Crocs: A 17% Earnings Yield Hidden in Plain Sight

Investment ThesisCrocs currently trades around $85 per share for amarket capitalization near $4.7 Billion. With normalized net income overthe last 12 months around $730 Million the shares are currently trading around6 times earnings or an earnings yield of nearly 17%. This is much cheaperthan the S&P 500 which sits near 31 times earnings or roughly 3.2% earningsyield. Crocs return most of their excess cash to shareholders in the formof stock buybacks, just assuming the business remains stable, this is an extremelyattractive investment.After years of rapid growth which saw the Crocs brand grow from 1.23 billon in2019 to 3.28 billion in 2024 a calculated annual growth rate (CAGR) of about21.67%, growth has stalled. In North America sales for the Crocs brand onlygrew about 3% and are down around 5% in 2025, indicating a maturing NorthAmerican market. This was a conscious decision from management given the tough2025 year they could have increased promotional activities and lowered pricesto boost the top line but they chose to discounting to preserve their marginsand focus on the long-term health of the brand. Looking forward I expect theCrocs brand to stabilize and return to growth in the coming years. Managementhas said this is a top priority and are confident they can return to profitablegrowth in North America in the next few years. Crocs have been able todiversify their product line outside of the main clog they have shown goodgrowth in sandals increasing their market share in the 3Q. They are currentlythe #1 footwear brand in the U.S on Tiktok which continues to solidify theirbrand with younger consumers. However Internationally it is a different story withmuch more room to grow. In 2024 sales grew 12% last year and increased by morethan 10% do far in 2025. In 2024 International sales accounted for about 44%of total revenue. Leading the growth is China which in 2024 saw 64% yoygrowth, with less than 1% of the market share in China this is a massive growthopportunity. China currently represents the second largest market currently forCrocs. I expect the international sales to continue to grow in mid-teens behindthe giant opportunity in China and they only has a 2% or greater market sharein South Korea and the UK leaving much more room for expansion. Even with amature North American market the company can still grow long term frominternational expansion.Crocs is a business with very good margins especially for a retailer. In 2024gross margins were over 58% with operating margins close to 25%. Tariffs in2025 have put some pressure on Crocs margins. In 2024 51% of Crocs were made inVietnam, with the increase in tariifs on Vietnamese-made products and tariffson other countries Crocs the parent company expects a 90 million hit to itsbottom line. They have been able to offset this increase in costs by finding 50million in cost savings in their business. They have also looked at changingthe manufacturing mix however with the tariff rates uncertain it's hard for acompany to predict where it makes the most sense. Margins still remain healthy withan estimated 24% operating margins for 2025. Due to the outsourcing business model Crox is a capitallight business. This allows the company to send most earnings back toshareholders in the form of stock buybacks. The lower the stock trades the morestock they can buyback increasing shareholder value. In 2024 alone Crox boughtback 7.1% of the entire company, increasing earnings per share and shareholdervalue.This is an investment that doesn't need to grow revenue tobe a good investment. I think they will over time due to international salesbut as long as the business doesn't deteriorate and people buy crocs this isgoing to be a solid investment. I think the stock is a buy all the way up to 6billion which is $109 a share. Crox at $85 a share is a strong buy and has aclear margin of safety for long term value investors. Business OverviewCrocs main product are foam clogs, they are big and bulkyand many call them ugly, but they are lightweight, comfy and easy towear. Kids will wear their Crocs for all occasions, even during physicaleducation by pulling the heel strap back and going into sport mode. Thecompany also owns HeyDude which is more of a lifestyle-oriented shoe brand thatit acquired in 2022. The two brands together had revenue of over $4.1Billion last year. The company has very healthy margins. Gross margins haveconsistently remained above 50%, and operating margins are expected to bearound 24% in 2025 which includes the tariff headwind. Crocs continues toperform well across most of its businesses, but domestic sales are slowing, andit has seen some temporary headwinds with HeyDude from over distribution andexcess inventory buildup. In 2024 HeyDude decreased 14% and in the 4Q of 2025they expect a 20% decrease. This is bad and Crocs certainly overpaid when theybought HeyDude for 2.5 billion. However it represents just 20% of sales isstill profitable and management expects to be abe to turn it around. My view in2026 they should be able to stabilize and remain profitable and then look toreturn to growth in the HeyDude brand in 2027 and beyond.The Crocs brand have a very passionate customer base. My mom is a 5thgrade elementary school teacher and say her kids all wear and love their Crocs.The company sold more than 100 million pairs of shoes last year. Crocs'customer base is large, cutting across kids, teens, and adults. They havea high repeat purchase rate helped through partnerships with Disney, Pixar,McDonald's, and the NFL. Crocs capitalize on personalization which starts withthe Crocs themselves and then you can add special Jibbitz that attach into theholes of the crocs again adding extra customization. The Jibbitz adds a highmargin product to the crocs while also increasing personalization. The businessis also expanding its footprint globally, with international revenue nowrepresenting approximately 40% of total revenue and growing much faster thanthe U.S. market.HeyDude has taken the more traditional footwear strategy. Their shoes arepopular for their comfort, versatility and just look like a normal pair ofshoes. They have strong retail partnerships with Amazon, Scheels, and Dick'sSporting Goods. After years of rapid growth HeyDude was plagued withexcess inventory. They have spent the last few years trying to fix theinventory problems while increasing their direct-to-consumer business which ismore predictable and have larger margins. The HeyDude business remains profitable,and the company expects sales to stabilize as they continue to work through inventoryand brings new products back to market. The company outsources production to third-party manufacturers in Asia,focusing on design and marketing internally. This creates a capital lightbusiness which allows the company to use the excess cash in reducing their debtfrom the HeyDude purchase and buying back shares of stock. Crox is a company with strong cash flow that can return asignificant amount of capital to shareholders in the form of stock buybacks. Moats and the 7 PowersWarrenBuffett often talks about the moat of a company. Every business is like acastle and in order to protect the castle you need a strong moat to keepcompetitors from storming the castle and taking your customers away. Hamilton Helmers book 7 Powers takes Buffett's castle and moat ideaand breaks it down into seven specific strengths called powers. According toHelmer, every lasting business needs at least one of these powers. If itdoesn't have one, competitors will eventually wear it down and eat away at its profits.The more powers a company has the bigger and stronger their moat is. The seven strategic powers are:Scale economies: producing at lower cost as volume growsNetwork effects: products that become more valuable as more people use themCounter-positioning: taking a strategy incumbents can't easily copySwitching costs: barriers that make customers hesitate to leaveBrand: emotional connection and trust that support pricing powerCornered resource: exclusive access to something valuableProcess power: unique ways of operating that are hard to replicatePowerCrocs' PositionCommentScale EconomiesModerateCrocs benefits from global reach and established supplier relationships that help keep production and logistics costs low.Network EffectsNoneEach purchase is independent; there is no user network.Counter-PositioningStrongCrocs leaned into comfort, personalization and function when competitors were focused on fashion and performance.Switching CostsNoneConsumers can buy other shoes.BrandStrongEmotional loyalty, especially among kids and teens, reinforced through personalization.Cornered ResourceNoneNo exclusive inputs or intellectual property.Process PowerNoneOperations are efficient but not unique.Brand (The Strongest Power)The Crox brand is the company's most important long-term durable advantage. You can buy knock-off foam clogs at Walmart or Amazon for $15. However, millions of consumers choose to spend $50 or more on the Croc.Crocs wins on anti-fashion comfort and customization, rather than high performance athletics or celebrity athlete sponsorship like Nike or Adidas.Many companies have tried to copy the Crocs Clog but have yet to penetrate the castle. Skechers and Deckers (HOKA and UGG) have tried to storm the castle but have so far been denied. The Jibbitz add-on charms are a part of this, but the real power is emotional: Kids do not just want a foam shoe. They want Crocs and the personalization that comes with it. Counter-PositioningCrocs were successful in no small part because they did the exact opposite of what entrenched players were comfortable with. The footwear industry for decades had been all about sleek, fast, and athletic. Crocs said bloated, clunky, cozy, and personal.Scale Economies Crocs does not manufacture their own shoes but they do benefit from scale economies. The manufacturing process is very capital-efficient at scale. Building 100 million pairs of shoes a year allows them to negotiate favorable pricing for raw materials and logistics that boutique brands cannot. This helps keep their gross margins near 50%.ConclusionThis is a castle with a strong moat. It is not impossible to breach, of course, with fashion risk and competitive copycats always a factor. But this combination of branding, conter positioning, and scale economies make this a much tougher business to dethrone than it's given credit for.Financial Review and Valuation Crocs business has transformed over the past five years. In 2019, it was still a weird niche brand. Today, it's a global company generating over $4 Billion in annual revenue and $1 Billion in Operating Income. Fiscal YearRevenue ($ B)Operating Income ($ M)Net Income ($ M)20191.2312911920244.101,022950Revenue more than tripled in five years, while operating income and net income both increased by about 700%. That growth came from international expansion, higher direct-to-consumer sales, and strong pricing power. PeriodRevenue CAGROperating Income CAGRNet Income CAGR1 Year (20232024)~4 %~1 %~0 %5 Years (20192024)~26 %~47 %~49 %Recently however growth has cooled, particularly in the United States, and management expects 2025 to remain soft with a weaker third quarter ahead. This has caused the stock to fall under pressure, but this has presented an opportunity for patient long term investors. In 2025 Crocs reported about $950 million in net income. However, this is inflated by a one-time tax credit. On a normalized basis, net income would have been closer to $730 million, assuming a 20% tax rate. Looking ahead 26% revenue growth is likely a thing of the past however I think mid-single digits is realistic. Free cash flow remains exceptional. The company generated nearly $1 billion last year, repurchased about $550 million of stock which equaled 4.3M shares or about 7% of company. They also paid down $320 million in debt. Total debt now stands near $2.2 billion, down from more than $3 billion following the HeyDude acquisition. At $85 a share and net income of 730M Crocs offers an earnings yield of roughly 17% This far exceeds a 4% Treasury bond and allows a large margin of safety if net income decreases a modest amount. Due to slowing revenue growth and some tariff uncertainty I am quite conservative when valuing Crox. The most I am willing to pay is about 10 times earnings and on top of this I want to discount 2024 earnings due to uncertainties in revenue growth and margin pressure. With 730M in net income in 2024 I will be conservative and use 600M about a 20% drop from last year as my earnings figure. So, I am willing to pay 6B for the business. With 55M shares outstanding I am willing to buy the stock up to $109 a share. With the current stock trading around $85 Crox is a strong buy at these levels. Growth Scenarios The goal in investing is not to guess the next quarter but to estimate what a business can earn over time. For Crocs, I will illustrate three scenarios on how the future could unfold: 0%, 5%, and 10% annual net income growth over the next decade. Each assumes that Crocs continues repurchasing about 3% of shares per year, a conservative number at the current stock price but consistent with recent history. As you can see from the chart below the downside is limited even assuming 0% growth and a 5 PE ratio. ScenarioAssumed P/E3-Year CAGR5-Year CAGR10-Year CAGR0% growth53.1%0.7%1.1%1022.1%14.1%8.4%2053.9%31.0%16.2%5% growth51.6%4.1%6.1%1028.1%19.6%13.7%2061.3%37.4%21.8%10% growth56.3%9.0%11.0%1034.0%25.2%18.9%2068.8%43.8%27.5%Bear Case: This scenario 0% net income growth. This occurs if HeyDude continues to be a drag on earnings never stabilizing and eventually losing profitability and ultimately being sold off or discontinued. The Crocs brand revenue growth stalls domestically while International growth slows and basically offsets the HeyDude disaster. Even in this scenario the downside is limited because the stock is trading at such a low multiple compared to earnings. If earnings simply hold steady and the market eventually values Crocs at ten times earnings, investors could still see returns near 8% annually over the next decade and over 14% the next 5 years. This is what we call a margin of safety.Base Case: In my opinion, the 5% growth case is the most realistic. This assumes the Crocs brand continues to be a cash cow. Domestic Crocs sales and profits stabilize while international revenue continues to grow in the low to mid-teens. HeyDude eventually stabilizes revenue and remains profitbale. In that range, total returns could reach 20% annually over five years and about 14% per year over ten years if the market assigns just a 10 times earnings multiple. If the earnings multiple gets close to 20 we would see extremely attratice returns of 61%, 37% and 22% over 3, 5, 10 year periods. Consistent stock buybacks and modest income growth will deliver double-digit returns from the current stock price. Bull Case: At the higher end, Crocs fires on all cylinders. HeyDude eventually returns to growth. Domestic sales return to single digit growth and international sales continue to lead the charge in the double digits. If Crocs can compound earnings closer to 10% annually and the multiple expands toward 20 times earnings, the outcome becomes exceptional. This combination could deliver returns near 25% annually over five years and close to 19% per year over a decade assuming just a 10 times multiple of earnings. If the stock remains this cheap, management will likely buy back more than 3% of shares each year, since lower the stock price is makes repurchases more effective. The more shares purchased at these levels the better returns will be for shareholders. Warren Buffett (Trades, Portfolio) looks for investments with a large margin of safety. Crox passes this test trading at only 6 times earnings and returning most excess cash to shareholders in the form of stock buybacks. Risks Crocs is certainly not a perfect business and has many risks which is why it sells for only 6 times earnings. North America growth has flattened, and the first six months of 2025 sales are down 5%. The company guided a weak third quarter and 2H in 2025. Tariffs and shipping costs have risen, squeezing margins given that most manufacturing is done in Asia. It's hard to pass these costs on to consumers in a very competitive footwear industry, these increase in costs will lower crocs operating margins. Fashion is another big uncertainty. Crocs rode the comfort-wear wave, but fashions can change fast and if clogs go out of fashion or the company can't stay fresh in the eyes of younger buyers, sales growth could slow further. HeyDude has struggled in recent years. The company expects to stabilize revenues and remain profitable but this is something to keep an eye on in the next few years.The classic clog also still accounts for most of the profits, meaning there is concentration risk. This is not a replacement product if the clog goes out of favor and consumers stop buying this would be very bad for the company. This is the biggest risk to the company and the stock. Crocs is still very profitable and cash-generative, with a strong balance sheet and ongoing buybacks giving a margin of safety as the company deals with short-term headwinds. Final Thoughts CROX does not have a giant moat but has established a durable brand, counter-positioning and economies of scale advantages. It is a strong earnings generator, growing free cash flow to reduce debt and return capital to shareholders. North America growth has stalled, but international still has plenty of upside. Trading around 6x earnings, CROX is offering quite a bargain if the business turns around. I don't think Crocs is perfect, but I do not see it as broken either. It is a stable profitable business with a pessimistic valuation. If EPS can grow at a modest rate from modest gincome rowth and buybacks, long-term returns should be compelling. Upside in my opinion could be much higher if they can regain momentum domestically while continue to grow internationally and maintain brand relevance. At $85 a share this is a strong buy and a buy at any price under 6 billion market cap or around $109 a share.