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.