Insights

Why Crocs Stock Crashed on Thursday

What happened

Shares of shoemaker Crocs (NASDAQ: CROX) were down on Thursday after the company reported financial results for the second quarter of 2022. Keep in mind that Crocs stock was already up more than 50% in a little more than a month going into today, so it was probably due for a pullback after strong gains.

That said, the company cut its full-year guidance (well, kind of), which has investors a little nervous. As of 10:40 a.m. ET today, Crocs stock was down 14%.

So what

In the second quarter, Crocs generated revenue of $965 million, which included a record $732 million for the Crocs brand. It also included impressive revenue of $232 million for its recently acquired Heydude brand, which was up 96% year over year. For what it’s worth, revenue of $965 million exceeded the high end of management’s guidance of $957 million.

Going into the quarterly report, it was reasonable to assume Crocs’ profit margins would be challenged by inflation. And this played out. Gross margin fell to 51.6% compared to 61.7% last year. And operating margin fell to 25.7% compared to 30.5% last year. However, both metrics were up from a gross margin of 49.2% and an operating margin of 18% in the first quarter, suggesting management’s efforts to preserve profits are paying off.

Now what

Some news outlets are saying Crocs’ management lowered full-year guidance, but it’s more nuanced than this. Previously, management guided for 2022 revenue of “approximately” $3.5 billion. With today’s report, it’s providing a guidance range of $3.395 billion to $3.505 billion. In other words, it’s still guiding for what it was before, but now it’s clear this is more toward the top of its expectations.

Trading at just a little more than one times this year’s sales and growing about 50% annually, Crocs stock looks very cheap. However, management won’t be taking advantage of its cheap price with stock repurchases. The company took on debt to acquire Heydude and is working to get its balance sheet to a more healthy place before resuming buybacks. This likely won’t happen until midway through next year.

Therefore, Crocs shareholders looking for a catalyst to the upside might need to be patient.

Jon Quast has positions in Crocs. The Motley Fool recommends Crocs. The Motley Fool has a disclosure policy.

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