The following segment was excerpted from this fund letter.
Crocs, Inc. (NASDAQ:CROX)
Crocs, Inc. trades at 5x this year’s earnings and 6x EBITDA. Like many of its peers in the consumer space, the valuation implies the market regards the company as a one-time pandemic beneficiary, and business prospects offer little growth beyond this year. While it would be ill-advised to suggest the company did not benefit from the pandemic’s effects on consumer spending of goods, I think this view is incomplete and neglects to incorporate the tremendous success the management team has achieved since they arrived five years ago.
Most recall Croc’s original success as having come from pretty much out of the blue, as the funny-looking but comfortable clogs sent the stock on a meteoric rise shortly after its IPO in 2006. Many also conflate the stock chart with a fad driven boom and bust cycle, even though a closer look at clog volumes actually shows fairly consistent growth over the last twenty years. Even so, the company was not without its problems, primarily from management missteps as an overburdened cost structure created profit headwinds.
Accordingly, when Andrew Rees became CEO in 2017, he had his work cut out for him. Initially, he focused his efforts on taking costs out and making the operation more efficient. He shrunk the store count by more than a third and began optimizing their go to market strategy by emphasizing sales through the direct-to-consumer digital channel and through wholesaler channel partners. This enabled the company to devote greater resources to product innovation and marketing, a smart reallocation of corporate resources that offered great payoffs for the branded consumer products company.
These efforts have paid off handsomely. Deft and efficient marketing spend with influencers on social media via platforms like Instagram put Croc’s back in the limelight. Clever products like jibbitz, the fun and offbeat charms which can be appendaged to the clogs, grew a second consumables-like revenue stream. Growth and profitability for the core Croc’s brand followed.
Today, management is focused on perpetuating the success of the Croc’s clogs, with new product adaptions partly aided by a consistent new diet of jibbitzs. But they are also keen on duplicating their successful playbook in new markets, both geographically in markets like Europe and Asia where they have a lot of room for growth, and importantly, across new products like sandals, and most recently, lightweight loafers.
The company’s December purchase of HeyDude was initially panned by investors. Management took on debt to finance the acquisition (though at 3x EBITDA it looks quite manageable) and paid a full multiple for a nascent company – born in Italy but selling shoes in America – that most investors had never heard of. Despite the initial share price reaction, the HeyDude acquisition looks quite promising, particularly when considering the company catapulted to half a billion dollars in sales and a low 30s EBITDA margin in just over a decade’s time.
Now Croc’s proven management team is intent on building on this strong start by bringing greater resources like increased marketing budgets and broader distribution to the promising brand. Proven industry veteran Rick Blackshaw has been appointed to lead the company’s efforts. Accordingly, the recent acquisition broadens Croc’s product line and adds another promising avenue of growth, positioning the company well to achieve its recent goals which imply multiyear sales and earnings CAGRs north of 20%. Insiders seem to agree the future is bright with several executives and board members making open market purchases all year long.
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