Investidea: Crocs, because these galoshes are in trend

Today we have a moderately speculative idea.: take shares in rubber shoe seller Crocs (NASDAQ: CROX), in order to capitalize on their rebound after the fall.

Growth potential and validity: 22% behind 16 Months; 76% behind 4 of the year; 10% per annum during 15 years.

Why stocks can go up: they have fallen sharply and the company is now cheap - although its business has great prospects.

How do we act: we take shares now by 101,98 $.

When creating the material, sources were used, inaccessible to users from the Russian Federation. We hope, Do you know, what to do.

No guarantees

Our reflections are based on the analysis of the company's business and the personal experience of our investors, but remember: not a fact, that the investment idea will work like this, as we expect. Everything, what we write, are forecasts and hypotheses, not a call to action. To rely on our reflections or not – it's up to you.

And what is there with the author's forecasts

Research, like this and this, talk about, that the accuracy of target price predictions is low. And that's ok: there are always too many surprises on the stock exchange and accurate forecasts are rarely realized. If the situation were reversed, then funds based on computer algorithms would show results better than people, but alas, they work worse.

So we're not trying to build complex models.. The profitability forecast in the article is the author's expectations. We specify this forecast for the landmark. As with the investment idea in general, readers decide for themselves, it is worth trusting the author and focusing on the forecast or not.

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Investment editorial office

What the company makes money on

The company designs and sells shoes - how hopelessly ugly, just as comfortable and functional. In fact, these are galoshes - although, certainly, The company has a very wide range of offerings..

According to the company's annual report, by sales channels, its revenue is distributed as follows:

1. Wholesale segment — 50%. Sales, which fall on resellers.
2. Retail segment - 24,1%. Sales of Crocs through outlets under its management.
3. Online segment - 25,9%. Direct sales to consumers through the company's online channels. However, the company collects sales statistics from its counterparties from the wholesale segment, so if you count sales through the websites of wholesalers, then online sales give 41,5% Crocs revenue.

Revenue by country and region:

1. America - 62,31%. USA give 57,93% company revenue. Segment operating margin — 41,9% from its proceeds.
2. Asian-Pacific area - 20,09%. Segment operating margin — 17,03% from its proceeds.
3. Europe, Middle East and Africa - 17,58%. Segment operating margin — 25,8% from its proceeds.
4. Other businesses - 0,02%. These are non-core businesses of Crocs, as well as intra-corporate settlements.

If you try to study the company's sales structure by types of goods, then we can get an idea, looking at the 76th slide of the company's presentation:

1. Kaloshi - 71%.
2. Sandals - 16%.
3. Jibitsa jewelry - 6%.
4. The mysterious "other" 7%.

Arguments in favor of the company

Fell down. Crocs shares have fallen sharply over the past three months: from 180 to 101,98 $. I believe, that we can pick them up waiting for the rebound.

New entry into the same river. Almost two years have passed since our first super-successful idea for this company.. To the question “is it possible to squeeze something else out of these shares”, I answer “yes”.

The pandemic will last forever. The world's largest economies are already learning to live in a state of, when new strains of viruses appear endlessly, and new bans, restrictions and their sudden lifting with the aim of introducing later become the norm. Under these conditions, I would expect the trends of the first quarantine to strengthen.. This will be largely facilitated by the massive transition of many employers to remote work.. In general, this will contribute to the erosion of established standards of appearance and unspoken dress code..

For example, already have "research", "proving" that the wearers of medical masks look more physically attractive in the eyes of others. So I would expect, that the planet and consumers are waiting for a large-scale "casualization". This will be facilitated by the reduction of consumption standards., caused by the economic turmoil stemming from the never-ending pandemic.

Why spend on good, expensive shoes, if a, Firstly, Tomorrow all restaurants and theaters will be closed again, and in those, that are open, can only be accessed by QR code, and secondly, I don't have much money for these shoes.. It’s easier to buy Kroks galoshes and walk to the nearest grocery store in them. Harbingers of this kind of socio-economic change even before the pandemic led to the stagnation and extinction of the once super-popular luxury lingerie brand Victoria's Secret.. So I guess, that Crocs as a whole expects further growth in sales.

It is inexpensive. The company is inexpensive as in relative, as well as in absolute numbers: P / E — 8,87 and P / S — 3,13, capitalization 6.01 billion dollars. This creates several possibilities at once.:

1. Shares may well pump up as appreciating cheapness and a positive business environment, and investors with the position “kam he, guys, fell, means, must be chosen - and in general, I read in telegram chat, that the company is promising!».
2. The company may well be bought. This would be a very thoughtful move for big corporations like Nike and Adidas., in whose business the pandemic went like a steamroller. Crocs are good, demanded goods, and the purchase of the company would be a great addition to the business of its competitors: Crocs' total margin in 2,5 times more, than Nike.
3. In its current form, the company is meaningless to its shareholders.. Crocs sets records for revenue and profit, its final margin has grown significantly and has already reached some IT levels in 35% from proceeds. It's just that this hasn't been reflected in quotes lately..

I believe, that Crocs could be the target of an activist investor, that will make its management please shareholders. For example, if Crocs spent at least half of its windfall profits on dividends, then the company's shares would give 5% per annum - royal yield even with future rate hikes FED. An activist could raise the issue of such payments. Well, or force the company's management to sell it.

What can get in the way

With such friends... The company does not manufacture its own products, and relies on third-party manufacturers. This allows it to focus on high value-added operations – hence the huge profits., but makes it dependent on people from outside.

Crocs' two largest unnamed counterparties account for a disproportionate percentage of its output.: falls on the first 46%, and on the second - 22%. Trouble for one of them, or simply a review of Crocs relationship with them, could negatively affect Crocs reporting..

Regional specifics should also be kept in mind.. Both counterparties of Crocs conduct their operations in China and Vietnam. In China, the most stringent quarantine measures are in place with the locking of cities if at least a couple of cases of coronavirus are detected - this may also affect the factories of Crocs counterparties.

Also, one of these counterparties may be associated with what is happening in Xinjiang - if this is revealed, then Crocs shares and business may be ostracized by the ESG lobby, if she keeps quiet about it. And if not, then Chinese counterparties will punish her business.

Logistics and prices. The now rising cost of shipping and raw materials is negatively affecting all brands of clothing and home goods - so I would mentally prepare for that, that these factors will leave an imprint on the reporting of Crocs for at least a couple of next quarters.

It should also be understood, that Crocs has many physical retail outlets, its short-term business may suffer from large-scale quarantines.

Hey, you! The company recently announced the acquisition of casual footwear brand Heydude for $2.5 billion.. There is nothing wrong with diversifying and expanding your business, but such a big purchase, burdensome bookkeeping Crocs, greatly reduces the possibility of the company introducing dividends in a significant amount. I would also prepare, that Crocs will expand further, which will further reduce the prospects for the introduction of dividends.

Accounts-accounts-accounts. The company has 1.392 billion debts, of which 350.215 million must be repaid within a year. The company has enough money to close urgent debts: 436,6 million on accounts plus 229.298 million debts of counterparties.

Basically, the situation is normal, but don't forget that, that the company will spend 2.5 billion on Heydude, a significant part of which she will have to occupy, - only 450 million the company will pay with its shares. This in general can greatly increase the total amount of debts of Crocs - which again reduces the possibility of introducing significant dividends.. Also, a large debt may subsequently scare away some investors..

Emission. Company to issue $450 million in new shares to buy Heydude, and this will dilute the value of Crocs shares - and may negatively affect its quotes.

What's the bottom line?

Shares can be taken now by 101,98 $. And then we have three options:

1. wait for growth to 125 $. This, On the one side, a lot - but, considering all the positive points, it's quite a modest goal. I think, that we will reach this level in the next 16 Months;
2. wait for the shares to return to 180 $. It's a brave goal - I think, that we will achieve it in the next 4 of the year. Surely during this time there will be at least one more hard quarantine, which will cause a frenzied demand for the company's products;
3. hold shares 15 years at the heart, to see, how Crocs will become a giant like Adidas, just for the world, inherited by the precariat.