CROX – add to your winners, stock could be double+

Crocs is fresh off its Investor Day and rallied nicely afterwards (+7% since 9/14 when it held Investor Day). Its YTD performance (+152%) is amazing. The stock on an annualized return basis is my best performer since I bought it in August 2020 at ~$40 (as of Friday’s close $155).

Some of you may remember from July of this year when I wrote:

In a bull case where the company sees higher growth, I could see sales getting to ~$5bn and FCF reaching ~$1bn+. At that point I think the stock could trade anywhere from a $10bn market cap (10% FCF yield) to $20bn market cap (5% yield), meaning the stock may be a double plus from here.

Sometimes you’re lucky and sometimes you’re good – this assumption proved to be spot on. Let’s go to CEO Andrew Rees:

But we’re not done. We have great ambition for the future. We believe the Crocs brand has the potential to achieve $5 billion plus in sales within the next 5 years. This translates into a compound annual growth rate north of 17%.

And later CFO Anne Mehlman said $1 billion in FCF is do-able by 2026:

It’s nice when management says what you had modeled in your assumptions:

I didn’t even factor buybacks into my model, so the FCF per share could be better than what I expected. Here’s what CROX said on buybacks – they’re thinking of buying back over 10% this year of the current float at the existing $9.7bn market cap:

In the words of one former Patriots quarterback, Let’s Fucking Go. This is a $1 billion buyback in FY 2021 on a stock with less than a $10bn market cap. Buybacks I still think don’t get played up enough in some circles, and it’s worth noting this is equivalent and IMO superior to a 10% dividend (not taxed and company can be selective on when to do the buyback – I reinvest all my dividends anyways so a buyback without taxes is the same thing – I’m just increasing my ownership of the stock). On Q4 alone if you bought in now, you’re getting a 5% buyback in the fourth quarter if the stock stays flat.

Perhaps just as important as the buyback itself is that Crocs is simultaneously showing us it 1) will reward shareholders through capital return and 2) intends to grow at a 17% CAGR and has a plan on how to grow.

This company has plenty of TAM (clogs is an $8bn market, sandals the company estimates at $30bn+, many consumers are repeat and multiple times a year purchasers) and a management group that knows how to win, as evidenced by the near 1,000%+ return since the current C-level suite took over. Crocs already has best in class margins (currently 26% operating margins) and will benefit from going more digital in the years to come (plans to get to 50%, currently at 37%).

More volume, check. Great margins, check. Cares about shareholders, check. Brand on fire, check (as an interesting sidenote, the company created a Minecraft Crocs virtual world to introduce its tie dye collection).

I’m specifically excited about what the company can do in sandals, as they plan to grow the segment by 4x over the next five years. Asia / China also represents a massive opportunity they think they can grow to 25% of the business. China is only 5% of revenue at present.

I try not to touch my winners and I believe there exists potential for Crocs to double again from here. I have no reason to doubt the $1bn in FCF number management cited. If they keep buying back shares, we might see shares decline 25%+ in the next five years. That could mean the stock could be doing $20.6 in FCF per share.

  • 64.6mm current shares outstanding * 0.75 = 48.5 million shares
  • 1bn FCF / 48.5mm = $20.6/share in FCF

If you think the stock can trade 20x FCF, that’s a $412 stock. Even at 10x, that’s $200+ a share. 

Holding amazing companies at reasonable valuations is easy. CROX remains a conviction buy at this price and the management group is the gift that keeps on giving.