Crocs: A Successful Transition Story With Further Upside Despite The Prolonged Rally

Summary
  • Crocs’ (CROX) shares have undergone a massive rally over the past few years, which has continued equally impressively over the past few months.
  • Crocs’ successful transition to digital sales, its powerful marketing strategy, and management’s focus on creating shareholder value should be powerful catalysts for the stock going forward.
  • We can see the stock deliver double-digit annualized returns in the medium term, due to its fair valuation.
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Crocs’ (CROX) shares have undergone a massive rally over the past few years, which has continued equally impressively over the past few months. As the company’s financials have remained robust during the ongoing pandemic, the stock has rallied by more than 600% since March’s selloff, currently trading at a 13-year high at around $60.

Until a few years back, the company had been struggling to create any shareholder value, as its margins were weak, and its iconic Clog shoe was too niche and inadequate to grow the brand and take it to the next level. Since Mr. Andrew Rees took over as the CEO in 2017, however, the company has completely transformed itself, diversifying into an array of shoe types and successfully modernizing the brand through pivotal marketing, unlocking the potential for shareholders to finally be rewarded for their patience.

Executing the right way

Despite Crocs’ stock rallying since 2017, sales have remained relatively stable over the past decade. The company has seen a consistent demand by those appreciating its unique shoes, leading to relatively stable history of sales. As a result, a massive increase in sales over the past few years is not the reason for the stock’s prolonged rally.

Instead, the three catalysts that we are going to discuss are Crocs’ successful transition to digital sales, its powerful marketing strategy, and management’s focus on creating shareholder value. With that being said, the company’s latest Q3 was the first one in which its sales grew QoQ in over a decade. Due to seasonality, Crocs’ sales would always drop going into the quarter ending September 30th. However, the company’s latest Q3 was marvelous, breaking its historical trend of reduced QoQ sales, reporting a top line of $361.7M as the graph displays below. This is quite a strong indication of future sales accelerating.

Catalyst #1: Solid e-commerce execution

One of the biggest catalysts that have helped the company improve its margins and could potentially further increase its future sales is Crocs’ successful execution of setting up its e-commerce sales channels. Last year, around 18.5% of Crocs’ total sales were processed online. During Q3, e-commerce revenues increased by 36.3% to $80.0 million. Digital sales grew by 35.5% to 37.7% of total revenues versus 32.2% for the same period last year.

Source: Investor Presentation

With more than 1/3 of its sales now done digitally, the company is able to better manage its costs and its inventory, which has caused a great increase in net income margins. From its money-losing quarters that lasted from 2013 to 2017, the company has continuously grown its net income margins, currently at nearly a decade-high of around 12% (last-twelve-months.)

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