Crocs, Inc. (CROX) is the seller of casual lifestyle footwear and accessories under the Crocs and HEYDUDE brands. CROX has become a hot topic of debate among investors due to its LTM P/E of 6.2 and its missteps, notably the HEYDUDE acquisition in 2022. There is much more going on if one were to deconstruct the numbers. First, let’s look at its financial profile highlights.

Issues Plaguing CROX

The slowdown in HEYDUDE sales has been highlighted as the most important reason for CROX’s dismal share performance recently. However, due to integration issues and the failure to properly disclose the wholesale inventory, mostly for FY2023, CROX is currently facing a shareholder class action lawsuit. Essentially, CROX has now been forced to work through those integration issues, reduce reliance on wholesale channels, and increase its direct-to-consumer (DTC) sales for HEYDUDE.

As one can see, HEYDUDE’s DTC sales have picked up recently, while the wholesale sales are shrinking. While CROX does have seasonality in its business, the increase in DTC sales has a benefit: CROX has pricing power in those channels, whereas there is a lag in when price increases flow through in the wholesale channel.

One more thing to note is that the majority of HEYDUDE’s revenue comes from North America (US and Canada). Now, here is the interesting part: If one were to look at the sales for the core Crocs brand, one can see that there is a slowdown in North America for that, too, and international sales are what are holding Crocs up, even with what they are achieving now.

Case for a Turnaround

As we saw above, the biggest issue plaguing Crocs is the slowdown in revenue growth in North America. Operationally, from a margin perspective, it is doing fine. Here are the main drivers for a turnaround:

• While not heavily publicized, HEYDUDE is now available in more countries in the EU and Southeast Asia. One shouldn’t be surprised to see a bigger contribution from those regions in the future.

• China was the main driver for international growth in Q1, witnessing a 30% growth.

• Inventory has been optimized to a large extent. It shows in the comments made during the earnings call, as it has remained unchanged compared to last year. Also, to move some of the older inventory, CROX has been discounting heavily across all regions.

• Q2 and Q3 are seasonally the best quarters for CROX.

• Increased focus on DTC sales would help drive profitability even in the face of forced price increases due to tariffs.

Tariff Impact

CROX withdrew its guidance for the year, as have many other retailers, due to tariff uncertainty. However, we do have some numbers to work with on the possible impact, as was highlighted in the Q1 earnings call. If the tariff is 10% (best-case scenario), the impact would be $45 million annually. If the 145% on China gets put in place and the reciprocal tariffs on Vietnam are not reduced, the impact would be $130 million (worst case scenario).

Now, what would offset this is the planned cost savings of $50 million in 2025. Hence, in the best-case scenario, there would be no impact. Worst case, lop off $80 million from operating income. Most probably, the tariffs will land somewhere in the middle or closer to the best-case scenario; hence, expect the impact on CROX to be minimal, as it can easily pass on some of the costs.

Verdict

Some things don’t require a tome to make a case for. CROX has been good at building branding in relationships with influencers and companies, as is evident from the relationships in China, India, and with McDonald’s and the Barbie franchise in the US, to name a few.

Now, CROX is a tactical medium-term turnaround play and not a buy-and-hold for more than 5 years. The management projects CROX’s TAM to be $160 billion. CROX does 2.5% of that per year. Assuming international growth and expansion, and for the reasons highlighted above, CROX can double that in 3 to 4 years. Hence, on the initial signs of a turnaround, the move up in the stock will be explosive. So, accumulate slowly heading into 2026, and please, as a reminder, no gambling with options.