Introduction:

CROX was introduced in the early 2000s, It was an instant hit with consumers despite CROX's unconventional designs. However, the company got too greedy and started introducing multiple products that diluted the core branding of CROX coupled with the financial crisis of 2008 led to the stagnation of CROX in the early 2010s. However, CROX had a huge boost in popularity during COVID-19, as people stayed home and prioritized comfort, purchasing a lot of athleisure products including Crocs. CROX learned from its past failures and capitalized on its resurgence through limited edition releases and collaboration with famous artists, this combined effort allowed CROX to reach nearly 4 billion in revenue in FY23.

Market:

According to the 2023 Q4 Earnings Conference, management sees strong growth potential for China, the UK, South Korea, and Australia. There are also a few large but challenging markets such as Japan and India.

In Korea, CROX’s products are popular, especially clogs due to the current fashion trend “Y2K”. Y2K is a fashion trend that celebrates the fashion trends of the early 2000s and that coincidentally happens to be the era where clogs were popular.

In Japan, CROX’s products are popular due to Japan’s strict culture around the removal of footwear in certain places e.g. Onsen, Restaurants, and Temples. This emphasis on the removal of footwear makes CROX the ideal product for Japanese consumers as CROX’s are easy to slip in and out.

India is a market with a large potential for CROX, this is due to the warm weather in India which leads consumers to prefer wearing sandals over covered shoes. However, the largest issue with CROX is that it is too expensive for the Indian consumer. A Clog costs about 3000 Rupees but the average median household income in India is 22,000 Rupees. This large price tag on CROX’s products limits the number of consumers who can afford CROX’s products.

Birkenstock is CROX’s closest competitor, creating shoes that are designed for comfort. However, Birkenstock is pivoting to becoming a luxury brand at a higher price point compared to CROX and is much less personalized to maintain its luxury look. Birkenstock is committed to maintaining its brand image as a luxury brand, even going so far as to leave Amazon. This brand image was further solidified as Birkenstock was acquired by LVMH in 2021. However, this is good for CROX as it has a significantly larger total addressable market compared to Birkenstock.

Revenue:

Shoes Sold

When forecasting the total number of Crocs sold, I assumed that CROX’s growth rate will grow at an elevated level for the next 5 years as CROX expands its presence into the new markets coupled with the rise of jibbitz, CROX's products that allow for personalization. The growth rate tapers back down.

When forecasting %DTC, Crocs is taking a leaf out of Nike and Adidas’ books by reducing their reliance on wholesalers (SOURCE). Even their closest competitor Birkenstock is pivoting towards DTC. I assumed that %DTC would grow to 60%.

Crocs Physical Revenue

When forecasting the number of company-operated Crocs stores, I assumed that the growth rate would pick up 3 years into my forecast as the interest rates environment improves which allows for CROX to expand its physical presence easily before the growth rate tapers back down.

When forecasting Revenue/Store, opting for less granularity I forecasted growth rate as a % of historic averages tapering towards the perpetual inflation rate.

Crocs Digital Revenue

When forecasting the %DTC Digital sales, opting for less granularity I assumed it remained constant as a % of historic averages.

When forecasting Price/Shoe, opting for less granularity I forecasted growth rate as a % of historic averages tapering towards the perpetual inflation rate.

Crocs Wholesale Revenue

When forecasting the price/shoe, I assumed that over time as CROX becomes more independent and less reliant on wholesalers they will be able to negotiate for more favorable terms from their wholesale partners. So I assumed that the price/shoe would grow at an elevated rate before tapering back down to the perpetual inflation rate.

HEYDUDE Revenue

When forecasting the total number of shoes sold, I assumed that the total number of shoes sold increased to a great extent in the earlier years of my forecast to reflect CROX breaking into newer markets. However, I believe that for HEYDUDE to successfully take off and become a multi-national brand it would take a long time and hence I did not reflect that in my valuation.

When forecasting the price/shoe, I assumed that the price did not grow at a fast rate in the earlier years as CROX has to appeal the HEYDUDE brand to more consumers through a lower price point. In the later years, as CROX gains pricing powers they can increase the price it charges per shoe.

Cost:

COGS and Others

When forecasting COGS and Others, opting for less granularity I forecasted it as a % of historical averages.

SG&A

When forecasting the total number of employees, I assumed that the number of employees per store remains constant with historical averages for CROX to maintain high-quality customer support in each store.

When forecasting cost per employee, I forecasted it as a % of historical averages before tapering wage growth rate at a rate in line with the perpetual inflation rate.

CapEX and D&A:

When forecasting CapEX and D&A, opting for less granularity I forecasted it as a % of historical averages.

WACC:

10Y T-Bond Yield (1M Avg) = 4.49%
Beta (SOURCE) = 2.04
Stable Market ERP (SOURCE) = 4.60%
COE = 13.87%

CROX’s bond is rated “BB” (SOURCE)
COD (1M Avg) = 6.56%
Marginal Tax Rate = 21.00%
AT-COD = 5.18%

Stock Price (5D Avg) = $140.16
Shares O/S = 60.50M
Market Value of Equity = 8479.68M
Weighted Average Maturity of Debt = 6 Years
FY23 Interest Expense = $161.35M
Market Value of Debt = 2077.25M

%Debt = 19.68%
%Equity = 80.32%
%WACC = 12.16%

Conclusion:

Ultimately in my base case, I value CROX at $158.15 per share. I believe that CROX is undervalued by the market due to the market's wariness about the success of the HEYDUDE brand and whether CROX will be able to continue pushing higher growth rates now that the athleisure trend is over. I believe that CROX's brand will continue to improve in value given how management embraces the same scarcity strategy that elevated Adidas and Nike to legendary status. CROX is also pivoting into other core products beyond the clogs in a bid to serve the diverse needs of consumers.

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