Crocs, Inc.

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 4/5

Crocs, Inc. is a global footwear company primarily known for its foam clogs, but also designs and sells a wide range of other footwear and accessories.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: Crocs is a global footwear company that designs, develops, manufactures, markets, distributes, and sells a wide variety of casual lifestyle footwear and accessories for men, women, and children. They are known for their iconic, comfortable, and innovative footwear.

Crocs positions itself as a “global leader in innovative casual footwear”, offering both comfort and style for consumers worldwide.

Revenue Distribution Crocs operates through two primary channels:

  • Wholesale: Crocs products are sold through distributors, traditional retailers, sporting goods stores, e-commerce marketplaces, and department stores.
  • Direct-to-Consumer (DTC): This includes company-owned retail stores, company-owned e-commerce websites, and third-party websites where Crocs acts as the seller.

In 2023, approximately 67% of total revenue was generated from the Wholesale channel, while DTC accounted for the remaining 33%.

  • Geography: Crocs is a global company, with revenues being generated primarily from the United States, the Asia Pacific region, Europe, Middle East, Africa, and other international locations.

In 2023, North America is its largest single market, accounting for 49% of its revenues followed by Asia pacific which is 27%.

  • Brands:
    • Crocs Brand: This core brand focuses on its iconic foam clogs and other casual footwear, often using the signature lightweight and comfortable design.
  • HEYDUDE Brand: Newly acquired in 2022, HEYDUDE is a multi-category footwear brand focusing on casual lifestyle shoes.

Industry Trends:

  • Casualization of Footwear: There is a growing trend towards comfortable, casual footwear options globally, which benefits Crocs with its main products and its unique selling proposition.
  • E-Commerce Growth: E-commerce continues to grow, especially among younger consumers which benefits Crocs through its DTC sales channel and its investments into its digital platform.
  • Shift in Consumer Preference: Consumers are valuing comfort, style, and uniqueness at an increasing rate, trends which are beneficial to the products sold by Crocs.
  • Global Expansion: Companies operating in footwear markets are increasingly expanding across the globe to reach new consumers and grow their sales.

Competitive Landscape The global footwear market is highly competitive, with several players vying for market share.

  • Direct Competitors: Other footwear companies selling similar foam-based clogs or other casual shoes.
  • Indirect Competitors: Brands offering casual footwear, such as sneakers and sandals, could impact Crocs.
  • Large Players Big players such as Nike and Adidas also compete in the casual footwear market.
  • Fast Fashion Competitors: In footwear category competition also includes brands which have fast moving trend-based items which appeal to the general public.

The market is very competitive.

What Makes Crocs Different:

  • Iconic Design: The signature clog design is instantly recognizable and has developed a strong brand following.
  • Comfort and Functionality: Products are designed to be comfortable for all-day wear and functionality, with lightweight and durable materials.
  • Innovative Use of Materials: Use of proprietary materials (Croslite) for comfort, functionality, and antimicrobial properties which differentiate them from competitors.
  • Customization Options: The ability to personalize products with Jibbitz charms resonates well with consumers.
  • HEYDUDE Acquisition: The acquisition of HEYDUDE allows for expansion into new categories of casual footwear which can help the company attract new consumers.

Crocs is distinguished in a competitive market by its recognizable design, comfort focused material, and customization options.

Financials

  • Revenues: CROX has shown strong revenue growth over the years driven by the increasing consumer preferences for its unique products. 2022 was a record year in terms of revenues.
  • Margins: Crocs generally operates on high margins, driven by its pricing power and relatively low manufacturing costs. Operating profit margins have been pretty stable at around 24% but it also has had huge fluctuations in recent times from around 15% to 30%.
  • Cash Flow: The company has shown good cash flow generation, indicating a strong underlying business and the brand’s market value is stable. Free cash flow in 2022 was around 620 million and in 2021 it was around 780 million with huge fluctuations in between, a testament to the nature of the business as a whole, which is very difficult to forecast.
  • Debt: The company has manageable levels of debt, with the recent acquisition being the primary driver of long-term debt increases. Despite the debt, their balance sheet health has remained pretty solid.

Latest Financial Performance and Concerns

  • Q1 2024 Results: Revenue increased by 6.2% to $939 million with a decline in North American region and growth being driven by growth in Asia pacific region. Gross margin declined by 100 points to 52.7%. There has been a rise in operating expenses by 17% which has led to a decline in profitability for the quarter.
  • Outlook for 2024: The company expects revenue growth to slow in 2024 with an emphasis on maintaining margins. They anticipate that the HEYDUDE brand will not be as profitable as the core CROX brand.
    • HeyDude Acquisition and Management’s perspective: Management has said they will continue to focus on profitability for the HeyDude acquisition which has had lower margins compared to its core CROX brands.
  • China Strategy: As consumer sentiment has not recovered in China, the company is more focused on its other markets.

Moat Analysis:

  • Intangible Assets (Brand): Crocs has a widely recognized brand but there has been an increase in knockoff copies that have affected the company’s value and its moat. Competitors can provide similar comfortable products which directly affect margins and pricing power of Crocs. HEYDUDE does not have a well-established brand as of now and thus is not creating a good moat for the company.
  • Switching Costs: Crocs benefits from modest switching costs, as customers may have their entire wardrobe or closet aligned with the products. The use of Jibbitz also creates some stickiness. The comfort factor is also a factor that ensures that customers will be loyal to their products. However these costs are not high and a competitor with a new innovative design may disrupt the business.
  • Network Effects: The network effect is absent. Other people’s use of Crocs does not influence your decision to purchase.
  • Cost Advantages: There are no specific cost advantages that can be clearly identified for this business. It depends on raw materials and production efficiencies, both of which can fluctuate a lot.

The moat of Crocs is weak due to high vulnerability to competition and it is mainly based on brand recognition and some switching costs which could be easily replicated by competitor brands.

Moat Rating: 2 / 5.

Risks that Could Harm the Moat and Business Resilience:

  • Changing consumer preferences: Consumer preferences and fashion trends can change very quickly, especially for retailers. There is no guarantee of how long the products made by Crocs will remain in style. Fashion is notoriously fickle, and that’s a fact which can affect this business heavily.
  • Competition: The footwear market is crowded and competitive. New companies and existing ones can launch new innovative products to compete with Crocs which can impact the company’s growth and profitability.
  • Reliance on foam clogs: Crocs depends heavily on the sales of its clog line and if that product line loses popularity, the company’s sales and growth will take a hit.
  • Supply chain issues: The manufacturing and sourcing process is difficult to manage. The company might face issues in maintaining the quality and/ or prices of its products in the future.
  • Acquisition risk: The company has acquired HEYDUDE recently and as seen from the past such acquisitions can often have execution and integration challenges, which could impact the profitability of the company.
  • Economic Downturn: Given the fact that the products of CROX are discretionary it may face demand challenges in the event of a macroeconomic downturn.

Despite these risks, the company still has good brand awareness and a business model that has generated profits historically.

Understandability: 2/5 While the core business of selling footwear is simple, the financial complexity arising from the multi-channel business and the accounting adjustments for acquisitions, impairments, and other things make it quite complicated to understand the business from the outside and requires deep understanding of accounting.

Balance Sheet Health: 4/5

  • The company is financially stable with good liquidity.
  • The current debt levels are manageable, and despite recent increase in long-term debt, it is still low compared to total assets.
  • There has been a consistent pattern of growing revenues.
  • The company has a huge inventory balance but seems to be managing it well.

Despite having a complex financial situation, the company has a solid enough balance sheet to meet its immediate liabilities and also have enough flexibility for future growth opportunities.