25 in the first quarter. This would be a significant dip from the $2.61 a share it served up a year earlier. Adjusted net income would actually go on to climb 16% to hit $3.02 a share.
The beat itself isn't a surprise. Crocs has landed comfortably ahead of its guidance on a pretty consistent basis. It has bested analyst profit targets by 21%, 5%, 9%, and now 36% in its last four quarters.
Crocs also raised its full-year guidance, but there is an asterisk to the "beat and raise" results. It went from eyeing earnings per share between $12.05 and $12.50 in 2024 three months ago to a range between $12.25 and $12.73 now. This is a $0.22-per-share revision after a beat of $0.82 a share. It's also sticking to its earlier top-line forecast of mere 3% to 5% growth. It's disappointing to see the goals not move higher on both ends, implying that the final nine months of the year won't be as great as it was modeling earlier this year.
3. The stock is cheap
The positives far outweigh the uninspiring guidance revision. Let's start with inventory, something that can sink a footwear company if it can't move merchandise that can grow fashionably stale. Despite the growing business, inventories at the end of the quarter are 18% lower than they were a year earlier.
It's not the only thing contracting. Crocs is using its hefty profitability to pay down its debt and to a lesser extent repurchase shares. Its $1.7 billion in borrowings is down 24% over the past year. Its fully diluted share count is 3% lower. Throw improving margins into the mix, and Crocs' expanding earnings power is getting even better when it's divided into fewer shares.
Crocs is trading for just 11 times the midpoint of this year's earnings guidance. If it continues to boost that number throughout the year -- as it often does -- the multiple will get even lower unless that stock is moving higher. Shareholders will win either way. Investing in shoe stocks can be risky, but with Crocs defying the non-believers for the last 22 years it's time to stop laughing at Crocs and start appreciating its appreciation as an investment.
