Crocs: A sustainable investment.
Opdateret: 3. maj 2022
Crocs carbon footprint per shoe is already low but it doesn't keep them from having very ambitious sustainability goals in reaching net zero by 2030. They have also gone 100 % vegan, while selling 85 % of their products without boxes. The stock has been on a wild ride gone from about $11 per share during the Covid crash to reaching $180 a share in November 2021. The question is if this sustainable investment has more room to grow?
This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.
Since I have attended the workshop with Phil Town, I have decided to change the layout of my analyses a bit. I will do some more calculations and also briefly go through why the company has meaning to me. If you want to read more about how I evaluate a company, please go to "MY STRATEGY" on my website.
For full disclosure, I should mention that I don't own any shares in Crocs when I write this analysis. I don't own any of their products either and I don't really have any relationship to Crocs prior to writing this analysis.
Crocs describes themselves as world leader in innovative casual footwear for men, women, and children. The company was founded in 2002 and has since then sold more than 720 million pairs of shoes in more than 90 countries around the world. Crocs most famous shoe is the clog, which is made by Crostlite, which is a closed-cell resin. It means that it isn't made from either rubber or plastic. The clog is only made from three ingredients, which makes it easy and cheap to make. Besides the clog, Crocs also make sandals, other types of shoes and Jibbitz, which different charms that pops into the holes of clogs. Each clog has 13 holes, meaning that a pair of clogs can have up to 26 Jibbitz at the time. The Crocs clog has a considerably following with American middle school and high school students that use the clog as a school shoe. The distinct look of the Crocs clog means that it is very recognizable, which results in Crocs have a very large brand moat.
Their CEO is Andrew Rees. He joined Crocs in 2014 and became the CEO in 2017. He has more than 25 years of experience in the footwear and retail industry, where he had various positions in companies such as L.E.K Consulting, Reebok, and Laura Ashley. He is recognized for being the one that led the resurgence of Crocs. To lead the resurgence of Crocs, by using social and digital marketing, boosting brand relevance with diverse fanbase by collaborating with different artists, brands, or designers that all spoke to different groups. He also decided to simplify the business, such as closing stores, to get the company smaller to have a very profitable strong growth model. As a leader he is known for being a very strong communicator of his strategy and plans and has said that in a broad organization you need to "humanize yourself" and be someone people feel like they can talk to, so you can get the most out of people and hear their wonderful and incredible ideas. He also stresses that his philosophy is that he is avoiding the urge to be right all the time, and instead coming to a consensus agreement on how you move forward. I believe that the combination of credentials and modern leadership of Andres Rees will make Crocs grow in the future, and I have great faith in the management of Crocs.
I believe that Crocs has a large brand moat. I really the management as well. Now, let us investigate the big five numbers to see if Crocs lives up to our requirements for a strong moat. In case you want an explanation about what the big five numbers are, you can have a look at "MY STRATEGY" on the website.
The first and most important number we will investigate is the return on investment capital, also known as ROIC. We want to see 10 years of history and we want the numbers to be above 10 % in all the benchmarks. The numbers are fantastic, especially in the later benchmarks where Crocs are delivering some amazing numbers. It is difficult to find companies with as good aa ROIC like Crocs.
The next numbers we will investigate are the Sales Growth Rates. Ideally the numbers should be above 10% in each benchmark and increasing. The older benchmarks are a bit underwhelming. However, the latest benchmarks are above the 10 %. I still feel rather confident, as we have seen the numbers be above the 10 % in the two latest benchmarks. It suggests that Crocs has momentum.
The next numbers are the EPS Growth Rates. As with all other growth rates we want the numbers to be above 10 % in all benchmarks. These numbers are fantastic. I really having seen many companies delivering numbers like these. It is probably not sustainable moving forward as these numbers are incredible but if it is growing at the 10 % a year, I would be happy.
The Equity Growth Rate is the most important growth rate, at least according to Phil Town. All right, these numbers are not what you would like to see. With negative numbers in four out of five benchmarks, it is a bummer compared to the other numbers we looked it. The good news is that it might have turned around in the latest benchmark. We will see moving forward from here.
Finally, we investigate the Cash Growth Rates. It is by far the best of the benchmarks. Once again, we see fantastic numbers, and only the oldest benchmark just falls out of the requirements. The rate does swing quite a lot from benchmark to benchmark, but it is a minor concern, when you have numbers like these.
To shortly summarize the five numbers from Crocs. One thing that I did notice through all the numbers is that the one-year benchmark is an outlier compared to the numbers, and it shouldn't be given too much importance. I'm really surprised to see the fantastic ROIC of Crocs, I didn't expect that. The cash growth rate and the EPS growth rate are well above the requirements, and it is difficult to find similar numbers in other companies. The sales growth rate is a bit underwhelming, while the equity growth rate is pretty much disastrous. Nevertheless, if I take an overall look at all the numbers, I must say that I'm very impressed with Crocs, and while you shouldn't make investments based solely on historical numbers, they certainly made me more interested in Crocs.
Another important thing to investigate is debt, and we want to see if a business has a reasonable debt that can be paid off within 3 years. We do so by dividing the total long-term debt by current cash flow. Having done the calculations on Crocs, they show that Crocs can pay off their debt in 0,58 years. Meaning that debt is not a concern.
Like with all other companies, there are some risks if you choose to invest in Crocs. One risk is that the brand goes out of fashion. Right now, Crocs is popular, and nothing suggests it will change, as their 2021 Brand Strength Survey showed that the brand relevance, brand desirability and brand considerations among consumers were up double-digits. Nevertheless, fashion changes and if Crocs fall out of fashion, it could be catastrophic for the company. Fright prices and delivery. Crocs has factories all over the world, which means that higher fright prices and longer delivery times can hurt Crocs if these issues continue in the long run. They have needed to increase their spending on airfreight to $75 million compared to it being lower than $10 million normally, to get ready for the different events in we had in the last quarter (Christmas, Black Friday, Cyber Monday etc.). The pandemic. While many countries are loosening restrictions, and we might see the backend of the pandemic, it isn't so all over the world. Crocs has nearly 70 % of their manufacturing base in Vietnam, and when Vietnam once again closed down due to the pandemic, Crocs must find other places to produce their products. Luckily, it is easier for Crocs than for other companies to switch production sites due to the limited inputs and simple configuration of their products. It also means that they have switched some of their production to other countries, including China, Indonesia, and Bosnia.
There are also lots of potential for Crocs. They mention four pillars that should drive their growth moving forward. Digital. They believe that going more digital will result in more long-term revenue, as they can elevate consumer experiences, personalize consumer journeys, and get directs consumer connection. Sandals. Sandals is a $30 billion addressable market, and so far, Crocs' revenue CAGR in sandals were more than 10 % for the three years before Covid. They expect that their sandals revenue will more than quadruple by 2026. Asia. They expect 25 % of the revenue coming from Asia by 2026. China is the second largest footwear market in the world, and they want to grow their brand there by teaming up with brand ambassadors and key opinion leaders. Product innovation. They will continue to innovate their product to reach new consumers, it could also be through acquisitions as they just acquired the Heydude brand. They will also continue to innovate their products by new collaborations, which has served them well in the past, while also looking into new colors, graphics, and personalization. Finally, I really like their Jibbitz business. It is something that their competitors don't have, and sales are growing nicely (more than doubled in Q3 2021 compared to Q3 2020).
All right, we have gone through the numbers, risks, and potential regarding Crocs and now it is time for us to calculate a price. To calculate price, we will need numbers that I have explained in the "MY STRATEGY" section of the website. I do not want to go through the whole calculation here. I chose to use an EPS of $6, which is a bit higher than the one in 2020 of 5,32 but way lower than the current one at 11,74. I chose an Estimated future EPS growth rate of 15 (Which is the highest I use but below the average of the last 5 years), Estimated future PE 30 (which the double of the growth rate, as the historically PE for Crocs has been higher) and we already have the minimum acceptable return rate on 15 %. Doing the calculations by using the formula I described in "MY STRATEGY", we come up with the sticker price (some call it fair value or intrinsic value) of $180, and we want to have a margin of safety on 50 % , so we will divide it by 2 meaning that we want to buy Crocs at price of $90 (or lower obviously), if we use the Margin of Safety price.
Our second way to calculate a buy price is the TEN CAP price, which is also explained at "MY STRATEGY". To do so, we need some numbers from their financial statements, keep in mind that all numbers are in millions. The operating Cash Flow last year was 266,9. The Capital Expenditures was 42,03. I tried to look through their annual report to see, how much of the capital expenditures were used on maintenance. I couldn't find it though, so as a rule of thumb, you expect 70 % of the capital expenditures to be used on maintenance, meaning we will use 29,42 in our further calculations. The Tax Provision was -105,88. We have 58,85 outstanding shares. Hence, the calculation will be like this: (266,9 - 29,42 - 105,88) / 58,85 x 10 = $22,36 in TEN CAP price. (It is mainly because of the very high negative tax provision).
The last calculation is the PAYBACK TIME. It is also described in "MY STRATEGY". With the Free Cash Flow Per Share at 5,45 and a growth rate of 15 %, if you want your purchase back in 8 years, the PAYBACK TIME price is $86,03.
Having investigated Crocs, I find the company to be very interesting. They have large moat, great management and a fantastic ROIC. I think they have a good growth strategy with their different pillars of focus, and it is encouraging to see that management believe they can grow into a $5 billion company by 2026. It means a CAGR of 17 % moving forward. At the same time, they guide with an operating margin of 26 % long-term, which is fantastic for a company that operates in a sector like Crocs. I also really like the emphasis they put on sustainability, as I believe it is very important for companies to have a very clear sustainability policy as it becomes important for consumers. Crocs is facing some short-term headwinds due to freight, while supply chain shortages could also affect the company. However, I believe that these issues are short-term. The long-term risk is to keep the brand relevant. Management has done an outstanding job in doing so, and their survey suggests that their brand is growing from year to year. The brand relevance is something that needs to be continuously monitored if you invest in a company like Crocs though. I'm really intrigued by the company, and I will probably open a position if it reaches my margin of safety price of $90. I might even open a smaller position before, as it is trading near my margin of safety price now and announce earnings next week. I'm still undecided though.
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