2023-11-28 09:56:56 ET
Summary
- Crocs has a well-defined growth strategy, focusing on online sales and brand awareness.
- The company is experiencing significant growth in China, consolidating the rubber market and cultivating loyalty among younger consumers.
- Despite a decrease in footwear sales, Crocs has offset this with higher prices and is rapidly reducing its debt burden.
Investment Thesis
Crocs ( CROX ) exhibits significant potential as a business with a well-defined growth strategy. Simultaneously, the company has proactively shut down physical stores while augmenting its online sales share, emphasizing the importance of brand awareness. The strategic move to close stores while maintaining a robust online presence reflects positively on the company's trajectory.
With an effective growth strategy, Crocs has not only fostered brand loyalty but has also successfully established a trend of wearing Crocs shoes. This approach has led to a notable surge in the retailer's financial performance. The primary drivers of its growth continue to be the ongoing shift to online operations and strong wholesale sales.
Growth Strategy
The company has proactively shut down physical stores while augmenting its online sales share, emphasizing the importance of brand awareness.
Invest Heroes Crocs
Despite the fact that the company operates to a greater extent in developed markets, the main point of organic growth will be the development of sales in China. According to the results of the 3rd quarter of 2023, the growth was 43%, which is higher than the average growth rate of 30% over the past 3 years.
Crocs
The company successfully transfers the experience of collaboration with bloggers to the Chinese market, creating new and successful collaborations. In fact, Crocs buys very effective advertising, which gives it the opportunity to cultivate loyalty among the younger generation in the fast-growing fashion footwear market in China.
Crocs
Financial Results Outlook
The company sold 37.3 mln pairs of footwear (-5% y/y) in 3Q 2023, down from our forecast of 40.4 mln pairs (a difference of 8%). The discrepancy was due to the termination of the contract with one of the key distributors in the EMEALA region due to signs that goods were diverted to the gray market.
Therefore, we are lowering expectations for footwear sales from 159 mln pairs (+9% y/y) to 153.3 mln pairs (+5% y/y) for 2023, and from 164.4 mln pairs (+7% y/y) to 152.7 mln pairs (-0.4% y/y) for 2024.
The slowdown in sales was successfully offset by a 17% y/y hike in the price of Crocs footwear to $27.25 a pair, while the average price of HEYDUDE footwear climbed by 3% y/y to $29.68 a pair. So, the average selling price in the quarter came to $28 a pair (we had forecast $26.3) due to higher sales in the sandals segment. We have also raised the average selling price of the company's footwear from $26.7 to $27.1 a pair for the period until 2024.
Invest Heroes
We are lowering the EBITDA forecast from $1203 mln (+35% y/y) to $1110 mln (+25% y/y) for 2023, and from $1383 mln (+26% y/y) to $1217 mln (+10% y/y) for 2024 amid the falling volume of footwear sales, which was partially offset by the rising average selling price.
Invest Heroes
The company is rapidly reducing its debt burden by directing all its free cash flow to debt repayment. During the quarter, the company generated an FCF of $215 mln (+6% y/y), up from our forecast of $190 mln (the deviation of 13% was due to faster inventory drawdown). We expect that the company will be able to earn an FCF of $606 mln in 2023 (+33% y/y), and the figure will jump to $784 mln in 2024 (+29% y/y). As a result, the net debt/EBITDA ratio could fall to 1.3x by the end of 2023, compared with 2.6x in 2022, and it could drop further to 0.5x in 2024.
Invest Heroes
Valuation
We are lowering the target price of the shares from $197 to $166 due to:
- the reduced EBITDA forecasts for 2023 and 2024;
- the shift of the FTM valuation period.
We are maintaining the status for the shares at buy .
Invest Heroes
Risks
- A stronger drop in real incomes of the population.
- The failure of a marketing campaign in Asian countries, which will lead to a loss of market share.
- The loss of the Latin American market, which will lead to slower growth in shoe sales.
Conclusion
Crocs is a promising business with the right growth strategy. The company not only cultivated loyalty to the brand but also made wearing Crocs footwear trendy. As a result, we are seeing a sharp acceleration of the retailer's financial results.
For further details see:
Crocs: Bright Future Ahead