Selling on the stock market: Is Crocs a buy?

Crocodile (NASDAQ: CROX) the stock jumped immediately after its earnings report in early November. This update showed strong sales growth and robust profitability during the sales period that ended in late September. These victories also came despite major pressures on the footwear industry.

But shares of Crocs continue to underperform a broader weak market this year. Through mid-November, the stock is down more than 24%, compared to a 17% drop in the S&P500. Let’s see if this underperformance simply reflects additional risks to the business or instead creates a compelling buying opportunity.

The latest trends

There was a lot to like about Crocs’ latest earnings report. While rival Nike experienced weak global growth due to slowing demand in China and the United States, Crocs had a strong back-to-school season. Sales rose 20% in its main footwear brand after adjusting for changes in exchange rates.

Operating profit margin fell due to increased costs, but remained strong at 28% of sales. This success meant less pressure to cut prices even as consumers became more selective in this time of inflation.

“Our outstanding third quarter results,” CEO Andrew Rees said in a press release, “are a testament to the strength of the Crocs and HeyDude brands.”

By contrast, Crocs believes that much of the recent spike in transportation costs and inventory will continue to pressure earnings through 2023. Earnings are also being hurt by the strength of the US dollar. And inventories have more than doubled year-over-year, which could add risk around the upcoming holiday shopping season.

Crocs is risky

However, most of this increase in inventory comes from the addition of the HeyDude business. As a result, Crocs doesn’t seem in danger of having to cut prices over the holidays. Management has just raised its 2022 outlook to 17% growth in its core business. The acquisition of HeyDude also brings no negative surprises so far, and is on track to contribute to sales and earnings growth this year.

These factors, combined with Crocs’ low valuation, could make the stock an attractive buy right now. Shares are valued at 1.9 times annual revenue, compared to 2.8 for Deckers and 3.6 for Nike. The profitability of Crocs is also far superior to that of either of these two shoe giants.

CROX PS Ratio data by YCharts

Investors may still want to err on the side of caution before jumping into the action today. The industry is highly sensitive to economic growth trends, which could continue to slow through 2023. And while Crocs hasn’t come under intense pressure from rivals’ price cuts, such promotions could pick up speed during the holiday season and early next year. This situation would jeopardize its impressive profit margin and threaten a key pillar of the stock’s bullish thesis.

Still, management deserves credit for outperforming its peers in a volatile industry and for making a bold but profitable bet on growing its portfolio. Success here makes it more likely that Crocs can deliver impressive returns in the industry. That’s why growth stocks deserve a place on your watch list, if not in your portfolio, right now.

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Demitri Kalogeropoulos holds positions at Nike. The Motley Fool holds positions and recommends Nike. The Motley Fool recommends Crocs. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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