I’m on record as saying that Crocs (NASDAQ:CROX) is the next big footwear brand, and that CROX stock is one of the best retail stocks to buy for the next five to 10 years.
But CROX stock has been under pressure recently, following the sandal maker’s second-quarter earnings in late July.
That print was good. Just not good enough for some investors. But assuredly good enough to affirm the company’s robust long-term growth narrative.
To that end, my advice here is simple. Let the turbulence shake out weak hands. Buy the dip. And hold onto CROX stock over the next few years, as Crocs becomes the world’s favorite casual footwear brand.
Here’s a deeper look.
The Next Big Footwear Brand
The long-term bull thesis on CROX stock is pretty simple.
We are in the midst of a secular, lifestyle pivot to consumers caring more about functionality than form.
Offices used to be filled with executives in expensive suits. Now they’re filled with people running around in shorts and flip-flops. Bombshell beauty products are out. Natural beauty products are in. Jeans and skirts are out. More comfortable and durable leggings are in. Value has beaten quality and stylishness in the retail vertical for several years.
Consumers today simply care more about function than form.
This consumption megatrend finally hit the footwear category in the late 2010s, giving rise to the ugly shoe trend, in which Crocs has been a star. The company’s signature clog is durable, affordable and comfortable. Many have also described it as ugly — the quintessence of function over form.
The numbers here don’t lie. Crocs has reported 7%-plus comparable retail store sales growth in every quarter since early 2018 (ten straight quarters).
This trend won’t die down anytime soon. Because it is part of a broader secular, lifestyle pivot, the ugly shoe trend will permeate throughout the global fashion world over the next five to 10 years, much like athleisure has permeated throughout fashion over the past decade.
Soon enough, you’ll be seeing Crocs shoes. Everywhere. Even at fancy dinners and office meetings. Much like you see leggings everywhere today.
To that end, Crocs — and CROX stock — has enormous upside growth potential over the next several years.
Strong Earnings From CROX Stock
Crocs’ second-quarter earnings were very good, and broadly confirmed that the aforementioned bull thesis on CROX stock is alive and well.
The company crushed second-quarter estimates. And by crushed, I mean crushed. Revenues were supposed to be $240 million. They came in almost 40% above that, at $330 million. Earnings per share came in at $1.01, versus 8 cents expected by Wall Street.
Revenues dropped 6% year-over-year, due mostly to store closures. But once those stores opened back up in mid-May, comparable-store sales rose 10.5% in constant currency, picking up exactly where they left off in early 2020. Global e-commerce sales surged 68%, underscoring that demand for Crocs remains robust — it’s just transitioning online.
Gross margins improved by 160 basis points to 55.2% on the back of strong demand, decreased promotional activity and increased pricing power. Operating margins rose 800 basis points to 22.3%, thanks to store closures reducing labor expenses.
Overall, it was a really good quarter which showed that:
- Crocs demand remains as robust as ever.
- The company continues to turn robust demand into gross margin expansion.
- Management is strongly executing and mitigating costs during the pandemic.
But CROX stock dropped after the print, probably because management gave a light guide for the second half of 2020 in which they called for revenues to be flat relative to the second half of 2019.
Crocs Stock Has Big Upside Potential
Don’t pay the light guidance too much attention.
Management is just being cautious, and rightfully so amid the pandemic. But demand for Crocs continues to be so robust — the recent KFC collaboration shoe sold out in minutes — that the company will almost unequivocally do better than flat growth in the second half of 2020, barring some rapid deterioration in the Covid-19 situation.
Looking past the second half of 2020, underlying demand trends imply that Crocs will continue to sell a lot of clogs over the next few years, powering what should be roughly 10% compounded annual sales growth to $2 billion — or more — in revenues by 2025.
Gross margins should continue to improve toward 60% on the back of strong demand trends. Positive operating leverage will kick in and drive the opex rate marginally lower. Operating margins will likely climb to 20% by 2025.
Assuming so, my modeling suggests that Crocs has visible runway to $4 in earnings per share by 2025. Based on a typical consumer discretionary 20 times forward earnings multiple and an 8.5% discount rate, that implies a 2020 price target for CROX stock of nearly $60.
Thus, I think CROX stock down at $35 looks really undervalued.
Bottom Line on CROX Stock
Crocs is the next big footwear brand, with huge revenue and profit growth potential over the next several years as the function over form trend becomes globally ubiquitous.
Relative to that long-term growth potential, CROX stock is significantly undervalued today.
So buy CROX stock on any weakness here, and hold it for the next few years.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he did not hold a position in any of the aforementioned securities.
