👞 Can Crocs Get More Teeth From Hey Dude?
GoDaddy onboards an activist investor.
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👞 Crocs: More Teeth?
Crocs (CROX) shareholders have seen returns of 1,700% since 2017. However, the comfort footwear manufacturer's most recent steps have confounded shareholders, and the management's justification has not cut ice. Will this undo all the hard work done so far? (Tweet This)
Leveraging Growth Opportunities
Crocs was founded in Boulder, Colorado, in 2002. The company produced a foam clog, whose designs it had purchased from Quebec, Canada-based Foam Creations Inc. Originally developed as a boating shoe, Crocs' first model named "Beach" was exhibited at the Fort Lauderdale Boat Show in Florida. All 200 pairs of footwear were instantly sold out.
The company forayed into the accessories market in 2006 with the acquisition of Jibbitz, which focused on decorations that can be clipped to the ventilation holes in the shoes. These designs were mainly aimed at children and featured Disney characters. Crocs went public the same year.
In 2007, Crocs registered its logo in over 40 jurisdictions. The trademark registrations extended to non-footwear products like sunglasses, knee pads, watches, and luggage. In 2014, Crocs streamlined its operations, and 180 people lost their jobs. Underperforming product lines were eliminated, and up to 100 stores were closed.
The company competes in the $305B casual footwear market and counts among its peer brands such as Sketchers, Deckers, and Wolverine, each of which eclipse Crocs in revenue terms.
Hey Dude completes the second half of today's story. It was established in September 2008 in Italy, and its first shoes hit the market in February 2009. By mid-2010, the company had spread across the US, Europe, East Asia, and South America. By October 2011, Hey Dude sold a million pairs of shoes, and by late 2017 it sold a million pairs in the US alone. Today, the US accounts for 95% of its revenue.
Are The Concerns Well-Founded?
Last week, Crocs announced its biggest acquisition ever - Hey Dude's $2.5B takeover. The deal will be funded by $2.05B in cash and $450M in Crocs shares issued to Hey Dude's founder Alessandro Rosano. The deal will immediately add to revenue and earnings growth for Crocs. The cash component will be funded by a $2B term loan and $50M borrowed through an existing credit facility.
The deal is expected to close in Q1 2022, subject to regulatory approvals. By 2024, Crocs expects Hey Dude to become a $1B brand and will complement Crocs' projection to achieve $5B in sales by 2026.
Hey Dude will continue to operate as a standalone entity after completing the deal. Rosano will become the strategic advisor and creative director for the new entity. Rick Blackshaw, the former CEO at CCM Hockey, will become the Executive Vice President and Brand President.
Despite severe business disruptions, including factory closures in Vietnam and supply chain issues due to Covid, Crocs managed to report record revenues in Q3. It also expects its revenue in 2022 to grow by over 20% Y-o-Y. Hey Dude too, is expected to report revenue worth $570M this year and between $700M to $750M in 2022. Over 40% of its business comes from online channels.
Crocs shareholders didn't seem too thrilled about the potential dilution of the iconic brand and drove the company's shares down 12% on Thursday, the worst single-day performance for its shares since April 2020. CEO Andrew Rees defended the deal, reiterating that they have no intention to tinker with the clog's design and that this acquisition is simply the addition of another brand to the portfolio.
If anything, the company's category portfolio, which is majorly skewed towards clogs, at 71%, will come down to 57% after adding Hey Dude to the product mix - something analysts termed as one of the "fastest rising brands."
Investors may be fretting about the unknowns in Hey Dude given it's a private company. They may also be concerned the stellar returns in the past five years are at risk and that they'll be left with a shoe bite! The only way Crocs can hope to assuage investor concerns is by showing their worries are misplaced.
CROX ended at $127.83, up 3.48%, after Thursday's 12% drop. Shares are up 107% this year.
Company Snapshot 📈
CROX $127.83 +4.30 (3.48%)
Analyst Ratings (10 Analysts) BUY 70% HOLD 30% SELL 0%
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Today's Market Terminology: Bear Spread
A bear spread with Call options is created by buying a Call option of one strike price and selling a Call option of a lower strike price of the same stock. The spread with the Put option is the opposite of the Call
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