Crocs Inc Q2 Earnings Summary
After reporting Q2 earnings, Crocs’ stock price fell almost 16% to $101 a share. Now the stock price has increased to $106 but is still down more than 12% after earnings, even though Crocs’ quarterly adjusted EPS increased 10.8% to $3.59, beating the Crocs Estimate of $2.98. During Q2, Crocs Brand revenues increased 13.8% to $833 million, and Heydude Brand revenues increased 3% to $239 million. Moreover, the operating margin increased by 3% to 29.7%. So, why was the stock down? We will comment first on the improvement and growth of Crocs Inc. and then dive into the reason for the recent stock drop.
Crocs Q2 Brand Performance
Crocs brand revenues increased 13.8% or 14.9% on a constant currency basis compared to 2022. This growth has been strongly fueled by the growth in Asia revenues of 33.2%, a region in which the company is seeing strong brand momentum, particularly in China, in which Q2 revenues increased by over 100%. In North America, revenues increased by 12.2%; in EMEALA, revenues declined by 0.2%. However, for the Crocs brand, DTC comparable sales increased by 19.5% and wholesale revenues increased by 3.8%.
Heydude Q2 Brand Performance
Heydude revenues increased 3% to 239.4 million, from which DTC increased 29.7% to $90.6 Million and wholesale decreased 8.4% to $148.8 Million. not spectacular growth for Q2 when we take into account Heydude’s 2-year growth of approximately 102% from Q2 2022 to Q3 2023. However, revenue growth was expected to decelerate as Crocs continues to improve its warehouse capabilities and expand the market for Heydude’s shoes globally, which is still yet to be seen as they are mostly sold in the US.
Crocs 2023 Outlook
Here is where Crocs investors felt disappointed with its Q2 2023 results, especially with Heydude’s brand performance. Although the revenue expectations for the Crocs Brand in FY 2023 increased by 0.5%, the expectations for Heydude were lowered from mid-20% on a reported basis to 14%–18%. On the Q2 Earnings call transcription, the CEO of Crocs, Andrew Rees, attributed this decrease mainly to the wholesale segment, as Crocs wholesale partners are being more cautious due to the overall state of the economy and uncertainty of the market and consumer spending, as well as a lack of strong history on Heydude’s shoes demand given the recentness of the company. Andrew Rees also mentioned the short-term constraints that Crocs is experiencing due to the continuing integration of Heydude’s operations, for which Crocs is improving its warehouse capabilities and implementing its ERP System in order to enhance Heydude’s efficiency.
Crocs growth drivers and challenges ahead
1. Geographical Diversification
When evaluating Crocs’ prospects, we have to consider the strong positioning of the brand and its differentiation in a highly competitive market, where they have seen great recognition, and solid compound annual growth of 34% from 2018 to 2022. And given the pricing and affordability of Crocs products, an economic downturn may not impact its sales as much as that of other discretionary companies. Additionally, the geographical diversification of Crocs gives the company a strong position to endure country-specific macroeconomic challenges and even take advantage of the decrease in the strenght of the dollar with respect to other countries, which could provide a nice boost and stability to Crocs revenue.
2. Crocs International Expansion
Crocs international expansion efforts has shown great results in Asia, where revenues grew by 39%, in china the growth in Q2 increased over 100%. Approximately 31% of Crocs total TTM revenues and 40% of Crocs brand TTM were from international markets. So, despite Crocs trading at a 10 P/E and at 14 times price to free cashflow, Crocs is still growing at double digits on annual basis, and maintaing a strong operating margin of approxiamtely 27% while improving its presence and recognition globally.
3. Sandals Global Footwear Market
Sandals’ global footwear market is estimated at $30 billion, from which Crocs has achieved a revenue of 310 million in 2022. This product segment is expected to grow 29% to $400 million in 2023, which will represent about 10% of Crocs’ total expected revenues of $4 billion in the 2023 FY. So, there is a sizable market share that could boost Crocs’ growth over the long term, and that represents Crocs’ ability to utilize its product quality and innovation capabilities to penetrate new niches in the footwear market globally.
4. DTC Transition
The DTC Transition is expected to increase Crocs’ profitability in the long term as they continue to reduce relationships with non-strategic wholesale partners and increase the reach of the direct-to-consumer channels through Crocs.com as well as Crocs’ marketplaces, which could improve the overall quality of the customer experience and Crocs brand reputation. The DTC revenues increased by 26% and represented 46% of Crocs TTM total revenues.
5. Wholesale
Wholesale revenue has a weak outlook as the wholesale partners will be facing a challenging environment due to the credit pressure on consumer spending in the quarters to come. In Q2, total wholesale revenues increased by 0.2% compared to 2022. For the Crocs brand, wholesale revenues increased by 3.8%, but for the Heydude brand, wholesale revenues decreased by 8.4%. This decrease in Heydude wholesale is mainly driven by a more conservative approach to bookings from wholesale partners in the current environment, and a lack of confidence in and history with Heydude’s products. Although other companies in the footwear sector, such as Skechers and Nike, are experiencing declines of 5.9% and 2%, respectively, on wholesale revenue, this shows a weaker wholesale performance than the 0.2% wholesale revenue growth from Crocs (still not very encouraging). There is substantial pressure to be felt on the wholesale revenues of Heydude since they represent approximately 61% of HEYDUDE’s revenue.
6. HEYDUDE Debt Repayment
During the first half of 2023, Crocs has repaid approximately $300 million of debt, and since the Heydude acquisition, Crocs has paid down approximately $850 million, reducing borrowings to $2 billion, which is still a significant amount of debt that represents almost 30% of the current Crocs market cap of $6.5 billion. However, the overall interest expense as a percentage of income from operations is 15%, not a concerning interest expense on the debt taken. Additionally, Crocs has expressed its commitment to achieving its long-term target for gross leverage of 1.0x–1.5x and balancing the capital allocation between debt repayment and share repurchase as the gross leverage decreases.
Conclussion
Crocs has a stable stream of revenue and cash flow that will allow them to continue to invest in their distribution and expansion strategy globally and repay the debt taken for the Heydude brand acquisition. We like Crocs’ strong brand recognition and its geographical diversification as it is not entirely exposed to a single market downturn, and we also find the valuation of the stock appealing and aligned with our conservative evaluation of Crocs fundamentals and its future prospects. However, we do remain cautious about the progress in regards to the expansion of the Heydude brand as its growth has deaccelerated, and another key issue to keep an eye on is the impact that the wholesale environment could have on the company as the wholesale channel represents approximately 54% of Crocs revenues.
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