CROX Q4'24 - reasons for optimism
HEYDUDE remains a drag on valuation but SG&A coming down, brand has some drivers and lots of cash for buybacks
CROX is flat since June 2021 and most of the story the last three years is the so-far failed acquisition of HEYDUDE. They paid $2.5bn ($2bn of it debt funded) to buy a company that just guided to a 7-9% sales decline in 2025. The price paid on HEYDUDE three years ago is about 40% of the market cap today. HEYDUDE right now contributes about 25% of sales and 10% of earning for CROX.
Because of the debt Crocs took on, much of the cash flow generated over the last three years has gone to debt paydown (close to $2bn over the last three years). All of this debt is supporting an asset that got off to a hot start and then underperformed. Sales in 2024 shrunk 13% in 2024 while SG&A was up 24%+:
Management did describe 2024 as an “investment year” and for the whole company guided to mind single-digits growth for SG&A. 2025 will be the conclusion of a “two-year investment cycle”. So reasons to believe SG&A growth will slow.
In 2024, unit sales for HEYDUDE took an even bigger hit than sales and look especially bad compared to the Crocs core brand. The saving grace here is ASP is increasing, but a 18% decline in units is not what Crocs expected here I’m sure:
It’s interesting to look at the merger deck - at the time, Crocs said it could get HEYDUDE to $1bn in sales by 2024 and the merger would be immediately accretive. 0 for 2 on that. However, it did in 2022 significantly beat its own expectation of $700-750m in sales for HEYDUDE in 22’. HEYDUDE also is producing earnings for them, albeit much lower quality ones than the core brand.
The debt from HEYDUDE is close to paid off; the leverage covenant they took on that stopped buybacks after the acquisition is now off the table and buybacks are ramping up again. The $551m the company did in 24’ represents close to 9% of the market cap today, and the stock is at ~$108 is significantly lower than where it traded for most of last year. In Q4 alone, Crocs did $225m of buybacks at an average price of $111.51 - the stock traded in the high eighties and low nineties for parts of February. I am thinking they were active in Q1 buying back shares.
Back to HEYDUDE - I think there is a case you are getting the company “for free” now, unlike shareholders three years ago. Additionally, your timing is much better. SG&A growth looks like it has peaked. The strategy just started to change and sales growth could come back in 26’ and beyond. The new head of HEYDUDE oversaw growth at Stanley during the 2020+ hypergrowth / viral years and was at Crocs for seven years before that. They have a decent list of celebrities wearing the brand, headlined by Sydney Sweeney, Travis Hunter (who potentially will go first in the NFL draft and wore HEYDUDE shoes at the Heisman trophy ceremony) and Jelly Roll. This slide from the deck they presented 2/13 gives some reasons for optimism:
In retrospect, the $2bn they spent the last three years on HEYDUDE debt could’ve gone to 100% buybacks on the core brand and they would’ve saved money on interest expense and drove the stock higher, which then wouldn’t be dragged down by an underperforming acquisition. Hindsight is 20-20 though and I was among shareholders who liked the acquisition, which at the time seemed possibly accretive (growing 26% with 26% op. margin at the time of purchase) and was purchased at about the same EV/EBITDA as Crocs (spoiler alert: the growth numbers clearly were COVID-boom enhanced). A more discerning shareholder would’ve sold on the acquisition announcement - but I believe might be looking again now.
Taking HEYDUDE out of the picture, the core brand is performing well and that’s what drove the stock higher last Thursday. The company guided to $13+ of EPS which doesn’t include the impact of buybacks (stock now trades 8.3x NTM earnings). Operating margin guide was 24%, which again implies SG&A is under control. The capex guide was light at $80-$100m. To put in perspective, the last two years of FCF is $923m (24) and $814m (23) and last two years of capex are $69m and $115m. CROX is going to have a lot of money left over for buybacks.
The board cleared them for an additional $1bn of buybacks this month and they now are authorization for $1.3bn of buybacks. A teens buyback yield in 2024 seems like a real possibility given where the stock trades right now.
Given how much cash relative to the market cap CROX is going to produce with a much lighter debt burden than the last three years, I like the stock on a valuation basis. I think HEYDUDE represents upside and is perhaps under-appreciated by the market because of the terrible track record. If anyone is going to turn this brand around, it’s the Crocs management team. Some closing words from CEO Andrew Rees:
