Does Crocs (NASDAQ: CROX) Have More Upside?

The remote working boom has impacted a lot of companies. Crocs’ NASDAQ: CROX foam clog shoes – which are very casual and comfortable – have been flying off the shelves since the pandemic made dress shoes an afterthought. In Q3, clog sales increased 31% yoy; their share of Crocs’ total footwear revenues increased from 62% in Q3 2019 to 72% in Q3 2020.

In the first two quarters of 2020, Crocs experienced single-digit yoy revenue decreases. But clog shoe sales helped Crocs return to company-wide revenue growth of 16% yoy for Q3.

Back in September, Crocs shares offered strong value and an attractive entry point. But shares have soared more than 60% higher over the past three months and change, begging the question:

Is the Crocs rally over?

 The short answer is no. CROX shares are changing hands at 23.7x forward earnings – still a very attractive valuation when you consider all that the company has going for itself.

Crocs is Winning in E-Commerce

Some companies neglected their e-commerce businesses pre-pandemic. They’ve tried to play catch-up, but it’s not hard to tell who has been taking e-commerce seriously for years.

Crocs has been focused on e-commerce for years. It has paid off. Last quarter, Crocs extended its streak of double-digit e-commerce growth to 14 straight quarters. In Q3 2020, the digital business grew 36%; it made up 38% of Crocs’ Q3 sales, up from 32% in Q3 2019. Those numbers were down from Q2 2020, but that’s because “much of brick-and-mortar was closed for an extended period” in Q2. Brick-and-mortar sales were bound to cannibalize digital sales as stores re-opened. What’s important is that brick-and-mortar sales grew by more than e-commerce sales decreased, leading to the double-digit company-wide growth.

Asia is Improving

In Q1 2020, Crocs’ performance in Asia was abysmal – sales dipped 28.1% yoy. Q2 were a little better, as Asia sales dipped 21% yoy. Asia, of course, was hit very hard in the early stages of the pandemic, so the lower sales were no indictment on Crocs.

In Q3, Asia saw an even bigger improvement; sales were down just 8.8% yoy to $67.7 million. That’s solid progress, but shouldn’t Crocs be returning to growth in Asia? Most Asian countries are reporting lower case numbers than western countries, after all…

Well, it turns out that Chinese tourism – which is still nowhere near pre-pandemic levels – is largely responsible for Asian Crocs sales. On the Q3 earnings call, CEO Andrew Rees noted, “There's a lack of tourists coming to Asia and within Asia. A big part of the Asian business is stimulated by Chinese tourists traveling to all those different markets. So we see that most strongly in our distributor businesses, which are in Southeast Asia. So think Thailand, Philippines, Indonesia, etc., where those distributors are heavily impacted.”

Asian tourism should pick up in 2021. That gives Crocs a great chance of returning to revenue growth in Asia in 2021

Crocs Has a Powerful Brand

Crocs cited a couple of surveys on its Q3 earnings call that lend credence to the idea that the company has a powerful brand.

In the company’s own 2020 brand survey, participants had a higher opinion of Crocs’ brand desirability, brand relevance, and brand consideration. In fact, those three metrics have averaged double-digit growth over the past four years.

The Piper Sandler NYSE: PIPR fall 2020, Taking Stock with Teens survey concluded that the Crocs brand remains one of the 10 most preferred footwear brands for American teens.

Crocs’ popularity is no accident. This company knows how to generate positive publicity. Earlier this year, for example, Crocs’ “A Free Pair for Healthcare” program got more than 860,000 pairs of Crocs into the hands of frontline healthcare workers. That’s amazing on its own, but the program also generated more than 29 million new visits to crocs.com.

How Should You Play Crocs?

Crocs offers growth at an attractive price. That said, shares are a bit extended now; they’ve more than 7x’ed off the March lows and trade more than 40% higher than the January/February 2020 highs.

There’s an argument to get into Crocs shares right now – the value is there at current prices – but shares look ready for a pullback.

Keep a close eye on Crocs – short-term weakness should be viewed as a potential buying opportunity.