Crocs, Inc. (NASDAQ:CROX) is a leading lifestyle footwear brand whose stock has outperformed the market over the past five and ten years. As a result, CROX posted a 5-year and 10-year total return of 28.8% and 21.6%, respectively. However, this does not mean that CROX is immune to short-term market volatility, depending on when investors decide to take their positions.
For what? Based on CROX’s 1-year total return of -9.4%, it significantly underperformed its peers mentioned above. However, according to my previous article as of mid-July 2022, CROX has recorded a total return of nearly 78%, outperforming that of the S&P 500 (SPX) (TO SPY) total return of 27% over the same period. What I mean is that your entry point is important if you want to consistently outperform the market.
Observant investors should be aware that Crocs is a highly profitable brand with a global distribution strategy. Additionally, it also has e-commerce and DTC channels, strengthening its wholesale distribution roadmap. However, CROX has experienced significant downward volatility since falling from its late April 2023 highs after hitting its low point in July 2022. As a result, CROX saw a decline of over 50% until its lows from November 2023. Separately, bearish buyers of CROX saw a fantastic opportunity to get back in after the initial sell-off in its post-Q3 earnings, suggesting significant pessimism was priced into its valuation.
From Crocs release of third quarter resultsinvestors should remember that the company revised its online strategy on HEYDUDE, as it continued to be hampered by the gray market contrary winds. As a result, Crocs stopped focusing on diluting its pricing levers and focused on building its brand and strategizing its product line to compete more effectively. Additionally, inventory dynamics have improved, allowing Crocs to have more visibility into its mid-term outlook and focus less on price competition.
As a result, Crocs was expected to reflect near-term revenue growth headwinds on HEYDUDE, even as it maintained its outlook on its core Crocs segment. Therefore, this was driven by the reduction in overall revenue and adjusted EPS guidance for FY23, although the revisions are not expected to be structural. As a result, management is considering a revised forecast for revenue growth of between 10% and 11%, down from its previous estimates of an increase of between 12.5% and 14.5%. This also resulted in a reduction in adjusted EPS, with Crocs forecasting a revised outlook of between $11.55 and $11.85.
Despite this, the company highlighted its “best-in-class” profitability, supported by an “A” profitability rating from Seeking Alpha Quant. As a result, Crocs is still expected to generate an adjusted EBIT margin of 27% in 2023, down slightly from 27.7% last year. These metrics are well above its pre-COVID-19 level of 11.6% in 2019. Although analysts expect Crocs’ margins to be under pressure in 2024-2025, it is unlikely return to pre-COVID-19 levels, with FY25 adjusted EBIT margin forecast at just below 26%.
Therefore, the pessimism over the recent demise of CROX, which has fallen more than 50% from its April 2023 highs, looks more like a sharp pullback than a return to a secular bear market phase.
CROX last traded at a forward EBITDA multiple of 7.1x, well below its industry peers’ median of 9.6x (according to S&P Cap IQ data). Finding Alpha Quant’s ‘B-‘ valuation reinforces my belief that CROX remains valued at an attractive discount to industry and industry peers.
However, savvy investors know that valuation is just one factor in forming an investment opinion and should not be the sole deciding factor. Critically, we also need to assess whether CROX could be a value trap, suggesting that market sentiments are pointing towards a secular downtrend bias, or whether its price action has remained constructive to buy the dips?
My analysis has taught me that optimistic investors need not worry too much. CROX remains supported above its 50-month moving average at its recent November 2023 low, as dip buyers returned after the initial post-earnings sell-off.
However, holders have experienced some volatility, likely attributed to Nike (OF) caution on its market outlook for increased “promotional activity.” Therefore, it appears that some profit-taking has been done to reduce exposure, but as long as the November low of $70 is held firmly, the long-term uptrend bias remains intact.
Therefore, I view the recent pullback as a new opportunity for investors who missed it is July 2022 and the November 2023 low to add exposure, as CROX is not rated as a value trap. While I don’t expect CROX to return to its all-time highs anytime soon, the risk/reward profile remains very attractive to outperform the market at current levels.
Note: Maintain purchase.
Important Note: Investors are reminded to exercise due diligence and not rely on the information provided as financial advice. Please always apply independent thought and note that grading is not intended to time any specific entry/exit at the time of writing unless otherwise noted.
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