Pe3check/iStock Editorial via Getty Images

Pe3check/iStock Editorial via Getty Images

Referencing back to my previous thesis, I now see Crocs, Inc. (NASDAQ:CROX ) as a strong buy while shares are near $60.00 per share. Looking at the Heydude acquisition, which closed on the 17th of February, and associated revenue, Q2 2022 and full year 2022 guidance increases, it is easy to see the margin of safety in Crocs. The stock trades right around 5.8X Forward Non-GAAP price to Earnings. Most importantly, Crocs is still rapidly expanding and making headway on reaching their goal of $6B by 2026 while focusing tons of efforts on ESG. Crocs now expects revenue of near $3.5B for full year 2022, up from $2.313B ending 2021. Factoring in an expected 52% full year revenue growth, near 800M in revenue from Heydude, and long-term product growth opportunities, I am pounding the table that Crocs is now undervalued.

For those who do not know about Heydude, they design what they claim are a comfortable shoes, that is, both versatile and accessible. They were founded in 2008 in Italy.

Heydude, much like Crocs, is an innovative company that focuses on lightweight shoes. By 2010, Heydude expanded into the Europe, South America, America, and Eastern Asia. Not so long after, Heydude reached 1 million shoe sales in 2011. By 2018, Heydude reached another milestone, selling 5 million pairs worldwide. Notably, Crocs reported in the earnings report that Heydude ranked ninth in Piper Sandler’s Spring 2022. This marks the second consecutive survey in which Heydude has placed in the top 10.

As of February 17th, 2022, Crocs completed its acquisition. The Heydude acquisition is being funded by a total of $2.05B, which is be paid in cash. A total of 2,852,280 shares will be issued to one of the sellers, Heydude's founder. The share price is based on a 20-day share price average period prior to the December 22nd signature date. Crocs increased commitments under its Senior Revolving Credit Facility by a total of $100.0 million, with a new total of $600.0 million, and also drew $50.0 million under its Senior Revolving Credit Facility. With these total acquisition costs, Crocs will be putting share repurchases on hold throughout 2022, but expects to be <2.0X gross leverage by the end of 2023, when share repurchases would likely be reinstated.

Crocs’ acquisition of Heydude adds another high-growth, profitable brand to the Crocs balance sheet, making it a powerhouse multiproduct machine. With Heydude being run independently from Crocs, the shoe innovation, marketing, and infrastructure scalability will bolster Crocs’ revenue for years to come. Heydude is expected to provide immediate accretive revenue growth to Crocs’ balance sheet, which I will dive deeper into later. All this said, Crocs is even more attractive now with Heydude on the balance sheet.

Crocs went into Q4 of 2021 expecting full year revenue growth to be 67% versus the Q3 guided 62% to 65%. Again, going into Q4 21, Crocs guided revenue growth of approximately 42%. Crocs also said, 2022 revenue growth was to exceed 20% compared to 2021.

So, how did they guidance compare to results? Q4 21 Earnings revenue came in at $586.6M, resulting in an increase of 42.6%, just beating guidance from Q3. Of the increases in revenue, sales in America increased 51%, EMEA increased 23%, and Asia Pacific increased 10%. Other notable number is Direct to consumer sales. Direct to consumers sales increased 45% versus the previous year and made up 54% of revenues. One of the most notable increases is with adoption of digital sales growth. This, in my opinion, will allow Crocs to reach its long term 2025 goals.

Q1 Revenue Growth (Crocs Investor Relations May 2022)

Q1 Revenue Growth (Crocs Investor Relations May 2022)

For Q4 2021, Digital sales grew 41% and represented 40% of revenues. 2021 Full year revenue came in over $2.313B, slightly beating what I predicted based on a 67% increase on full year 2020 revenues of $2.3B. Adjusted earnings per share doubled from 1.06 to 2.15 for a year over year period comparison, and ended 2021 at $8.32 on a diluted basis. Gross margins increased 770 basis points to 63.4% when compares to the same period in the previous year. Croc’s cash and equivalents as of the 31st of December 2021, came in at $213.2 million.

For Q1 2022, Crocs expected revenues near $605M to $630M. Previously, I predicted that Crocs would predict around a 20% increase of revenue, or near a $460M increase. I felt this was conservative. I originally predicted on a conservative side that the 2022 final revenue predictions would come in around $2.76B. Now, looking at the most recent earnings. Crocs Q1 2022 earning showed revenues of $660.1 million increasing 43.5% when comparing a year over year period. Crocs brand revenues came in at $545.2M increasing 18.5% when compared to 2021. Heydude brand revenues came in at $114.9M for the period following the close of the acquisition. Crocs Brand digital sales grew 20.3%. Heydude digital sales represented 25.9% of total Heydude Brand revenues.

North American revenues increased 19.5%, Asia Pacific revenues 16.0%, and Europe, Middle East, Africa, and Latin America revenues increased 17.9%. Crocs Cash/cash equivalents totaled $172.0M as of March 31, 2022. This is lower when compared to $213.2M as of December 31, 2021. Inventories increased to $407.6M as of March 31, 2022. Which is up from $213.5M on December 31, 2021. This increase was driven primarily by the addition of Heydude products to inventory combined with an increased Crocs brand product.

FY2022 Guidance (Crocs Investor Presentation May 2022)

FY2022 Guidance (Crocs Investor Presentation May 2022)

Crocs now focuses on six United Nations Sustainable Development Goals (SDG) the company can contribute to. These categories consist of: Zero Hunger, Gender Equality, Decent Work and Economic Growth, Reduced Inequalities, Responsible Consumption and Production, and Climate Action. Crocs has been recognized by Forbes as one of America’s best mid-sized employers, as well as one of the best employers for diversity. With this said, Crocs is staying focused on upkeeping its SDGs.

Crocs recently released the 2021 ESG report. In 2021, Crocs donated more than 150,000 pairs of shoes globally. Crocs also enabled over 25 million meals for those in need, by raising $2.5 million. One of the most important ESG components I found was that Crocs identified more sustainable alternatives for packaging. The alternatives include the integration of post-industrial and post-consumer recycled materials, which are said to be introduced throughout 2022. Crocs was recognized as an Employer of the Area in Broomfield, CO in 2021. Additionally, Crocs’ storage and fulfillment facility in Ohio was awarded a One Green Globes Certification for New Construction. This award was presented due to displaying and practicing environmental efficiency practices. The award stated that through the construction, the Crocs facility recycled more than 75% of its construction waste.

Much like Crocs, Heydude has focused on sustainability. Products from Heydude are made from recycled leather, organic cotton, recycled plastics, and recycled cork. Going even further than this, Heydude put a lot of effort into reducing retail waste with shipping. Heydude ships products with the packaging consisting of cornstarch, which adds biodegradability to its packaging products used. After looking into the initiatives, it is easy to see how buyers love the products, and the companies.

For Q2 2022, Crocs expects revenues to be approximately $918 to $957 million, which implies approximately 43% to 49% growth when compared to second quarter 2021. Crocs Brand revenue growth to be approximately 17% to 20% on a constant currency basis, and 12% to 15% on a reported basis, which implies revenues of approximately $718 to $737 million on a reported basis. The impact to prior year of pausing Russia is approximately $20 million. Heydude revenue is expected to reach $200 to $220 million.

For Full year 2022, Crocs is expecting revenues to be approximately $3.5B which will represent representing between 52% and 55% growth when compared to 2021. Revenue growth for Crocs Brand is set to exceed 20% when compared to 2021. This does not account for Heydude. Heydude brand is predicted to be $750M to $800M. It is worth nothing that Crocs said that gross margin would include $75M million in air freight for the first half of 2022. Adjusted operating margin to be approximately 26% to 27%. Gross leverage to be below 2.0x by mid-year 2023 following strong earnings and cash flow expectations for 2022. Crocs stated an expected adjusted diluted earnings per share of $10.05 to $10.65, with capital expenditures amount close to $200M accounting for supply chain investments supporting company growth.

Growth Framework (Crocs Investor Presentation February 2022)

Growth Framework (Crocs Investor Presentation February 2022)

Crocs largest opportunistic goals are still Sandals and Asia markets. Sandals market alone stands at what Crocs values as a $30B market, which currently has no set leader. Crocs hopes to 4x its current sandal revenue growth by the year 2026. Crocs’ ability and history of marketing should aid in driving growth within the sandals department. Crocs hopes to take existing customers and Segway clog owners into multiproduct owners, and own sandals as well. For a simple number equation, if crocs can get 5M of those who own clogs to buy 1 pair of sandals at $39.99 a pair, this would boost revenue by about $199M.

Total revenue from sales in Asia came in at $184,335,00M. If Crocs can continue growing market share from Asia sales and 3x by 2026, Asia should offer revenue near $553M. Currently, China stands as the worlds 2nd largest footwear market. Over the years, Crocs has been developing production incentives and investing in marketing and collaborations in the Asia areas. I personally see Crocs reaching closer to $600M in Asia revenue by 2026, based on the previous calculations, and history of revenue growth/revenue beats.

Digital Sales are expected to reach $2.5B by the year 2026. To put this into perspective, 40% of 2021 sale were accounted for by digital sales. This with 2021 revenue coming in at exactly $2,313,416.00, 40% comes out to $925,336.40. So, for Crocs to get to $2.5B in digital sales in 2026, that means there is more than a 2.5X opportunity in digital sales alone. Crocs also said that Crocs brand is expected to be $5B and Heydude to reach $1B by 2026. With the expectation of Digital Sales to be $2.5B, this would come out to about 42% of revenue in 2026 to come from digital sales alone. Crocs also expects annual free cash flow to exceed $1B in 2026.

On May 6th, 2022, Crocs and Figs (FIGS) announced a partnership for donating shoes together. They announced that during the National Nurses Week, the Crocs and FIGS combo will give away 10,000 pairs of Crocs shoes. They also announced they would give away 10,000 pairs of FIGS scrubs to caregivers across the United States. This is a great move for both.

With the Heydude acquisition transaction is now closed, the provided $800M in revenue for FY2022, Q2 2022 revenues expected to come in near $918M to $957M, I love Crocs at is current share price and valuation. In 2021 Full year revenue came in over $2.313B, slightly beating what I predicted based on a 67% increase on full year 2020 revenues of $2.3B. Now calculating the predicted 20% growth reaching $3.5B with at least $800M coming from Heydude, I am predicting full year 2022 revenue to result slightly over $3.6B.

I believe investors should use this overall market pullback to buy shares or add shares of a value growth combo play for a company with a history of both revenue growth and earnings per share growth.

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Disclosure: I/we have a beneficial long position in the shares of CROX either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.