Crocs: The best margins in the sector.

Crocs are popular among customers due to their innovative and highly comfortable products that can be personalized in various ways. Furthermore, its products are inexpensive to make, which means that Crocs continuously manages to deliver the best profit margins in the sector. Is Crocs worth investing in? At what price? It is what I am going to analyze in this analyis.

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 represents 4,38% of my copytrading portfolio. If you want to copy my portfolio or view the stocks I currently hold, you can find detailed instructions here. I also own Crocs products that I really like. However, my ownership of shares and products in Crocs will not impact this analysis. I will strive to keep it unbiased, as I always do. If you want to purchase shares or fractional shares of Crocs, you can do so through eToro, which provides a user-friendly platform that makes it easy to get started.

Crocs describes itself as the global leader in innovative casual footwear for men, women, and children. The company was founded in 2002 and has since sold over 800 million pairs of shoes in more than 80 countries worldwide. Crocs' most famous shoe is the clog, which is made from Croslite, a closed-cell resin. It means that it is not made of either rubber or plastic. The clog is made from only three ingredients, making it easy and inexpensive to produce. Besides clogs, Crocs also make sandals, other types of shoes, and Jibbitz, which are charms that can be inserted into the holes of the clogs. Each clog has 13 holes, which means that a pair of clogs can accommodate up to 26 Jibbitz at a time. The Crocs clog has a significant following among American middle school and high school students who use it as a school shoe. Besides the Crocs brand, Crocs also owns the HEYDUDE brand, which they acquired in 2022. Crocs sells its products in more than 80 countries through two distribution channels: wholesale and direct-to-consumer. In 2023, wholesale contributed 52% of the sales, while direct-to-consumer sales accounted for 48%. Crocs has two reportable operating segments: the Crocs Brand and the HEYDUDE Brand. The Crocs brand contributed approximately 76% of the revenue in 2023, while HEYDUDE contributed approximately 24% of the revenue. The distinctive appearance of the Crocs clog makes it highly recognizable, contributing to Crocs' strong brand moat.

The CEO is Andrew Rees. He joined Crocs in 2014 and became the CEO in 2017. He has over 25 years of experience in the footwear and retail industry, having held various positions in companies such as L.E.K Consulting, Reebok, and Laura Ashley. He is recognized for leading the resurgence of Crocs by spearheading the implementation of social and digital marketing strategies. By collaborating with various artists, brands, or designers who appeal to different target audiences, we can enhance brand relevance. He also decided to simplify the business by closing stores to downsize the company and establish a highly profitable and resilient growth model. As a leader, he is known for his strong communication skills in effectively conveying his strategy and plans. He believes that in a large organization, it is important to "humanize yourself" and be approachable so that people feel comfortable talking to you. This enables you to maximize people's potential and listen to their valuable and innovative ideas. He also emphasizes that his philosophy is to avoid the constant need to be right and instead focus on reaching a consensus agreement on how to proceed. I believe that the combination of Andres Rees' credentials and modern leadership will drive the future growth of Crocs. I have great faith in the company's management.

I believe that Crocs have a strong moat. I really like the management as well. Now, let us examine the numbers to determine if Crocs meets our criteria for a robust competitive advantage. In case you want an explanation about what the numbers represent, you can refer to "MY STRATEGY" on the website.

The first and most important number we will investigate is the return on invested capital, also known as ROIC. We want to review a 10-year history, and we expect the numbers to surpass 10% for each year. Looking at the numbers, it is a tale of two distinct periods. The numbers up to 2018 were disastrous, with ROIC being negative in all five years. However, the numbers from 2019 onwards have been great, despite reaching a low point of 15,8% in 2022. However, 2022 was a challenging year for most companies, and Crocs managed to increase its Return on Invested Capital (ROIC) again in 2023, even though it has not reached the previous heights. Personally, I believe that CEO Andrew Rees is the reason for the improved Return on Invested Capital (ROIC) of Crocs once he was able to implement his strategy. I'm encouraged by the numbers that Crocs has delivered under Andrew Rees' leadership.

The following numbers represent the book value plus the dividend. In my previous format, this was referred to as the equity growth rate. It was the most important of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actual numbers and the year-over-year percentage growth. The equity has decreased every year from 2013 until 2019, which is not an encouraging sign. However, Crocs managed to turn things around in 2020. The year 2021 was marked by the acquisition of HEYDUDE. The acquisition also impacts the figures in 2022 and beyond, where the equity is significantly higher. It is worth noting that Crocs managed to increase their equity from 2022 to 2023, and hopefully, this is a trend we will continue to see moving forward.

Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins provide a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. Crocs has managed to deliver a positive free cash flow every year since 2016, significantly increasing it in subsequent years, and reaching its highest level ever in 2023. Crocs have also managed to boost their levered free cash flow margin, which has been above 10% in the last four years, and above 20% in two of those four years. Crocs hasn't managed to reach the high level of success they achieved in 2021, but they came close in 2023. Hopefully, Crocs will manage to surpass the 2021 numbers in 2024. Additionally, the high free cash flow yield of 10,4% indicates that Crocs is trading at an inexpensive price. However, we will discuss this further later on.

Another important aspect to consider is the level of debt. It is crucial to determine whether a business has manageable debt that can be repaid within a period of 3 years. We do this by dividing the total long-term debt by earnings. After conducting the calculations on Crocs, it is evident that the company can pay off its debt in 2,01 years. It has been less than three years, which means that debt is not a concern for me when investing in Crocs. It is worth noting that management has prioritized paying off debt since the HEYDUDE acquisition, which I believe is another sign of great management.

As with all other companies, there are some risks associated with investing in Crocs. One risk is competition. The global casual, athletic, and fashion footwear markets are highly competitive. Crocs' wholesale, retail, and e-commerce businesses face competition from companies like Nike, Adidas, Skechers, and Birkenstock. Some of these competitors have significantly greater financial resources, more comprehensive product lines, a broader market presence, longer-standing relationships with wholesalers, a longer operating history, greater distribution capabilities, and stronger brand recognition than Crocs. Furthermore, trends change rapidly, and although a brand like Crocs is currently popular, trends could shift, potentially allowing competitors to gain market share. Macroeconomics. Uncertainty about current and future global economic conditions may cause consumers, wholesalers, and retailers to defer purchases or cancel purchase orders for Crocs' products in response to tighter credit, decreased cash availability, and weakened consumer confidence. Crocs' financial success is sensitive to changes in general economic conditions, both globally and in specific markets, that may adversely affect the demand for Crocs' products. In its annual report, Crocs mentions that global inflation, elevated interest rates, industry-wide logistics challenges, and foreign currency fluctuations resulting in a stronger U.S. Dollar have impacted its results. Crocs expects these factors to continue affecting its business. Relying on third-party manufacturers. All of Crocs' footwear products are manufactured by third-party manufacturers, with the majority located in Vietnam, China, and Indonesia. Crocs compete with other companies for the production capacity of our third-party manufacturers, and Crocs do not exert direct control over the manufacturers' operations. Crocs' largest third-party manufacturer for the Crocs brand, with the vast majority of operations in Vietnam and China, produced approximately 47% of Crocs' production in 2023, which is an increase from the previous two years. Due to the concentration of Crocs' third-party manufacturers, disruptions at their facilities could have a negative impact on Crocs' financial results.

There are also plenty of reasons to invest in Crocs. One is sandals. In 2023, sandals surpassed the $400 million revenue mark, growing by 29% compared to last year, and now account for 13% of the Crocs brand sales mix. Furthermore, Crocs gained market share across its four prioritized sandal segments: everyday style, sport, street, and adventure. Sandals also attract new customers, as 61% of consumers who purchase sandals were new to the Crocs brand. Management has mentioned that these consumers shop more frequently, carry a higher average order value, and purchase multiple Silhouettes. Management also mentioned that sandal consumers are predominantly female compared to our other buyers. It means that the sandals category brings diversification not only to Crocs' overall product mix but also to Crocs' customer mix. Jibbitz. Jibbitz is a low-cost, high-margin product that none of Crocs' competitors offer. The Jibbitz business grew by 17% to over $0.25 billion in 2023, constituting approximately 9% of the total Crocs brand portfolio. Management has mentioned that they continue to view personalization as a major consumer trend and see an opportunity to further grow the Jibbitz penetration in 2024. This growth can be achieved notably through improved wholesale execution, deeper international penetration, and increased speed to market. They also mentioned that they believe there are  incremental penetration opportunities for Jibbitz. Finally, management has mentioned that they are super excited about using personalization through Jibbitz to create ongoing consumer engagement. International growth. Crocs' international market is growing rapidly. Management sees a great growth opportunity in China. Not only did Crocs report record revenue in China in 2023, but revenue from China still only represents 4% of its total revenues, highlighting the untapped potential Crocs has in the region. Management mentioned that other global brands, which benchmark revenue from Greater China, have a substantially higher revenue contribution from China, about four to five times higher than Crocs' 4%. Management also mentioned that South Korea has the highest market share of any discrete market globally. The fact that Crocs is growing in Asia is good for business. Management has mentioned that the Asian consumer is embracing personalization at a higher rate than other parts of the world, which could lead to increased Jibbitz sales. It isn't only the Asian market that is growing; management has also mentioned that they are seeing a great trajectory in parts of Western Europe and Australia.

Now it is time to calculate the share price of Crocs. I perform three different calculations that I learned at a Phil Town seminar. The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 12,79, which is from the year 2023. I have selected a projected future EPS growth rate of 7%. Finbox expects EPS to grow by 7% in the next five years. Additionally, I have selected a projected future P/E ratio of 14, which is double the growth rate. This decision is based on Crocs' historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be $87,07. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Crocs at a price of $43,54 (or lower, obviously) if we use the Margin of Safety price.

The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 930, and capital expenditures were 116. I attempted to analyze their annual report to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 81 in our calculations. The tax provision was 84. We have 60,5 outstanding shares. Hence, the calculation will be as follows: (930 – 81 + 84) / 60,5 x 10 = $154,21 in Ten Cap price.

The final calculation is referred to as the Payback Time price. It is a calculation based on the free cash flow per share. With Crocs' free cash flow per share at $13,45 and a growth rate of 7%, if you want to recoup your investment in 8 years, the Payback Time price is $147,65.

After investigating Crocs, I find the company very interesting. They have a moat, great management, solid financial performance, and deliver the best margins in the sector. Competition will be an ongoing risk for Crocs as they compete mostly against larger companies. Furthermore, fashion trends shift, and if Crocs do not continue to innovate, they risk losing market share. Macroeconomics has affected Crocs in the past and will continue to do so in the future. However, the risk is short-term as macroeconomics will eventually improve. Relying on third-party manufacturers and manufacturing concentration poses a risk for Crocs. For example, at the end of 2021 and into the first quarter of 2022, several of Crocs' third-party manufacturing facilities in Vietnam were either closed or not operating at full capacity due to local COVID-19 outbreaks and safety protocols. This situation had a negative impact on Crocs' financial results. Furthermore, with the deteriorating relationship between China and the United States, it may affect supplies from China in the future. There are also many things to like about Crocs. They are expanding their sandal business, which is attracting new customers who shop more frequently and have a higher average order value. The Jibbitz business may be my favorite aspect of Crocs, as it is a high-margin segment that sets it apart from its competitors. Finally, Crocs is growing rapidly internationally but still has plenty of room for further growth. I believe the rewards significantly outweigh the risks, which is why I own Crocs shares. I will increase my position if shares drop below $87, which is the intrinsic value of the Margin of Safety price, and below a 50% discount on the other two calculations.

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