Stock Market Sell-Off: Is Crocs a Buy?

Stock Market Sell-Off: Is Crocs a Buy?

fangs (CROX 3.16%) stock jumped immediately following its early November earnings report. That update showed strong sales growth and robust profitability in the selling period that ended in late September. Those wins came despite major pressures on the footwear industry, too.

But Crocs’ shares are still underperforming a weak broader market this year. Through mid-November, the stock is down over 24% compared to a 17% drop in the S&P500. Let’s take a look at whether that underperformance simply reflects added risks to the business or instead creates a compelling buying opportunity.

The latest trends

There was a lot to like in Crocs’ latest earnings report. while rival Nike saw weak global growth thanks to slowing demand in China and the US, Crocs had a great back-to-school season. Sales rose 20% in its core footwear brand after accounting for currency exchange rate shifts.

The operating profit margin dropped due to increased costs but remained elevated at 28% of sales. That success implied less pressure to cut prices even as consumers became more selective in this inflationary period.

“Our exceptional third quarter results,” CEO Andrew Rees said in a press release, “are a testament to the strength of the Crocs and HeyDude brands.”

On the downside, Crocs believes a good portion of the recent spike in freight and inventory costs will continue pressing earnings into 2023. Profits are also being hurt by the strong US dollar. And inventory more than doubled year over year, potentially adding risk around the upcoming holiday shopping season.

Crocs is risky

Most of that inventory jump came from the addition of the HeyDude business, though. As a result, Crocs appears to be in no danger of having to slash prices over the holidays. Management just raised its 2022 outlook to 17% growth in its core business. The HeyDude acquisition isn’t bringing any negative surprises so far, either, and is on track to contribute to sales growth and earnings this year.

These factors, combined with Crocs’ low valuation, could make the stock an attractive buy right now. The shares are valued at 1.9 times annual sales, compared to 2.8 for Deckers and 3.6 for Nike. Crocs’ profitability is much higher than each of these two shoe giants as well.

CROX PS Ratio data by YCharts

Investors might still want to be cautious about jumping into the stock today. The industry is highly sensitive to economic growth trends, which could continue slowing into 2023. And while Crocs hasn’t faced intense pressure from price cuts among its rivals, such promotions could accelerate over the holiday period and into early next year. That situation would imperil its impressive profit margin and threaten a key pillar in the bullish thesis for the stock.

Still, management deserves credit for outperforming peers in a volatile industry and for making a bold, but profitable, bet on bulking up its portfolio. Success here makes it more likely that Crocs can deliver industry-thumping returns. That’s why the growth stock deserves a spot on your watchlist, if not in your portfolio, right now.

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