I have some DD on CROX i need to post so here

Company: Crocs inc.
Ticker: CROX traded on the NASDAQ exchange
MC, TEV, & Price (as of Apr. 22): $4.54Bn, $5.29Bn, & $71.18
Sector: Consumer Discretionary
Industry: Textiles, Apparels, and Luxury Goods – more specifically Footwear & Accessories
Recommendation: Buy
Current Analyst Target Stock Price Mean: $150.71 or 103.2% upside

1-year Target price: $110 or a 55% upside 
3-year Target price: $245 or a 244% upside

Crocs is a public company that started as a manufacturer and distributor of shoes. Crocs was founded in 2002 by George Boedecker, Lyndon Hanson, and Scott Seamans. When on a vacation together, the three guys found out about these shoes that were produced by a Canadian company. They bought the IP for the shoe and redesigned it creating the well-known Clogs design, and started the Crocs company.
Crocs has a broad portfolio that is mostly constituted of shoes made from Crocslite material to provide a lightweight, comfortable, and odor-resistant pair of shoes. Crocs’ market is segmented based mostly on characteristics like style, casual, active, and core. Crocs also deal in accessories that complement its products and are a key part of its brand image.
Many know Crocs for its “unique” look which allowed for it to prosper in the late 2000s. As the Great Financial Crisis and the subsequent recession happened, many people started cutting their spending back. Casual footwear was hurt immensely with many people needing money to pay rent and other necessities.
As spending picked up 2011 Crocs, in pursuit of growth, tried to go into more luxury items ultimately spreading themselves to thin. This resulted in changes in management a few times until 2014 when Andrew Rees was chosen as CEO and instigated a radical shift in the company by closed the broad wholesale relationships and staying with ones that were the most successful and supported the brand image. Along with the closing of many wholesale distribution channels, Crocs also closed many unprofitable brand-owned stores which only sold Crocs-branded products similar to Lego stores. They closed manufacturing centers in favor of third party manufacturing which was much better for the company’s health and strain on the cycle of production and freed up cash. Along with better marketing, a boost in sales was seen in 2012-2015, but unfortunately it then stagnated. 
Some growth was seen in 2018 at 6% and in 2019 with 12.6%, an as COVID started, the company was able to grow digitally and create relationships with brands and celebrities allowing for large growth of 67% in 2021. 

Crocs Product Lineup: Clogs, Sandals, Flip-Flops, Slides, Flats, Sneaker, Boots, Loafers, Socks, and Jibbitz

The largest revenue contributors are the Clogs, Sandals. Slides, then Jibbitz with the other types of casual footwear being much smaller contributors.





The product price ranges from $15 - $95 with the low end of the range being mostly slides or sandals along with jibitz and socks. At the higher end at $60 are high end clogs with cool designs and more ankle support or better traction bottoms. Even higher than that in the $80 - $95 are bundles of flats, sandals, clogs, sock, with designs and custom Jibbitz such as American flag clogs with patriotic Jibbitz and socks. 
However, these aren’t single products so single product prices range from $15 - $65 which is at the lower range of footwear apparel, even in the casual footwear space giving Crocs (including HEYDUDE) a very large TAM of $160Bn with it being only $40Bn without HEYDUDE due to the fact that HEYDUDE loafers open up a larger part of the footwear market.

Most of their footwear, as a main staple of their brand and business model, have holes in which Jibbitz can be put in.

Jibbitz are pretty much charms that can be attached to Crocs’ clogs and sandals which have 26 holes on a pair and are very popular among people who have brand awareness and along with their clog shoes. It is one of their most well known products. 

• Crocs averages 5 – 6% of revenue through Jibbitz which in 2021 ended up at around $112 million.

  Their pricing is amazing with black and white letters going for $5 each and gold letters going for $6 each making it so that using modeling for certain phrases or names popular among their mostly young customers. Along with letters, customers can buy ‘special charms’ that have iconic characters like Patrick from SpongeBob SquarePants a popular television show from the childhood of many of their customers, or Yoda from Star wars. This allows for people to express themselves in more than just their style. Besides this, many people customize the (excuse my language) heck out of their clogs and fill all 26 holes of their pair of footwear which itself costs at least $100 or often more than the actual shoe.
  Besides the customer appeal of the customization and expression of interests, it provides a lot of value because it is simply one piece of plastic that can be stuck in the hole and does not fall out making an easy manufacturing process using plastic molds along with a design on the top.

  Crocs produces all of its products with third-part manufacturing mostly in SEA and HEYDUDE does the same with the majority of manufacturing in China and Indonesia.

  They sell their products through a combination of wholesale brick and mortar relationships which make up around 50% of sales along with 375 of their own Crocs-branded stores. Another 50% of sales are through digital/e-commerce e-retailers, third-party marketplaces, and their own websites which are well-developed and are similar in style to websites like Nike and is the only place where every Jibbitz charm can be purchased acting as a large pull factor

Crocs Marketing

Introduction:
Crocs is an international brand and cater to clients in at least ninety countries of the world. Its distribution channel includes international and domestic distributors and retailers along with direct-dealing consumers.
As said before, it is pretty evenly split between wholesale and direct-to-consumer along with manufacturing being mostly in Asia, more specifically SEA.

Customer Perception:
Crocs is an American footwear company based in Colorado, USA, responsible for creating one of the most unique (and one of the most hated) shoes of all time: the foam clogs. You’ll feel that you’re not only wearing a unique design, but Crocs’ signature product also provides you unparalleled comfort and long-lasting durability.

Overcoming Appearance:

Though crocs are now known for their functionality, comfort, durability, and as some would describe “funky look,” this look used to be the main threat to the business. A decade ago, people cared less about a product’s uses, and more about how it is aesthetically pleasing which crocs definitely weren’t. 

In the last decade, a shift in consumer buying process occurred. Consumers now care much more about the utility and health benefits of products they use and are much more eco-conscious. This is more or less due to the expansion of information accessibility and especially social media. This is similar to the reason why diets/lifestyles such as veganism, vegetarianism, keto, and IF (intermittent fasting) have become popular recently.

This has created the perfect setup for Crocs as their main downside has turned into a strength making their brand iconic and unique since people care less about aesthetic. It has allowed for a strong brand identity to be developed that is known for selling very durable, eco-friendly, and fun products.

Pandemic POWER:
Another important business strategy Crocs adopted was to market itself as the ideal shoes for frontline healthcare workers because they are easy to clean and inexpensive to replace.
Reportedly, it has given away some 860,000 pairs of shoes to healthcare workers in the U.S. worth $40 million in retail value and $10 million in cost to the company. And footwear analysts say: “People who weren’t considering the brand a year and a half ago are now considering Crocs.”

Their major strength of durability has slowly become a large risk in that one pair of crocs can be worn for years. Management has clearly realized and attacked this business risk by increasing prices off what once was a $30 shoe to $45 - $60. This is a smart move because not only is it largely mitigating the risk of non-recurring customers, it is also capitalizing on their increased brand awareness making this price increase more reasonable in the consumer’s mind because of Crocs being known for its durability.

Pricing Power & Possible Problems:
Crocs’ Product Portfolio of footwear (excluding Jibbitz) is priced based off of the customer’s time of use. Because of the whole’s for ventilation in Clogs and the open nature of sandals are ideal in warm weather when this ventilation is needed not only for comfortability, but also health wise for outdoor activities such as nature walking. This ventilation greatly lowers the chance of fungus/bacteria growth because they thrive in warm&damp&dark conditions and the holes and proprietary hydrophobic crocslite material prevents this growth.
These are all reasons why Crocs’ products are priced significantly higher during the spring, summer, and early winter leading to a much worse operating margin during Q1 which expands by usually 600-800 BP in the peak summer months. This creates a possible business impact of people taking notice and buying their footwear in the winter months though this wouldn’t be large enough to greatly affect future performance, but on many blogs that parents view, the seasonal pricing is one of the more highlighted details.

Power of Digital Marketing:
One of the many reasons for Crocs’ success over the last 3 years is their marketing, more specifically their digital marketing. What is so great about Crocs is their customer engagement which is creating loyalty and repeat purchasing which are major tenants of the digital marketing funnel. One example of their success in digital marketing is their visible engagement is their Instagram account. They have 1.4M followers and they average almost 30k likes per post. This is a crazy high like-to-follower ratio that many consumer brands can only dream of.
Along with this, they have great reach outside to other audiences through a flurry of content such as memes and reels which the algorithm favors greatly. The great thing is that most of their content is customer produced and also comes from platforms like TikTok and YouTube allowing them to captivate on a much younger audience which will surely propel future growthl
By using their brand identity so correctly on their IG, they are improving their brand image so much and are definitely one of the most successful consumer brands in digital marketing.

Celebrity & Brand Partnerships:
Their Celebrity Partnerships aren’t usually very large but are extremely targeted at the influencer’s fan base
• The official ambassadors of the brand are Drew Barrymore and Natalie Dormer that “sold” their products to young women, trying to convince them that Crocs are fashionable.
• Popular rap singer Post Malone released his own version of Crocs that sold out in just 10 minutes.
• In 2015, little Prince George appeared in Crocs and increased the sales of kids' slippers by 1,500%.
• Also, Crocs have been worn by George W. Bush, actress Helen Mirren, singer Ariana Grande, and many other famous people.

Recently in July of 2020, a collaboration between KFC and Crocs was done making Fried Chicken Shoes which sold out in less than 30 minutes.

In Balenciaga’s 2022 Summer collection, there was announced to be a crocs partnership in which both brands created a crocs style shoe with a large Balenciaga’s platform style.

Along with the Jibbitz charms allowing customers to express their support for movements, phrases, and characters, Jibbitz also allow customers to express their personality and emotions and greatly increase second hand marketing not only through posting on social media, but also through simply seeing a friend with cool charms on their pair of crocs. This is basically word-of-mouth marketing at its purest form based not at actual word, but on the trust one has with the person wearing the Crocs transferring to trust in the brand. It also creates FOMO (fear-of-missing-out) similarly to a kid seeing their friends with a new toy and wanting the toy also. 
Clearly, these brand partnerships allow customers to express themselves and create loyal and ecstatic customers that are willing to pay top dollar and premium on the secondary markets increasing popularity.

ESG Analysis

Though it isn’t the best ESG ranking, this is mainly due to the fact that the textile industry often employs overseas labor.
Though there surely won’t be any ESG mania over Crocs, the business itself is sustainable in its nature.

Crocs has given away some 860,000 pairs of shoes to healthcare workers in the U.S. worth $40 million in retail value and $10 million in cost to the company.
Crocs shoes are made from croslite, a closed-cell resin made from polymer. This soft material is scratch-resistant along with being slip-resistant. This makes it so that Crocs shoes are very durable and last much longer than normal shoes making the product a very eco-conscious choice.
Crocs has set a goal of going net zero emissions by 2030 and just recently they announced the appointment of a VP focused on this goal.

Market Analysis:
The Casual Footwear market is set to grow At 2-3% CAGR over the next several years though the growth does not matter as much since it is very large and there is clear opportunity for growth through Crocs marketing expertise which is very good along with a diversified product portfolio with the growth of non-clog footwear and the HEYDUDE loafers
Crocs has expanded its demographic massively to not just older people, but to a lot of teenagers and currently, according to a Piper Sandler survey, they are the 8th most popular brand among teenagers which will currently help the long term future of the company.
Along with demographics, they have expanded their geography a lot with many sales in EMEA and especially in Asia

Market Share
Crocs’ main product is Clogs which essentially, as seen in this BAM model, they have competitors for and this market is worth $4 billion and is its own sub market of the casual footwear market.

MarcoEconomic Headwinds:
Inflation is forcing price increases with Crocs and most brands. Because casual footwear’s less necesssary nature, there is the chance of consumers not wanting to bite the cost. Though Crocs’ uniqueness helps mitigate this and its $40-$60 price gives it an above average income customer who can stomach some price raising especially with the durability of the product.

MacroEconomic Tailwinds
The Continued growth in digital or e-commerce spending allowing for Crocs and the industry to grow well online. Though a partial problem of lowered margins on Amazon and other platforms, but luckily Crocs has a solid site which attracts a lot of people, mitigating this problem.

Enterprise Value post-HEYDUDE acquisition
My calculations for Estimated Enterprise Value after Q1 Report on May 5, 2022 are in the appendix. I did this because using the 2021 FY EV is significantly skewed to the upside because it does not include the debt from the HEYDUDE acquisition which asses $2.05Bn in Debt. I then averaged the three cases from my DCF below this section.

Here is the comparison of CROX NTM EV/EBIT to its industry which, excluding GEO, was 13.18x significantly higher than CROX - this included specialty retail, large premium apparel brands, and wholesale competitors.

A more likely accurate comparison is on the right with all of CROX’s competition in the branded casual footwear. Unfortunately, two of them had negative/Not available data. This also gave an average of 10.44x, which is pretty high in comparison to CROX’s 8.71x ratio


The fact is that CROX has the highest margin and fastest revenue growth on this list with higher margins than LULU, NIKE, and TOD'S which are all large premium bands with decent low teens revenue growth and mid to high teen operating margins
These companies are trading at 3-4x higher due to the facts of size, better financial position, predictability, balance sheet, or brand value. Enterprise Value includes a large part of financial health so the financial position/balance sheet is not really the reason. I think that in the next few years, CROX will have closed some of the gap between these giants.
SKX - One of CROX's competitors along with Doc Martens both trade in the range i believe CROX should be trading in. If Crocs were to trade at a NTM EV/EBIT of 10.5 which is in this range, this would result in a 31.5% upside in price or over $95 per share. 
Doc Martens is forecasted to have similar growth rates in the high to mid teens and similar margins at 23% though they trade at 11.7 NTM EV/EBIT and are definitely a smaller brand and should trade at a discount meaning that logically CROX could trade even higher.
For instance, SKX has lower margins and lower growth rates more in the high singles and low teens long term though they trade higher because of their balance sheet which is valued highly in these time of interest rates and CSP & GDP growth being questioned along with inflation. 
Though this is partially the reason, more with the acquisition and bear market, it should not be a problem because the debt CROX just took out should be paid out fairly quickly with FCF.

This clearly shows that the recent drop in CROX’s price was most likely an overreaction and that CROX, in a peer comparison, has a large MOAT adding to its margin of safety and that it is trading significantly under its intrinsic value.

Along with this through reading through the 130 page loan term agreement for the Loan taken out for the HEYDUDE acquisition and 8-k:

• Interest rate = 3.50% + {Term SOFR + Term SOFR adjustment}(0.5% SOFR floor)
• If they decide to pay in 1 month intervals: 4% interest rate
• 3 month intervals: 4.32% interest rate
• 6 month intervals: 4.82% interest rate
These numbers are all as of April 1st and the agreement was on Feb. 17. If they were smart, they would have locked in a low 4.52% interest rate for 6 months knowing the Fed’s rate hikes were coming. The long term interest rates after some

Investment Thesis:
In my appendix, you can see a DCF analysis of 3 cases based off of guidance for CROX and along with this, I made a worse-case scenario with pre-COVID growth rates and margins. I think it is so unlikely for crocs to return to as it was before COVID because it has gone through such a transformation. This can be seen in its brand image and marketing which is now known by a younger audience, its excellent reforming of distribution channels, its growth of digital distribution channels, and its growth of DTC by 45% to 54% of revenues Yoy making the business health much stronger than 2-3 years ago.
The DCF discount rate here is 10% though I am basing my thesis more on a visibly undervalued stock based on future cash flow alone outpacing 10% along with visible growth shows a strong business plan and really strong management. I also think the peer comparison is a better judgement than the discounting part of the cash flow and that the growth of the company in the future will show that they deserve a higher multiple even in this bear market.
I think they will get below 2.0x Net Debt-to-EBITDA by 2023 YE which is seen in the appendix through long calculations involving cash flow analysis using capital expenditure, D&A, taxation, valuation allowance, debt obligations, and interest expense.
Management has promised that once they reach this leverage ratio, they will start committing free cash flow to share buybacks which have been their main way of returning value to shareholders over the past 3 years with CROX purchasing back over $1B in shares in 2021.
Say by the end of 2024, if they adjust to 12.8x NTM EV/EBITDA, which is the 3-year ratio average pre-COVID from 2017 – 2019, with a conservative 2025E EBITDA of $1.35B (less than bear case), CROX should have an EV of 17.3 billion. Assuming net debt stays constant from 2023 YE to 2024 YE, we get a market cap of 15 billion with $800M of FCF in 2024 assuming $600M is put towards buybacks. This gives a 3-year target price of $245 or a 240% upsidew/out share buybacks and if share buybacks are done in the most conservative way at the target price, we get an adjusted 3-year target price of $255 of a 250% upside.
For the sake of showing I am not bias, I am going to use the Worst case scenario which has pre-COVID financials with decreasing margins, decreasing growth, HEYDUDE dying, and it instead takes 3 years to reach the leverage ratio instead of two. If this happened, this means that the management that has transformed the company over the last 4 years and brought it to its greatness today will be kicked out, that is how bad this case is. Say by the end of 2024, if they adjust to a 10x NTM EV/EBITDA which is below its peers current average and below historical, they will achieve an enterprise value of $7 billion with $2.3 billion in net debt giving a market cap of $4.7 billion and in the years afterward, they would likely be buying back $400M in stock which is an over 8% return which would likely also be priced in and give a good return.
This just shows that even in the worst of the worst situation, a small opportunity cost may be the only cost of this investment.

Manufacturing and Capital Expenditure:
As stated in the 2021 10-K, “Despite these actions, we expect to still be impacted by global logistics challenges in 2022. Specifically we plan to invest approximately $75MM in air freight in 2022 to bolster out inventory positions for the first half of the year in all regions. Supported by the health of our brand, wholesale orders for the first half of 2022 have been strong. However, we expect to have limitations around demand fulfillment in the first half of the year.”
There are Supply chain issues with Crocs itself. Also, China’s recent lockdowns have a chance of afffecting HEYDUDE demand fulfillment and their manufacturing being largely in China and Indonesia.
Around half of current cash, which is 200MM is held up in manufacturing centers so though there is technically less cash on hands. The company has ready cash to increase inventory and a line of credit of $600MM if needed with a cash conversion cycle of around 83 days which is average to long for the industry, there is definitely apt liquidity for growth.
The Guidance 2022 CAPEX of $170-200MM is enough to support future growth along with the 3% of revenue long term. This isn’t horrible considering a 26+% operating margin along with a considerable tax write off along with intra-IP transfer making effective tax rate on on EBT being more like 10-15%.
Post 2023 with long term guidance, these are the rough number using 26% operating margin, interest of $85M, and CAPEX of 3%.
This leads to over a billion in FCF by 2026 with probably only the mandatory 1% or $20MM in principal which is incredible and will be used for share buybacks and possibly a dividend once growth slows down.

Four Tenants behind long term growth:
Digital Sales:
• The company’s goal is to maintain a 40% of total revenue being through digital and thus by 2026E, reach $2.5Bn in digital sales.
• One of the main ways is through their website, Crocs.com, the place with the largest selection of Jibbitz charms being a mature gateway product to the website. This is especially important because selling direct through their website is much easier and increases their margin. I would say Crocs has a very robust and well designed website that is sure to be increasing along with their cumulative digital penetration.
• Along with their website, they sell through many e-commerce sites such as Amazon, Zappos, Zalando, and Tmall
• Along with digital being an important distribution/sales method in most B2C businesses, digital selling has allowed Crocs to grow faster in EMEA and Asia especially where e-commerce adoption is strong with e-retailers like Alibaba.com, Pinduoduo.com, JD.com, and third-party markets like Tmall.

Sandals Market Opportunity:
• Their casual market which is practically the market for sandals is worth $30B and is very fragmented with no clear leader.
• Though it is fragmented, they key manufacturers of the casual sandal market are Cbanner, Crocs, Aokang, Adidas, Clark, STand SAT, Belle, Kenneth Cole, Daphne, Skechers, GEOX, Rieker, Aldo, topscore, Steven Madden, ECCO, Decker, Caleres, Apargatas, Birkenstock, and RedDragonfly.
• Sandals provide an additional gateway product along with product sales have little seasonality along like Clogs.
• The main consideration of consumers when looking for sandals is icon, style, comfort, adventure. Crocs does have icon considering they have large brand awareness in the casual footwear market, their style is very good along with the ability for jibitz charms attachments, they definitely have comfortability because of the material, and their material is durable and adventurous.
• The Sandals brand consideration or awareness is shares with Clogs allowing for easier customer acquisition and no need to build brand identity in a new market.
• The Downfall of Croc before 2014 had been the the spreading thin of the brand into unfamiliar yet appealingly high growth markets. This is the downfall of many apparel branding who are both blessed and then cursed by the need for growth.

Luckily, this expansion into a familiar and similar casual market shows that the company is correctly using their knowledge and expanding into the correct markets and not just the most attractive ones. 
The company has a target of 4x Sandals Revenue Growth by 2026E.

Asian Market Opportunity for Long-Term growth:
• Asia, more importantly China, provides the greatest opportunity to support long-term growth with China being the largest footwear market.
• Digital adoption had been very strong in China with their being large participation on key platforms like Tmall, Alibaba.com, or Pinduoduo.com
• The strategies being used are developing local-for-local production, marketing, and collaborations with already most of Crocs third-party manufacturing being done in Southeast Asia and much of HEYDUDE manufacturing in China. Along with this, almost all HEYDUDE sales are in North America while Crocs already has a pretty large Asian presence which means this is also a great opportunity for the casual loafers of HEYDUDE.

Details of HEYDUDE acquisition and Great Management:
• The acquisition was closed on February 17, 2022 and was financed by $2B in a Term Loan, $450 million in shares at a price double the current, and $50MM from a line of Credit.
• The shares went to the founder who has a two-year half and half lockup period for the shares and he will continue to be on the HEYDUDE team.
• Along with founder, Rick Blackshaw will be the EVP and Brand President. He has 25 years of experience in footwear and consumer products with being a president of Sperry, President of Keds, VP of the Chuck Taylor division of Converse, and other roles in Timberland and Reebok. He is an industry veteran with decades of experience who will be a great leader for the brand.

Strategic Rationale: A high Growth, highly profitable, strong cash flow
• This acquisition creates a leader in branded casual footwear being only second to Skechers and expands the company to multi-product/multi-brand
• Aids in Digital Growth Framework with HEYDUDE having almost 50% of sales digital in 2021
• Ability to build and leverage Crocs playbook of marketing expertise and wholesale relationships

HEYDUDE wholesale and Specialty opportunity & Marketing:
• Crocs has a total of 375 company owned stores that sell only Crocs products opening up another distribution play for HEYDUDE, though 20-30 stores were closed in lieu of Ukraine-Russia Conflict.
• Along with their stores, of the top 20 B&M wholesale relationships for both companies, only 6 of them overlap meaning their is a large possibility for B&M expansion.
• The other additive to growth is the marketing opportunity with Crocs brand awareness at 92% of market while HEYDUDE is only at 20%.

All of this is reason why I think it will be possible for HEYDUDE to be worth it long term even though the expensive cost with 2022E revenue being $700-750MM with a 25%+ operating margin and that they will be able to get to $1Bn+ by 2024.

Management:

In the last 8 years, the company has bought back shares. These buybacks, at the time, constituted at least 5% (excluding 2016) of the outstanding and in some of these years, the buyback amount constituted up to 15% of outstanding. Along with this, the company had a dividend of 12 million from 2014-2018 meaning that the management has consistently returned value to shareholders through buybacks, dividends, or a combination of the two. 

During 2021, the company in a very smart decision sold $700MM in junk bonds in two seperate borrowings in order to pay back debt and allow for buyback of shares buy capitalizing on historically low interest rates.

This clearly shows management’s commitment to returning value to shareholders and they still have a remaining authorization for over a billion in shares to buyback and promise to do so once their Net Debt-to-EBITDA ratio is below 2.0x.

Along with buying back shares and dividends showing management’s commitment to returning value to shareholders, there is also a quite significant amount of insider ownership with around 100-200MM by current governance. There is also significant ownership by the founders who own near 10% of the float.

Besides the insider ownership being a good amount, what is most important is the recent insider trading and in the last 3 months, insiders have bought 255k shares and sold 80k which is almost all of the insider shares bought in the last 12 months according to NASDAQ.

This is a pretty clear indication governance views shares as too cheap at this point.

Along with this, management seems pretty transparent in the view on this business especially when considering the impact of supply chain issues in the first half of this year along with expenses related to the HEYDUDE acquisitions
Along with business risks in 2022E, the company has also set quite detailed guidance for 2022 of Revenue of $3.4Bn, at least an adjusted operating margin of 26%, Capital expenditure of $170 - 200MM.
Along with clear and detailed estimates for 2022, they have made long term goals of $6Bn+ in revenue by 2026E, $1Bn+ in revenue for HEYDUDE by 2024E, 26%+ adjusted operating margin, and capital expenditure should average at around 3% of revenue with the exception of 2022E.
Along with all of this, the number of shares short has dropped significantly in the last few months going from 4.9 million in October to currently 2.6 million. This means that many shorts believe there is little downside left and thus a clear margin of safety at the current price below intrinsic value
Along with all of these things backing up management’s competence, most to all of them have extensive experience at Crocs or are veterans of the footwear industry including the EVP/Brand President of HEYDUDE, Rick Blackshaw, and so does Andrew Rees, CEO and director for CROX.

Competitive Positioning:
Besides being priced significantly beneath its competitors giving CROX a MOAT in terms of valuation due to its lower multiple, it’s market position among casual footwear is very strong and unique. It’s clogs, what Crocs is known for, is a very durable and long-lasting shoe that is still casual in use and appearance. Along with its initially ugly appearance makes it unique, clogs themselves are there own small part of the footwear market like slides or sandals just smaller. The unique factors of its shoes are covered more in detail in the product line up and marketing section.
The usefulness of this uniqueness is that it drives large brand awareness since Crocs is a household name now, especially with the recent rise. The clog, its star product, has also driven traffic to its other product lines such as its slides and sandals which also have JIbbitiz which provide a large competitive edge because they allow for personal customization and expression.

Margin of Safety:
• Unreasonable 60% drop over the last 6 months
• At a discount to smaller peers on a EV/EBITDA basis and FCF basis
• One of the largest and most-well known casual footwear brands
• Insider Buying of Shares showing Management backing
• Short-Interest Coverage helping out short-term visibility on a technical perspective
• Shares were repurchased at higher than current price

Summary of Investment Idea and Summary:
A simplification of my idea/thesis is that CROX has recently seen an overreaction to the news of the HEYDUDE acquisition which causes the stop in share buybacks because cash flow over the next 2 years is being used to pay back debt and rising CAPeX and along with Fed’s rate rising, inflation, Russia-Ukraine Conflict causing the market to shift to bearish at least in the short term. The price of CROX has thus fallen from a high of $180 to the current price of $75 which I view as significantly undervalued.
CROX is trading at 7.98x NTM EV/EBITDA which is a significant discount to its peers in the branded casual footwear space along with peers in the Textiles, Apparel, and Luxury Goods industry. Along with this margin of safety, it has large brand awareness and after this acquisition, has a diversified product line with a long term revenue growth around 20%+ and an operating margin 26%+ allowing for strong cash flow generation.
What can already be seen from my calculations in my report is that CROX will be deleveraged enough by 2023E year end to start buying back a large amount of shares and possibly in the long term future reinstating its dividend.
I feel that my report clearly shows that CROX is significantly undervalued and over the next year my target price is $110 from a current price of $75 and over the next three years, my target price is $245.

Risks:
• Inflation – Crocs has already, in their own words, been “early” to their competitors in raising prices since management expected inflation to be more severe than others which played out really well and makes the margins sustainable.
• The causal footwear brand has a relatively low barrier to entry creating significant competition along with brand counterfeiting or fake clogs which though used to be a bigger problem, still hurt sales.
• Supply-chain disruptions though margins are still high and are mostly factored into guidance though in the future, if recovery is slower than expected, CAPEX may be higher thus lower FCF.
• HEYDUDE not growing as much as intended though to reach the ambitions, it only requires continuing the same growth rate as Crocs, though synergy with Crocs is likely considering the strong management.
• Possible Overdependence on brand value leading to brand stagnation and failure to strengthen and preserve value though success in marketing is clear with Marketing and advertising becoming a smaller % of revenue over the past 5 years, Pre-COVID.

Catalysts:
• Meeting or Exceeding of Mangement’s Guidance or Exceeding of Analyst’s Expectations
• HEYDUDE outperforming expectations and strategic rationale playing out better than expected.
• Economy performing better with inflation being more on the mild/medium level and Consumer Spending being much higher.
• Meeting the leverage ratio to buyback shares earlier than expected due to non-cash recoveries or use of current cash&cash equivalents.

Appendix:

Enterprise Value Calculation

Discounted Cash Flow with 3 cases

The only difference (at least for 2022) between GAAP and Non-GAAP operating margin is the HEYDUDE acquisition costs which make GAAP 22%. Much of that is non-cash costs, but besides this, there will be little difference in adjusted operating and GAAP operating.

Worst – Case Scenario for CROX:

2022 & 2023 Levered Free Cash Flow Calculations:

Tax Analysis Depreciation & Ammorization: