Expansion Into China And India May Strengthen Global Presence Despite Short-Term Risks

Key Takeaways

• Crocs’ international expansion and emphasis on marketing for HEYDUDE aim to boost long-term revenue by enhancing global market share and brand equity.
  
• New product innovations, strategic inventory management, and direct-to-consumer investments may improve margins and operational efficiencies, supporting topline and bottom-line growth.
  
• Declines in HEYDUDE and challenges in China, India, and marketing strategy could restrict short-term revenue growth and pressure margins despite necessary SG&A investments.

Catalysts

Designs, develops, manufactures, markets, distributes, and sells casual lifestyle footwear and accessories for men, women, and children under Crocs and HEYDUDE Brand in the United States and internationally.

• Crocs' ongoing international expansion, with significant investments in markets like China and India, is expected to drive future revenue growth through increased market share and new store openings.
  
• The strategic pivot towards marketing investments for HEYDUDE, focusing on building brand awareness and resonance among younger, female consumers rather than short-term performance marketing, is anticipated to enhance long-term brand equity and eventually revenue.
  
• The introduction of new product innovations and collaborations, such as the Eco Wave and partnerships with figures like Sydney Sweeney, are tailored to appeal to a broader consumer base, supporting future topline growth and potentially improving gross margins due to unique offerings.
  
• The management of in-market inventories and rightsizing of HEYDUDE's account base to focus on larger strategic accounts are efforts aimed at stabilizing the brand, which can positively impact net margins and operating efficiencies.
  
• Continued investment in direct-to-consumer channels, including growing digital presence and premium outlet stores for HEYDUDE, may drive higher-margin sales and improved earnings due to the control of the retail experience and pricing.

Crocs Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Crocs's revenue will grow by 3.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 20.5% today to 16.0% in 3 years time.
• Analysts expect earnings to reach $717.9 million (and earnings per share of $12.11) by about December 2027, down from $834.7 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $809.3 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.0x on those 2027 earnings, up from 7.8x today. This future PE is lower than the current PE for the US Luxury industry at 18.8x.
• Analysts expect the number of shares outstanding to grow by 0.58% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.82%, as per the Simply Wall St company report.

Crocs Future Earnings Per Share Growth

Risks

• HEYDUDE's revenues declined 17%, and its performance has not yet reflected the investments made, signaling a longer turnaround time than initially planned, which could limit growth in overall revenues for Crocs, Inc.
  
• The cautious macroeconomic environment in China and regulatory pressures in India are affecting sales, which might pose a risk to international revenue growth projections.
  
• The strategic shift from performance marketing to brand marketing for HEYDUDE has negatively impacted digital performance, possibly restricting near-term revenue growth and affecting overall earnings.
  
• The predicted slight decrease in revenue stability from North America and the slowdown in HEYDUDE could constrain short-term revenue growth and net margins.
  
• Continued investments in SG&A for talent, marketing, digital, and retail, while necessary for long-term growth, are expected to put incremental pressure on EBIT margins, potentially impacting net earnings negatively in the short term.

Valuation

• The analysts have a consensus price target of $135.52 for Crocs based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $180.0, and the most bearish reporting a price target of just $100.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $4.5 billion, earnings will come to $717.9 million, and it would be trading on a PE ratio of 14.0x, assuming you use a discount rate of 7.8%.
• Given the current share price of $111.55, the analyst's price target of $135.52 is 17.7% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.