While the equity markets have staged a remarkable comeback in 2023, several individual stocks are down this year. One such stock is the retail footwear company Crocs (NASDAQ:CROX). Valued at a market cap of $5.7 billion, CROX stock is down nearly 50% from all-time highs. While investors remain wary of the mid-cap company, I am bullish due to its enticing growth prospects, widening profit margins, and very cheap valuation.
CROX Stock Falls Following Q3 Report
Crocs is the company behind iconic brands such as HEYDUDE and, of course, Crocs. While it is part of the mature retail footwear market, Crocs has grown its revenue from $1.23 billion in 2019 to $3.55 billion in 2022.
In Q3 2023, Crocs reported revenue of $1.05 billion with adjusted earnings of $3.25 per share. Analysts forecast the company to report revenue of $1.03 billion and earnings of $3.10 per share. But following its Q3 results on November 2, Crocs stock fell by more than 5% as investors were not impressed by its 2023 guidance.
Crocs estimated revenue between $3.905 billion and $3.94 billion for 2023 compared to a consensus forecast of $4.01 billion. Its earnings guidance between $11.55 and $11.85 per share was also lower than estimates of $12.09 per share.
However, in Q3, Crocs exceeded the high-end of its revenue guidance due to double-digit revenue growth in its Crocs brand. Its top line was joined by industry-leading operating margins as the company gained market share amid the back-to-school season.
HEYDUDE Brand Under Focus
Crocs completed the acquisition of HEYDUDE for $2.5 billion in early 2022. While the company generates revenue from multiple channels such as Direct-to-Consumer, Wholesale, and Retail, HEYDUDE’s primary source of sales is from its wholesale distribution channel.
In Q3 2023, Wholesale revenue for HEYDUDE fell by 19.4%, spooking investors in the process. The company now aims to accelerate its marketplace management strategy to ensure long-term growth, resulting in a readjustment of its full-year outlook.
Three Reasons CROX Stock is Attractive
Despite the stalling sales of Crocs’ HEYDUDE brand, the retail stock remains an enticing investment option. Let’s see why.
1. The Stock is Undervalued
Crocs is forecast to increase its earnings at an annual rate of 10% in the next five years. Currently priced at 7.8x forward earnings, CROX is cheap and trades at a PEG (price-to-earnings-growth) ratio of 0.87x. Generally, a PEG ratio of less than one indicates that a stock is undervalued.
2. Profit Margins are Improving
As a standalone brand, Crocs reported an operating margin of 37.4% in Q3 compared to 33.1% in the year-ago period. Due to its improving bottom line, Crocs reduced its corporate debt by $400 million to $1.9 billion in the last three quarters. It also provided Crocs with the flexibility to repurchase shares worth $150 million in Q3.
3. HEYDUDE Sales Should Normalize
Soon after the acquisition, Crocs aggressively flooded the market with HEYDUDE products, resulting in higher inventory levels. Basically, Crocs wanted to increase brand awareness for HEYDUDE and is now wrestling with the growth pains associated with the brand.
Crocs expects HEYDUDE sales to decline by at least 20% in Q4 of 2023, resulting in single-digit growth for the combined entity.
Nonetheless, Crocs expects HeyDude to rake in $1 billion in sales in 2024, which suggests its sales estimates for the next 12 months may move significantly higher.
Is CROX Stock a Buy, According to Analysts?
Regarding Wall Street’s view on the stock, Crocs features a Strong Buy consensus rating based on seven Buys and two Holds assigned in the past three months. At $121.78, the average Crocs stock price target implies an upside potential of 28.8%.
It’s entirely possible that the market is overlooking Crocs’ dirt-cheap valuation and solid sales and profit margin growth. With CROX stock well off its high, it allows investors to accumulate shares at a discount and likely benefit from outsized gains when the market sentiment recovers.