One year ago, shoemaker Crocs (CROX 2.96%) completed its acquisition of fellow shoe company Heydude. At the time, management was promising that Heydude would generate revenue of $700 million to $750 million in 2022, and it hoped the brand would reach $1 billion in annual revenue by 2024.
Heydude is way ahead of schedule. It generated $986 million of pro forma revenue in 2022 (including the revenue generated in the weeks prior to the deal closing on Feb. 17). In other words, it’s basically already a billion-dollar brand, and that’s really good news for Crocs shareholders.
The simple explanation for Crocs’ market-crushing performance
When Andrew Rees became CEO of Crocs in June 2017, his immediate focus was to improve the company’s profit margins. His approach was multifaceted — and it worked, as the chart below shows.
Since June 2017, Crocs stock is up about 1,600% compared to just 65% for the S&P 500. And its margin expansion is a big part of the story. Its trailing-12-month gross margin has improved from below 50% then to 54% today, and its operating margin has gone from less than 1% to nearly 25%.
While the chart above does show impressive margin expansion, you may have noticed margins went down in 2022. To be specific, gross margin dropped from 61.4% in 2021 to 52.3% in 2022, while operating margin fell from 29.5% to 23.9%.
Crocs’ margins fell due to the acquisition as Heydude’s profitability lagged that of Crocs. However, they’re still quite good for a shoe company, and they’re expected to get better over time, allowing Crocs to maintain a long-term goal of a 26% operating margin overall.
In other words, Crocs is a market-crushing investment in large part due to its improved profit margins. Buying Heydude didn’t just give it another billion-dollar brand — it also gave management a new opportunity to execute its proven margin-expansion playbook.
Why being ahead of schedule is really good news
As mentioned, Heydude reached $1 billion in revenue about two years ahead of schedule. And I think this is meaningful for Crocs’ shareholders for two related reasons.
First, Crocs took on debt to finance its $2.5 billion buyout of Heydude. It repaid $550 million in 2022, including $300 million in the fourth quarter alone. Higher revenue for Heydude is fueling more profits for the company overall and facilitating a quicker paydown of its debt.
Second, Crocs’ management has used cash flow to repurchase a meaningful amount of shares in recent history, as the chart below shows.
Right now, Crocs has paused share repurchases to focus on paying down debt. Therefore, higher revenue for Heydude is fueling better-than-expected profits for Crocs as a whole. This, in turn, is helping get debt back down to desired levels, which will allow the company to resume share repurchases.
Looking at Crocs stock, I believe it’s still one to buy for investors with time horizons of five years or more. The company is expecting between $11.00 and $11.31 in adjusted earnings per share (EPS) in 2023, which would be modest growth from its adjusted EPS of $10.92 in 2022. However, this means that the stock is still very inexpensive compared to its profits. And over the next several years, EPS should increase as Heydude’s margins improve, debt is paid down, and share repurchases resume.
For me, this all points to Crocs continuing its market-crushing ways over the long haul.