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Crocs (CROX)

By: Bill Miller IV, CFA, CMT

February 28, 2024

Ticker: CROX
Market capitalization: $8.5B
Enterprise value: $10.4B
Price: $139.32 (as of 5/20/24)

What the Company Does

CROX makes and sells Crocs and HEYDUDE shoes in over 85 countries. With nearly $4B in sales and 100 million pairs sold in 2023, Crocs is among the globe’s top ten non-athletic footwear brands. Approximately 2/3rds of sales are in North America, with wholesale and direct-to-consumer channels each comprising about half of sales.

Why We Own It

CROX has two high-quality brands in a large addressable market (~$160B in casual footwear globally) but trades at a valuation implying poor prospects. Since its launch as a public company in 2006, its products have been deemed a “fad” though have proven to be anything but, as shares have risen more than tenfold from $10 at IPO to $139.32 today, outperforming most other stocks in the process. Despite its high profitability with best-in-class operating margins and average returns on equity exceeding 200% over the past four fiscal years, the stock still gets no respect, trading at less than 11x earnings, free cash flow and operating profits. Not only do we believe intrinsic value is materially higher today than the current price, we believe that management will continue to innovate and find value-accretive ways to grow the business, just as CROX has for the past two decades.¹ The equity market’s primary investor concern today is that CROX overpaid for HEYDUDE, though debt markets do not seem to share that view. Management has been transparent about eliminating non-strategic wholesale accounts for HEYDUDE, which has put a damper on the brand’s recent growth trajectory, even though HEYDUDE sales nearly doubled since purchase two years ago.

How Management Allocates Capital

Management has three priorities – 1) Grow the brands, 2) Repay debt, 3) Repurchase shares. Net leverage is now within the target range of 1.0x – 1.5x EBITDA, leaving room to deploy cash flows toward growth and share repurchase, which we believe is an especially attractive use of funds at the current valuation.

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¹Past performance does not imply future results. This is based upon projections which may not come to pass. Not only could projections fail to materialize, but the business and stock price could also move in the opposite direction. The stock could go to zero and you could lose all of the money you invest.

Top ten holdings can be viewed here. Holdings are subject to change.

Enterprise value is a measure of a company’s total value. EBITDA is earnings before interest, taxes, depreciation and amortization and is a calculation of a company’s financial health. IPO is initial public offering. Return on equity (ROE) is calculated by dividing net income by shareholders’ equity and is a measure of financial performance. Free cash flow is earnings before depreciation, amortization, and non-cash charges minus maintenance capital expenditures.

The information presented should not be considered a recommendation to purchase or sell any security and should not be relied upon as investment advice. It should not be assumed that any purchase or sale decisions will be profitable or will equal the performance of any security mentioned. References to specific securities are for illustrative purposes only. Portfolio composition is shown as of a point in time and is subject to change without notice.

The views expressed in this commentary reflect those of the author as of the date of the commentary. Any views are subject to change at any time based on market or other conditions, and Miller Value Partners disclaims any responsibility to update such views. These views are not intended to be a forecast of future events, a guarantee of future results or investment advice. Data from third-party sources cited herein is believed to be reliable, but may not have been independently audited by Miller Value Partners.

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