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Intro & Thesis
The fashion & apparel business is extremely trendy, cyclical, and unpredictable. Everyone has looked at an old photo of themselves and cringed at what they chose to wear at least once in their life.
With this in mind, investing in a fashion stock with a long-term horizon might seem illogical. How can one predict that one company’s products will still be trendy 10, 5 or even 1 year from now? In order to invest with peace of mind in this sector, several questions must be answered.
Does the company have a history of following trends? Is there insider ownership? Has the company marketed its previous products well enough to acquire new customers? Can the company expand into new markets? How can this be predicted? I will answer these questions in the following paragraphs and demonstrate why Crocs (NASDAQ:CROX) is still a buy despite any recent selloff for long term investors.
The Company
I always look at insider activity when considering an investment. Executives and directors sell their stock for many reasons. But in my opinion, there is only one reason why they buy stock- they see major upside ahead.
Two directors have purchased nearly $3M of Crocs stock in the few weeks. Treff Douglas purchased just under $1.5M in the last month and Smach Thomas purchased $1.4M. Beth Kaplan picked up $100k worth after the selloff. This isn’t much, but it fits the overall pattern. The aspect of these purchases that catches my attention is the timing. Crocs has been steadily declining in the last few months. Two of these insiders made their purchases in a 3-week period as the value of the stock went down. In my opinion, this clearly indicates long term optimism.
Expansion By Acquisition
Crocs recently completed its acquisition of Hey Dude. Because Hey Dude sells casual footwear, Hey Dude sales will have little to no impact the sales of Crocs’s sandals and clogs. So, the acquisition is only for expansion purposes, not for buying out competition.
Crocs paid $2.5B for Hey Dude. Some would say they overpaid for the company considering Hey Dude has 20% of Crocs total sales yet paid a price equivalent to 50% of its market cap to complete the acquisition. The price that Crocs paid to acquire Hey Dude clearly shows management believes the new addition all bring huge upside in the coming years. So how much upside does the new footwear brand have?
Hey Dude was founded in 2008 and was on multiple continents by 2010. The company sold its 1 millionth pair of shoes in 2011 and 5 millionth pair by 2018. This expansion represents a 25.85% CAGR for units sold during the 7 year period. I had a brief conversation with a senior manager at Crocs named Chas James. His most common answer to almost every question was “We haven’t said that publicly.” But he did tell me two things about Hey Dude worth noting. The first is that the company had a very basic marketing strategy and did not utilize strategies similar to Crocs. Secondly, he gave me Hey Dude sales figures going back to 2018. As you can see in the table below, the growth since 2018 has been stunning.
| YEAR | Hey Dude Revenue | Percent Growth YOY |
| 2021 | $580M | 204% |
| 2020 | $191 | 241% |
| 2019 | $56M | 180% |
| 2018 | $20M | X |
With this growth in mind, Crocs must believe they can accelerate this growth even further in order to pay such a price for the acquisition. According to Andrew Rees “By leveraging the proven Crocs playbook to enhance Hey Dude’s growth trajectory, we see a tangible pathway to a highly profitable combined company”
From what I can gather, there are 3 major reasons why Hey Dude will be extremely successful for Crocs. First, the marketing plan for Hey Dude will be similar marketing strategies that worked so well with Crocs. For example, the Crocs Snapchat filter had 4 million shares in just a 10 day period. Crocs has also collaborated with numerous celebrities to build brand recognition, which I wrote about in my last Crocs article. The previous marketing plan for Hey Dude was much simpler and did not involve the same social media presence that Crocs did. Even though the casual shoe company did not have the same level of marketing in place, the company was still very effective.
The second reason is customer satisfaction and high quality product. As you can see Amazon (AMZN), the Hey Dude brand is highly popular with consumers. This pair of Wally loafers boasts over 12k total reviews with 96% ratings. This pair of women’s loafers has over 50k ratings with 95% 4 star or above. Here is another pair of men’s Wally shoes with 74k reviews of 95% 4 star or above. The company also sells boots as you can see here. Although the boots are not nearly as popular, customer satisfaction is still spectacular.
And finally, 95% of Hey Dude’s shoe sales were within the United States. In my opinion, this can be a huge inflection point for the company going forward. The chart below shows how Crocs has performed worldwide YOY over the last few quarters.
| QUARTER | AMERICAS | EMEA | ASIA |
| Q4 2021 | 51% | 22.5% | 10.3% |
| Q3 | 95% | 43% | 21% |
| Q2 | 136% | 53% | 27% |
| Q1 | 87% | 41% | 20% |
| Q4 2020 | 100% | 15% | -19% |
| Q3 | 26% | 13% | -9% |
This is the inflection point that will drive the company’s sales significantly higher. The plan is for Crocs to reapply its effective sales strategy on Hey Dude. Hey Dude is another company in the footwear space but not in the sandal space. The sale of boots and loafers will not impact sandals or clogs sales as they are mutually exclusive. And since 95% of Hey Dude’s sales are only in the US, the company has an open runway of worldwide growth.
Should Hey Dude grow at only 25% of its current rate, sales will hit $2.9B for the new acquisition alone. It should be noted that Crocs currently predicts sales to be at $5B by 2025 according to transcripts. My honest opinion is that sales will be closer to $8B for FY 2025.
The Final Step
Should Hey Dude products sell anywhere near as well as Crocs has internationally, this company has serious upside. Crocs has a long history of marketing excellence as well as international expansion. The current sales target for the company is $5B by 2025. Given the factors previously stated, I see it blowing passed $5B and closer to $8B in sales. With a FWD P/E of 7, Crocs is now positioned as a value stock as well as a growth stock.
Crocs is my fourth largest holding, and I am not selling anytime soon. Insiders are putting their money where their feet are, and I am following in their footsteps.
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