1 Stock So Cheap It’s a STEAL?

Crocs started selling its trademark footwear in 2002, and it rapidly became an iconic American brand. Before long, the shoes gained a global following, and today, more than 720 million pairs have been sold in 90+ countries.

Originally, there was just one style — a soft, lightweight sandal made from Crocs’ proprietary Croslite material. Now the company offers a full catalog of styles and colors with options for any type of weather and terrain.

In the past five years, Crocs stock (CROX) has risen nearly 1,000%, peaking at more than $180 per share in November 2021. Now that the price has crashed from those lofty highs, is it time to buy CROX stock based on valuation alone?

Who Invented Crocs and Why?

There were three great minds behind Crocs: George Boedecker, Scott Seamans, and Lyndon Hanson. While they were sailing the Caribbean, they took note of the fact that one pair of their shoes was much more comfortable — and less slippery — than all the rest.

The footwear that everyone envied was made by Canada-based Foam Creations, and the group realized there was a tremendous opportunity to redesign and market Foam Creations’ proprietary material. They licensed the technology and created their own version — Croslite. In 2002, they launched their first attempt at the Fort Lauderdale International Boat Show.

The comfortable, albeit odd-looking, shoes were a hit, and every pair sold. Demand rapidly expanded beyond the boating community. In 2002, the company saw annual sales of $24,000. By 2005, total sales exceeded $108 million.

A year later, it was clear that an IPO was in order, and the company went public in February 2006. The following year, Crocs reported $168 million in net income.

Why Did CROX Stock Fall?

The company’s dramatic success in 2007 created a sense of giddy optimism, and Crocs leaders started branching out in every direction. The company launched multiple distribution channels and made inroads in a number of new markets simultaneously. It added a long list of new designs to its catalog and made a massive investment in marketing.

Unfortunately, doing so much at once was an expensive proposition that didn’t pay off. In 2008, demand was already down as a result of the looming recession. At the same time, 47% of total revenue went to sales, general, and marketing expenses. It was too much, too fast, and Crocs lost $185 million.

Investors were devastated, and CROX stock dropped to just a bit over $1 per share. The company laid off 2,000 employees, and many believed bankruptcy was on the horizon.

How Did Crocs Make a Comeback?

The Crocs leadership team wasn’t about to lose their business, and they were willing to do whatever it took to turn things around. They reevaluated every aspect of the company’s strategic plan and delivered one of the most remarkable comebacks in business history.

They didn’t undo every move that was made in 2008 and start over. Instead, they took the most successful elements of their 2008 growth strategy and scrapped the rest. Crocs analyzed the performance of each brick-and-mortar store, then closed those that couldn’t keep up. The distribution network was streamlined to be more efficient and less expensive, and the number of unique products went down by 80%.

Crocs became laser-focused on Generation Z, and it marketed its signature clogs heavily to that audience. In addition, it stopped pouring money into marketing in dozens of nations and instead limited itself to the United States, China, Japan, Germany, and Korea.

It took some time for Crocs to get back on top — nearly 10 years — but by 2017, Crocs were back “in.” Generation Z saw the footwear as an opportunity to express their individuality while staying on-trend, thanks to the company’s clever decision to collaborate with popular fashion designers.

Since 2017, Crocs has explored options for expanding its product line, but it isn’t rushing willy-nilly into a large catalog like it did in 2008. Instead, it periodically releases limited-edition shoes that connect with consumers’ FOMO (fear of missing out). That boosts sales without putting Crocs in the position of managing too many products.

This strategy is working — and not in a small way. Crocs’ total 2021 sales came in at more than $2 billion. That might not be impressive when compared to casual footwear’s total addressable market of $160 billion worldwide, but it is quite an achievement when the total addressable market for clogs is considered. At the moment, that figure is just $8 billion (and growing), which means Crocs has 25% of the global market share.

Are Crocs Cool Again?

Are Crocs back in style? Absolutely, yes. Here are some of the headlines from the past 12 months:

• Essence – Crocs Are Making A Comeback — And Not As House Shoes
• GQ – How We Learned to Love Crocs
• Today – Crocs are everywhere right now — here’s why
• The Harvard Crimson – Why Are Crocs Cool?

Various clog designs have been spotted on some of the world’s biggest celebrities, and demand goes beyond Generation Z.

Next up, Crocs plans to enter the sandals market with styles that feature the proprietary material that Crocs is known for. However, this new line will speak to consumers who want the comfort without the clog. That’s a massive group. Right now, the global addressable market for sandals is more than $30 billion.

Crocs is quite certain that there is no clear market leader in the sandals space, which presents an important opportunity. Current customers are likely to add sandals to their collection of clogs, and Crocs can use its proven strategy to bring new sandals customers on board. If all goes as planned, Crocs has projected that, by 2026, it will increase its sandals-related revenue at least four times over.

Highlights of the sandals strategy include a robust digital experience that draws consumers in with engaging content and viral campaigns. Crocs’ e-commerce sales are already at 37%, which is high for the industry, and the company expects that figure to reach 50% within five years. If successful, the move to e-commerce will increase sales and lower expenses, which ultimately means higher profits.

It is also worth noting that Crocs’ strategic sandals plan has an international element — but not one that repeats past mistakes. Crocs won’t overextend itself by attempting to enter every possible market. Instead, it will focus on areas where there is already brand awareness, including China, Southeast Asia, and India.

Finally, Crocs is branching out a bit from a brand perspective. Its recent acquisition of Italian footwear company HEYDUDE promises to add revenue right away while supporting Crocs’ trendsetting image.

Does Crocs Have a Moat?

Casual footwear is an interesting category from a competition perspective. Most brands can’t build a moat because there is always an alternative brand that is more comfortable or available for a lower price. However, Crocs is unique in that it has a distinctive design and a very loyal following.

When its proprietary material is added into the equation, other companies simply can’t duplicate these clogs. Occasionally, a knock-off version will come out at a lower price, but they can’t compete on comfort and quality. Those who are craving Crocs always return to the real thing — even if they have to pay a little more.

It also helps that Crocs doesn’t have any direct competitors if its full catalog of products is considered. Of course, any number of companies make some version of casual footwear, but Crocs stands alone in its particular blend of e-commerce, retail, and wholesale channels.

CROX Fourth Quarter and Full Year 2021 Financial Results

Crocs announced its Q4 and full-year 2021 financial results on February 16, 2022, and CROX stock has been drifting down ever since. It wasn’t because of the earnings report — that was very well-received. Instead, CROX stock went down over concerns related to the acquisition of HEYDUDE.

This transaction cost the company $2.05 billion in cash, plus the issuance of 2,852,280 shares to the founder of HEYDUDE. It looks like the purchase will pay for itself reasonably quickly, as revenues are projected to come in between $700 and $750 million. Nonetheless, the acquisition has investors a little spooked, and share prices may not fully recover until those projected revenues become a reality.

Highlights of the most recent financial reports include the following:

Fourth Quarter 2021

• Total Revenues – $586.6 million (42.6% increase year-over-year)
• Direct-to-Consumer (DTC) Revenues (retail and e-commerce) increased 44.5% year-over-year
• Wholesale Revenues increased 40.3% year-over–year
• Gross Margin – 63.4% (year-over-year increase of 770 basis points)
• Adjusted Gross Margin – 63.7% (year-over-year increase of 770 basis points)
• Selling, General, Administrative Expenses (SG&A) – $212 million (as compared to Q4 2020’s $164.5 million)
• SG&A as a percentage of revenue – 390 basis point improvement year-over-year to 36.1%
• Income from Operations – $160 million (147.5% increase year-over-year)
• Adjusted Income from Operations – $168.1 million (93.1% increase year-over-year)
• Diluted Earnings Per Share – $2.57 (compared to Q4 2020’s $2.69 – decrease attributed to lower tax benefit)
• Adjusted Diluted Earnings Per Share – $2.15 (compared to Q4 2020’s $1.06)

Full Year 2021 

• Total Revenues $2.313 billion (66.9% increase year-over–year)
• Gross Margin – 61.4% (year-over-year increase of 730 basis points)
• Adjusted Gross Margin – 61.6% (year-over-year increase of 700 basis points)
• SG&A Expenses – $737.2 million (as compared to 2020’s $535.8 million)
• SG&A as a percentage of revenue v 680 basis point improvement year-over-year to 31.9%
• Income from Operations – $683.1 million (219% increase year-over-year)
• Adjusted Income from Operations – $695.3 million (164.8% increase year-over-year)
• Diluted Earnings Per Share – $11.39 per share (149.8% increase year-over-year)
• Adjusted Diluted Earnings Per Share – $8.32 per share

Crocs CEO Andrew Rees expressed how pleased he was with the results through the following statement:

Our fourth straight year of revenue growth was fueled by continued strong consumer demand for the Crocs brand globally. We are excited about our sustainable growth trajectory for both the Crocs and HEYDUDE brands and are confident in our plan to grow to $6 billion in revenues by 2026.

Is CROX Stock a Buy?

Crocs has a strong strategic plan to grow the business without taking the same risks that caused a near-catastrophic failure in 2008. For now, analysts are evenly split between “buy” and “hold” ratings, primarily because they want to see how HEYDUDE will perform.

Investors who are willing to take on some risk can buy CROX stock now and enjoy the returns if HEYDUDE delivers. More risk-averse investors are better off waiting for another quarter or two of financial results before adding CROX stock to their portfolios.

When we ran the number, CROX had a fair market value of $107.36, which represents nearly almost 49% upside opportunity at the time of research.