Crocs Stock Slips on Revenue Warning. Should Investors Buy the Dip?

The strong year for Crocs (NASDAQ: CROX) suddenly came to a screeching halt after the company issued disappointing guidance. Even after the big pullback, shares of the casual footwear company are still up nearly 20% on the year. Let's look at Croc's most recent report and guidance to see if this is a buying opportunity.

HeyDude remains an issue

It has been a tale of two brands with Crocs the past couple of years, with its namesake brand flourishing, while its HeyDude brand, which it acquired in 2022, has floundered.

HeyDude once again was the main issue for the company when it reduced its guidance, because it said it was taking longer than planned to help turn the brand around.

For the third quarter, HeyDude revenue sank 17.4% to $204 million. Direct-to-consumer (DTC) revenue fell by 9.3% to $91 million, while comparable DTC sales sank 22.2%.

Wholesale revenue plunged 22.9% to $113 million. The company projected the brand's sales to be down 4% to 6% in the fourth quarter and 14.5% for the year, which was worse than the 8% to 10% drop it was previously expecting.

The company will look to build upon the core of its Wendy and Wally shoes, while adding models. It is still looking to stabilize North America by focusing on its core, younger female audience.

Image source: Getty Images

The Crocs brand, meanwhile, continued to show strength, with revenue climbing 7.4% to $858 million. Crocs DTC revenue rose 7.7%, with comparable DTC revenue up 4.8%. Wholesale revenue increased 7.1%. International growth led the way, with sales surging 15.5% to $367 million, while North America revenue edged up 2.1% to $491 million.

While China has been a difficult market for many brands recently given the country's economy, the Crocs brand saw more than 20% growth in the country. It also called out strength in Australia, France, and Germany. Looking toward next year, the company expects China and India to be nice growth drivers.

Overall, revenue at Crocs rose 1.6% to $1.06 billion. DTC sales increased 4.4%, while wholesale revenue fell 1.4%. Adjusted earnings per share (EPS) jumped 10.8% to $3.60. This was helped by the company buying back 1.1 million shares in the quarter.

Adjusted gross margins were solid, rising 220 basis points to 59.6%. However, it did see a spike in operating expenses with selling, general, and administrative costs up 19.4%. On the balance sheet, inventory was down to $367 million from $490 million a year earlier. The company reduced its net debt to $1.24 billion from $1.81 billion a year ago.

Crocs guided for fourth-quarter sales to be flat to slightly up, which would be just over $960 million in revenue, and for adjusted EPS of between $2.20 to $2.28. Those numbers were well below the consensus calling for EPS of $2.72 on revenue of $1 billion.

Can Crocs stock rebound?

Trading at a forward price-to-earnings ratio (P/E) of only 8 times next year's analyst estimates, Crocs stock is cheap. At this point, nearly all of the company's profits are coming from its main brand, with little contribution from HeyDude.

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

The HeyDude acquisition was clearly a mistake by Crocs. The brand has greatly underperformed expectations. The company must fix it or jettison it at this point. That said, the core Crocs brand has been performing very well. It's done a nice job expanding internationally, while also introducing new silhouettes, and innovating with its Echo and InMotion franchises.

If not dragged down by HeyDude, the stock would likely command a higher multiple given the Crocs brand solid revenue growth and margins. As such, I'd be a buyer of the stock at current levels, as I believe the Crocs brand business alone is worth more than the current valuation of the stock.

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