Investing in What You Know - Crocs, Inc. (Ticker: CROX)

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Crocs, Inc. (Ticker: CROX)

My favorite investment book by a wide margin is “One Up on Wall Street” by Peter Lynch.  One day someone can explain to me, why learning about investing is less important than studying the Italian Renaissance and I think they should teach that book in colleges as a required course.  The main mantra of Peter Lynch is “invest in what you know”, obviously taking financials and valuation into account, which brings me to Crocs. In my family, only myself and the dog don’t have a pair.  

Below are the returns for the Crox covered calls that expire on January 17^th, 2025

Everyone knows what Crocs are, so I will skip the explanation.  The company Crocs, Inc has two brands – Crocs and Heydude. Below is a graph showing the annual revenue from the sale of Crocs.  The graph doesn’t include Heydude brand that Crocs acquired in 2022- we will get to that brand shortly.  I wish more things in my life had the same trajectory as Crocs' revenue.  A company that can grow revenue from $1Bn to $3bn in 7 years deserves a standing ovation or at the very least, a grad school case study and a management book.

Below is an income statement for the Crocs brand (excluding Heydude).  Management was able to grow not just revenue but also maintain a healthy margin, forecasting that Crocs revenue will grow 4-6% in 2024 and the company will maintain a steady margin.  

As the business grew, the stock price did not disappoint, well until the end of 2021 at least

If there was such a thing as beauty on Wall Street, the performance of Crox between 2014 and November 2021 would certainly qualify.  From about $15 per share in early 2014 to $160 in less than 8 years.  You could have bought a lot of rubber shoes with those gains. 

But why just sell rubber shoes when you can sell all kinds of shoes? So why not spice things up and acquire someone else who also makes shoes?  I have never worked with a management team that was not excited about the prospect of an acquisition. In, December of 2021 Crocs announces the acquisition of Heydude for $2.5Bn, including taking on $2Bn of debt to fund the purchase. 

As is apparent in the stock chart, the acquisition of Heydude is when management ambitions collided with cynic Wall Street expectations.  With Q4’23 revenue for Heydude being down 19%, I assume management probably wishes they could rewind the clock.

Mental Arithmetic

I once worked with a very successful gentleman who was incredibly capable and it has certainly reflected in his career progression and net worth.  One of his common expressions was “Guys this is just arithmetic”.

So let’s do the math: You have a stock that was trading at $160 per share in Q4’21 and now trades at about $100.  That drop in share price has erased roughly $3.6Bn of value.  Heydude acquisition was $2.5Bn and since the end of 2021, by my estimate, Crox generated $1.2B of cash, while growing the pre-tax income for the Crocs brand from $683MM in 2021 to over $900MM in 2023.

Heydude may have not met management’s ambitions. However in 2023, based on management statements, I estimate that Heydude still will generate $950MM of revenue and approx. $206MM of pre-tax income – see Heydude estimated P&L below.  Based on the company's public statements, things have stabilized and investors can hope for brighter days ahead. 

My focus in this letter is covered calls and I am not going to opine on whether the drop in stock price is justifiable – as I am more concerned with the downside, but the math above is certainly worth thinking about if you are contemplating just buying shares.

But to put it all together:

The table below shows my estimate of the P/E multiple and Unlevered earnings as the multiple of the Enterprise Value (Equity Value + Net Debt). At 8.5x projected 2024 P/E, I wouldn’t call Crox expensive.

My Positions

I have written covered calls that expire in Jan 2016 with a strike price at $55 and $60 when the stock was trading at about $90. More recently, in November of 2023, I wrote covered calls with a strike price of $60. My thinking was that at $60 per share, it would be trading at below 5x my estimated 2024E earnings – I can live with that risk.

Musings

“There are old pilots and there are bold pilots, but there are no old bold pilots.” According to the internet, this quote is attributed to a pilot Dorothy Verrill.  The thing that I find attractive about covered calls is that they allow investors to adjust the amount of risk taken.  As you think about investing decisions, think about where you want to be in the risk continuum.  My personality prefers first getting the return of capital, before the return on capital, so I typically write covered calls that deliver 10-12% annualized return in this interest rate environment, but it will vary if I feel that the stock is “cheap” – to each their own. 

Happy Investing

Sam

Behind the Curtain: The Story Behind Endgame Mindset Newsletter

After graduation from NYU’s Stern, I started my adult life as an Investment Banker in Lehman Brothers’ Mergers and Acquisitions group. I have spent the majority of my professional career as an investor, investing on behalf of large institutions such as Morgan Stanley, Merrill Lynch, and Bank of America, as well as a private equity fund and helping companies buy other companies.  In my free time, I spend a lot of hours researching stocks.  A lot. It is hard to save your way to retirement without making good investments. 

Recently, I have also started focusing on Covered Calls.  My goal with covered calls in the current rate environment is to generate a 10-12% unlevered return.  In writing this newsletter, I share my analysis and what I own with others, hopefully helping them earn steady and attractive returns as well.

 Disclaimer:

Although the information contained in the newsletter is obtained from sources I believe to be reliable, I cannot guarantee its accuracy. Calculations made in this letter are based on my estimates and not only do I make mistakes but actual performance will almost certainly be different from my projections. The opinions expressed in the newsletter are mine and may change without notice. The information in the newsletter may become outdated and I have no obligation to update it. The information in the newsletter is not intended to constitute individual investment advice and is not designed to meet your personal financial situation. It is provided for information purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell, or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor or a group of investors. It should not be assumed that any investments in securities, companies, sectors, or markets identified and described were or will be profitable. I strongly advise you to discuss your investment options with your financial adviser before making any investments, including whether any investment is suitable for your specific needs.

In summary – do your homework before putting money at risk!