In the midst of the tech stock frenzy, one “boring” enterprise has quietly delivered astounding investment returns. Crocs, the renowned foam clog slip-on manufacturer, has witnessed an impressive surge of 451% in its stock price over the past five years. This remarkable performance outshines the S&P 500’s total return of 104% during the same period. However, as investors ponder whether to jump on the Crocs bandwagon, recent financial results and the company’s overall strengths and weaknesses come into focus.
Crocs recently announced its second-quarter financial results, surpassing Wall Street analysts’ expectations. The company reported a revenue of $1.1 billion, representing a 3.6% year-over-year increase. While the Crocs brand accounted for 82% of total sales and experienced growth, the subsidiary HeyDude faced a revenue dip of 17.5%. Diluted earnings per share rose by 11.2%, continuing the company’s consistent top- and bottom-line growth trend.
One notable aspect of Crocs’ success is its profitability. Over the past five years, the company has maintained an impressive average gross margin of 55.4%. This surpasses not only sportswear leader Nike but also consumer electronics giant Apple. Such figures indicate both the cost-effectiveness of producing Crocs shoes and consumers’ willingness to pay a premium for them. The operating margin, averaging 22.6% in the last five years, further highlights the company’s ability to achieve economies of scale.
Crocs also holds significant long-term growth potential, particularly in expanding its international presence. Last quarter, the brand’s international sales surged by 18.7%, outpacing the 3.0% gain in North America. The company aims to further penetrate the Chinese market, the world’s second-largest footwear market.
Despite Crocs’ remarkable stock performance, its shares continue to trade at a remarkably low valuation. With a current price-to-earnings ratio of 10, less than half of the S&P 500’s multiple, the stock appears undervalued. This discrepancy can be attributed to concerns surrounding the strength of the brand. The recent struggles faced by industry heavyweight Nike serve as a reminder of the challenges in consistently meeting consumers’ evolving preferences. Effective marketing, product innovation, and finding the right balance between direct-to-consumer and wholesale channels remain crucial priorities.
The primary fear among investors is that Crocs’ popular foam clogs may fall out of favor with consumers. As the majority of the company’s revenue is derived from this single product, any decline in its popularity would deal a significant blow to Crocs. However, the company’s financial performance thus far suggests that such concerns may be unwarranted. Nevertheless, the forward-looking nature of the market keeps these worries alive. Investors who acknowledge and comprehend this prominent risk factor may still find the stock enticing, especially considering its recent surge and attractive valuation.