Crocs: Finding The Bottom (Ticker: CROX)

Breaking my own rule, and feeling optimistic (so far)

“Starting with the Crocs brand, as we communicated last quarter, we elected to take two strategic actions to protect the long-term brand health. First, we pulled back on the breadth and depth of promotional activity across our digital channels in North America. This promotional pullback has had the greatest impact on our Classic Clog business as we work harder to protect our icon. Second, we continue to reduce receipts into the wholesale channel to better match supply to demand and ultimately drive a demand-led model.” - Andrew Rees

By reducing promotional discounts and wholesale sell-in, Crocs is aiming for a full reset of its brand to close out 2025. Financially, the goals of this reset are to improve gross margins and inventory efficiency by sacrificing near-term sales.

Management telegraphed this reset in August, calling for an approximate 10% revenue decline year-over-year in Q3 2025.

Crocs stock subsequently collapsed to a trailing free cash flow multiple of five, its lowest in years. That is a 20% free cash flow yield, mind you. Mr. Market believed this guide and more, pricing in continued deterioration in the quarters to come.

Zooming, Crocs financials look just fine. Revenue declined 6.8% year-over-year in Q3, beating its initial guide. The Q4 guide calls for another 8% decrease in sales year-over-year. Both are supposed to be kitchen sink quarters.

Trailing twelve-month revenue of $4.07 billion is only a tad below its all-time high of $4.14 billion in LTM revenue set earlier this year, and that is with the HeyDude acquisition disaster.

Is the Crocs brand dying? Far from it. This is a business that — including the inorganic addition of HeyDude revenue — has taken sales from $1.2 billion pre-pandemic to around $4 billion in 2025. It is expanding internationally, has great cash conversion, and is buying back stock at a rate that will make you salivate.

Below, I will outline my thoughts on recent earnings and why I broke my “never invest in apparel” rule to buy Crocs stock earlier this year. Contents of this newsletter include:

• Managing the brand

• International opportunity

• Management competence and the buyback

• Is this an emerging moat?

• Li Lu and Timbaland: a closing thought

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