2.  Overpaying for the HEYDUDE acquisition and increasing debt load in a rising interest rate environment – Crocs funded the HEYDUDE deal with a $2 billion term loan, and a $50 million draw from its revolving credit facilities, notwithstanding the 2.85 million shares (worth ~$450 million) issued to HEYDUDE ’s founder Alessandro Rosano. The stock is down ~50% since the HEYDUDE acquisition announcement on Dec 23, 2021. So, let’s try and address these issues.

Let's consider the buybacks at a higher price. Crocs has steadily focused on shareholder yields via buybacks and reduced its outstanding shares from ~91 million in 2012 to ~61 million in 2022. When it repurchased shares last year at more than double its current price levels, the company had no clue that the stock was going to plunge. If it did think that it would have waited for a better buyback opportunity. Don't you agree? Well, the past 2 years have been completely unpredictable for the entire world. So, punishing Crocs for paying a higher price to buy its own shares seems a tad unfair. 

Last year, when Crocs saw an opportunity to combine with another fast-growing footwear brand that more than quadruples its Total Addressable Market or TAM to ~$160 billion, and is accretive to revenue, margins, and earnings, the company seized the opportunity.  In conjunction with the acquisition, it has decided to pause buybacks, until it brings the gross leverage ratio to <2x by mid-2023 from ~3x currently. This demonstrates responsible capital allocation priorities and a commendable ‘make hay’ strategy.

Did it overpay for the acquisition at 4.4x (HEYDUDE's) 2021 sales of ~$570 million? Let's do the math here. HEYDUDE is already exceeding expectations. Even as the integration process is underway (the acquisition closed in mid-Feb), it represented $115 million or ~17% of total Q1-22 revenues of ~$660 million and is expected to contribute $750-800 million on a reported basis, or $840-890 million on a pro forma basis for the entire fiscal 2022. This should bring the acquisition multiple to ~2.9x FY22 proforma sales from the ~4.4x in 2021.

Besides, when Crocs actually leverages its legacy playbook and unlocks synergies, HEYDUDE should be set to grow into a $1 billion+ brand by 2024 (bringing the multiple further down to ~2.5x). In two years, if Crocs can almost halve the acquisition multiple, HEYDUDE should become a free purchase in a few more years. The market seems to have missed the forest for the trees here, by discounting the significant growth acceleration potential from HEYDUDE and obsessing on the price instead.

The demand for its clogs rose so much during the pandemic that copycat versions began to emerge. Determined to banish these fake clogs, Crocs is suing ~21 companies, including Skechers, Loeffler Randall, and even Walmart for trademark infringement. A most recent legal win was against USA Dawgs and Double Diamond Distribution in an infringement suit that awarded Crocs ~$6 million+ from these two companies for selling imitation clog shoes. This verdict may set the precedent for the outcome of other lawsuits. 

Crocs is also dipping its toes into the world of NFTs or non-fungible tokens. Earlier this year, it submitted a trademark filing with the United States Patent and Trademark Office that requests the right to use the Crocs name on NFTs of "footwear, clothing, bags, accessories, and charms”. Although the raging NFT fever in 2021 has cooled off considerably, NFTs aren’t going anywhere in a hurry. Crocs NFTs will leverage its brand value equity and play a key role in marketing strategies.

This immense growth potential makes the bargain valuation even more compelling. If the market awakens to the value proposition and a mean reversion of the P/E multiple to ~11x (the low end of the two-year TTM P/E range of 11-20x) with the 2022 EPS guidance midpoint at $10.35, CROX may trade at >$110 (11 X $10.35 = $113.85). Expectations to be a $6 billion+ brand in 2026 (Crocs = ~$5 billion + HEYDUDE = ~$1 billion), would bring the price/sales to ~0.60x at current levels, vs. TTM price/sales of ~1.3x.

The downside could be limited, as most concerns seem priced into the stock at current levels. However, if Crocs fails to execute on its growth initiatives (which should be uncharacteristic), and macro conditions deteriorate further (at which point not just CROX will be affected), there could be further downside. Of course, there is the danger of fickle teenage customers, who can make or break a brand. (Remember the downfall of Abercrombie & Fitch in 2013.)  But, Crocs has so far navigated this thin ice challenge quite adeptly with strategies like influencer endorsements, personalized shoe charms, etc...

CROX is a growth story that continues to unfold on a clear strategy of capitalizing on pop culture trends relevant to its teen and young adult buyers, with the paradigm shift in perspective to ‘Comfort Vs. Beauty’. With the valuation lingering at 2-year lows, the stock is available at a deep discount, while its clogs aren’t. On an interesting side note, you can buy 1 Crocs share now at a price slightly higher than what you pay (~$50)  for its classic clogs.