A second chance at the one that got away: Crocs Inc $CROX

Double your money with ugly clogs?

Long time subscribers will know by now how much I like following insider transactions, especially inside purchases by the Chief Financial Officer. While the CEO is allowed to be overly optimistic to inspire the staff and sell the stock, the CFO is a dyed-in-the-wool pessimist. If the CFO is buying in size, I’ll give a company a long hard look.

In May of 2022, I saw that the CFO of Crocs (CROX), Anne Mehlman, purchased $142,000 of stock at a price of $54.91 a share, it got my attention. When I saw that CROX was trading at a price to earnings ratio of 5.5x, I was more than interested. Everything was amazing by the numbers, but I always try to make sure that I understand the business well enough to make an informed decision, and I do not understand fashion. And I especially did not understand those stupid resin clogs.

I did not pull the trigger on CROX due to my own limited competence in fashion and footwear. And then I watched the stock price go 2.5x in seven months.

A few months later, I was bringing my kids to the pediatric dentist, and in the waiting room, sat next to a family with a child around ten years old, wearing Crocs, and covered in rubber charms which I now learn are called Jibbitz. I asked the pre-teen what the deal was with Crocs, and I was quickly informed that absolutely everyone in elementary school is wearing them.

The fashion choices of children are notoriously fickle. Can I rely that this fashion trend will be durable long enough to enjoy a return on my investment in CROX? I believe so for a couple of reasons. The first is the pajamafication of our society. Somehow it has come to pass that everyone is walking around in their pajamas whenever possible. Clothes are all about comfort, and in the case of Lululemon, lifting and shaping. Why have we become a bunch of pajama-wearers?

Not to go too far down a sociology rabbit-hole, but the cost of clothes always played a class signaling role in society. As we have become wealthier, everyone can afford to dress up, and so now there is no reason to do so. Once the billionaire tech founders of silicon valley started showing up in t-shirts, everyone else followed suit, unless they are forced into a dress-code by their job, which is an inversion of the original status signal of dressing up. So now, following Mark Zuckerberg’s lead everyone who can afford to dress like they just fell out of bed, does so.

Will this trend reverse? I’m sure it will someday, that is the nature of fashion. Not to go too far off the economic history deep end after just going too far off the sociology deep end, but it was observed over a hundred years ago that women’s skirt length changed with interest rates, lower interest rates leading to shorter skirts, and higher interest rates leading to longer skirts. This observation was later confirmed with statistical analysis, and found to be true, with about a three year lag time. The explanation is that when money is easy and jobs are easy to find, people dress less professionally. When money is tight and jobs are harder to find, people dress more professionally and less casually. The era of pajamas coincided with the era of zero interest rate policy.

Interest rates are higher for now, Jerome Powell had his famous “higher for longer” moment, but President Trump seems set on lowering them again, as low as the Federal Open Market Committee will allow him to go. And even now, interest rates still aren’t high by historical standards, aside from housing, financial conditions are loose.

If I were to make an educated guess about when the pajama phase of society will end, probably it will be three years after interest rates are actually in restrictive territory, which will happen several years after this current cutting cycle which is only just starting. With CROX at a price to earnings of 4.5x, my best guess is that society will still want to be wearing pajamas for the next four and a half years at least, which derisks CROX at this price level pretty well.

The second reason why I believe Crocs will stay popular in elementary school is the need for young people to express individualism at that age. Those Jibbitz charms allow young people to express themselves in a world where 18% of public schools have a uniform, and another 44% have a dress code that would be categorized as “strict” by the National Center for Education Statistics. Wearing Crocs allows young people to plug a Scrappy Doo charm into their clogs if that’s the message they want to send, and it only costs $8 for the personalization.

Speaking of the finances, how amazing is this business if they can convince young people to spend $8 on a rubber charm to plug into their shoes? Not only that, but when I was a kid, I would have one pair of shoes, and later when I was an athlete, a second pair of cleats. Young people today are able to convince their parents to buy them a whole Crocs wardrobe so that they can color-coordinate. From the sample picture below, tabulate that each pair costs around $45, and each charm costs between $4 and $8. That’s about $600 of revenue to Crocs for one child’s footwear. It adds up over time, especially as their feet grow.

Children’s footwear is about 25% of Crocs’ business. The rest is sold to adults. Some of that is for work, healthcare professionals love having a non-slip, non-absorbant, comfortable footwear. But work wear is only about 12% of Croc’s revenue. The rest is shoes sold to adults, adults who wear pajamas. It’s not all adults, but for the adults who love Crocs, they buy a lot. And it’s the same as with children, they want to color-coordinate, even if they buy fewer Jibbitz. The lady below is surrounded by $1,500 worth of Crocs. I’m not sure I’ve spent that much on shoes in my life.

Here’s another satisfied customer with a $1,400 collection. What an amazing business.

The subreddit r/crocs has 40,000 members. It’s hard to find a closet picture posted with less than $1,000 of Crocs within. And the business gets even more amazing when you learn that 50% of sales are direct to consumer. I’ve written about so many companies that tried to go direct to consumer and failed. But when you know your shoe size, and all you want to do is match the right color, customers buy their Crocs directly from the company, bypassing retail markups. Oh, and because they are made out of molded resin, gross margin is over 60%.

When I originally looked at Crocs, I was worried that they would go out of fashion. But Crocs aren’t in fashion, they just have a dedicated following of super users. Those super users probably aren’t going back to wearing regular shoes. Their business looks more like a beer brand, where 90% of sales are due to the top 30% of customers. How hooked are those customers on this product? I don’t think there’s many coming back to shoelaces once they’ve Crocked up their whole wardrobe.

So why did the stock crash 29% yesterday? At first glance, it was an amazing quarterly earnings announcement, revenues had a new record high of $1.15 billion, up 3.4%. Operational income was $309 million, down from $326 million the year before. That cash was spent to retire $105 million of debt, and to buy back $133 million of stock. Retiring 2.3% of shares outstanding in a single quarter is not bad for a $4.17 billion market cap company. Crocs is in the middle of a $2.4 billion share buyback authorization designed to retire 30% of their float, there is about $1.1 billion left authorized on the buyback.

But management guided for a weak and “choiceful” American consumer in the second half of 2025. They announced that they cut their advertising budget starting in May, no sense setting cash on fire for no reason, and that their retailers are slowing down wholesale orders. They also chose this quarter to fully impair the goodwill from the prior acquisition of HeyDude, a footwear brand that Crocs acquired in 2022. HeyDude only makes up 19% of Crocs’ revenues, and the acquisition cost $2.5 billion.

The initial acquisition was probably a worse use of capital than $2.5 billion of share buybacks, but it’s not the first bad acquisition I’ve ever seen. The risk will always linger that Crocs goes on to do future bad acquisitions as well.

Personally, I love goodwill writedowns. These non-cash events, through GAAP accounting principles, show up as a net income loss. The quantitative strategies and algorithms immediately sell off the stock and create a buying opportunity for any human who understands what’s happening under the surface. If that was the only negative thing on the earnings call, I would be pounding the table.

But management guided toward a weak US consumer. This isn’t new though, US sales were down 6% year over year already. But at the same time, Crocs has been expanding their international market, growing 16% year over year in the rest of the world, bringing international revenues up to 52% of the whole. Growth in China was 30% year over year! Management is guiding for Q3 2025 revenue to be down by at least 9%. But, even if the US consumer is weak in the second half of 2025, international growth could offset that weakness.

A lot of CROX enthusiasts on Twitter believe that management’s guidance was overly negative, and that the US consumer won’t possibly be that weak. Time will tell, perhaps the stock price has more room to fall even below $75. But I would be happy starting a position now, even knowing that the price could continue to fall some. There’s no shame in starting small and averaging down. There does appear to be some possible inconsistency within management’s own guidance, they expect international sales to keep growing at mid teens percentages year over year, do they really expect US sales to fall 12% to 15% in a single quarter to generate a down 9% combined result?

I would love to pretend that fashion and apparel are within my circle of competence, but they are not. Crocs sell on Tiktok Shop, and I don’t even know what that is. But management seems to be on top of their marketing game, as far as I am able to ascertain. Management has been creating new products to satisfy every imaginable fashion trend for consumers to express their individuality, from Pokémon and Disney to NFL draftees wearing Crocs with Swarovski crystals on the red carpet. Management seems to be putting in the effort.

I believe the 29% selloff was an overreaction, driven by how GAAP handles goodwill writedowns, and the negative US guidance. But with such a strong international business, a weak US consumer could easily be overcome by aggressive international growth. I believe that CROX at $75 is a great buying opportunity, and within the next two years, there should be an opportunity to sell it at $150.

Why does CROX sell at a price to earnings of 4.5x when their peers in footwear sell at 15x? I think that stock market participants believe that the clogs are ugly, and they don’t want to believe that ugly clogs are a durable market. I think the stock market is probably wrong about CROX, and if they do rerate to a price to earnings of 15x while at the same time retiring another 20% of their float, the price target goes from $150 to $250.

Crocs Inc (CROX) $74.39: $150 within two years.