Crocs: The Stock That’s Secretly Crushing It

August 15, 2024
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Despite its impressive gains, Crocs (CROX) hasn’t been grabbing headlines. This remarkable stock, often overlooked in favor of high-profile tech stocks, has quietly risen 451% over the past five years. In comparison, the S&P 500 has generated a total return of 104% in the same period. With such a significant surge, investors are now pondering if it’s still a good idea to buy Crocs shares.

Consistent Outperformance

Crocs recently reported its second-quarter financial results, which surpassed Wall Street analysts’ expectations. The company recorded $1.1 billion in revenue, marking a 3.6% increase year over year. Notably, the Crocs brand, which accounts for 82% of the company’s sales, saw gains that more than offset a 17.5% revenue dip for its HeyDude brand. 

Additionally, diluted earnings per share rose by 11.2%. This continues Crocs’ long streak of top- and bottom-line growth over the past few years. The company has responded to these strong results by lifting its operating margin and earnings per share outlook for the fiscal year, while maintaining its revenue guidance. Crocs’ robust cash flow generation allows it to reinvest in the business, pay down debt, and repurchase shares, further solidifying its financial position.

Profitability and Growth Potential

One standout aspect of Crocs is its profitability. Over the past five years, the company’s gross margin has averaged an impressive 55.4%, surpassing even sportswear giant Nike and top consumer electronics brand Apple. This high margin indicates both the low production cost of Crocs shoes and consumers’ willingness to pay for them.

Crocs’ operating margin tells a similar story, averaging 22.6% over the past five years. This margin has improved over time, demonstrating the company’s ability to achieve economies of scale.

Furthermore, Crocs demonstrates substantial long-term growth potential, particularly through its efforts to expand internationally. Last quarter, the brand’s international sales surged by 18.7%, notably outpacing the 3.0% increase in North America. The company plans to further penetrate the Chinese market, the world’s second-largest footwear market, which could significantly drive future growth.

Attractive Valuation

Despite the impressive performance and growth prospects, Crocs shares are trading at a bargain-basement valuation. The current price-to-earnings ratio of 10 is less than half the multiple of the overall S&P 500. This low valuation seems incongruent with Crocs’ consistent profitability and growth, indicating a potential buying opportunity for investors.

However, there are underlying market fears that may contribute to this low valuation. The primary concern is that Crocs’ popular foam clogs could fall out of favor with consumers. Since most of the company’s revenue is derived from this single product, a decline in its popularity could significantly impact Crocs’ financial performance. Although there has been no indication of such a decline so far, the market’s forward-looking nature keeps this risk in focus.

The Bottom Line

Crocs’ stock has delivered a remarkable 451% return over the past five years, vastly outperforming the S&P 500. The company’s strong financial performance, high profitability, and significant growth potential, especially in international markets, make it a compelling investment. The low price-to-earnings ratio further enhances its attractiveness, despite market concerns about the potential decline in the popularity of its core product.

For investors who understand and appreciate the risks associated with a single-product dependency, Crocs could still represent a valuable addition to their portfolios. The combination of a robust financial position, strategic international expansion, and an attractive valuation makes Crocs a stock worth considering, even after its impressive surge over the past five years.

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