May 10, 2022
[6 min Read]
Company: Crocs inc. Ticker: CROX traded on the NASDAQ exchange MC, TEV, & Price (as of Apr. 22): $4.54Bn, $5.29Bn, & $71.18 Sector: Consumer Discretionary Industry: Textiles, Apparels, and Luxury Goods - more specifically Footwear & Accessories Recommendation: Buy Current Analyst Target Stock Price Mean: $150.71 or 103.2% upside
1-year Target price: $110 or a 55% upside 3-year Target price: $245 or a 244% upside Crocs is a public company that started as a manufacturer and distributor of shoes. Crocs was founded in 2002 by George Boedecker, Lyndon Hanson, and Scott Seamans. When on a vacation together, the three guys found out about these shoes that were produced by a Canadian company. They bought the IP for the shoe and redesigned it creating the well-known Clogs design, and started the Crocs company. Crocs has a broad portfolio that is mostly constituted of shoes made from Crocslite material to provide a lightweight, comfortable, and odor-resistant pair of shoes. Crocs' market is segmented based mostly on characteristics like style, casual, active, and core. Crocs also deal in accessories that complement its products and are a key part of its brand image. Many know Crocs for its “unique” look which allowed for it to prosper in the late 2000s. As the Great Financial Crisis and the subsequent recession happened, many people started cutting their spending back. Casual footwear was hurt immensely with many people needing money to pay rent and other necessities. As spending picked up 2011 Crocs, in pursuit of growth, tried to go into more luxury items ultimately spreading themselves to thin. This resulted in changes in management a few times until 2014 when Andrew Rees was chosen as CEO and instigated a radical shift in the company by closed the broad wholesale relationships and staying with ones that were the most successful and supported the brand image. Along with the closing of many wholesale distribution channels, Crocs also closed many unprofitable brand-owned stores which only sold Crocs-branded products similar to Lego stores. They closed manufacturing centers in favor of third party manufacturing which was much better for the company's health and strain on the cycle of production and freed up cash. Along with better marketing, a boost in sales was seen in 2012-2015, but unfortunately it then stagnated. Some growth was seen in 2018 at 6% and in 2019 with 12.6%, an as COVID started, the company was able to grow digitally and create relationships with brands and celebrities allowing for large growth of 67% in 2021.
Crocs Product Lineup: Clogs, Sandals, Flip-Flops, Slides, Flats, Sneaker, Boots, Loafers, Socks, and Jibbitz
Four Tenants behind long term growth: Digital Sales: • The company's goal is to maintain a 40% of total revenue being through digital and thus by 2026E, reach $2.5Bn in digital sales. • One of the main ways is through their website, Crocs.com, the place with the largest selection of Jibbitz charms being a mature gateway product to the website. This is especially important because selling direct through their website is much easier and increases their margin. I would say Crocs has a very robust and well designed website that is sure to be increasing along with their cumulative digital penetration. • Along with their website, they sell through many e-commerce sites such as Amazon, Zappos, Zalando, and Tmall • Along with digital being an important distribution/sales method in most B2C businesses, digital selling has allowed Crocs to grow faster in EMEA and Asia especially where e-commerce adoption is strong with e-retailers like Alibaba.com, Pinduoduo.com, JD.com, and third-party markets like Tmall.
Sandals Market Opportunity: • Their casual market which is practically the market for sandals is worth $30B and is very fragmented with no clear leader. • Though it is fragmented, they key manufacturers of the casual sandal market are Cbanner, Crocs, Aokang, Adidas, Clark, STand SAT, Belle, Kenneth Cole, Daphne, Skechers, GEOX, Rieker, Aldo, topscore, Steven Madden, ECCO, Decker, Caleres, Apargatas, Birkenstock, and RedDragonfly. • Sandals provide an additional gateway product along with product sales have little seasonality along like Clogs. • The main consideration of consumers when looking for sandals is icon, style, comfort, adventure. Crocs does have icon considering they have large brand awareness in the casual footwear market, their style is very good along with the ability for jibitz charms attachments, they definitely have comfortability because of the material, and their material is durable and adventurous. • The Sandals brand consideration or awareness is shares with Clogs allowing for easier customer acquisition and no need to build brand identity in a new market. • The Downfall of Croc before 2014 had been the the spreading thin of the brand into unfamiliar yet appealingly high growth markets. This is the downfall of many apparel branding who are both blessed and then cursed by the need for growth.
Luckily, this expansion into a familiar and similar casual market shows that the company is correctly using their knowledge and expanding into the correct markets and not just the most attractive ones. The company has a target of 4x Sandals Revenue Growth by 2026E.
Asian Market Opportunity for Long-Term growth: • Asia, more importantly China, provides the greatest opportunity to support long-term growth with China being the largest footwear market. • Digital adoption had been very strong in China with their being large participation on key platforms like Tmall, Alibaba.com, or Pinduoduo.com • The strategies being used are developing local-for-local production, marketing, and collaborations with already most of Crocs third-party manufacturing being done in Southeast Asia and much of HEYDUDE manufacturing in China. Along with this, almost all HEYDUDE sales are in North America while Crocs already has a pretty large Asian presence which means this is also a great opportunity for the casual loafers of HEYDUDE.
Details of HEYDUDE acquisition and Great Management: • The acquisition was closed on February 17, 2022 and was financed by $2B in a Term Loan, $450 million in shares at a price double the current, and $50MM from a line of Credit. • The shares went to the founder who has a two-year half and half lockup period for the shares and he will continue to be on the HEYDUDE team. • Along with founder, Rick Blackshaw will be the EVP and Brand President. He has 25 years of experience in footwear and consumer products with being a president of Sperry, President of Keds, VP of the Chuck Taylor division of Converse, and other roles in Timberland and Reebok. He is an industry veteran with decades of experience who will be a great leader for the brand.
Strategic Rationale: A high Growth, highly profitable, strong cash flow • This acquisition creates a leader in branded casual footwear being only second to Skechers and expands the company to multi-product/multi-brand • Aids in Digital Growth Framework with HEYDUDE having almost 50% of sales digital in 2021 • Ability to build and leverage Crocs playbook of marketing expertise and wholesale relationships
HEYDUDE wholesale and Specialty opportunity & Marketing: • Crocs has a total of 375 company owned stores that sell only Crocs products opening up another distribution play for HEYDUDE, though 20-30 stores were closed in lieu of Ukraine-Russia Conflict. • Along with their stores, of the top 20 B&M wholesale relationships for both companies, only 6 of them overlap meaning their is a large possibility for B&M expansion. • The other additive to growth is the marketing opportunity with Crocs brand awareness at 92% of market while HEYDUDE is only at 20%.
This is a pretty clear indication governance views shares as too cheap at this point.
Risks: • Inflation - Crocs has already, in their own words, been “early” to their competitors in raising prices since management expected inflation to be more severe than others which played out really well and makes the margins sustainable. • The causal footwear brand has a relatively low barrier to entry creating significant competition along with brand counterfeiting or fake clogs which though used to be a bigger problem, still hurt sales. • Supply-chain disruptions though margins are still high and are mostly factored into guidance though in the future, if recovery is slower than expected, CAPEX may be higher thus lower FCF. • HEYDUDE not growing as much as intended though to reach the ambitions, it only requires continuing the same growth rate as Crocs, though synergy with Crocs is likely considering the strong management. • Possible Overdependence on brand value leading to brand stagnation and failure to strengthen and preserve value though success in marketing is clear with Marketing and advertising becoming a smaller % of revenue over the past 5 years, Pre-COVID.
Catalysts: • Meeting or Exceeding of Mangement's Guidance or Exceeding of Analyst's Expectations • HEYDUDE outperforming expectations and strategic rationale playing out better than expected. • Economy performing better with inflation being more on the mild/medium level and Consumer Spending being much higher. • Meeting the leverage ratio to buyback shares earlier than expected due to non-cash recoveries or use of current cash&cash equivalents.