S&P Global Ratings revised its outlook on Crocs, Inc. to stable from negative on expectations that the company’s revenue and EBITDA would continue to grow despite a challenging macro environment.
The stable outlook reflects S&P’s expectation that over the next year, the company would continue to grow its topline, driven by volume growth, while managing cost headwinds, such that S&P Global Ratings-adjusted leverage stays in the low-to-mid-2x area.
The agency also affirmed its ‘BB-‘ issuer credit rating on Crocs and revised its outlook to stable from negative.
At the same time, S&P’s ‘BB-‘ issue-level rating on the company’s $2 billion senior secured term loan B and ‘B’ issue-level rating on the senior unsecured notes was reaffirmed. The recovery ratings remain at ‘3’ and ‘6’, respectively.
S&P said in its analysis, “While we continue to view the company’s key clog category to be a niche segment, we believe Crocs will continue to grow its revenue and EBITDA given the continuation of the casualization of consumer wardrobes. Nevertheless, under the current challenging macro conditions, higher inflationary pressures have dented household affordability and consumers may cut back on discretionary spending, which could constrain demand for Crocs and HeyDude’s products. We have not seen customers pulling back so far based on recent operating performance, but this could change in 2023 as our S&P Global economists are forecasting a mild recession. Additionally, both brands are subject to potential volatility from rapidly evolving consumer preferences and global fashion trends which could affect demand.
“We expect the company to continue to grow its topline driven by continued strong demand in both U.S. and international markets, but at a slower pace given our S&P Global economists’ forecast for a mild recession in 2023. Despite our forecast for EBITDA margins to contract from inflationary headwinds, we forecast adjusted leverage to further improve to the mid-2x area by the end of 2022 and in the low-to-mid-2x area by the end of 2023.
“Operating performance has remained steady since the transformational acquisition of HeyDude in February 2022.
“The company’s operating performance is generally in line with our expectations with pro forma adjusted leverage in the high-2x area for the last 12 months ended Sept 30, 2022. Consumer demand for both Crocs and HeyDude brands remained strong in 2022 with sales for both brands growing double-digits. The Crocs brand continues to gain share from other casual-wearing footwear such as Skechers and Vans. HeyDude is also showing strong momentum as Crocs has put in its planned investment in branding and marketing to increase HeyDude’s consumer reach and brand equity. The company leveraged its experience to scale HeyDude by expanding its distribution and customer reach. The integration of HeyDude is largely done with the back-end accounting and finance function fully integrated, and Crocs is putting in a new ERP system for HeyDude with CAPEX increases to $150 million to $170 million for supply chain investment to support growth. We expect the company to fully integrate HeyDude but there could be risks associated with the ERP system implementation.
“The company prioritized debt reduction following the HeyDude acquisition, but we expect it to resume share repurchases in the second half of 2023.
“The company is committed to debt reduction following the HeyDude acquisition. It repaid its revolver borrowing and made prepayment to its term loan B by using excess cash flow. The company has suspended share repurchases until it gets to its public gross leverage target of 2x, which it expects to reach by the middle of 2023. The company has grown revenues and EBITDA over the last few years but has also been aggressively adding debt. Historically, it raised debt to fund several accelerated share repurchases totaling $1 billion in 2021. Therefore, we believe the company is likely to resume share repurchase in the second half of 2023 once it reaches it leverage target in mid-2023. We have baked in $200 million of annual share repurchases in our forecast and believe it will remain within the bounds of its financial policy. If leverage rises above 3x for debt-funded share repurchases, we could view it as a shift toward more aggressive financial policies and it would weigh negatively on the ratings.
“The stable outlook reflects our expectation that over the next year, the company will continue to grow its topline driven by volume growth while managing cost headwinds, such that adjusted leverage stays in the low-to-mid-2x area.”
Photo courtesy Crocs
