Summer is coming and Crocs is on fire

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JTechnically speaking, summer in the United States doesn’t start until June 21st. But even here in May, the specialist in plastic sandals Crocodile (NASDAQ: CROX) already looks hot.

In its just-released earnings, Crocs boasted phenomenal growth in the first quarter of 2022 with sales up 44% year-over-year to $660.1 million and a adjusted earnings up 38% to $2.05 per share. Business is so good, in fact, that after smashing analyst forecasts for sales and earnings in the quarter, Crocs also raised its forecast for the rest of the year.

Management now expects to achieve sales of $3.5 billion during 2022 and achieve adjusted earnings of between $10.05 and $10.65 per share. Not everything news from Crocs was good, however.

Image source: Getty Images.

Sales soar, but profits look weak

Despite overwhelming analyst forecasts, Crocs stock has since fallen about 10%. Part of the reason was probably because the whole stock market was crashing. The Nasdaq was down almost 5% last Thursday. But another big part of Crocs’ stock price weakness, I suspect, was the fact that while its sales were skyrocketing, the company was making far less profit. by pair of shoes sold.

Admittedly, judging by the figures above, this may not be obvious, but it is nonetheless true. While adjusted earnings increased 38%, Crocs earnings – as calculated under generally accepted accounting principles (GAAP) – actually decreases 19% year over year to just $1.19 per share. This is due to a combination of higher input costs and increased air freight spending.

Crocs gross profit margins fell 580 basis points in the quarter to 49.2%. Selling, general and administrative expenses took the opposite direction, increasing by 330 basis points. As a result, the cobbler’s operating profit margins plummeted 910 basis points to just 18%.

With each additional sale of a pair of shoes bringing much less profit, it’s no surprise that profits have fallen despite the increase in sales.

What’s next for Crocs?

Can Crocs reverse this trend as the year progresses and reverse its stock price? It’s not at all clear.

Giving guidance for the remainder of 2022, Crocs accentuated the positive, predicting that sales will continue to soar 52% to 55% from 2021 levels. Management guidance on earnings, however, took the form of adjusted figures. As we saw above, the Crocs adjusted revenue isn’t the problem – it’s Crocs real GAAP numbers that suffer.

Crocs also said it expects to incur higher costs for air freight at least in the first half of this year. And it forecast slightly lower adjusted operating margins (26% to 27%) over the next three quarters than it enjoyed in the first quarter alone. So unless I miss my guess, all of this implies that actual GAAP earnings for the year could significantly underperform Crocs’ promise of more than $10 in adjusted earnings.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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