Down more than 50%, is this the next monster growth stock?

Crocodile (CROX -0.92%) may not offer everyone’s favorite shoes, but the company has certainly achieved an important metric for consumer discretionary stocks over the years: the “unique metric.” In other words, thanks to its great product offerings, the kids who loved Crocs in the 2000s and 2010s are growing up, but certainly not outgrowing their love of foam clogs.

The cobbler has made a comeback in recent years, and the pandemic has seemingly sealed the deal on consumer preference for comfort and utility. However, despite its strong growth, the shares are down about 56% from all-time highs. That’s no reason to ignore stock, though. In fact, now is the time to consider whether Crocs is the next monster growth story in the making.

A strong dollar, inflation and acquisition spending weigh heavily

Crocs posted year-over-year sales growth of nearly 51% in the second quarter of 2022. However, as all multinational companies have reported, a record rise in the US dollar has taken its toll in the last quarter. . A strong dollar reduces the value of a sale made abroad when that sale is converted into dollars, and the dollar has skyrocketed. This is a sequel to interest rate hikes by the US Federal Reserve in an attempt to control inflation. Adjusting for currency effects, Crocs revenue would have increased nearly 56% in the second quarter.

Inflation has also been a problem for the company. Air freight shipping spending has been a particular concern over the past year. Higher costs led to a decline in adjusted operating margin to 30.1% (compared to 30.7% last year). On an unadjusted basis, operating profit margin was 25.7% (30.5% last year), mainly due to the integration of the lower margin HeyDude brand.

But, overall, Crocs did a great job in the second quarter. Profitability on a free cash flow basis is expected to increase going forward as the company digests the costs of acquiring HeyDude. The Crocs brand is now expected to see growth of 9% to 12% for the full year of 2022, lower than the 20% growth forecast previously provided. While Crocs holds on to its massive gains in the pandemic era, there’s plenty to be excited about the company’s new HeyDude range.

Get a small brand of hot shoes at low prices

As of this writing, Crocs shares are trading at 8.8 times trailing 12-month earnings, or 23 times company value to trailing 12-month free cash flow. It would be a fair to slightly high price if the Crocs brand was all there is here. But it’s not just the Crocs brand. HeyDude has been under the company’s umbrella since its acquisition in February 2022.

HeyDude’s sales soared 96% year-over-year in the second quarter, making it one of the hottest footwear brands and generating about a quarter of the total revenue of the trimester. Crocs is only just beginning to plug the occasional upstart kick into its distribution channels, and it sees HeyDude making $1 billion in annual revenue in 2023 (the expectation for 2022 is HeyDude sales of $940-980 million). dollars including the results before the acquisition).

Besides skyrocketing expansion, HeyDude is also already very profitable – the adjusted operating margin was 32.6% on a stand-alone basis in the second quarter. Of course, Crocs incurred considerable debt to make the purchase. Total debt stood at nearly $2.8 billion at the end of June, resulting in interest charges of $33 million in the last quarter. But given the rapid growth of HeyDude and positive impact on the bottom line, this remains a very promising merger between the two casual shoe companies.

The HeyDude brand is changing the dynamics of Crocs stock. What would otherwise be a value play suddenly looks like an underrated growth stock with tons of potential. It’ll take patience, but Crocs could be a monster consumer-goods investment to own over the next few years if its leading brand of foam clogs maintains steam and HeyDude continues to thrive. After the latest earnings update, this high-end shoe stock looks too cheap to ignore.