On Tuesday, Williams Trading adjusted its outlook on Crocs (NASDAQ:CROX), reducing the price target from $163.00 to $140.00, while maintaining a Buy rating on the company’s stock. The analyst cited a mix of factors influencing the decision, including a revision of financial forecasts for the coming years. For fiscal year 2024 (FY24), estimates have been raised, whereas expectations for FY25 have been lowered, and initial estimates for FY26 have been introduced.
The revision follows Crocs' third-quarter performance for 2024, which showcased a 7.5% increase in revenue, surpassing consensus predictions by 2.5%. This positive outcome was attributed to lower-than-expected selling, general, and administrative expenses (SG&A), which were 130 basis points below consensus, and a favorable tax rate. However, these gains were tempered by a significant 17.4% decline in sales of HEYDUDE, Crocs' subsidiary brand, which was more severe than the anticipated 14.6% decrease.
Despite efforts by the HEYDUDE team to rectify the brand's trajectory, today's market reaction reflected concerns over the revised FY24 revenue guidance for HEYDUDE. Analysts had previously believed that the worst was over for the brand, but the current situation suggests a more complex recovery, particularly in the North American market. A strategic shift in marketing from performance to brand focus is expected to yield long-term benefits but is likely to cause short-term challenges.
The analyst pointed out that HEYDUDE's revenue growth is not anticipated until the second half of FY25. This delay is partly due to a more conservative approach by wholesalers for the spring 2025 season than previously expected, given HEYDUDE's lackluster retail performance. This caution has prompted management to label FY25 as a year of stabilization. Furthermore, the analyst projected that first-quarter sales for FY25 would deteriorate even more than the -6% to -4% range guided for the fourth quarter of 2024, as a result of the cautious stance from U.S. wholesale accounts.
In other recent news, BARK and Crocs have launched a pet-friendly footwear line named Pet Crocs, marking a unique collaboration between the two companies. This initiative is part of their effort to tap into the growing pet accessory market. The products, available online and in select retail stores, include dog shoes and matching human Crocs.
In analyst activity, Williams Trading has maintained a Buy rating on Crocs, raising the fiscal year 2024 revenue forecast from 8% to 9% due to the brand's ongoing momentum. However, the revenue projection for HEYDUDE, another brand under the Crocs umbrella, was slightly lowered. Baird reaffirmed its Outperform rating on Crocs, suggesting a promising outlook for the company's third-quarter earnings.
Meanwhile, Guggenheim initiated coverage on both Crocs and G-III Apparel Group (NASDAQ:GIII) with a Buy rating, highlighting the brand's resilience and underappreciated free cash flow for Crocs, and the seasoned management team and growth plans for G-III Apparel Group.
InvestingPro Insights
Despite the recent challenges faced by Crocs, particularly with its HEYDUDE brand, InvestingPro data reveals some encouraging financial metrics. The company's P/E ratio of 8.4 and PEG ratio of 0.34 suggest that Crocs' stock may be undervalued relative to its earnings potential. This aligns with an InvestingPro Tip indicating that Crocs is "Trading at a low P/E ratio relative to near-term earnings growth."
Moreover, Crocs has demonstrated strong financial performance with a revenue of $4.06 billion in the last twelve months as of Q2 2024, and an impressive operating income margin of 26.36%. These figures support another InvestingPro Tip that the company has been "Profitable over the last twelve months."
For investors considering Crocs' long-term potential, it's worth noting that the company has shown a "High return over the last decade," according to InvestingPro Tips. This historical performance, combined with the current financial metrics, may provide some context to Williams Trading's maintained Buy rating, despite the lowered price target.
InvestingPro offers 12 additional tips for Crocs, providing a more comprehensive analysis for investors looking to delve deeper into the company's prospects.
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