Chit Chat Stocks - Crocs (Ticker: CROX) with Jacob Franklin

Episode Date: April 27, 2023

Crocs (CROX) designs and manufactures casual footwear, with strong pandemic demand but also faces supply chain disruptions and sustainability concerns. Listen as Brett and Ryan ask questions about the company, its business model, and valuation. Enjoy the show! ***************************** This episode is sponsored by Stratosphere.io, a web-based terminal for financial data, KPIs, and more. Try it out for FREE or use code “CCM” for 15% off any paid plan. Sign up here: https://www.stratosphere.io/ ***************************** Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney  Subscribe to our Substack to receive free show notes and charts that go along with every episode: https://chitchatmoney.substack.com/ Interested to see more of Jacob's work? Find him on Seeking Alpha: https://seekingalpha.com/author/jacob-franklin Contact us: [e-mail] Timestamps Crocs | (3:24) Partnerships | (13:31) Acquisitions | (23:33) Earnings | (28:17) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. My name is Ryan Henderson, and I am joined by my co-host, Brett Schaefer. Today is our Thursday deep dive episode where we interview an analyst to discuss a single stock or industry. And today we have on Jacob Franklin to talk Crocs. First, a little quick shout out. Jacob's a great investor and an individual investor. He's not managing some big fund or anything like that, but you can tell that he does a really good job analyzing the stocks that he owns and he kind of fishes in the same ponds that we do. And we actually have a little bit of portfolio overlap. So we talk, or at least I do, I talk with Jacob on a regular basis about investing. So it was fun to get him on the show. If you're more interested in what

he has to say, he also did a show on Ally Financial a while back, which I think is still really relevant even after this sort of banking panic. But anyways, that's a little pitch for Jacob. Before we get to the show though, we want to talk about our sponsor, Stratosphere. Today's episode is brought to you by Stratosphere. They are our investing home screen for fundamental research. Brett is showing here some of the data you get with Stratosphere and you might not be able to see it if you're just listening to the show, but it goes back a long way. So we're talking about Crocs here today. They have data dating all the way back to 03. It's got great data visualizations. You can get all the SEC files aggregated in one spot. We literally use it

every day and they have a bunch of custom built KPIs for all sorts of companies. So I really do recommend checking it out. It's free to check out, use, and then there's paid plans as well. And a lot of the paid plans I really think are worth it. We use a paid plan. And like I said, we use the platform every single day. If you're interested in any of them, you can use code CCM for 15% off. But like I said, you can also just check it out and get the free one as well. It's stratosphere.io. Go ahead, check it out. And then we have an interview after, a short interview after our interview or after the episode with the founder of Stratosphere, Brayden Dennis, to kind of go over the platform if you're more interested. But

without further ado, here's our interview with Jacob Franklin. Welcome to Chit Chat Money. On this show, hosts Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or a recommendation. Now, please enjoy this episode. Okay. Today, we are welcomed by now two-time guest, Jacob Franklin. He is a writer at Seeking

Alpha, and he previously came on the show to talk Ally Financial, which that was another one that listeners really seemed to enjoy. And so today, we're talking about less, I guess, maybe Ally's been controversial, I guess you could say, and this is maybe less of a controversial one and it's Crocs. People probably have heard of them, but I guess let's maybe set the groundwork for the business. Can you explain people? I mean, people know what the product is, but can you explain the basics of the actual business model? Sure. Yeah. And first just want to say thanks for having me back on. I enjoyed being on the first time and I'm excited to be back. Yeah. So Crocs, Crocs, like you said, it's a pretty simple business. I think probably most people listening will understand. They sell shoes, the Crocs branded slip-on shoes that people either love or hate.

um there's a few different ways to kind of break down their their business uh they do uh wholesale versus direct meaning either they're selling it directly via their own like in-person stores or online via their website or they're giving it to a distributor or wholesaler who's um selling it on their behalf uh the other way to break it down that i talked about a little bit is online versus offline. And then probably the last way is North America versus international. North America is kind of more penetrated. And right now, the international is growing more quickly. And then finally, they acquired a second brand last year, Hey Dude. So you can kind of look at it by the two brands. And then outside of that, it's a pretty, I would say, asset-light business.

They're not really specializing in the operations of getting and selling these shoes. They just distribute it. Really the only thing they own are those crock stores and some warehouses for storage, but they don't own or operate the factories that are actually producing the shoes. And so I really think of it, even though they're selling shoes, I really think of this as a kind of brand management business. That's their core competency. What's the split right now between wholesale versus direct? Do most of their sales still come through the footwear stores?

Most of their sales don't come through the footwear stores. They break it down by direct and indirect, and they break it down by online and offline, but they don't break it down by direct offline. So you can't say how much of the direct, because they count direct as both their owned and operated stores and their website. And they do a lot of sales directly through their website. I think the split between wholesale and direct, I don't remember exactly what's on my head, but it's somewhere around 50-50. Okay. And I'm assuming that direct has been growing a little bit over time? They've both been growing. The mix hasn't shifted too much.

I actually think that they've had a little bit more of a shift towards wholesale recently, specifically because they're growing internationally. And in some international markets, they sell through distributors who basically own the whole country. If it's a smaller country, like, say, I mean, not that it's a small country, but Brazil is a smaller part of their business. They have a distributor there who kind of just buys the crocs in bulk from them and then sells it throughout Brazil.

So I think that's been growing a little bit faster just because the internationals are a little faster. Okay, and I maybe should have led with this question, but are you a customer? I wasn't before I started researching the stock, but I did buy a pair during research and I will say that I love them. So I use them all the time now.

They're like my go-to slip-on shoe. Do either of you guys have a pair? I do not, no. i don't i mean we know the seattle area seattle area has lots of uh a lot of wares i are a lot of friends that love their crocs yeah i i will say i mean i wasn't like really a crocs hater before but i was kind of indifferent um i think you got to try them uh they're they're really nice for just casual slip-on shoes yeah we'll talk yeah i think maybe we'll later i don't know we can get to the anecdotal evidence especially when we hit to the big question that we talked

before is whether this recent growth is just a fad or if it's sustainable. But one follow-up I had to how the business works is what are these things made out of? Is it just plastic? Is it really simple plastic material? Do they have some sort of, maybe you don't know this, but my thinking is compared to other shoes, these are going to be really cheap to make. And do they have superior margins than maybe some of the other competitors out there yeah that's a good question so it's it's made that they have this proprietary formula called crocs light which is uh i mean you can kind of just think of it uh as um uh you know kind of a they call it a molded product and you can actually look up uh videos online of it getting made but you know there's not really much human

interaction there's just like a machine that kind of like stamps them out um and like you said yeah they do have very good gross profit margins because they're cheap to make, they're light to produce. But I think the more impressive thing is they have good gross profit margins and their average revenue per unit is only $25. So they have really good gross profit margins while also selling a really inexpensive item, which if you look at other shoe retailers, they're a little bit ahead, maybe like 5% gross margin better than other ones. But a lot of the other ones also have an ARPU average revenue per unit of more like in the $50 range.

So they're selling cheaper things and getting that same kind of gross profit. Right, no, that's super interesting. Yeah, because like Nike's can be 200 bucks, 100 bucks, Crocs, that's significant. Yeah, do you think, we're kind of going a little bit tangent here, but do you think they have pricing power

given that they built up a bit of a nice brand over the last 10, 15 years? I mean, yeah, I think they do, especially because, like I said, their average selling price is pretty low. I think it's the kind of thing where people really like the brand. I mean, could they sell these things for $100? No. But I think if they're pushing a few extra percentage points into the product, I don't

know that people would actually even notice that much. If you're buying a $25 thing and it starts selling for $27 and it's a brand you like know. I think that's the pricing power of consumer products. 100%. Now, back to the stock, Crocs has just crushed the market over the last five years. Why did that happen? What changed? What are they doing right that led to this phenomenal performance? Yeah. I think really, the turnaround started in, uh, mid 2014 or, um, in 2014, um, the, the company they'd been growing for a while, but I mean, to be honest, it wasn't very well operated. They'd kind of been growing revenue, but they'd been doing all sorts of other stuff and the revenue growth hadn't led to profit

growth. Um, so, uh, Blackstone, um, made an investment in them and, uh, they also had a change in management and their kind of sales pitch when they um you know they took over was we're going to focus on profitability and we're going to buy back shares uh and that was you know and that's what they did um they were they um there was just kind of a lot of stuff they were doing that wasn't actually profitable like they had 620 retail locations at the end of 2013 and as of the end of uh you know the most recent sec filing they're they actually have less retail locations now than they did in 2013 they're down to 340 retail locations they also were like operating their own factories which is you know like i said i don't really think that's their

core competency they had they were focusing on tons of like they were trying to diversify so they were kind of taking this this proprietary material they have and trying to build out all sorts of different shoe brands rather than just kind of staying focused on the core Crocs thing. So they had all these different units, SKUs that weren't profitable and they weren't selling much of, but they were kind of wasting their time on. They had way more employees than they needed. It just wasn't efficiently operated. So basically what happened then, a new president came in, Andrew Reese. And he has a background. He was a consultant, a branding consultant for a long time. So he came in, I'd say the first few years, they kind of really spent cutting

the excess out of the company. And you can see basically every year since he took over, the free cash flow increased for them. And they started buying back shares, which I think if you buy back shares, when you start the turnaround and it works out, you look like a genius. um and uh they also you know got there's another ceo uh greg ribot i don't know if i'm saying that right uh who was there originally in 2015 uh he left in 2017 and andrew reese became the ceo and he's still the ceo today uh and he's still like he's very you can tell in the way that he runs the company he's very like branding focused like that's that's what he specializes in and um they you know, they, they spend money on advertising. They don't spend money on operations. They don't

spend money on R and D. And it might sound like for someone that's maybe not familiar with the Crocs business, it might sound like, Oh, you know, what kind of brand management do you really have to do? Like it's, you know, they're just little, basically plastic shoes. People buy them, you give them a bunch of colors, but they've had really successful like partnerships too. I know They had a partnership with Kentucky Fried Chicken that's been super successful. I know that sounds weird, but they've got these little drumstick bones that stick off the end of the shoe that I know people like. And so I guess, I don't know if there's a question to answer or to ask here, but besides like some of the, I guess, do you think that's sustainable? Do you think they can do like, just kind of like experiment with a bunch of different styles of their shoes and continue to grow sales that way? Or do they have to stop being a one trick pony, I guess?

um i mean i think they can i think that that's what they're really good at um like what you brought up um the the partnerships or collaborations they do with people they actually i think kind of pioneered that they've done it for a long time even before this transition i'm talking about started um but they really leaned into it um and i think if you look at like they've partnered with really big names you know like justin bieber and stuff like that and i think if you look at the amount they're spending on marketing you kind of like if you look at you know getting justin bieber that's a huge name they have lots of other huge names if you look at the amount they're spending on marketing you're like how how are they getting all of these people to do this marketing

for them like they're they're getting just a great return and i and the other thing the product kind of plays into it too because of the that manufacturing process we talked about they're very good at being able to come out with new um you know new versions that can look whatever the person they're collaborating with looks like they can do weird little things to them like make the height of the shoe taller or add fur to it or whatever there's a million other little things they do so they're very good at they call it newness like having newness all the time and it's i think i mean i don't know for sure but i feel like it's probably easier for them and cheaper for them than a lot of other things because of the way their product is made it's

really you know it's like a coming out on an assembly line and they can just get a different color color thing to use um so i think that you know for a lot of the advertising they do like you mentioned kfc um i don't know what that contract looks like but it's really a win-win for kfc because they're all you know kfc is also a brand business if they can keep their brand relevant by partnering with crocs like that's another way that they're winning also um and like i said i think that this is like the main focus of what the crocs team actually does is brand and market their business um i actually think they're very it sounds like weird and maybe it's kind of a risk but i really think they're kind of on like the fashion edge with a lot of

the stuff they do which sounds strange but like uh they a few years ago they came out with like platform crocs which are basically crocs with more they're higher um and at the time everyone was like this is hideous why would you do this i mean you know crocs a lot i guess that reaction a lot and actually now like in the past year i've noticed a lot of other brands have started doing that like um the birkenstocks started doing it um i can't think of other ones off the top of my head but like i really actually think they're kind of almost leading edge of fashion in some footwear things yeah it's it's kind of hilarious to think about uh because it's like maybe for people that are international listeners they might not know the crocs brand but it's kind of like a half

joke yeah look up the shoes if you don't know if you don't know look up look them up just look up crocs and then you'll know what we're talking about yeah it's like kind of just like you know So Crocs kind of brings a funny brand image, I think, at times. But at the same time, people are really ardent supporters of it as well. So anyway, I also had mentioned that I called it a one-trick pony. I should take that back because a couple of years ago, they acquired Hey Dude, as you mentioned. I guess, what are your overall thoughts on the acquisition?

Could you maybe give some numbers on it so listeners have an idea of how large it was too? Yeah. I mean, my overall thoughts on it, I think it's a pretty risky move. Like we can go through the numbers and I mean, the numbers are actually, I think, pretty compelling. So they bought it at the beginning of 2022, like during the first quarter, and it ended 2022 for the whole year, including the time they didn't own it.

They didn't own it for a few months in the beginning of the year. It did almost a billion dollars in sales. And that turned into a little over $230 million in operating profit. And they spent $2.5 billion to acquire it. So they paid a little, I don't know what that is, like 11 operating income multiple. and uh the other thing is it grew 75 percent from 2021 to 2022 so if you're you know paying a 10 times multiple for something that's growing 75 percent uh i think that's pretty compelling i do still think it's really risky um i know we'll talk a little bit more about if crocs is a fad but i i think hey dude has a much shorter track record as a brand and in my mind it's not as differentiated so there's a lot of upside here but there's also a lot of a lot more risk in my mind that things don't go well um are there any synergies between the two like is there any i

don't know do they get more premium does hey dude get more premium shelf space at wholesalers or other retailers because they're now under the crocs brand uh yeah that's i think the playbook they mostly ran this year was just i don't even know if it's more premium shelf space i think just didn't have shelf space at a lot of retailers before crocs bought them um and i mean i think crocs is if you're a retailer it's a it's um it's something you want to have on your shelf and so i think they've had a lot of success getting hey dude onto shelves uh getting that customer consideration um and in fact another stock i follow and own academy sports and outdoors like even called out during one of their earnings calls like adding hey dude and how well it was

selling um so i think that that's like part of the 75 growth year over year i think was crocs just getting shelf space for hey dude um and and there's also a lot of like if you listen to talk about a little bit like the hey dude brand was kind of like it sounds crazy for how big it was but it sounds like almost kind of like you know a startup shopify brand that they um There was a lot of room for improvement. They were still using QuickBooks. They had one supplier in China who supplied all of their stuff. So when that supplier had problems, they just ran out of inventory.

When I first started researching the company, I went and tried to look at the HeyDoo's website and they were out of stock of almost everything on their website, I think because they were having issues getting stuff from the factory. So I think they've improved that. That's really what they've spent a lot of time on. They also spent no money on advertising really before. So Crocs has started putting some advertising behind the product in the second half of 2022. I think whether or not that's successful will really be the determinant of its successful

investment. And yeah, I think it makes sense. another, I think, brand, but whether or not it works, you really kind of have to trust management on. Yeah, I totally agree with that. Now I had a next question here on margins, but you already hit that in the other section. So I had one follow-up on marketing and do you think the reason they're so efficient with marketing and why their bottom line profit margins are so high compared to maybe someone else out there within this industry is that when someone wears these, they're almost a viral advertisement in and of themselves, a mini one where they're so unique.

And, you know, the first reaction people have is it's maybe a conversation starter. Maybe if someone's meaner, they might poke fun at someone for wearing them at first, but now that every, you know, not, they have kind of a big, uh, I don't know, like it kind of think while you were talking i was thinking about how they might have basically with their business model with how the shoes look the marketing might just be free with with all their customers i i do think they have really passionate customers i think it partially comes from i mean crocs are very divisive and so i think that people who've been fans of them have been told a lot that what you wear is ugly and i actually think that kind of feedback kind of will ingrain in people like you know this is my thing

it's part of my identity it's like hershey bars kind of they taste so bad but americans were like you know we're gonna eat them even though everyone around the world's like you know you can have better chocolate right and they're like no this is our brand we love it it's kind of ironic yeah or like if you when i think about free advertising though actually like if you go look at the social media presence of crocs there's lots of people who are like posting tiktok videos of like their Crocs hauls, or all the Crocs they have, or this funny thing they did with their Crocs. People are just so passionate about the brand, they'll go post on social media, and they definitely get free advertising that way.

Looking back to maybe the Hey Dude acquisition, would you want to see them do more in terms of M&A or you called it risky? Do you think that would be kind of too risky? I would probably prefer them not to make more acquisitions and stay focused on the brands. I mean, especially if you're talking right now, they still have a

decent bit of leverage from the HeyDudes acquisition. I definitely wouldn't want them to take on another acquisition now. I think maybe in the long run, if they have more opportunities they like. If Allbirds works out, they'll probably have a lot more leeway from investors to make another purchase like it. You said Allbirds. You mean, hey, dude?

Oh, yeah. Sorry. Actually, I was thinking about my next response. Hey, dude. Yeah. Which is, I've actually, so I also follow Allbirds, which is another publicly traded choose stock. And if you thought, I thought about maybe Crocs should buy Allbirds because I love Allbirds. Yeah. I think, so I think they're another brand that has like passionate people who like them. They have a target demographic. Um, but if you follow them, like they're actual, like what they're doing, I think they're really poorly operated and they're making a lot of the same mistakes that Crocs made when it was getting started. Like they're going out and they're going out and opening a ton of retail locations and they're trying to diversify

away from kind of their core sneakers into a ton of different other stuff and apparel which i don't think anyone's really asking for and so i think that probably and it's really cheap right now like i don't remember what the enterprise value is but the enterprise value is like 200 million dollars or something like that it's like i mean this is probably just a value investor in me but If they could buy another brand that was struggling, I think, for operational reasons and kind of rerun the playbook, I like that more than spending $2.5 billion on a hot brand. But that's totally just my own kind of speculation and thinking. Was that a SPAC? Do you remember? Yeah, it was a SPAC.

Oh, actually, maybe it wasn't. I'm not sure. I think it was a hyped up public entrance or entrance to the public market. So that's for sure. Yeah. Like what's the guy in the SPAC King? I think I don't know how to say his name. Do you know who I'm talking about? I think.

Yeah. I think he was involved in the IPO. So it's if it wasn't a SPAC, I think it was like a very of the era, I would say. Yes. And it was very, yeah, it was very popular. I think with like, I think it was kind of in San Francisco. Yeah. Yeah. In San Francisco, kind of the Silicon Valley, the tech space, it was kind of known as fashionable work shoes. But I guess maybe moving away from M&A, can you talk a little bit about the financials for Crocs to kind of give people an idea and maybe like loop valuation into this? Like, what's the overall size of the business? How much are they earning? How much do you think they could earn? Yeah, I want to talk on one other thing, kind of margins related first, which is just how like how asset like this business is like, if you want to see a really beautiful chart chart since 2014 or 2015, when this change happened, chart the like invested capital in the business compared to the, you know, free cash flow or no pat. And the capital invested in the business is up 20%, I think, since 2015, and the free cash flow is up, I think, let's see, I had it written down somewhere, but I don't remember,

like 3,000%. A lot. A lot. They've basically grown without investing any additional capital in the business. And I think that's part of what makes us really attractive is that I think they have a decent runway of growth, and that growth doesn't involve them investing much more capital, I think, on both brands. And that's what makes a branding consumer business like this really attractive if it's

successful. Let's see. And then you were asking about valuation, right? Yeah. And financials, maybe just like how much does the overall Crocs business do in revenue and earnings? Yeah. So on the revenue front, their trailing revenue across both brands was $3.5 billion. And they had about $900 million in operating income, which is kind of what I like to look at. when it across the uh you know past 12 months um and so they had about they had about 900 operating income and uh they i think have an enterprise value of about nine billion

so you're kind of talking about um you know uh 10 enterprise value to operating income which isn't a uh super challenging evaluation metric uh if you look at them compared to some of like who i think of as their peers like um beckers they own uggs and uh hokas one one or sketchers uh they're they're cheaper on most valuation metrics you look at um but i think uh they're growing just as fast if not faster and they um are you know they're getting better returns on on their capital. So I think that they're, from that perspective, they look cheap. I also think, I mean, I don't want to go into too much math here, but I think if you kind of do a reverse DCF and look at how much they need to grow, it's not too demanding. I think the current stock price

in my mind kind of implies for fair value, they're just kind of growing at GDP, maybe a little more than GDP in the same asset light way. They're kind of growing top line 3% and they're not needing to reinvest too much in the business. And I think you will get that. That's like pretty fair price. So your question you need to answer, I think when looking at the valuation is do you think they'll be like a GDP plus grower or is this a fad that's going to start turning around in the other direction. That tees up our next question. Why is Crocs not a fad? I think maybe to set it more specifically from an investor perspective, why, and I think you don't think this is going to happen since you own the stock,

why is revenue not 40% lower seven years from now? yeah so i i mean i think this is the the key question you have to answer if you're going to invest in crocs i do think there's like a little bit of a misconception which is like crocs had this first kind of like i would say fad period um in the mid 2000s mid mid 2000s to kind of 2010 time period and then it kind of i feel like the perception is it then had another fad during COVID, right? But I think if you go look at their revenue or how many units they were actually selling, it grew really from that mid-2000s time until 2011, 2012. But then it didn't really fall back. It just kind of maintained at that level. They just did a billion in sales for all

of the 2010s-ish. And then I think with this turnaround that happened, the first few years, they were kind of focused on profitability and they were actually losing revenue, but they were getting more profitable like they wanted. And then you could kind of see in 2017, 2018, they started to grow again. So between 2017 and 2020, Crocs revenue grew 35%. percent um so like that's that's not is that uh sorry sorry is that per annum or uh in total no that's total good good question um yeah so 35 in total um so i think they were already starting to build pre-covered at like i think there's perception maybe rightly that it's a coven beneficiary. And then COVID hit, the revenue doubled between 2020 and 2022. So I think the

risk is that, hey, maybe it goes back to 2020 or 2019 levels. But I think that my perception on this, and I kind of get this from the way this worked the first time, is I think that once people try Crocs, they like them, and they keep buying them. And obviously, they're not going to retain all their customers, but they kind of had this explosive growth during their first fad phase. And then even when you thought they're not really a fad anymore, they basically were selling the same amount. And so I wouldn't be shocked if growth at some point flatlines. And I actually kind of think if you look at the data, some of the leading indicators, which I'm sorry, I should clarify, I'm not like some analyst that has a great leading indicator.

I like to look at the Google search trends for Crocs. I know that sounds like very basic, but I think it's a good... That's proprietary data. That's all the hedge funds are using. My channel checks. But I think it does a good job of representing kind of like consumer mindshare, which is really important for Crocs. And also, if you go and run kind of a analysis of revenue to Google search trends, they look fairly correlated.

So I think that that's like a kind of simple, simple metric you can use if you're interested in like how it's doing today. But anyways, back to what I was saying, like, I think if you look at like the results last year, plus like kind of the Google search trends in this year so far, you can kind of see like the US growth looks like, I mean, they're still growing a little bit, but it looks like it's kind of flatlining. but they're still growing a lot internationally and i think there's a lot more room to penetrate internationally um especially like and also if you think about like asia and europe which is where they're growing really fast uh those areas didn't necessarily get all the stimulus checks that um americans got that kind of helped fuel the boom in consumer products in america um Like I think the Crocs brand grew 75% in APAC last year. So I think they're still experiencing explosive growth.

It's just maybe not in the U S and so I think that even if the U S is maybe flatlining or, you know, maybe even there's a small revenue decline, I think it could be offset by the, that growth internationally. And, and yeah, I think it is a fairly sticky product that I think there's a chance it goes down, but I don't think it's going to revert all the way back to where it was in 2020.

No, that I, it seems like there's, yeah, there's a lot of different scenarios that could play out, but I don't know. You put a, you put a compelling risk reward opportunity there.

Also, it's, I think it's been around longer than most people think before they really look at it. Like, most people probably don't think it dates back to the mid-2000s like that was the first fad i feel like a lot of people kind of maybe this is just my age demographic or whatever but like i think a lot of people think of it as sort of a short-term flash in the pan fad that hasn't been

around for a decade plus yeah it's interesting if that bias might be there on wall street with a lot of people that might be older they might be seeing young people wearing it and they only noticed that for the first time now but yeah and actually there's another point i want to bring up which is there's this concept in in brands that kind of the longer you've been around the longer likely to be around uh you just kind of have that relevance so like i do think like when you talk about crocs it's it's been around for 20 years it's probably been pretty popular for i don't know at least 15 longer than that somewhere between 15 and 20 and so um like i i think that's a pretty decent time period to say that it's not going away um and also if you look at

there's definitely other footwear brands that are cyclical um you know they kind of go in and out of fashion um you know if you talk about like doc martens or uggs um stuff like that um you can go look at them uh and they do they do kind of have ups and downs in their popularity but i think generally once they like reach a new crest even on the next down cycle unless unless it's just going away like it doesn't go back down to the previous down cycle it kind of has reaches a newer height um now there's some shoe brands that just go away um like like when i look research a little bit for this is um i don't know if you remember toms do you remember those yeah like they still exist but they're they've kind of one donate one right

yeah exactly so like that was kind of a fad that just kind of petered out eventually there's some more examples of that. But if you look at the ones that are fads, I think a lot of them are more like they were here for a few years and then they just kind of petered out. In my mind, Crocs has kind of passed that threshold. Yeah. And they might be a little idiosyncratic just because of the strangeness and the uniqueness of the concepts. It might have taken a little, there might've been a lot, or I think there was probably a lot more friction to get them acceptable among the people that are maybe more, how do I say it? Self-conscious about how they look in public, right?

And now that it's accepted, I don't know. I'm putting the, I'm doing the bookcase for you, but I have one more question here on management. You talked about them a little bit and how they came in the new management and kind of fix things up and started buying back stock. What's their capital allocation strategy now? Do they have one?

Is it just forward to buybacks? Is it, you know, you mentioned they have some debt. What is it? What do you think about it? Yeah. Historically, under this management, it's been buy back the shares. The HeyDude acquisition is really the first thing they've done that hasn't just been buy back the shares. Right now, they're prioritizing paying down their debt. The debt they took on for the HeyDude acquisition is floating rate. So that looks like a pretty bad decision in hindsight. And it's pretty expensive at this point. So I think they're prioritizing that. They've said that once they get down to a leverage ratio that they think

they're going to attain halfway through the year, they're probably going to start mixing half buybacks and half debt pay down. Or depending on the price of the shares, if it's cheap, they'll buy more shares. And if the shares are more expensive, they'll pay down more debt. But I think it's probably pretty safe to assume that those are their priority A and priority B are prying down debt and buying stock. And the only other thing I mentioned, people don't usually think about this in terms of capital allocation, but it is, I think, a choice for them. I don't think they're going to cut back on the amount of marketing they spend. And they've also said that they're going to ramp up the marketing they spend on HeyDude to try to make the brand successful. I think people

don't usually think about that, but I think that that's basically how Crocs invest for the future is those marketing dollars. And so I think they'll probably continue to lean into that. Just for reference, you looked it up too, Ryan? I think we were about to say the same thing. Yeah. I'm looking at the shares outstanding here. They're down basically 30% over the last, since 2013, 2014. Yeah.

I guess how much debt did they end up taking out for that Hey Dude acquisition? They took out like $2 billion in debt and then they, it was 2.5 total considerations, like 500 million was in stock and 2 billion was in debt. And they've paid back about $500 million of the debt last year, I think. But they've paid down $500 million of the debt, but then interest rates went up. So actually, if you look at how much projected interest payments, I mean, it'll be less than this because they're going to pay down some debt. But if you just assume that interest rates stay static where they are right now and they don't pay down any debt, the interest payments they're going to make this year are pretty close to the interest payments they made last year because of the floating rate on the debt.

That won't be the case because they'll pay down debt. Yeah, it's a bummer. I wonder if they could have gotten fixed rate or maybe purchased more with equity, but I guess that's hindsight. I guess less. I mean, the other really hindsight thing on it is you look at what happened to their stock, partially because they made the acquisition, but after the acquisition, it was the stock tanked. And you're like, you could have just not bought this other brand and bought back your own shares at a much lower multiple than you paid to acquire this new brand. So I think that's really the hindsight thing you look at. And you're like, why buy this thing when you could buy back your own shares when they're trading at like five times earnings?

At least the numbers look good on HeyDude. I mean, yeah, it's a thing where if it works out, like everyone will say the management's geniuses. Yeah, that's true. I guess, okay, so kind of summarize, concerns over it being a little trendy or kind of a fad probably are leading to a low market multiple. I think you quoted it like 10 times operating income, roughly. So I guess it's not very hard to conceive the upside of the investment. Like Crocs continues to grow.

HeyDude continues to grow. So I maybe wouldn't bake in any multiple re-rating, but you can easily get a good investment on that, especially if they're buying back too. Flip side, how could it basically be the opposite? How could this go poorly from here? Yeah, I mean, I think we covered the biggest one, which is like, this is a fad. We go back to 2020 levels. The other thing I'll say that it's related, but they had more promotional activity pre-COVID, which meant they were marking down more of their supply. And so their gross margin and overall

profitability wasn't as good. I think their operating profit margin I think was 10% in the year ended in 2019, and I think it was 25% last year. So they've had a big expansion there. It was something that had basically been, their operating margin had been continuously improving ever since the CEO Andrew Ruiz came in. So I think it's reasonable to think that their level of operating profitability would be higher. But if you have some kind of aversion in how much promotional activity they're having to do, I think you could see some margin compression. um and then the other the other thing i think about that you know with the hey dude acquisition um management is pretty well compensated i'd say um i mean it's hard to complain when the

stock's done what it's done but sometimes you see that and you see them making acquisitions and you're like is this going to turn into some kind of empire building exercise where management just goes on and starts like increasing the size of the company so that they can increase their compensation. So I think that's like another way thing that could go wrong is they could start making a bunch of acquisitions, um, and basically, you know, not actually, um, have the shareholder focus that they, cause I think basically from when Andrew Reese took over, they've been very shareholder focused. So I think maybe if they lose some of that shareholder focus, that could be, um, downside. Uh, and I did just want to touch on the valuation

re-rate. I know I talked about operating margin or operating income to enterprise value, but I'm just going to use EV to EBIT here because that's what the numbers have in front of me. Crocs right now's EV to EBIT is about 11.5. Deckers Outdoor, which I mentioned earlier, I think it's the closest comp in my mind to them, currently trades at 17 times EV to EBIT. So I know that you don't want to count on a multiple re-rate, but I think that if the upside situation occurs, Crocs just turns out to be resilient and they're growing or they're staying where they're at for another few years. I don't see why the market wouldn't re-rate it to be more similar to its peers once it's proven that it's not a fad.

Or it gives protection if other stocks re-rate more towards them. There might be some protection if whatever, the market goes down more. Okay. Last question. If press release drops tomorrow, says Cox is buying Allbirds for $250 million, I think the market cap I'm looking at right now is like 185, how would you feel? If they weren't over levered already, I wouldn't mind it. With the amount of leverage they have right now, I don't love it.

But the other thing about 250 million is, if I remember Allbirds balance sheet, their net cash from the IPO still, so that would actually be, they would get some cash back and that would be less enterprise value. I wouldn't love it. I would say, you know, I think they need to stay focused on, on Hey Dudes and, um, they need to deleverage. If something like Allbirds came around in two years, Hey Dudes doing successful is successful and they've delivered, then I think, you know, they kind of have that, that runway to, to do it more. Okay. Well, I think that's going to do it. Uh, I guess for anyone that wants to

keep up with you, keep up with your work, what are the best places to do that? You, since we last spoke, I think you did, you didn't have a Twitter before we last had you on, right? Yeah. Yeah. You had one that was inactive, right? Yeah. Yeah. I have a Twitter now. Um, I'm semi-active. Uh, so yeah, follow me on Twitter. I tweet about stock stuff. Uh, also if you are, uh, you know, if you tweet about stock stuff, I'm trying to find more people to follow because, um that's what i enjoy about it is actually having people i follow who tweet unique interesting things about stock so let me know and then i also write on seeking alpha as you mentioned the beginning of the show uh i publish stock research there yeah semi-frequently too yeah

it's it's a big consistent amount of write-ups so go check those out for sure everyone and we'll we'll uh link to the seeking alpha and twitter in the bio for our show notes for anyone that wants to check it out. But let's sign off here with the disclosure. Brett and I are not financial advisors. Anything we say or discuss here on Chit Chat Money is not formal advice or recommendation. We are, however, general partners at Arch Capital, so clients may have positions in the securities discussed in this podcast. Thank you all for listening. Thank you, Jacob, for coming on the show again, and we will see you all next time. Okay. I'm welcomed by the founder of our exclusive sponsor, Stratosphere.io,

Brayden Dennis. Brayden, welcome. I wanted to basically give listeners that are interested in Stratosphere more context around what the platform is. So let's start there. What is Stratosphere and then why did you decide to start it? Yeah. Thanks for having me. I appreciate it. And I'm glad to be sponsoring the podcast as a listener myself. I like the deep dives. I like the different guests, the different perspectives on some interesting companies. So I think it's a good concept for a podcast, which is kind of what led me down to making Stratosphere in the first place, which was I was making content online and frustrated with the tools that were available to me. So I started building a very scrappy version of the product just for free, just to figure out how can I overlay 10 years of financial side-by-side up to 35 years we have now, and how can I actually build out a proper database of company KPIs that are not just revenue, but if you're looking at Costco, how many warehouses do they have? How many paid members

are in like our costco members or you know if i want to do a comp against like the streaming like how many netflix subs versus uh hbo plus discovery plus no disney plus like how do i build out proper comps of those because those are the metrics that actually move the business those are the ones that actually move the needle more than any like gap financial metric you'll find and so it started off as just purely a passion project and i figured let's just make the leap into entrepreneurship and uh see where it goes and you know it brought brought us here today yeah and like you mentioned it is the stuff that you can't find anywhere else at least not now i mean you could find it page by page and on their front exactly you can go through 35 uh pdf filings

and find it be my guest and that and that's basically what we did for a long time so what do to, I guess, maybe describe the pricing model so people know, but you're going to say there's a free platform. What do free users get? Yeah. Good thing. Because our mission was to always build a free platform. And so we really kept true to our mission and give an amazing platform for free, which gives you 10 years of financial statements on 40,000 global security. So we don't list you just to US securities. It's on global stocks. We give you a watch list, the screener, comparisons on competitors, fundamental charting up to 10 years, filings, transcripts. You can look at the press releases right inside the app,

news, ETFs, funds, super investors, hedge fund letters, investor holdings, and financial calendars. Those are all the features you'll get on the free tier. Now, on the middle tier, the personal tier, you're going to unlock up to 35 years of financials and just kind of like nice to have, like quality of life, like notifications being built in, price targets for building models, like business owner mode where you can hide prices, like kind of like just that next level for individual investors who want to level up. And then the top tier is for like investment teams and professionals who want to unlock that KPI data and request KPI coverage as well. Like a firm will be like, here,

we want these 10 names in our coverage and in your coverage. And then you'll have basically our, our entire universe that we're looking at, which is great. Right. Because like earning season comes around and we have it updated within 15 minutes when Netflix comes out with their net subscriber ads, like it's right there in one place, especially easy to handle around the peak of earning season. And that matters a lot for these people.

And so we have a premium tier for that as well. That's the three plans that are available today. And now a perfect time to shameless plug our code. If you use CCM, you get 15% off any of the paid plans. But I think that covers it pretty well. If you're interested, please go ahead and check out stratosphere.io. We'll have a link in the description as well. But thank you, Brayden, for joining us.

Brian, keep it up. I really like what you and Brett are doing and I'll be listening along.