Crocs, Inc. (NASDAQ: CROX) experienced a remarkable year before facing a sudden downturn due to disappointing guidance. Despite this recent dip, the shares of the casual footwear company have still risen by almost 20% so far this year. Let’s examine Crocs’ latest financial report and its future projections to determine if this presents a potential buying opportunity.

Challenges with the HeyDude Brand

Crocs has been a story of two brands over the last couple of years. The flagship Crocs brand has thrived, while the HeyDude brand, acquired in 2022, has struggled to find its footing.

The company highlighted HeyDude’s underperformance in its recent guidance adjustment, citing insufficient progress in revitalizing the brand.

In the third quarter, HeyDude’s revenue dropped 17.4% to $204 million. Direct-to-consumer (DTC) sales fell by 9.3% to $91 million, and comparable DTC sales saw a significant drop of 22.2%.

Wholesale revenue for HeyDude plummeted 22.9% to $113 million. The company’s forecast for HeyDude suggests a sales decline of 4% to 6% in the fourth quarter and a 14.5% drop for the year. This outlook was more severe than its previous estimates, which anticipated an 8% to 10% decrease.

Crocs plans to enhance its core offerings, such as the Wendy and Wally styles, while introducing new designs. The company aims to stabilize its North American market by focusing on younger female consumers.

Image source: Getty Images

In contrast, the Crocs brand itself showed resilience, as its revenue increased by 7.4% to $858 million. DTC revenue for Crocs rose by 7.7%, and comparable DTC revenue was up by 4.8%. Wholesale revenue grew by 7.1%. International sales drove this growth, with a remarkable 15.5% increase to $367 million, while North American revenue edged up by 2.1% to $491 million.

Despite challenges in the Chinese market, where many brands have struggled recently, Crocs achieved over 20% growth in the country. The company noted growth in other international markets, such as Australia, France, and Germany, and anticipates that China and India will be significant growth markets next year.

Overall, Crocs’ revenue climbed by 1.6% to $1.06 billion. DTC sales rose by 4.4%, while wholesale revenue dipped by 1.4%. Adjusted earnings per share (EPS) increased by 10.8% to $3.60, aided by the buyback of 1.1 million shares in the quarter.

Adjusted gross margins remained strong, improving by 220 basis points to 59.6%. However, operating expenses rose sharply, with selling, general, and administrative costs climbing by 19.4%. Inventories fell to $367 million from $490 million a year ago, while net debt decreased to $1.24 billion from $1.81 billion.

Crocs anticipates fourth-quarter sales to be flat or slightly higher, projecting just over $960 million in revenue, with an adjusted EPS prediction of $2.20 to $2.28. These estimates are noticeably lower than the consensus, which expected EPS of $2.72 on revenue of $1 billion.

Evaluating Crocs’ Stock Potential

With a forward price-to-earnings ratio (P/E) of only 8 times next year’s analyst estimates, Crocs stock appears undervalued. Currently, most profits stem from its core Crocs brand, with minimal contributions from HeyDude.

CROX PE ratio (forward 1y), data by YCharts.

The acquisition of HeyDude has proven to be problematic for Crocs. However, its flagship Crocs brand has performed well, expanding its international presence and innovating new styles through the Echo and InMotion franchises.

If Crocs were not hindered by HeyDude’s struggles, it would likely have a higher stock valuation based on solid revenue growth and profit margins of the Crocs brand alone. Given the current stock price, I see potential in buying the stock, as I believe that the Crocs brand’s true value exceeds its current market valuation.

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Geoffrey Seiler has positions in Crocs. The Motley Fool recommends Crocs. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.