Crocs Stock: The Reasons For Keeping Our Hold Rating (CROX)

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Crocs, Inc. (NASDAQ:CROX) together with its subsidiaries, designs, develops, manufactures, markets, and distributes casual lifestyle footwear and accessories for men, women, and children worldwide.

So far, we have published three articles about the company on Seeking Alpha, initially rating CROX stock as "buy" and earlier this year downgrading it to "hold".

Rating history (Author)

Since our first writing in May, 2022, the stock price has increased by more than 130%. We believe that this increase has been possible, because at that time the stock was substantially undervalued. At the current price level, especially in the current macroeconomic environment, we do not see substantial upside potential in the coming quarters. We have raised our concerns previously about the still depressed consumer confidence levels, the elevated inflation and on a company specific level about the deteriorating profit margins and declining efficiency. Today we will be revisiting these points and we will provide an updated view, taking the latest available information into account.

Last time, we used net profit margin to gauge CROX's profitability. Back then we were concerned about the contracting profit margin. Since then, however, the picture has somewhat improved. The declining trend of Crocs' profitability has somewhat reversed, which is definitely a good sign.

Just like before, Crocs is still maintaining its lead in terms of profitability in the footwear industry, which makes the company an appealing candidate for investors looking to invest in this space.

Profitability comparison (Seeking Alpha)

At this point, we will have to start digging a bit deeper which factors have caused the improvement of the net profit margin.

The reason for the slightly expanding margin can be explained by the decrease in COGS and SG&A. While these figures are still well-above the pre-pandemic levels, it is promising to see a changing trend.

We would like to see both of these figures further decline, however, before we would consider rating the firm's stock as "buy" again.

Inventories have remained elevated and are still concerning for us. We would like to see this figure come down. We understand though that the radical jump in early 2022 has been partially caused by the acquisition of HEYDUDE.

The latest guidance given by the management in April for Q2 has disappointed many investors as it came in below analyst estimates. As a result, that day the stock price has dropped by as much as 20% intraday. We believe it will be important to closely follow the Q2 numbers how they compare with this guidance.

In our opinion, a significant positive surprise is not likely. Consumer confidence, which has a substantial impact on the demand for discretionary goods has not improved during Q2, while inflation has also remained elevated.

U.S. Consumer confidence (Tradingeconomics.com)

The FX environment has become somewhat more favourable compared to late 2022 though, due to the weakening of the USD compared to other currencies. In 2023, however, the index has been fluctuating between 102 and 106. The weaker USD may have a minor positive impact on CROX's financial results.

USD Index (Investing.com)

Last, but not least, we have to mention the firm's latest partnership deal with Foot Locker (FL). This is definitely a good step for both firms. It gives CROX's HEYDUDE brand much more visibility both in physical stores and online, which could eventually lead to higher sales. Do not forget, however, that HEYDUDE margins are generally lower than those of Crocs, meaning that if the HEYDUDE share of total sales increases, it may put downward pressure on the margins.

Asset turnover, in contrast to the net profit margin, has kept on decreasing, due to the falling sales.

What is even more concerning in this regard is that the accounts receivable in the past months have jumped up substantially, while sales have declined. It may be an account warning sign that Crocs could be manipulating its sales figures, potentially by selling more on credit and pulling demand forward from future periods.

Once, again, we would like to see this trend normalise, and we would like to see the revenue growing faster than the accounts receivable before we would upgrade our rating to "buy".

The company's liquidity position has improved slightly since our last writing as indicated by the current- and the quick ratio. In general, we prefer to see both of these metrics above 1 to be more certain that the company has enough current assets to meet its current liabilities.

Even with the slight improvement, Crocs is still positioned relatively unfavourably in this regard compared to its rivals in the footwear industry.

Comparison (Seeking Alpha)

The net profit margin has stopped contracting in the previous quarter and CROX has remained the leader in the footwear industry in terms of profitability.

Since our last writing, neither consumer confidence, nor expenses have shown a substantial improvement. Inventory levels have also remained high.

The firm's newly announced partnership with Foot Locker, however, could boost HEYDUDE's visibility and could lead to sales growth in the near term.

CROX's asset turnover has kept deteriorating as sales have been on a declining trend. At the same time, accounts receivable have increased, which may be an accounting warning sign of potential manipulation.

Crocs' liquidity position has also slightly improved, but it still compares unfavourably to that of its peers.

For these reasons, we maintain our "hold" rating.

This article was written by

Analyst's Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Past performance is not an indicator of future performance. This post is illustrative and educational and is not a specific offer of products or services or financial advice. Information in this article is not an offer to buy or sell, or a solicitation of any offer to buy or sell the securities mentioned herein. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. ll expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. This article has been co-authored by Mark Lakos.

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