This is the 26th valuation that I'm sharing publicly and it's about Crocs, a company that had exceptional share price performance (over 1000%+ in the last 5 years). As always, I'll try to provide as much information in the best-organized manner I can.
What is Crocs?
The company is engaged in the design, development, marketing, distribution, and sale of what they call “casual lifestyle footwear and accessories” for women, men, and children. The business is fairly easy to understand, but from the start, it is quite clear that they're in a very niche part of an industry.
The key points about their historical financial performance
The company's revenue was around $1b back in 2017 and it was growing 10% on average year over year, until 2021, when it went up 67% to $2.3b!
No, there was no acquisition. The increase was due to the following 3 reasons:
– Higher demand (46%)
– Increased prices (19%)
– Favorable FX (2%)
It is not often that a company can raise prices and sell more products at the same time. The main reason behind the increased demand is their marketing efforts that paid well as the products were trending on various social media platforms. Of course, although they benefited from this during 2021, it can also be noted as a risk in the coming period if there's a shift in the consumer's taste or in the online trends.
At the same time, the operating margin went from below 2% to 30%, one of the main reasons is the increase of products sold directly to consumers. Management's guidance related to the long-term operating margin is at 26%, which means they're agreeing the 30% is not sustainable.
The HEYDUDE acquisition
The company was growing organically through its R&D and marketing operations, but this month they've made a large acquisition. They've acquired HEYDUDE, a company in a similar industry that expects to bring between $700-$750m in revenue in 2022 (for comparison purposes, Crocs revenue in 2021 was 2.3b).
Historically, large acquisitions destroyed more value than they've created. So the share price has declined since the announcement (over 50% since its all-time high).
The purchase price was $2.5b consisting of $2.05b in cash (for which they obtained a long-term loan) + issuing 2.8m shares to the HEYDUDE's founder.
Is debt worrying?
Prior to this acquisition, they had roughly $1b in debt. For a profitable company with a market cap of around $5b, that's not worrying at all. However, if we add the additional $2b and uncertainty coming from the large acquisition, it gets to a bit worrying.
The company was buying back shares, but as the debt increases significantly, they announced share repurchases are on hold until gross leverage is <2x, which is not expected to occur in 2022.
The path for the next 12 months is clear, integrate the large acquisition and use the free cash flow to reduce debt.
What is ahead?
The analysts are forecasting between 41% and 49% revenue growth for 2022. Of course, part of that is due to the acquisition that is expected to bring $700-$750m. If we exclude this, their expected growth is around 10-15% of their original business, not that far from their historical numbers.
My valuation
I used the DCF model and I used the following assumptions:
Revenue growth – 45% next year followed by 10% between year 2 and 5 and then declining to a risk-free rate of 2%
Operating margin – 26% for next year, declining to 25% afterward
Discount rate – WACC of 10.87%
Valuation outcome: $154.85/share (Current share price – $82.7)
Main risks
In my opinion, there are two main risks:
- A shift in consumer taste / online trends that have a negative impact on the company.
- Failure to integrate the acquisition / Poor performance of HEYDUDE
What if my assumptions are significantly incorrect?
Below is a table that estimates the fair value of Crocs based on different scenarios related to the expected revenue (in 10 years from now) and the operating margin:
| Revenue / Op. margin | 24% | 25% | 26% |
|---|---|---|---|
| 100% ($4.6b) | $110.1 | $116.4 | $122.7 |
| 173% ($6.3b) | $146.7 | $154.9 | $163.0 |
| 200% ($6.9b) | $159.9 | $168.7 | $177.6 |
| 270% ($8.5b) | $193.7 | $204.3 | $214.8 |
*Note: The management is targeting $6b in revenue by 2026.
Based on all scenarios, it seems that the company is undervalued compared to the current stock price of $82.7.
It's my first time going through the reports of this company, so I could be missing something. If that's the case, please let me know in the comments below. We're all getting better by sharing views and opinions, even when we disagree on certain topics.
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