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Will Crocs' (CROX) Robust Upside Story Continue Despite Woes?

Crocs Inc. CROX displays a remarkable upside story despite the looming effects of the coronavirus pandemic and supply-chain disruptions. The company has been gaining from sturdy consumer demand for its brands. CROX’s focus on product innovation and marketing, digital capabilities, and tapping growth opportunities in Asia bodes well.

Crocs’ immediate action to shift production, enhance factory throughput, leverage air freight, and strategically allocate units helped mitigate the impacts of factory closures in Vietnam and the global supply-chain issues. This should help retain its momentum in the near term.

Crocs continued with its stellar performance in third-quarter 2021. Both the top and bottom lines not only surpassed the Zacks Consensus Estimate but also improved year over year. Sturdy consumer demand and brand strength contributed to the upbeat performance. The better-than-expected results prompted management to raise the 2021 view. Crocs now estimates 2021 revenue growth between 62% and 65% versus the previously mentioned 60-65% increase.

The Zacks Rank #3 (Hold) company has a market capitalization of $9.04 billion. In the past year, CROX has rallied 131.9% compared with the industry’s growth of 7.6%. It also compares favorably against the Consumer Discretionary sector’s decline of 12.1% and the S&P 500 index’s growth of 25.2%.

Zacks Investment Research
Zacks Investment Research

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In the past 30 days, the company’s estimates for 2021 earnings per share have been unchanged. For fiscal 2021, its earnings estimates are pegged at $7.59 per share, suggesting 135.7% growth from the year-ago period.

Here’s Why Crocs Should Retain the Momentum

Crocs is likely to retain its strong performance on strong brand demand. The company continues to witness robust consumer demand for its sandals and Jibbitz. Also, Crocs is likely to benefit from its focus on product innovation and marketing, digital capabilities, and tapping of growth opportunities in Asia, primarily China.

Crocs is making significant progress in expanding digital and omnichannel capabilities. We note that digital sales advanced 68.9% and accounted for 36.8% of revenues in the third quarter. Within digital, all regions witnessed double-digit increases from the year-ago period. Digital sales surged an impressive 129% from third-quarter 2019. Digital penetration represents 32.8%, 38.1% and 56.9% of revenues for the Americas, the Asia Pacific and EMEA regions, respectively, in the quarter.

Robust traffic, higher pricing and fewer promotions benefited the company. Gains from strategic collaborations, influencer campaigns along with digital and social marketing efforts remained upsides.

The company recently outlined its long-term strategy and key initiatives to deliver sustainable growth. It expects to generate revenues of more than $5 billion by 2026, witnessing compounded annual growth rate (CAGR) of more than 17% in the next five years. It expects to attain the revenue target on strong digital sales, improved market share for sandals, growth in Asia, and innovative product and marketing. Management expects four times revenue growth in sandals by 2026. The company sees long-term opportunities in Asia, primarily in China, the second-largest footwear market in the world.

Management expects revenue growth to witness a CAGR of 25% for 2026 and represent 24% of total revenues. It anticipates at least 50% of total revenues to come from digital channels by the end of 2026. Driven by strong revenue growth, the company anticipates improved profitability and cash flows through 2026. It expects the adjusted operating margin to be more than 26% and annual free cash flow in excess of $1 billion by the end of 2026.

Moreover, the company’s timely actions helped mitigate the impacts of factory closures in Vietnam, its major manufacturing hub, and the global supply-chain bottlenecks in the third quarter. It took immediate action to shift production, enhance factory throughput, leverage air freight, and strategically allocate units. The company remains optimistic about navigating through these tough times. It is shifting production capacity to China, Indonesia and Bosnia.

Management notified that the company could ramp up factory production due to the limited inputs and simple configuration of products. Crocs is also planning to lower its dependency on West Coast ports by adding East Coast transshipment capabilities to reach key customers in the United States.

In spite of the temporary disruptions, Crocs anticipates revenue growth of more than 20% in 2022, fueled by brand strength and consumer demand globally. Wholesale orders for the first half of 2022 have been exceptionally strong. To strengthen inventory positions across all its regions for the first half of 2022, Crocs plans to invest approximately $75 million in air freight.

Headwinds to Counter

Crocs has been encountering operational headwinds related to the ongoing supply-chain challenges and factory closures due to the COVID-19 pandemic. The supply-chain disruptions have been challenging for manufacturers and have significantly hampered the mobility of products across the globe. Port congestions, increasing material costs, and truck driver shortages remain concerning. Global inflation contributing to incremental freight costs, higher wages, primarily in distribution centers, and increased raw materials costs will continue through the fourth quarter of 2021 and 2022.

Management informed that factory closures in Vietnam and the global supply-chain bottlenecks impacted the business in the third quarter of 2021. Crocs expects EMEA’s fourth-quarter revenues to be disproportionately impacted by the Vietnam supply-chain challenges. It also expects non-GAAP adjustments of $8-$10 million associated with distribution center investments to hit the gross margin.

Stocks to Watch

We have highlighted some better-ranked stocks from the broader Consumer Discretionary space, namely Guess GES, PVH Corp PVH and Under Armour UAA.

Guess currently sports a Zacks Rank #1 (Strong Buy). The company has a trailing four-quarter earnings surprise of 97%, on average. Shares of GES have surged 17.9% in a year’s time.

You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Guess’ current financial-year sales suggests growth of 38.6% and that for earnings per share indicates substantial growth from a loss of 7 cents reported in the year-ago period.

PVH Corp, a Zacks Rank #2 (Buy) stock, has a trailing four-quarter earnings surprise of 72.3%, on average. The PVH stock has gained 1.4% in the past year.

The Zacks Consensus Estimate for PVH Corp’s current financial-year sales and earnings per share suggests growth of 27.6% and 571.6%, respectively, from the year-ago period’s reported numbers. PVH has an expected long-term earnings growth rate of 37.5%.

Under Armour currently carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 244.5%, on average. Shares of the company have gained 28.4% in the past year.

The Zacks Consensus Estimate for Under Armour’s current financial-year sales and earnings per share suggests growth of 25% and 396.2%, respectively, from the year-ago period. UAA has an expected long-term earnings growth rate of 25%.


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Guess, Inc. (GES) : Free Stock Analysis Report

PVH Corp. (PVH) : Free Stock Analysis Report

Crocs, Inc. (CROX) : Free Stock Analysis Report

Under Armour, Inc. (UAA) : Free Stock Analysis Report

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