The Philoctetes Asset: Why The Market Shuns Crocs

Crocs is a bit of a heated topic here. And with due reason, it has been a cheap stock for quite some time and only gotten cheaper. The whole heydude and fashion fad situation helps fuel the fire for debate. I'm here to suggest a different mindset that might interest new buyers and assure current holders such as myself. Looking at how crocs behaved pre acquisition is a critical factor. It's a great business, delivering a 3 year average of almost 60% ROIC, it's not a fad, it was the blackstone capital infusion with the entrance of Andrew Reese in 2019. The company was growing, printing cashflow and trading at 14 earnings multiples.Gross margins were impressive and above industry average Then comes the heydude fiasco. Upon further investigation the found Alessandro Rosano was more of a trader then business owner. The brand was indeed selling more shoes than it could manufacture, there was a craze for attaining heydude shoes that sparked Andrew Reese attention and fogged some crucial problems. Heydudes was resorting heavily to small wholesellers, that were selling the product fast but as is expected with these types of sellers, can easily discount heavily and erode brand quality when things go a bit sour. This happened when crocs purchased the brand and switched to their larger wholesellers. Granted heydudes was a bad acquisition. They're currently getting around 137 million for a 2.5 billion investment. That's a 5.5% ROIC and far from the 500 million they were expecting. When we add this to the current wholesale cleanup going on with the major crocs brand and asset impairment, things go sour. Alas, crocs is still returning 60% ROIC after the heydude aquisition (if we clean the purchase from the books) and sales have not fallen heavily. In fact, it is expected that they pick up after the wholesale clean up of this year. If you want an even more detailed analysis check out [https://open.substack.com/pub/medismarketnotes/p/the-philoctetes-asset-why-the-market?r=35je77&utm\_campaign=post&utm\_medium=web&showWelcomeOnShare=true](https://open.substack.com/pub/medismarketnotes/p/the-philoctetes-asset-why-the-market?r=35je77&utm_campaign=post&utm_medium=web&showWelcomeOnShare=true) At this price point, crocs is my favorite stock. If management can keep profitability in check and allow for slow to moderate growth, the market will eventually see that it's pricing for disaster.