Crocs, Inc.'s (NASDAQ:CROX) Underwhelming Growth Prospects are Driving the Decline

The consumer discretionary sector is usually among the first to get hammered on broad market decline. Instability creates significant declines in the sector, with stocks like Crocs, Inc (NASDAQ: CROX) declining over 40% year-to-date.

Yet, this pushed it towards an attractive valuation – a situation not often seen nowadays.

Click here to view our latest analysis for Crocs

Full-year 2021 results:

• EPS: US$11.62 (up from US$4.64 in FY 2020).
• Revenue: US$2.31b (up 67% from FY 2020).
• Net income: US$725.7m (up 132% from FY 2020).
• Profit margin: 31% (up from 23% in FY 2020). The increase in margin was driven by higher revenue.

Revenue was in line with analyst estimates. Earnings per share (EPS) surpassed analyst estimates by 8.0%.

Over the next year, revenue is forecast to grow 48%, compared to an 11% growth forecast for the industry in the US. Over the last 3 years, on average, earnings per share have increased by 109% per year, but its share price has only increased by 41% per year, which means it is significantly lagging earnings growth.

2022 Guidance

• Q1 Revenue: US$605-630m vs. US$633m consensus
• FY EPS: US$9.70 – US$10.25 per share vs. US$9.84 consensus
• Revenue growth (excluding HEYDUDE): exceed 20%
• Adjusted operating margin: approx. 26%

With earnings growth superior to most other companies of late, Crocs has been doing relatively well. Yet, its price-to-earnings ratio (P/E) is surprisingly low at 6.7x. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favor.

If you'd like to see what analysts are forecasting from now on, you should check out our free report on Crocs.

How Is Crocs' Growth Trending?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Crocs' to be considered reasonable.

If we review the last year of earnings growth, the company posted a substantial increase of 150%. Although, its longer-term performance hasn't been as strong, with three-year EPS growth being relatively non-existent overall. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Turning to the outlook, the next three years should generate growth of 6.2% per annum, as estimated by the eight analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 11% each year, which is noticeably more attractive.

The Key Takeaway

Generally, our preference is to limit the use of the price-to-earnings ratio to establish what the market thinks about the overall health of a company. So far, it seems that the market anticipates a slowdown in growth that would leave the stock behind the broad market. Investors feel the potential for improved earnings isn't great enough to justify a higher P/E ratio.

However, some analysts consider this fear as overblown. For example, Erinn Murphy from Piper Sandler remains bullish on the stock - arguing that the HeyDude revenue outlook is conservative.

Overall, the company has been selling quality products and healthy margins, producing hefty earnings per share, and making a solid strategic acquisition. While the short-term panic might prevail, we'd certainly have this one on the watchlist.

For those willing to go deeper, we've discovered 3 warning signs for Crocs that you should be aware of before investing.

Of course, you might also be able to find a better stock than Crocs. So you may wish to see this free collection of other companies that sit on P/E's below 20x and have grown earnings strongly.

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Simply Wall St analyst Stjepan Kalinic and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.