Crocs (NASDAQ:CROX) shares have underperformed since I upgraded the stock to “Strong Buy” back in June. More recently in September, I wrote that I thought the Crocs brand alone was worth $150, and I thought investors should be able to look past the issues at HEYDUDE. They have somewhat, taking lowered guidance in stride, but they have yet to value CROX based mostly on the Crocs brand, which represents most of its EBITDA. Let’s catch up on the name.
As a reminder, CROX is the owner of the footwear brands Crocs and HEYDUDE. Its namesake brand is best known for its molded clog silhouette, although they come in a variety to other styles such as sandals, edges, flips and slides.
CROX acquired the HEYDUDE footwear brand in 2022. It is best known for its casual shoes that have a flex-and-fold outsole and ergonomic insole.
CROX sells its both brands through the wholesale and DTC channels.
For the third quarter in a row, CROX failed to impress investors when it reported its Q3 results last month, with the stock dipping -4.0% the following session. That followed a -16.3% drop following its Q1 report, and a -9.7% dip after posting its Q2 results. Once again, HEYDUDE was the primary reason behind the drop.
Third-quarter revenue grew 6.2%, or 5.8% in constant currencies, to $1.05 billion, topping the $1.03 billion consensus.
Crocs brand revenue jumped 11.6%, or 11.1% on a constant currency basis, to $798.8 million. Crocs North American comparable sales climbed 10.2%, while Asia revenue jumped 26.5%, or 28.6% ex-FX.
HEYDUDE brand revenue fell –8.3% to $246.9 million. DTC revenues climbed 14.6% to $100.4 million, while wholesales revenue sank -19.4% to $146.5 million.
Adjusted gross margins rose 230 basis points to 57.4%. Crocs led the way with adjusted gross margins climbing 460 basis points to 62.1%, while HEYDUDE adjusted gross margins declined -600 basis points to 42.8%. Overall adjusted operating margin was 28.3%.
Adjusted EPS of $3.25, meanwhile, came in above analyst expectations of $3.04.
Turning to the balance sheet, inventory was down to $390.2 million from $513.7 million a year ago. The company said Crocs inventory was down -14% to $279 million, while HEYDUDE inventory was -41% lower to $111 million.
CROX ended the quarter with $1.94 billion in debt and $127.3 million in cash & equivalents.
The company has generated $580.7 million in operating cash flow through the first nine months of the year, with free cash flow of $494.3 million.
Looking ahead, CROX guided for Q4 revenue to fall by -1% to -4% to sales of $903-938 million. Crocs revenue is projected to grow between 4-7%, while HEYDUDE revenue is expected to fall -20% to -25%.
It is projecting adjusted operating margins of 21.0% and adjusted EPS of between $2.05-2.35.
For the full year, the company forecast revenue of between $3.905-$3.940 billion, representing between 10.0-11.0% growth. Crocs revenue is projected to rise by 12-13%, with HEYDUDE revenue growing 4-6%, or -4% to -6% when including the period prior to the acquisition. It is looking for operating margins of 27.0% and adjusted EPS of $11.55-11.85.
That was down from its prior guidance calling for sales of $4.000-$4.065 billion, representing between 12.5-14.5% growth, and adjusted EPS of $11.83-12.22. The Crocs revenue guidance was unchanged despite more difficult FX headwinds, while the HEYDUDE revenue guidance was down from a prior outlook of 14-18% growth.
Its original guidance was for sales of $3.9-$4.0 billion, and adjusted EPS of $11.00-11.31.
On its earnings call, management said that post back-to-school season for HEYDUDE was soft and that with a limited history with the brand, wholesalers have been more reluctant to order for the spring. The company also said it decided in September to stop matching gray market pricing on Amazon (AMZN), which it said will hurt sales in Q4 and likely into the first half of next year.
On its Q3 earnings call, CEO Andrew Rees said:
“Beyond this year, I would like to provide some of the building blocks and how we’re thinking about HEYDUDE’s growth agenda. First, we are adopting an omnichannel approach to drive engagement and meet consumers where they shop. In addition to strengthening our digital capabilities and staying disciplined with our strategic wholesale partners, we’ll explore brand accretive opportunities. To that end, we are in the early days of developing an outlet retail strategy for the HEYDUDE brand, leveraging Croc’s successful retail playbook. We have opened our first outlet locations and expect to have 5 locations by the end of the year. Second, we’re remaining laser-focused on winning with our U.S. strategic wholesale partners through improved segmentation and differentiation. In 2024, we are focused on strengthening our family channel partners, further tapping into the sporting goods channel where we have ample white space, and elevating our approach with [more base] specialty. We also expect to start 2024 with a much cleaner account base, having shuttered over 50% or 600 accounts during the year. We have also pulled back on digital rights for accounts that fall outside of our strategic accounts. Third, international. We have set up a few test markets in Europe and are laying the groundwork to expand in new international markets in the next 2 to 3 years. We will use an approach that is consistent with our Crocs playbook, go direct to markets where we are direct for Crocs, and utilize distribution partners in markets where we are indirect with Crocs.”
HEYDUDES has been a problem for CROX much of the year, and Q3 was no different. In fact, results from the recently acquired brand have only worsened throughout the year and after raising guidance twice this year in spite on HEYDUDE, the CROX had to lower its outlook as its namesake brand could not overcome HEYDUDE’s issues.
At this point, I think it’s fair to say it hasn’t been a particularly good acquisition, as these problems are set to extend into next year. However, I do like the plan of management laid out above. Outlet stores are a good way to get rid of excess inventory and preserve some margin and, while cleaning up its wholesale accounts and being in the right stores is important when building a brand. International is likely something further down the line, but testing the product abroad is a good first step.
On the positive front, HEYDUDE inventory looks to be in good shape. The brand still appears to have a following, with it being ranked the #7 footwear brand among teens according to a Piper Sandler Taking Stock With Teens survey. Now this doesn’t necessarily translate into success, as Nike (NKE) was #1 by a wide margin and the struggling Vans was #5, but the company does have something to work with to help turn it around.
The Crocs brand itself, meanwhile, is doing well, and the company is generating some nice free cash flow, which is allowing it to paydown the debt from the HEYDUDE acquisition.
CROX trades around 7.1x the 2024 consensus adjusted EBITDA of $1.12 billion and 6.8x the 2025 consensus of $1.17 billion.
It trades at a forward PE of 7.8x the 2024 consensus of $12.19. Based on 2025 analyst estimates of $13.24, it trades at 7.2x.
CROX is projected to growth its revenue 4% in 2024 and about 5.5% in 2025.
CROX is one of the cheapest footwear companies out there.
At this point, I think it is pretty safe to say that the Crocs brands is making up at least $900 million of CROX’s EBITDA, if you just allocate SG&A proportionately. Place a multiple of 11-13x on that, which is the low end of the range of what footwear companies are trading at, and that gets you a $127-157 stock valuation. With the company likely to pay down at least $500 million in debt over the next year, that would equal a $135-165 at the end of 2024.
While HEYDUDES isn’t worth the $2.5 billion CROX paid for it, based on price to sales multiples in the space, which tend to be over 1x, it should be worth somewhere around $1 billion, which is another $16.50 a share in value.
While I’m not changing my price target, industry valuation have risen while the key Crocs brand story has not. I think the stock should command a valuation higher than my target, but I want to be more conservative at this time and value HEYDUDES at $0 and Crocs towards the low-end of competitors. I feel there should be room to raise my target later.
CROX made a big mistake buying HEYDUDES and clearly overpaid. It likely will have to write-down the acquisition, and worse it has sunk the stock price.
However, this has created an opportunity for investors, as the core Crocs brand is currently worth a lot more than the current value of CROX given the HEYDUDES overhang. Crocs continues to do well, both growing sales and expanding margins. It has been gaining traction in Asia and showing strong North American DTC sales. There is no reason for the company to be valued well below other footwear brands.
HEYDUDE will take a while to potentially fix, and one of the biggest risks is that management gets too distracted by HEYDUDE and loses focus on its main brand. However, the company was been able to turn around the Crocs brand under its current CEO, so I think he has the opportunity to do so with HEYDUDES as well.
I continue to rate the stock a “Buy.” I will keep my $150 target, but I ultimately think the stock should be valued even higher. While I don’t think CROX needs to improve HEYDUDE to be worth a lot more than its current price, at this point the market disagrees. As such, I’ll continue to watch for a turnaround in the brand, while making sure it does not distract from the core Crocs brand. Investors should get a sense of how the holiday season went in January, as the company will be attending ICR and presenting January 8th.