Crocs: Oversold Status Triggers Compelling Value Buy - Heydude Headwinds Have Bottomed

seekingalpha11-02

Crocs has been oversold at current levels, as the market over-reacts to the softer FQ4'24 guidance and the stock tanking by -21% over two days.If anything, HEYDUDE has shown sequential sales growth ...

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DNY59 CROX's Long-Term Investment Thesis Remains Robust - Albeit With Numerous Near-Term Headwinds We previously covered Crocs, Inc. (NASDAQ:CROX) in August 2024, discussing the market's mixed reactions to the lackluster HEYDUDE FQ2'24 performance, despite the excellent core CROCS outperformance. With the management already raising their FY2024 guidance and HEYDUDE generating sequential improvements in sales numbers, we had believed that it remained well positioned to report robust numbers in H2'24, significantly aided by the rich FCF generation and improving balance sheet health.   CROX YTD Stock Price Trading ViewSince then, CROX has mostly traded sideways before the market painfully over-reacted to the softer FQ4'24 guidance, despite the double beat FQ3'24 performance. We believe that the -21% sell-off has been overly done indeed, attributed to the notable sequential improvement in HEYDUDE's numbers, significantly aided by the still decent CROCS execution. For reference, HEYDUDE has seen sales bottoming at $195M in FQ1'24 (-14.4% QoQ), with things consistently improving by +1.5% QoQ in FQ2'24 and +3% QoQ in FQ3'24. This is on top of the management's promising FQ4'24 HEYDUDE sales guidance at approximately $216.6M (-5% YoY), implying a more than decent +6.1% QoQ growth. If anything, HEYDUDE's DTC revenues have also been increasing sequentially from $60M in FQ1'24, to $84M in FQ2'24 (+40% QoQ), and to $91M in FQ3'24 (+8.3% YoY) - with it signaling positive early indicators to its growing brand awareness. The same was observed in HEYDUDE's higher volumes sold at 7M pairs by the latest quarter (+16.6% QoQ) and stable ASPs at $30.94 (+0.5% QoQ), contributing to the brand's improving adj gross margins of 47.9% (-1.2 points QoQ/ +5.1 YoY). On the other hand, the CROX management's lowered FY2024 HEYDUDE sales guidance at -14.5% YoY does not instill confidence indeed, compared to the original guidance of \"flat to slightly up\" in the FQ4'23 earnings call and the lowered number to -9% YoY in the FQ1'24/ FQ2'24 earnings call, attributed to the brand's painfully slow turnaround. The same sales deceleration has also been hinted by the management for the CROCS core brand, with an estimated FQ4'24 sales guidance of $746.6M (-12.9% QoQ/ +2% YoY), compared to FQ4'23 levels of $732M (-8.3% QoQ/ +10% YoY) It is unsurprising then, that the market has over-reacted as it has after the mixed FQ3'24 earnings call, despite CROX raising their overall FY2024 adj EPS guidance to $12.86 (+6.8% YoY), compared to the original guidance of $12.27 (+1.9% YoY) offered in the FQ4'23 earnings call. The Consensus Forward Estimates Seeking AlphaThese reasons may also be why the consensus have decided to downgrade their forward estimates, with CROX expected to generate a decelerating top/ bottom-line growth at a CAGR of +3.5%/ +5% through FY2026. This is compared to the original estimates of +12.09%/ +10.09% and the historical outsized growth at a CAGR of +25.3%/ +105% between FY2017 and FY2023, respectively - with it potentially implying the end of CROX's high growth trend. CROX Valuations Seeking AlphaThis decelerating growth trend may also be why CROX has been discounted to FWD P/E non-GAAP valuations of 8.64x, compared to its 5Y pre-pandemic mean of 22.25x, 10Y mean of 25.24x, and the sector median of 17.18x. Given the temporally dilutive impact of Heydude on its overall performance, we believe that the stock is now trading at a relatively elevated FWD PEG non-GAAP ratio of 1.90x as well, compared to its 5Y pre-pandemic mean of 0.31x and 10Y mean of 0.81x. On the other hand, when compared to its Consumer Discretionary peers, including Nike (NKE) at FWD PEG non-GAAP ratio of 3.73x, V.F. Corporation (VFC) at 3.29x, and On Holding AG (ONON) at 2.13x, it appears that CROX remains a reasonably valued investment thesis no matter the decelerating growth trend.  So, Is CROX Stock A Buy, Sell, or Hold?  CROX 5Y Stock Price Trading ViewFor now, the market has punished CROX with an unwarranted two-day correction of -21%, as the stock now trades below its 50/ 100/ 200 day moving averages while retesting the 2024 support levels of $109s. Based on the management's FY2024 adj EPS guidance of $12.86 (+6.8% YoY) and 1Y P/E mean of 10.20x, it is apparent that the stock is now trading below our updated fair value estimates of $131.10. Based on the consensus downgraded FY2026 adj EPS estimates from $14.69 to $13.93, there remains an excellent upside potential of +30.2% to our updated base-case long-term price target of $142.00, thanks to the recent pullback. If anything, we continue to stand by our previous conjecture of the potential upward rerating in its FWD P/E valuations nearer to the 5Y average of ~15x, upon the successful monetization of HEYDUDE, as discussed above, with it bringing forth a near doubling upside potential to our bull-case long-term price target of $208.90. With FY2025 likely to bring forth an easier YoY HEYDUDE comparison as the main CROCS brand continues to grow at a projected high single digit of +8% YoY in FY2024, we believe that the CROX stock is likely to outperform from these oversold levels, offering opportunistic investors with a rich capital appreciation prospect. Combined with the still reasonable FWD PEG non-GAAP ratio, we are reiterating our Buy rating at this dip. Risk Warning It goes without saying that the CROX stock is only suitable for those with a long investing trajectory, since we believe that its reversal may be prolonged, attributed to HEYDUDE's slower reversal and CROCS' decelerating sales trend in North America. While the inflation has cooled and labor market remains robust, it is apparent that consumer discretionary spending has been impacted as consumer reverted to pre-pandemic shopping patterns dropping closer to need and concentrating spend around key shopping events and holidays, otherwise \"consumer pulling back.\" This development is critical indeed, since CROCS top-line driver remains in the North American region at 57.1% of its overall sales in FQ3'24 (-3 points YoY), with it implying more near-term pain until the macroeconomic outlook normalizes and/ or the international CROCS FQ3'24 growth at +15.4% YoY well balances the demand headwinds domestically.  As a result, CROX investors may want to remain patient, since we are unlikely to see sentiments and its stock price performance improve any time soon.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.2","shortVersion":"4.29.2","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2480041468"}