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  • Glenn

Crocs: A sustainable investment.

Opdateret: 6. apr.

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, back to $47 in June 2022, while now trading above $120. Is now the time to buy Crocs?

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 at the time of writing this analysis, I do own shares in Crocs, as it is 3,59 % of my copytrading portfolio. I also own Crocs products that I really like. However, me owning shares and products in Crocs will affect this analysis as I will keep it unbiased as always.

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 numbers to see if Crocs lives up to our requirements for a strong moat. In case you want an explanation about what the 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. Looking at the numbers it is a tale of two different periods. The numbers up to 2018 are disastrous, while the numbers from 2019 are great despite the decrease in a challenging 2022. Personally, I believe that CEO Andrew Rees is the reason that the ROIC of Crocs have improved once he was able to implement his strategy. I'm encouraged to see numbers like these.

The next numbers are the book value + dividend. In my old format this was known as the equity growth rate. It was the most important of the four growth rates I used to use in my analyses, which is why I will continue to use it moving forward. As you are used to see the numbers in percentage, I have decided to share both the numbers and the percentage growth year over year. The equity has decreased every year from 2013 until 2019, which isn't an encouraging sign. However, Crocs managed to right the ship in 2020. The 2021 is affected by the acquisition of Hey Dude. The acquisition also affects the numbers in 2022. Hence, we cannot really conclude anything from the numbers in 2021 and 2022. All in all, I'm optimistic and believe that we will see higher numbers in 2023.

Finally, we investigate the free cash flow. In short, free cash flow is the cash a company generates after it has paid for operating expenses and capital expenditures. Levered free cash flow is the amount of money a company has left remaining after paying all of its financial obligations, I use the margin for it to make more sense. Free cash flow yield is the free cash flow per share a company is expected to earn against its market value per share. Crocs has managed to deliver a positive free cash flow every year since 2016, while significantly increasing it in the later years. Crocs have also managed to boost their levered free cash flow, which is very encouraging to see, while the high free cash flow yield indicates that Crocs is trading at a cheap price, but we get back to that later.

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 earnings. Having done the calculations on Crocs, they show that Crocs can pay off their debt in 4,25 years. It is higher than I would like, but as the reason is the acquisition of Hey Dude, I'm not overly concerned. Management has also managed pay down debt, which we will back to later.

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. Another indicator that Crocs has a strong brand moat is that in Piper Sandler's 2023 Spring Survey Crocs was rating as the number 6th most popular footwear brands among teenagers, while Hey Dude rated as the 8th most popular footwear brand. Macroeconomics. Macroeconomics could affect Crocs in the short-term. In their 2022 fourth quarter earnings call, management mentioned that inflationary costs resulted in gross margins decreasing by 180 basis points, while higher freight prices and inventory handling costs resulted in another 180 basis points decrease in gross margins. Furthermore, if we see a longer recession, it could affect consumer confidence, which will affect the sales of Crocs products. The high debt. Crocs has a high debt because of the acquisition of Hey Dude. And while management has paid down $500 million worth of debt in 2022, management still expects to interest to be higher in 2023 than in 2022 because of the rise in interest rates. Furthermore, the share repurchase program has been set on hold as management prioritizes to pay down debt.

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. Right now, Crocs sells sandals for about $300 million a year. However, management expects that sandals is $30 billion addressable market, meaning there are plenty of room to grow. Management expects 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 Hey Dude 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. Jibbitz is a low cost and high margin product that none of their competitors have. In 2022 the sales of Jibbitz grew by 27 % year over year and is now 8 % of the total revenue.

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 $8,82, which is the number from 2022. I chose an Estimated future EPS growth rate of 15 (Which is the highest I use but below the consensus growth from Finbox at 21,2 %), 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 $264,60, 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 $132,30 (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 603,1. The Capital Expenditures was 104,2. 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 72,94 in our further calculations. The Tax Provision was 178,3. We have 61,7 outstanding shares. Hence, the calculation will be like this: (603,1 - 72,94 + 178,3) / 61,7x 10 = $114,82 in TEN CAP price.

The last calculation is the PAYBACK TIME. It is also described in "MY STRATEGY". With the Free Cash Flow Per Share at 8,08 and a growth rate of 15 %, if you want your purchase back in 8 years, the PAYBACK TIME price is $127,55.

Having investigated Crocs, I find the company to be very interesting. They have large moat, great management, and some good numbers. 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. 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 macroeconomics. 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 surveys show that Crocs is still a popular brand. The brand relevance is something that needs to be continuously monitored if you invest in a company like Crocs though. I really like Crocs and it is the 3rd largest position in my portfolio. I may add to the position if Crocs falls below the TEN CAP price of $114,82, as it would trade at a 50 % discount to intrinsic value on all my three calculations.

My personal goal with investing is financial freedom. It also means that to obtain that, I do different things to increase my wealth. If you have some extra hours to spare each month, you can turn a few hours a week into a substantial amount of money in a few years. If you are interested to know how I do it, you can read this post.

I hope that you enjoyed my analysis. Unfortunately, I cannot do a post of all the companies I analyze. I am available to copy but if you do your own trades, you can follow me on Twitter instead, as I tweet when I buy or sell anything.

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