In October, I believed that Crocs (NASDAQ:CROX) was making steps again, even as the company cut the full year guidance in a relatively modest way at the time. I liked the strong earnings power, badly needed to deleverage a bit following the HEYDUDE acquisition. This meant that the investment proposition was quickly de-risking, as non-demanding valuations made me quite upbeat on the shares here.
Creating Some Perspective
In the 2010s, Crocs was a business which saw real struggles as the business generated just over a billion in sales at the time on which low single digit margins were reported. This was nothing to get excited about, after a boom period in the 2000s, as Blackstone even had to invest into the business to provide a capital infusion as Crocs carried along a bit of debt.
Pre-pandemic, Crocs was a $1.2 billion business with margins reported around 10% of sales, as shares traded around the $40 mark. The pandemic provided a huge boom to the business as 2020 sales rose by 13% to $1.4 billion with operating margins nearly doubling to 19%, allowing earnings per share to more than double $3 per share.
Originally, the company guided for earnings to advance to $4 per share in 2021, pushing up shares to a high of $180 per share, in part by incredible momentum which pushed up earnings power to an annualized $10 per share during the year. That operating and share price momentum meant that a then valued $11 billion business announced a $2.5 billion deal to acquire HEYDUDE late in 2021 around the peak.
Shares fell overnight to $120 upon the deal announcement, as I raised some flags around that deal. In the end, 2021 sales rose 67% to $2.3 billion as earnings came in at $8 per share, with more improvements seen for 2022 (excluding HEYDUDE). In fact, organic growth was seen around 20% for 2022, which together with HEYDUDE might imply that 2022 sales could rise to $3.5 billion, with earnings seen around $10 per share.
By the summer, shares had fallen to the $50 mark, even as the company had seen a solid first quarter, with net debt reported at $2.7 billion, a substantial number which just trailed the market value of the shares, as investors were clearly depressed, fearing a reversal to pre-pandemic operating performance.
By October, when I last looked Crocs, shares had rallied to the $80 mark. This came after the company saw full year sales now coming in at $3.45 billion (after raising the original $3.5 billion guidance alongside the first quarter earnings release) with earnings seen at $9.90 per share.
With shares trading around 8 times earnings and leverage seen around 3 times EBITDA, appeal was evident in my eyes, even as organic sales were moving down, yet I concluded to hold onto my position.
Partial Boom Bust
While I am glad to hold onto my position, as shares rose to the $150 mark in April, they have fallen quite a bit to $112 per share here. In January of this year, Crocs announced preliminary full year sales for 2022 at $3.55 billion, as the company guided for a 10-13% increase in 2023 sales to $3.9-$4.0 billion.
In February, the company posted full year sales at $3.55 billion on which the company posted operating profits of $851 million and GAAP earnings of $540 million, equal to $8.71 per share. Adjusted earnings came in as high as $10.93 per share, set to rise in a much more modest fashion to $11.00-$11.31 per share in 2023, all while net debt was down to $2.1 billion already.
A peak of $150 in April happened the day ahead of the release of the first quarter results as shares fell overnight to the $120s upon the release of the numbers. First quarter sales rose by 34% to $884 million (and remember that the HEYDUDE deal closing during the first quarter of last year) which makes comparables from now onwards more difficult. GAAP earnings essentially doubled to $2.39 per share as net debt was stable near $2.2 billion following some working capital changes given the seasonality in the business.
While the company only guided for 6-9% revenue growth in the second quarter, it upped the full year sales guidance by a point to 11-14%. Full year adjusted earnings are now seen between $11.17 and $11.73 per share, at the midpoint at $11.45 per share, all while leverage came down to about 2 times already.
And Now?
Compared to the situation in October last year, we have seen an $80 stock rise to $110 all while earnings power improved from $10 to $11 per share, marking modest valuation multiple inflation. I understand this move as valuations are still low, and the debt overhang is quickly getting eliminated on the back of retained earnings and solid performance.
Of course, we have seen a huge move to the $105 mark in the meantime, which with the benefit of hindsight it has proven to be an excellent exit opportunity, at least temporary, but I missed out on that. Amidst all this, I remain upbeat on Crocs here, as execution and leverage should be enough of a trigger to push up a low multiple, with the business getting more established and diversified here.
Hence, I continue to be upbeat here on Crocs as I think that Crocs is improving the quality and underlying strength of the business, and given the current earnings yield, I am a happy owner of the shares here. I anticipate better days down the road, even as I fully recognize that current mid-twenty operating margins are historically high. A reversal to more historical levels still allow for a reasonable valuation multiple and interesting long term investment case.
Read the full article here
