Overview
GENERAL ANALYSIS
Company Description
Crocs Inc. (CROX) was founded in 2002 and is headquartered in Broomfield, Colorado. The company is active in the footwear industry and its products are recognized worldwide, thanks to their authentic and comfortable design. The company’s brands include Crocs and HEYDUDE, which was acquired back on 17 February 2022. The latter brand was in fact founded in 2008 in Italy and became to be known for its variety of styles and attention to the sustainability of materials, as well as for the affordability of its products. The brand has been growing rapidly to the point that Crocs CEO Andrew Rees has predicted that it will surpass $1 billion in sales for the year 2023. Thanks to this acquisition, the company managed to diversify its line of products, while still remaining truthful to its culture and history.
Crocs Inc. currently sells shoes in 85 countries and it is among the 10 largest companies in the non-athletic footwear industry, as reported on the investor relation section of the company’s website. According to a press release from 2022, the corporation registered record-breaking revenues during the year, with sales equal to $3.6 billion (Crocs and HEYDUDE combined). According to some figures published by the company for the first quarter of the year 2023, the geographic distribution of revenues is very much concentrated in North America, which constitutes 61% of the overall sales, while the Asia-Pacific region represents 19% of revenues and the remaining 20% is distributed among Europe, Middle East and Africa (this information is only related to the Crocs brand, though, while there are no available data on HEYDUDE). It is estimated that the company’s reputation is mainly driven by Crocs brand, which is reflected also in the products penetration; clogs, in fact, represent 57% of the overall sales from the line offered by the company. Crocs Inc.’s sales mainly happen at the wholesale level, although direct sale contributes to about 44% of the overall revenues (the two channels are therefore both very relevant for Crocs’ business).
FINANCIAL ANALYSIS
Introduction
In this part of the analysis we will provide a thorough examination of Crocs’ financials and performance measures. In this way it will be possible to evaluate the company’s performance so far and in the last years, as well as gain relevant insights on its prospects and investments potential.
Liquidity
Liquidity refers to the capacity of an asset to be readily converted into cash in order to fulfill immediate obligations or liabilities. The most common measures used in the liquidity analysis are the current ratio, quick ratio, and cash ratio. Theoretically, a ratio greater than one is regarded as favorable. The current ratio evaluates a company's current assets (assets that can be converted into cash within a year). The quick ratio is computed by summing cash and cash equivalents, accounts receivable, and short-term investments, as only more liquid accounts are kept in the calculation, and then dividing the result by current liabilities. Lastly, the cash ratio is represented by the sum of cash and cash equivalents divided by the current liabilities; this measure mainly serves to understand a company’s ability to pay its short-term obligations with cash.
By analyzing Crocs’ liquidity, we can certainly make some important considerations about the past five years. The current ratio showed a quite remarkable decrease from 2018 to 2019, reaching a value of 1.69 (from 2.06). However, the company managed to slightly increase the ratio in the following years up to 2021. In 2022, Crocs registered a decrease again, although by just 0.12. Overall, though, it should be noted that the values of the current ratio have always been well above 1, which signals that Crocs would be very much able to repay its current liabilities.
The quick ratio for the company analyzed, on the other hand, is slightly smaller, as obvious, with the years 2019 and 2022 showing values lower than one. In this case, the fluctuations seem more marked with respect to the current ratio. That being said, though, the company still shows an overall sufficient ability in the repayment of short-term debt.
Finally, the cash ratio from 2018 to 2022 shows results consistently lower than one, with the 2022 value equal to 0.3. This more conservative measure of liquidity, therefore, shows some difficulties in repaying current liabilities with cash resources, especially in the last year.
To sum up, the analysis shows an overall ability by Crocs to repay short-term debt. However, the company should probably address the issue related to the last year’s decline in all the values and in particular the cash ratio, and try to increase its cash accounts, to look safer from an investor’s point of view.
Profitability
In order to assess the profitability of Crocs Inc. we will proceed with the analysis of the main financial indicators, namely, Return on Equity (ROE), Return on Invested Capital (ROIC), as well as Net Revenue and Net Profit Margin. Through this analysis, it will be possible to gain a good understanding of the company’s profitability throughout the years.
Return on Equity (ROE): it measures the return generated by the company’s equity, hence, it indicates how efficient the company is at using the resources invested by shareholders.
Crocs’ ROE has always shown that the company has a great ability in generating value, as it has been consistently increasing its returns, reaching a value of 382.98% in 2022. A huge growth was achieved in 2020, interestingly enough; the company, in fact, managed to achieve great results by increasing its return on assets by roughly 24 percentage points. It later was also able to maintain such encouraging measures, by increasing its ROA even more in 2021 and increasing leverage in 2022, while decreasing in return on assets. It should be anyway remembered that at the beginning of last year, Crocs Inc. acquired the HEYDUDE brand, which could have played a decisive role in the indicators mentioned.
Return on Invested Capital (ROIC): Measures the return generated by the company on its invested capital, showing the company’s ability to allocate its capital efficiently on investments.
Crocs’ results in this indicator have a similar configuration to ROE, with constantly increasing figures, until 2021, in this case. The company showed a remarkable ability in allocating its resources reaching a result as high as 90.26% in 2021. The year 2022 registered a considerable decrease while still maintaining successful figures throughout the year (29.23%).
Net Profit Margin: this measure evaluates a company’s operations’ profitability after the deduction of all expenses, both from operations and financing activities, and taxes.
The net profit margin for Crocs increased from 2018 to 2019, while it decreased in the following year, i.e. 2020. However, these three years all showed very high margins (15.19% in 2018, 31.39% in 2019, 22.58% in 2020) but the situation seems to have changed in the last two years (2021 and 2022) as the margins decreased noticeably, down to 4.6%. Such a remarkable change is attributable to an increase in the weight of SG&A expenses and Depreciation expenses, that contributed to bring the EBIT margin down as well, but such a change was mainly due to an increase in taxes paid, as in the previous years Crocs Inc. had increased its deferred taxes leading to higher savings (some deferred taxes account even increased by more than 20% from 2020 to 2021).
Net Revenue: Net revenue is the revenue a company earns during a period, from its operations, after any consumer discounts and allowances are factored.
Crocs’ net revenues have experienced a continuous increase, which signals the company has adopted successful strategies throughout the years analyzed. From 2018 to 2019 and from 2019 to 2020, net revenues rose, but not as much as during the following years. Indeed, in particular, the best performance was achieved right after the COVID-19 pandemic, i.e. during the year 2021, where the account increased by 66.88%. In 2022, the growth associated with net revenues was slightly less, but was still relevant, and, more precisely, it was 53.70%, reaching net revenues of $3,554.99 million, which is undoubtedly a very high figure, in which the acquisition of HEYDUDE certainly played a part (the same cannot be said for 2021 where net revenues totalled $2,313.42 million).
To sum up, Crocs Inc. has exhibited very encouraging results as far as Return on Equity is concerned, but also ROIC shows that the company is very successful at allocating its capital resources. However, all indicators seem to be telling a slightly different story in 2022. This is probably due to two main factors; the fact that 2021 was a very successful year for the company, that is likely to remain an isolated case, and to the fact that Crocs Inc. acquired HEYDUDE in 2022, which probably somehow affected the accounts of the corporation. The company should probably try to address the increase in SG&A and Depreciation expenses, as they have deeply affected Crocs’ margins this last year.
Stock Valuation
In this financial report, we will conduct a stock valuation analysis for Crocs Incorporation. The valuation will be carried out adopting the Discounted Cash Flow (DCF) model. The DCF uses projected future cash flows and sums their present value to determine the enterprise value of the company.
To begin the analysis we first computed the weighted average cost of capital by utilizing external estimates for the market risk premium and cost of debt (from Professor Aswath Damodaran). Also the risk free rate and the tax rate, as well as the company’s beta were externally sourced (in particular beta was taken from Yahoo!finance). Using the Capital Asset Pricing Model we later computed the cost of equity.
To calculate the present value of Crocs, we have forecasted its future cash flows, taking into account revenue growth, and computing a series of regression analyses for capital expenditures, depreciation and amortization and working capital investments with respect to revenues (for which forecasts were based on external estimates for the company, for 2023 and 2024, and other studies on the overall industry for the following periods). EBIT was also indirectly predicted by analyzing the behavior of cost of goods sold as well as SG&A expenses. These projected cash flows have been discounted back to their present value using the company's WACC of 6.22%.
Finally, we computed the terminal value adopting two different approaches, namely, perpetuity growth and EBITDA exit multiple. In the first case, a growth of 2% was used (this is also the target inflation for the US), in order to remain conservative in the estimates and we obtained a stock price of $222.36.
In the latter approach, we relied on comparable companies, keeping in mind that the footwear industry hosts very different companies, which display considerably dissimilar features in some cases. Hence, we used an exit multiple of 13.05x. Based on this method, we have determined a stock price of $114.99.
Since these values have a pretty wide range, we felt it would be more accurate to compute a weighted average of the two estimates, giving equal importance to the two computations. The result obtained was a stock price of $168.67 which is close to some experts’ estimates reported on Yahoo!Finance.
Discounted Cash Flow Analysis
Multiples Analysis
A multiples analysis is widely used by experts to evaluate the company’s performance and valuation, by comparing it with its direct competitors and the industry. In particular, Crocs’ EV/EBITDA ratio and P/E ratio are taken into consideration.
Crocs shows an EV/EBITDA ratio of approximately 9.02, as indicated also on Yahoo!Finance. This basically means that investors value the company about 9.02 times the EBITDA. On the other hand, the industry shows a ratio that is close to 20.23, according to some computations by Professor Aswath Damodaran of NYU, shown on its website. This means that, with respect to competitors in the industry, the company has a much lower valuation.
Moreover, focusing on the P/E ratio, Crocs presents a ratio of about 10.96, meaning that investors would pay as much as 10.96 times the current stock price of the company, to become shareholders. Also in this case, such information must be evaluated against the industry P/E ratio which is about 13.49 (still according to estimates by Professor Damodaran).
This analysis, suggests that the company is affected by an overall lower valuation than its peers, since its EV/EBITDA is lower, but, on the other hand, the P/E ratio also communicates that the Crocs’ stocks are cheaper than the industry average, based on its earnings per share.
Piotroski Score
The Piotroski score is commonly used to determine the strength of a firm’s financial position. It is represented by a discrete number from 0 to 9, where the higher a company scores, the better.
The first aspect to be analyzed is profitability, and, more specifically, several data are taken into account in order to understand how profitable the corporation under examination is. Crocs earns a first point because it shows a positive income in 2022 (and even in the preceding years), it also shows positive return on assets, which counts as one more point as well as a positive operating cash flow. Crocs also shows good quality earnings, since its operating cash flow is greater than its net income. This leads the company to gain the maximum number of points (+4) from the profitability assessment.
Later, leverage and liquidity are analyzed, awarding a maximum of 3 points total. Crocs does not gain a first point, for leverage, as long-term debts have not decreased in the last year but, actually, they have sharply increased. No point is received from the liquidity performance as well, since the company experienced a decrease in its current ratio. Lastly, the company receives one point since it did not issue any common stock during 2022, but, instead, shares were even decreased. This means that Crocs receives a total of one point (+1) in this section.
Last but not least, the corporation showed lower gross profit margins in 2022, with respect to 2021, which does not allow it to receive any points from it and the same is true for the asset turnover ratio which declined in 2022. Hence, Crocs receives no points from this last section of operating efficiency.
To conclude, the company receives a score of 5 out of 9 on the Piotroski score scale, which indicates a relatively good financial health, but at the same time, highlights the fact that the company should address some issues that might lead to growing concerns.
Risks
Since Crocs is completely dependent on its proprietary material Croslite™ which enables it to be less subject to suppliers’ behaviors, on the other hand, it is highly exposed to the risks associated with supply chain disruptions. This obviously represents a possible threat which could seriously affect the company’s business, as it would be left without any alternative solution.
Furthermore, the footwear industry has been under scrutiny for its sustainability issues and some innovative materials and brands are emerging as valid alternatives to the more traditional ones; if Crocs fails to address these issues and find solutions to the sustainability concerns, it could produce some serious backlash for the company.
The corporation should also try to readily reverse the trend of some of last year’s accounts, in order to look more reliable to investors, although it is very much clear that 2021 was an extraordinary year. Nonetheless, the corporation should try to keep growing at a fast pace, watching out for growing competition in the industry and the need for constant innovation.
Comments