Why Crocs Stock Is Becoming Too Cheap to Ignore | The Motley Fool

After Crocs (NASDAQ:CROX) closed the acquisition of a competing footwear company in mid-February, its stock has plummeted to 52-week low. Yet the demand for the casual shoemaker’s products remains high, and its business fundamentals are impressive. Here’s why its stock may be ready to hit the ground comfortably.

An acquisition brings out the skeptics

Crocs recently closed on its acquisition of HEYDUDE, a private casual footwear brand known for its lightweight, affordable shoes, for $2.5 billion. Crocs took out a new $2 billion loan, ​​drew $50 million under its revolving current facility, and issued 2.8 million shares (about 4.5% of its shares outstanding) to HEYDUDE’s founder to fund the deal. Since Crocs announced the acquisition in December 2021, its stock has dropped nearly 50%.

One possible reason could be the meteoric rise of Crocs’s total long-term net debt. In the past four years, its long-term net debt rose 540% from $120 million to $771 million, as the company has heavily invested in digital sales, Chinese markets, and supply chain infrastructure.  We can’t know yet whether those investments will pay off in the long term, but the $2 billion the company just added to its already growing long-term debt could worry some investors as interest rates continue to rise. 

Additionally, investors could be questioning whether management can allocate Crocs’s capital effectively. In 2021, the company spent $1 billion in share buybacks at an average price of about $121 per share, using a mixture of its free cash flow and its revolving credit line (at interest rates north of 4%). Those purchases look like a huge waste today, with Crocs stock closer to $70. The company has suspended its share repurchasing program indefinitely as it grapples with its new debt. Still, there is reason to believe that the company will pay that debt down over time: It produced $511 million in free cash flow in 2021 and has $213 million in cash and cash equivalents on its balance sheet.

Crocs shoes are more popular than ever

Despite the sell-off in Crocs’s stock, its footwear is selling better than ever. In 2021, Crocs sold 103 million pairs of shoes, up 49% from 2020, at an average selling price of $22.71, up nearly 12% from 2020. That translated to a record $2.3 billion in net sales in 2021, up an impressive 67% from 2020. For comparison, casual footwear competitor All Birds (NASDAQ:BIRD) produced $277 million in net sales in 2021, up 27% from 2020. And even as Crocs faced supply chain issues in 2021, the company expanded gross margins from 54.1% to 61.4%, operating margins from 15.4% to 29.5%, and net margins from 22.5% to 31.3% year over year.

As for guidance, Crocs management expects $3.4 billion in net sales in 2022, an estimated $620 million to $670 million of which would come from HEYDUDE. Management recently stated that it expects HEYDUDE to reach $1 billion in sales by 2024, roughly a 33% increase from 2022. Excluding HEYDUDE, management guided for Crocs-branded net sales to be up roughly 20% in 2022 and it expects $5 billion in net sales by 2025.

Crocs has entered value stock territory

Despite record net sales growth, Crocs stock is down 60% from its peak in November 2021. As a result, the stock looks underpriced by traditional value metrics like P/E ratio and free cash flow yield. Crocs currently has an unusually low P/E ratio around 6 — its previous two-year low was 11 — and a free cash flow yield of 12.5%. For comparison, the S&P 500 Index recently averaged a P/E of roughly 24% and a free cash flow yield of 1.9%.  With its impressive sales growth, Crocs appears to be a rare growth stock priced like a value stock.

Looking ahead, monitor whether newly acquired HEYDUDE hits its revenue goals and management’s ability to pay down the company’s debt. If it succeeds in those areas, Crocs could reward investors for years to come.