clovercity/iStock via Getty Images

clovercity/iStock via Getty Images

Crocs (NASDAQ:CROX ) is a great buy after the Heydude acquisition, future expansionary plans, Environmental, Social, and Governance (ESG) initiatives and is trading under 13X Forward GAAP price to earnings. Crocs Expects Revenues to Grow to Over $5 billion in 2026 with an annual free cash flow of over $1B. Based on share buybacks, 2022 guidance of a 20% revenue growth, and immediate accretion of Heydude to Crocs earnings, Crocs is a buy.

Crocs has been around for 20 years and has been making a huge impact ever since 2002. Crocs strives to be the leader in innovative casual footwear for women, men, and children. Crocs goals are to combine comfort and style with value. Crocs shoes are sold in over 90 countries since they began in 2002 and has since sold over 720M shoes. Crocs offers over 364 accessories to clogs called Jibbitz, with 64 letter variations. They currently offer Men's, Women's, Kids, and a "Crocs at Work" line. Crocs offer a wide range of styles ranging from clogs, sandals, slides, flip-flops, boots, flats, wedges all the way to platform shoes. The "Crocs at Work" line consist of nursing shoes, chef shoes, slip-resistant shoes, standing shoes, and restaurant/hospitality shoes.

Crocs' most recent 3rd quarter results show revenues of $625.9 million which increased 73.0% when compared to 2020. Revenue growth was strong in all regions, with sales in America up 94.5%, Asia Pacific up 21.2% and EMEA up 42.8% in a year over year period. Notably, Crocs' digital sales grew 68.9% to represent 36.8% of total revenue. Digital Sales across all regions resulted in double-digit growth over the prior year. One of the most unique results is that the operating income more than doubled to $203.1 million when compared to third quarter of 2020. Diluted earnings per share were $2.42, as compared to $0.91 for the same period last year. Adjusted diluted earnings per share were $2.47, up $1.53 compared to $0.94 for the same period last year. During the third quarter, Crocs repurchased 1.1 million shares or $150M worth of common stock. Crocs is expected to bring its total fiscal year for 2021 share repurchases to total $1B.

Crocs is now expecting 2021 full year revenue growth to be between 67% versus previously stated 62% to 65% when compared when to 2020 revenues of $1.38B. For Q4 21, Crocs is guiding revenue growth of approximately 42% and non-GAAP operating margin of approximately 28%. For 2022, Revenue growth to exceed is expected to exceed 20% compared to 2021. Mind you, this was before the Heydude acquisition and does not include the revenue growth from Heydude. I think that the 20% will end up proving to be conservative in nature. Crocs is probably playing it safe with financial estimate. Crocs stated that the revenue generated from Heydude will have immediate accretion to growth. Heydude is expected to generate of $700M in 2022.

Crocs is paying $2.5B for Heydude with a combined stock and cash deal. I think the price is right for the market of opportunity. of the $2.5B, $2B of the of the purchase will be financed through term loan B. $450M shares to be issued to the seller, which is relatively small. The rest will be paid though cash. Crocs trailing twelve-month free cash flow per share came in at $6.50 for 2021, $3.34 for 2020. The growth in FCF has aided in the acquisition and will further allow Crocs to pay down the debt of the acquisition fast.

Crocs shoes are made from Croslite material, Crocs' proprietary blend for molded footwear technology. This material delivers the same standard fit and comfort with a low carbon footprint. Crocs has been focusing tons of efforts on Environmental, Social, and Governance (ESG) initiatives. The main talk is Crocs' plan to achieve net zero emissions by 2030 through both sustainable ingredients and packaging. The bio-based products previous mentioned are expected to go on sale in 2022. Crocs' next environmental sustainable shoe incorporates Dow's (DOW) new ECOLIBRIUM Technology. The process transforms sustainably sourced by-products into a Crocs shoe. In addition to eliminating carbon, Crocs will be removing leather from their product line to become a 100% vegan brand.

Crocs is partnering with thredUP in which you can send previously loved and gently worn clothes and shoes to thredUP. When you send items to thredUP you in turn get a credit to Crocs. Crocs is all about boosting its environmental status quo ahead of the times. The partnering with thredUP helps clean landfills, which is on track for their goals.

I attribute these innovations and ESG focuses on Michelle Poole. She became President of Crocs in September of 2020. Her role added oversight for Americas, Asia and EMEA regional commercial teams. She previously served as the Chief Product and Merchandising Officer at Crocs beginning in 2014. Poole brings 29 plus years of experience to Crocs after having serving at Converse, Timberland, and Sperry Top-Sider.

Something else to keep an eye on is the sticking power of the brand Crocs. According to Piper Sandler's Talking Stock with Teens, Crocs, PacSun, Heydude, Zara, SHEIN, Gymshark are all fashion brands gaining share. Another notable event of crocs popularity is that on November 30th, News crowned the Crocs Classic Clog as the shoe of the year during the 35th year of awards.

One of the most untapped areas is in Asia. The landscape and lack of market share offers "Significant Whitespace". China is the second largest footwear market in the world. To get the most from the opportunity in Asia, Crocs has been leveraging Tier 1 influencers and celebrities alike. Crocs expects about a 25% revenue CAGR through the end of 2026. Crocs is also developing local for local production, marketing, and collaborations. Asia will continue to offer the largest long-term growth opportunity through 2026. Asia digital sales rose 30% since 2019.

The second opportunity is to Sandals. Crocs' goal is to 4X Revenue Growth utilizing Sandals with a target date of 2026. According to Crocs, the sandal industry is a fragmented casual sandal market valued around $30B. To date, there no specific casual sandal industry leader. Crocs is committed to convert existing clog style shoe customers and provide an additional gateway to another product variation. Crocs benefits from a strong track record of growth, through 2021 has represented 13% of footwear sales in Q3. Third quarter year to date growth in the sandal market rose 31% compared to previous year.

I think the Heydude acquisition is perfect for Crocs as it combines two fast-growing brands. The combination quadruples the TAM to over $160B which perfectly aligns with Crocs' plan to expand heavy into EMEA focus on China. Heydude will build upon Crocs' digital penetration and help expand to those areas. By bringing Heydude's products onto the balance sheet it builds a product portfolio establishing Crocs as a multi-brand company. Crocs will build separate Heydude leadership team under new Brand President, Rick Blackshaw, to maintain growth trajectory and minimize disruption to the Crocs brand. Alessandro Rosano, Heydude founder will stay on as a Strategic Advisor and Creative Director.

Even before factoring in Heydude's revenue, Crocs is expecting 20% growth compared to 2021. I feel this is conservative in nature, seeing Crocs is trading right around 12X 2022 earnings. With 20% growth Heydude is set to generate $570 million in sales this year with over 10 million pairs of shoes shipped. Currently, 95% of Heydude's revenue comes from U.S. markets. I believe this market share aligns perfect with Crocs goals to move into Asia which will also benefit the Heydude segment. Heydude is expected to add $700-750 million in sales to Crocs' balance sheet throughout 2022. To date, Heydude has registered around 14% growth in digital sales, which is a perfect fit for the crocs brand. I only see the digital sales increasing moving forward.

Like most companies today, the most known risk is supply chains issues. Global industry-wide logistics challenged Crocs. The Vietnam factory was forced to close over several weeks throughout the third quarter. The company has taken steps to overcome the supply chain and manufacturing constraints to continue strong growth in gross margins for 2022. Crocs shifted production to China, Indonesia, and Bosnia. The shift aiding in production and minimized shortfall of Croc's production. This is where Crocs' simple design provided, and will continue to provide, a strategic competitive advantage in product production.

Crocs expects to have global logistics challenges through 2022. Ending the year 2021, international shipping was disrupted and created huge delays due to port congestions. These delays in shipping did impact earnings due to higher costs to ship products. Failing to execute production and delivery of products throughout 2022 could drastically impact future revenue. However, Crocs is planning to invest approximately $75 million in air freight in 2022 to bolster our inventory positions for the first half of 2022 in all regions. There is an expectation that the logistical challenges will still result in limitations for demand fulfillment in the first 2 quarters of 2022. With Quarter 4 reporting soon, we will see if the regional supply constraints impacted revenue in Europe, Middle East, and Africa (EMEA).

Inflation has also begun to effect Crocs. First the global inflation has contributed to already higher incremental freight and other shipping costs, wage increases, and cost of materials. Crocs has relied on third-party manufacturers located outside of the U.S. to produce products, as previously stated. As Covid continues, inflation moves higher, and supply issues remain, it could offer risk to revenue for the next few quarters.

With a forward P/S under 4, combined with the overall market pullback, Crocs is a buy at these levels. With Heydude looking to bring in over $700M in revenue for 2022. Full year 2021's estimated 67% increase on $1.38B would result in over $2.3B in revenue for 2021. The 20% increase in revenue would be a $460M increase, which I feel is conservative in nature. 2022 final revenue should come in around $2.76B. Crocs have gained market share and have tons of influencers and celebrities helping. Heydude should provide a long-term revenue booster bolster Crocs into a multi-branded network. Crocs has proved itself for the last 20 years, and I feel it will continue prove itself as a market leader.

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Disclosure: I/we have a beneficial long position in the shares of CROX either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.