Crocs (CROX) - Value Buy
We believe Crocs is an good business with recognizable product and a loyal fan base. It has the highest operating margin in the industry and an excellent management team experienced in turning around consumer brands. It’s valuation is unfairly downgraded due to decline in Heydude and excessive worries about fashion risk. We believe management can stabilize the decline in Heydude and counter fashion risk through global expansion and product innovation, driving relevance among its core customer group. It’s a value buy. Please see our research attached below:
Investment Thesis I: Product Differentiation and Competitive Pricing Crocs stands out in the market by offering differentiated products at competitive price, while maintaining the highest EBIT margin in the industry, surpassing that of luxury brands such as Birkenstock. This is a Key trait all successful consumer retail companies possess.
Investment Thesis II: Effective Marketing Strategy and Collaborations Crocs' marketing strategy effectively resonates with its core customer base, ensuring brand relevance. The brand minimizes fashion risks by adopting a collaboration strategy, introducing variations of its products tied to timeless icons like Disney characters or sports teams. The same model, different print model generates high ROI.
Investment Thesis III: Heydude's Potential as a Growth Engine The transformation of Heydude is poised to become Crocs' secondary growth catalyst. This impending recovery post restructuring will prove that Crocs should be valued at a premium rather than a discount. Approximately 60-70% of the stock price increase is attributed to valuation adjustments, with the remaining 30% linked to robust growth, high margins, and shareholder-accretive stock buyback actions
https://www.horizonscapitals.com/s/Crocs-Inc-Presentation.pdf
We have also been activist in advocating for better capital allocation through increasing stock buybacks instead of paying down debt, when stock is trading at such depressed levels (6.4x TTM P/E).
