Popular casual footwear manufacturer Crocs, Inc. (CROX) has emerged as a leader in innovative core molded footwear, selling more than 720 million pairs of shoes in more than 90 countries internationally since its inception in 2002. Strong, worldwide, consumer demand for its brand, coupled with its plans to switch to sustainable materials and achieve net-zero emissions by 2030, has helped its stock gain 105.4% over the past year. However, the stock is trading 5.7% below its 52-week high of $136.50, which it hit on July 22. CROX is based in Niwot, Colo.

Although CROX’s stellar second-quarter earnings and sturdy digital sales growth have attracted investors’ attention, the stock’s valuation at its current price level could be concerning.

While its “Crocs Socks” debut should drive its revenues, given its brand momentum, recent news regarding the increasing sale of footwear that infringes on its trademarked designs could diminish its brand value.

Here is what we think could influence CROX’s performance in the coming months:

Fake Clogs Could Affect Brand Image

While CROX has been ramping up its e-commerce business and focusing increasingly on direct-to-consumer channels, it is decreasing its reliance on wholesale and cutting ties with longtime retail partners. This move has led some stores to replace the brand with shoes that copy its trademarked name and designs. Although CROX has filed complaints regarding trademark infringement related to the shoes, the sale of copycat clogs could tarnish the company’s brand image among its consumers and dilute the unique and high quality of CROX’s registered trademarks.

New Collection Could Boost Sales

On July 27, CROX introduced a new, seasonal, first-of-its-kind collection of high-quality socks—Crocs Socks—collection for men, women, and children. This addition to its iconic brand portfolio should enable the company to exploit  another avenue to personalize its customers. Inspired by footwear within Crocs’ Classic Collection, the new unique Crocs Socks collection might  bolster its brand value among its fans worldwide and boost its sales in the near term.

Robust Quarterly Performance

During the second quarter, ended June 30, 2021, CROX’s revenue increased 93.3% year-over-year to $640.8 million, due primarily to strong growth in revenue across all regions. The company’s digital sales grew 25.4% year-over-year, while direct-to-consumer sales grew 78.6% versus  2020. CROX’s operating income came in at $195.3 million for this quarter, compared to $56.6 million for the same period last year. Furthermore,  its gross margin expanded 740 basis points from the prior-year quarter to 61.7%. Its non-GAAP net income increased 109.9% year-over-year to $144.38 million over this period.

Stretched Valuation

CROX’s 4.60x trailing-12-month EV/Sales ratio is 171.6% higher than the 1.69x industry average. And in terms of trailing-12-month Price/Sales, the company is currently trading at 4.52x, which is 232% higher than the 1.36x industry average. Also, the stock’s 18.73 forward Price/Book ratio compares poorly with the 3.56 industry average.

POWR Ratings Reflect Uncertainty

CROX has an overall C rating, which translates to Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight different categories. CROX has a C grade for Value. The stock’s higher-than-industry valuation multiples are in sync with this grade.

In terms of Stability grade, the company has a D. This justifies its relatively high 1.85 beta value.

However, CROX has an A Momentum grade, which is consistent with its price returns over the past year.

In addition to the grades we’ve highlighted, one can check out additional CROX ratings for Growth, Sentiment, and Quality here. CROX is ranked #44 of 66 stocks in the A-rated Fashion & Luxury industry.

Click here to view the top-rated stocks in the Fashion & Luxury industry.

Bottom Line

Robust revenue growth across digital and direct-to-consumer channels in its last reported quarter, coupled with the growing popularity of its casual footwear, has helped CROX’s stock maintain solid momentum. However, its premium valuation and the emergence of copycat clogs in the market have added uncertainties to its prospects. Therefore, we think investors should wait until the company fares better in navigating the crisis.

CROX shares fell $0.69 (-0.54%) in premarket trading Wednesday. Year-to-date, CROX has gained 104.28%, versus a 18.29% rise in the benchmark S&P 500 index during the same period.

About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More...

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