The acquisition of Heydude
Crocs shares have been in a downtrend since mid-November, which intensified following news of the acquisition of rival Heydude. The deal will be valued at $2.5bn: $2.05bn will be transferred in cash and the rest in Crocs shares. The deal is expected to close in Q1 2022. Heydude will operate as a division of Crocs, with the founder of the company retained as strategic advisor and creative director.
Investors have reacted negatively to the news: it has to do with borrowing to close the deal, and hence the increased debt burden. Against this backdrop, the value of Crocs fell by 11%.
Crocs managers believe that buying Heydude will benefit the company. The arguments include:
- expansion of the product portfolio
- an increase in the number of customers and sustainable sales growth (especially in the northeast US)
- an increase in cash flow and overall operating margins, which will contribute to a rapid reduction in debt.
Of particular note is Heydude. The company has great potential. More than 40% of Heydude's operations are conducted online, with expected annual revenues of $570m, while Crocs CEO Andrew Rees estimates that revenues could reach $700m-$750m in 2022.
In addition, investment firm Piper Sandler lists Heydude as one of the fastest-growing brands. That's the view analysts reached after conducting the Taking Stock With Teens survey. Heydude was ranked 8th in the autumn 2021 survey, up from 17th in 2020.
Crocs is acquiring Heydude at EV/EBITDA of 15x and EV/S of 4.4x, which is a reasonable level given the growth rate of the acquired company. The realisation of the deal will expand the size of Crocs' addressable market to $125bn.
In other words, the negative investor reaction to the Heydude acquisition could be a good opportunity to acquire Crocs shares.
Financial results and company valuation
Crocs continues to report excellent financial results with a Q3 2021 revenue of $625.9 million, an increase of 73% and 100%, respectively, over the same period in the previous two years.
E-commerce sales accounted for 37% of total revenue, growing 69% in Q3 2021. At the same time, Crocs continues to show business efficiency - operating and net profit margins in Q3 2021 increased to 32.4 and 24.5%, compared to 20.0 and 17.1% in the same period a year ago.
Crocs also retains its financial position - at the end of Q3 2021 it had $436.6m of liquidity and $686m of total debt. The Heydude acquisition will increase Crocs' debt to $2.75bn, with Net Debt/EBITDA reaching 2.97x, which is considered acceptable.
FCF remains positive, with free cash flow in Q3 2021 of $136m, after all fixed costs, and Operating Cash Flow of $150.5m.
The attractiveness of Crocs as an asset also lies in the company's undervaluation: the main multiples showed a rather low result:
- EV/S - 3.85x
- PE - 10.97x
- Forward PE - 13.23x
- P/FCF - 18.16x
In January 2022, investment firms Loop Capital and Piper Sandler raised their price targets on Crocs shares to $190 and $246, respectively.
How to take advantage of the idea?
- Buy the stock at $119.5.
- Allocate no more than 2% of your portfolio for purchase. To compile a balanced portfolio, you can use the recommendations of our analysts.
- Sell when the price reaches $190.