Crocs Remains A Growth Driver – HeyDude’s New Management Looks Promising (NASDAQ:CROX)

Lemon_tm We previously covered Crocs, Inc. (NASDAQ:NASDAQ:CROX) in March 2024, discussing why we had upgraded the stock to a Buy as the CROX management offered a promising guidance for HeyDude sales recovery in H2’24, with the robust cash flow also well deployed towards deleveraging and share count retirement. Combined with the growing demand for its products internationally, well balancing the decelerating growth domestically, we believed that it had offered a compelling growth investment thesis then. Since then, the CROX stock has already recovered by +23.7% well outperforming the wider market at +5.1%. Even so, we are re-iterating our Buy rating here, as the company reports double beat FQ1’24 earning call while raising its FY2024 guidance, thanks to the robust Crocs sales domestically/ internationally, well balancing HeyDude’s ongoing inventory correction. We are also encouraged by the new management brought in to revitalize the HeyDude brand, despite the recently lowered FY2024 HeyDude guidance. Combined with the healthier balance sheet and the growing bullish support observed in its stock movement, CROX remains a compelling investment. CROX Continues To Deliver Robust Profitable Growth Domestically & Internationally Author’s Rating Seeking Alpha CROX continues to demonstrate why it is a successful global footwear brand, despite our original reservations in September and December 2023. We have applauded its turnaround then, with Crocs continuing to report promising sales growth as the rest of its peers in Customer Discretionary sector suffer impacted sales, including Nike (NKE) and V.F. Corporation (VFC). Crocs Iconic Footwear CROX Part of CROX’s success is attributed to its ability to leverage the iconic footwear through strategic partnerships, such as NBA, Disney (DIS) through the Toy Story line, Sanrio through Hello Kitty, and High Street Fashion through fashion designers, naturally triggering interest in different consumer groups. This builds upon the brand’s motto for “casualization and personalization,” while allowing the company to use localized approaches in different markets and partnering with local partners, such as Tmall in China (the equivalent of Amazon in the US). These successes have already contributed to CROX’s double beat FQ1’24 earnings call, with revenues of $938.63M (-2.2% QoQ/ +6.1% YoY) and adj EPS of $3.02 (+17% QoQ/ +15.7% YoY), with the QoQ fluctuation attributed to the seasonally higher holiday sales in FQ4’23. Otherwise, most of its top-line tailwinds are attributed to the accelerating Crocs sales internationally at $360.9M (+38.1% QoQ/ +21.3% YoY), following the same trend observed in FQ4’23 – particularly in China and Australia. The same robust growth (to a smaller extent) has also been observed in CROX’s domestic sales of $382.91M (-18.7% QoQ/ +8.9% YoY), particularly in the D2C segment at $202.57M (-39.7% QoQ/ +13% YoY). These numbers well balance HeyDude’s impacted performance thus far, with the FQ1’24 revenues of $194.81M (-15.5% QoQ/ -17.2% YoY) further underscoring the brand’s ongoing inventory correction. Nonetheless, we are encouraged by Crocs higher ASPs at $23.36 (+11.2% YoY) and to a smaller extent, HeyDude’s at $27.68 (+5 YoY), implying the still robust demand for CROX’s branded offerings, with it directly flowing into the increasingly richer overall gross margins of 55.6% (+0.4 points QoQ/ +1.8 YoY/ +5.5 from FY2019 levels of 50.1%). The company also reports lower HeyDude/ Crocs inventory levels of $391.95M (-17.6% YoY) and higher HeyDude/ Crocs inventory turnover ratio of 4.25x in FQ1’24 – compared to 3.42x in FQ1’23, reducing the risk of overstocking. Combined with the moderating net debts on balance sheet at $1.56B (inline QoQ/ -27.4% YoY) and current net-debt-to-EBITDA ratio of 1.47x, we believe that CROX remains well positioned to achieve the lower end of its leverage target of between 1x to 1.5x in the near-term, thanks to the Crocs brand’s excellent performance domestically and internationally thus far. CROX Raises The FY2024 Guidance, While Bringing In New HeyDude Top Management For now, CROX has already raised its FY2024 bottom-line guidance, with adj EPS of $12.49 (+3.8% YoY) at the midpoint, compared to the original guidance of $12.27 (+1.9% YoY) offered in the FQ4’23 earnings call. These numbers further imply the robust demand for its Crocs offerings, despite the unfortunately lowered HeyDude FY2024 revenue guidance of -10% YoY, compared to the original guidance of “flat to slightly up” YoY. From these numbers, it appears that the HeyDude inventory correction is likely to be prolonged against the original estimates of H1’24. Perhaps this is why CROX has brought in new leadership in April 2024, Terence Reilly, with the aim of reshaping the HeyDude brand successfully as how he has for Stanley Brand into a “social media fad.” For context, Stanley Brand, the insulated drinkware company, had generated a drastic jump in sales from $74M in 2019 to $750M in 2023, recording an impressive CAGR of +78.4%, partly attributed to Reilly’s highly effective “consumer marketing in social media, while creating tumblers in new limited edition colors, creating both scarcity and novelty.” Combined with the multiple improvements in CROX’s overall ASPs and inventory levels, as discussed above, we believe that the company remains well poised to deliver a decent performance in FY2024 as guided by the management, with FY2025 likely to bring forth improved YoY comparisons and perhaps, better numbers for HeyDude. CROX Remains Reasonably Valued To Its Peers CROX Valuations Tikr Terminal Despite the relatively stable consensus forward estimates at a top/ bottom line CAGR of +4.8%/ +6.6% through FY2026, as discussed in our previous article, it is apparent that the market is increasingly optimistic about CROX’s prospects. This phenomenon has already been observed in the upgraded FWD P/E valuations to 12.19x, compared to the previous article at 9.98x and its 1Y mean at 8.91x. Even when compared to its Consumer Discretionary stock peers, such as VFC at FWD P/E valuations of 17.98x, NKE at 25.90x, and On Holding AG (ONON) at 44.18x, it appears that CROX remains reasonably valued here after the comparison in growth rates. This is after comparing CROX’s top/ bottom-line growth projections through FY2026, to VFC at +1.2%/ +15.4%, NKE at +3%/ +11.4%, and ONON at +25.9%/ +55.1%, respectively. So, Is CROX Stock A Buy, Sell, or Hold? CROX 4Y Stock Price Trading View For now, CROX appears to be retesting its previous resistance levels of $158s, as it also runs away from its 50/ 100/ 200 day moving averages. For context, we had offered a fair value estimate of $120 in our last article, based on the FY2023 adj EPS of $12.03 and the discounted FWD P/E valuations of 9.98x. For now, based on CROX’s raised FY2024 adj EPS guidance of $12.49 and the slightly higher FWD P/E valuations of 12.19x, it appears that the stock is still trading near to our upgraded fair value estimates of $152.20, though with a still excellent upside potential of +53.2% to our reiterated bull-case long-term price target of $236.80, as discussed in our previous article. Readers must also note that the management has guided intensified deleveraging and share repurchases from FQ2’24 onwards, with the robust LTM Free Cash Flow generation of $789.15M put to good use (+33.7% sequentially). As a result of the attractive risk/ reward ratio at current levels, we are maintaining our Buy rating for the CROX stock.