Crocs Maintains Brand Relevance: Is This Behind Its Rally?

Crocs Inc. CROX has created a market niche through its footwear brands focused on comfort and style. Famous for its iconic clog material, Crocs' simple design and great comfort continue to be an instant hit among consumers. The company offers a wide variety of footwear products, including sandals, wedges, flips and slides that cater to people of all ages.

Crocs witnesses favorable trends, supported by solid consumer demand across the Crocs and HEYDUDE brands, accompanied by effective pricing actions and lower freight costs. Additionally, the company is confident about its strategies and investments, which are expected to drive long-term market share gains.

Shares of this Zacks Rank #3 (Hold) company have risen 45.7% in the year-to-date period against the industry's 25.5% decline. The leading footwear company also compared favorably with the sector's decline of 1.1% and the S&P 500's growth of 16.9%.

The Zacks Consensus Estimate for CROX's current financial-year sales and earnings indicates growth of 4.4% and 5.6%, respectively, from the year-ago reported numbers.

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Crocs' Long-Term Game Plan

We expect the CROX stock to retain momentum, given its continued progress on the long-term strategy and key initiatives to deliver sustainable growth announced in September 2021. The company's growth strategy is focused on three key initiatives to drive durable and consistent growth — igniting icons to enhance brand awareness and relevance; investing strategically in Tier 1 markets to drive market share growth; and diversifying the product range to attract consumers.

The company has been witnessing incredible success with its diverse collaborations and partnerships. CROX has demonstrated growth across different markets through its partnerships with iconic brands like Toy Story and Hello Kitty, and emerging ones like Klott. The collaboration with Simone Rocha, a luxury brand, further solidifies its brand positioning in the high-end market. The recent launch of Echo Storm in direct-to-consumer channels and through partnerships with Foot Locker and JD Sports are on track.

In addition, the company has been experiencing strength in clogs, sandals and personalization. Its classic clogs are serving as a significant driver of growth, attracting customers and retaining the existing ones. Management continues to view personalization as a mega consumer trend, with the opportunity of expanding the Jibbitz penetration in 2024 via higher penetration within digital and wholesale channels, continuously innovating with product freshness and advanced speed to market capabilities.

The company's long-term targets include generating revenues of more than $5 billion, representing a five-year compounded annual growth rate (CAGR) of more than 17% by 2026. It expects to attain the revenue target, driven by strong digital sales, improved market share for sandals, growth in Asia, and innovative products 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. It estimates revenue growth to witness a CAGR of 25% and to represent 24% of the total revenues in 2026. The company targets digital channels to contribute at least 50% of the total revenues by the end of 2026. Driven by strong revenue growth, the company anticipates delivering improved profitability and cash flows through 2026. It expects the adjusted operating margin to be more than 26% and the annual free cash flow in excess of $1 billion by the end of 2026.

Bumps in Path

Crocs has been witnessing rising costs related to the HEYDUDE acquisition. Also, distribution and logistics inefficiencies have been acting as headwinds. This has been resulting in higher SG&A expenses for a while now. Looking ahead, the company is concerned about continued inflation, higher interest rates and geopolitical tensions across the globe, alongside the increases in the aforementioned costs.

Stocks to Consider

Some better-ranked companies in the Consumer Discretionary space are G-III Apparel Group GIII, Hanesbrands HBI and Guess GES.

G-III Apparel is a manufacturer, designer and distributor of apparel and accessories under licensed brands, owned brands and private label brands. It sports a Zacks Rank #1 (Strong Buy) at present.

GIII Apparel has a trailing four-quarter earnings surprise of 571.8%, on average. The Zacks Consensus Estimate for GIII's fiscal 2024 revenues indicates an increase of 3.3% from the year-ago period's reported level.

Hanesbrands engages in the designing, manufacturing, sourcing and sale of apparel essentials. The company currently flaunts a Zacks Rank #1.

The Zacks Consensus Estimate for HBI's 2024 earnings indicates growth of 666.7% from the 2023 reported figures. HBI has a trailing four-quarter average earnings surprise of 10.2%.

Guess engages in the designing, manufacturing, sourcing and selling of apparel essentials for men, women and children in the United States and internationally. GES sports a Zacks Rank # 1 at present.

The Zacks Consensus Estimate for GES's current financial-year revenues indicates growth of 11.7% from the year-ago reported figure. Guess has a trailing four-quarter earnings surprise of 31%, on average.

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