Crocs: Near-Term Pressures May Keep The Stock In Check

seekingalpha11-20 18:22

Crocs stock dipped ~19% despite better-than-expected results due to lower HEYDUDE performance expectations and EBIT margin pressure for 2025.Management's focus on brand building over performance ...

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You can become one too!","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"BK4146":"鞋类","CROX":"卡骆驰","LU1988902786.USD":"FULLERTON LUX FUNDS GLOBAL ABSOLUTE ALPHA \"I\" (USD) ACC","BK4585":"ETF&股票定投概念","LU2264538146.SGD":"Fullerton Lux Funds - Global Absolute Alpha A Acc SGD","BK4588":"碎股","LU1064131342.USD":"Fullerton Lux Funds - Global Absolute Alpha A Acc USD"},"translate_title":"Crocs：近期压力可能会抑制该股","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"CROX":0.9},"content_text":"Crocs stock dipped ~19% despite better-than-expected results due to lower HEYDUDE performance expectations and EBIT margin pressure for 2025.Management's focus on brand building over performance marketing for HEYDUDE will likely lead to higher SG&A expenses and slower revenue growth in the near term.Historical guidance cuts for HEYDUDE raise concerns about market perception of future guidance, potentially limiting investor excitement.The strong USD poses a headwind for Q4 ’24 revenue and profitability, adding to near-term challenges despite the stock's cheap valuation.Editor's note: Seeking Alpha is proud to welcome Windward Picks as a new contributing analyst. You can become one too! Share your best investment idea by submitting your article for review to our editors. Get published, earn money, and unlock exclusive SA Premium access. Click here to find out more » Spirins  Crocs (NASDAQ:CROX) reported Q3 '24 results on the morning of Oct 29, 2024 and the stock dipped by ~19% to close at $111.6/sh and has been declining ever since and now trading close to $98/sh at the time of writing. Management's comment on HEYDUDE's turnaround to take longer than initially planned and guidance on lower '25 EBIT margins (compared to '24) due to the increasing investment towards the brand was clearly not well received. This has brought the stock down to compelling valuations (6.6x on '24E EBITDA) and presents a relatively high margin of safety to investors. I arrive at a target price of $126/sh even at very conservative assumptions and recommend a Buy on this stock. However, I see some near-term headwinds that may further keep the stock range bound for a quarter or two. Slower-than-planned turnaround for HEYDUDE Management's comment on the slower-than-planned turnaround for the HEYDUDE brand as well as pressure on '25 EBIT margins (compared to '24) was not well received by the investors. Here is an excerpt from the Q3'24 results press release: We have sharpened our strategy around HEYDUDE as we work to create higher brand relevance through our product and marketing initiatives. While we are seeing early green shoots from these actions, HEYDUDE's recent performance and the current operating environment are signaling it will take longer than we had initially planned for the brand to turn a corner. While we are resetting our full-year outlook for HEYDUDE, I remain confident in the long-term trajectory of the brand. Management directionally guided the '25 EBIT to be lower compared to '24 in the Q3'24 conference call: In 2025, we plan to continue to invest behind talent, marketing, digital and retail in order to create sustainable long-term growth, which will put incremental pressure on our EBIT margin rate versus 2024. Don't expect a turnaround soon With the Q3 '24 results, management reduced HEYDUDE's full-year revenue growth for '24 from -10% to -8% to -14.5% and also decreased sales guidance for Q4'24. The decrease is due to management pulling back on performance marketing (such as Google Ads). However, the company has, and continues to, invest in their Brand Building marketing campaigns, some of which include signing Sydney Sweeny as their global spokesperson, collaboration with Jelly Roll, and TikTok activations—all the fun stuff! I like that the company focuses more on Brand Building rather than Performance marketing, especially when they are in the early stages of building a brand. However, this would cause revenue growth to suffer over the next few quarters compared to the first half of 2024 where the company did spend on Performance Marketing. On top of that, management expects Q1 '25 to have a quarter-on-quarter decline for wholesale, adding more pressure on stock. HEYDUDE's SG&A Increase is a Certainty I do not know when the brand would turn around, but one thing is for certain: the company will continue to increase its spend toward HEYDUDE's Brand Building, which means a higher SG&A spend in '25 compared to '24. Another thing to note is that the Brand Building efforts (unlike promotional activities) pay off over a longer course of time than the fiscal period in which the spend takes place. Both these points have been highlighted by management's commentary in the Q3'24 Conference Call: For HEYDUDE, next year is about brand stabilization. As Andrew shared, we are seeing green shoots around the brand receptivity from a broadening group of consumers, but note that financial results will lag the marketing momentum we are currently seeing. The increase in SG&A spend will be seen as early as Q4 '24. As per the Q3 '24 Conference Call, management expects Q4 to have slightly higher adjusted gross margins than 55.3% in the last year and adjusted operating margin of 19.5%. This leaves SG&A to be at least 35.8%, and so far, is the highest SG&A as a percent of sales since the acquisition of HEYDUDE in early 2022. Crocs Inc Q3'24 Investor Presentation Recall that the management has already guided for a pressure on EBIT in '25, implying higher SG&A expenses; here is an excerpt from the Q3'24 Conference Call: In 2025, we plan to continue to invest behind talent, marketing, digital and retail in order to create sustainable long-term growth, which will put incremental pressure on our EBIT margin rate versus 2024. It is too early to say where SG&A would land in '25. Since this is a year of \"Brand Stabilization\" for HEYDUDE, we can continue to see more of Brand Building marketing spend compared to Performance Marketing spend. This can also lead SG&A expenses growth to exceed sales growth, especially in the first quarter or two in '25. This has been the case recently where sales grew by $125M in LTM (until Q3'24) over the last period while SG&A grew by $209M. This leads me to provide a table below of how different levels of SG&A would have impacted '25E Adjusted EBITDA and the implied multiple at a stock price of $98/sh. For 2025E, I am assuming a 2% sales growth (conservative) and Gross Profit margin of 57% (58% in LTM). I further assumed a net Debt of $1,288M at the end of '25E. Even if SG&A as a percent of sales goes to 39%, the implied EV/EBITDA goes up to 9x, which is relatively cheap for a company with a very recognizable brand, competent management and runway for growth for both Crocs (especially in the International markets) and HEYDUDE. Own Estimates, Company Financials Management Guidance on HEYDUDE Sales May Not Mean Much Another concern that I have is on the market's perception of HEYDUDE '25 guidance to be provided with the Q4'24 result. In early '23, management provided a guidance of mid-20% growth in FY23. The guidance was later reduced to 14–18% in the Q2'23 result (management notes cautious bookings by wholesale) and further down to 4–6% in the Q3'23 result (faster-than-planned curtailment of non-strategic accounts). Some color here on the '23 guidance cuts here is warranted. The reduction of non-strategic accounts has been an ongoing process since '22 as the management felt that the range of distributors was too wide and those accounts did not support the brand adequately. In Q3'23, the management decided to accelerate this process, as discussed in their Q3'23 Conference Call: During the quarter, we took decisive action around HEYDUDE to accelerate our marketplace management strategy to ensure long-term brand health. As such, we are adjusting our full-year outlook to reflect this shift. The image below (taken from Q3'23 Investor Presentation) shows that over 50% of the wholesale accounts were curtailed: Crocs Inc Q3'23 Investor Presentation Although this seems like a large percent of total non-strategic accounts, the size of the closed accounts seems to be small given that HEYDUDE Wholesale revenues only declined from $463M in 9M '23 to $362M in 9M '24 and that the previous managers of HEYDUDE had been selling to a wide range of distributors in a fragmented market. Given this historical experience where the management fell short of guidance, it is possible that a higher guidance for '25E may fail to excite investors in the interim, unless the market sees some evidence for growth. Currency A Headwind Another headwind, although not major, for Q4'24E is the recent strength in the USD. The Q4 '24 revenue guidance of \"flat to up slightly\" is on already low and on a constant-currency basis. For context, reported revenue growth in the 9M '24 period for the company is 3.7% compared to constant-currency growth of 4.5%, a variance of about 0.8%. Since the USD has appreciated this quarter (USD Index up ~4.2% QTD), the pressure will hurt reported sales and, in turn, the profitability, at least in the near term. Valuation No matter how I look at it, the valuations are compelling. I arrive at a target of $126/sh with a conservative '25E EBITDA of $905M and a multiple of 9.5x. The '25 EBITDA estimate (22% margin) also does not represent the true earning power of the business, since I have assumed a higher SG&A and only a 2% year-on-year sales growth. Assuming that the EBITDA margin of 28% is more representative of the business' earnings power, the target jumps to $170/sh at 9.5x EV/EBITDA multiple. EV EBITDA Valuation (Own Research, Company Financials) The current stock valuations are quite depressed, and not much growth is implied at these prices. The current price of $98/sh at the time of writing implies that my '25F FCF estimate of $545M (at conservative assumptions of 2% sales growth, 37% SG&A) would grow at only 0.5% in the future. This is quite conservative given that the Crocs brand, which makes 80% of the revenues, has not stopped growing, and the concerns are primarily on the HEYDUDE business. I recommend this stock, a compelling BUY. Own Estimates, Company Financials Risks Although the current valuations imply relatively low downside, the thesis depends on at least a stable performance of the Crocs brand and a turnaround of HEYDUDE brand. For the Crocs brand, the management has historically shown their strong marketing capabilities by keeping the brand relevant and exciting, and also have exhibited successful scalability to different regions of the world, which gives me some faith. However, customers' tastes may change in North America as well as globally, and preference may switch to other types of footwear. Shifts towards casualization of attire fueled quite by Covid has been a huge tailwind for the Crocs brand and any reversal in this trend can hurt the business. For the HEYDUDE brand, the product line can really fail to hold market share in a very competitive footwear industry and brand building can take longer than expected, i.e., much higher SG&A expenses for a much longer time. This risk of higher SG&A spend is somewhat limited by the managements' history of good capital allocation and their focus on reduction of SG&A during '14 and '17 (refer to pg 7 of Q1'23 Earnings Presentation) under the current Director and Chief Executive Officer, Andrew Rees. Conclusion  CROX has been slammed by investors recently from the weaker performance of HEYDUDE, and the management expecting the brand to take longer to turnaround. As a result, the stock trades at a cheap EV/EBITDA multiple of ~6.6x (at $98/sh price) and has limited downside. Even with conservative assumptions, I arrive at a target price of $124/sh and recommend a buy. However, various headwinds in the next one to two quarters, such as the weak HEYDUDE sales, growing SG&A expenses can keep the stock range-bound in the near term.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"-1","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":"4.29.1","shortVersion":"4.29.1","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/2484193999"}