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In the last quarter, the legendary investor Li Lu made a move that caught my attention. He bought shares of Crocs Incorporated. Yes, Crocs, the crazy-looking shoe company that you either hate or love. Now, this isn't his biggest position. Actually, it's far from it. But when someone like Li Lu, the so-called Warren Buffett of China, puts money into a company, it's worth paying attention.
And what makes it even more interesting for me is the fact that I already own the stock. And I have held it for over 2 years now. My position is actually up around 30% currently, and most of that gain actually came this year as the stock is up roughly 25% year-to-date. Now, I haven't reviewed this position in a while, and on top of that, people in our Discord community asked about it.
And since Li Lu rarely explains his moves, the only way to really understand this investment is to break it down ourselves. So, in this video, we're going to look at the numbers. We'll go through their latest earnings, analyze their financials, and calculate the company's intrinsic value to answer one simple question: Should I keep holding Crocs, or is it time to sell?
All right, so let's start with earnings. Now, what if I would tell you that Crocs actually beat their latest earnings? What is the first thing that pops into your head? The company should be doing good, right? Well, not really. If we look at the last quarter's key results, revenue was down about 4% year-over-year to $958 million.
But if you look closer, the main drop actually comes from the Heydude brand, which was down around 18% while the Crocs brand itself was basically flat. Margins shrank on both sides, with Crocs brand margins down about 3%, and Heydude dropped closer to eight. Now, to be fair, margin issues are happening across the industry.
I mean, even Nike is struggling with similar pressure, but it's still not a great sign. Adjusted EPS came in at $2.29. Again, a beat, but still down about 9% compared to last year. Now, if we zoom out and look at the full year 2025, we see a really similar picture. Heydude is declining quite heavily, while Crocs brand is more or less flat.
So, overall, the numbers are not that impressive. And when we look at the forward guidance, it doesn't get much better. For 2026, they expect roughly flat revenue and around $13 in adjusted EPS. And if you remember, last year it was about $12.50. So, as you can see, an earnings beat doesn't always mean that the company is doing great.
But now, let's take a closer look at the financials. Maybe there we'll find something positive, or maybe there will be even more red flags. So, this is Crocs. They're currently trading at around $108. And when we look at their price graph over the last 5 years, we can see that it's a complete roller coaster going up and down all the time.
Now, they're currently trading at a negative price earnings ratio, which basically shows that last year they lost money. But as you can see, they should go back to profitability as their forward PE is 8.3. Now, 8.3 is definitely a small price earnings ratio, that's for sure. Also, they have the surprisingly high return on invested capital of over 30%, which basically means that they're doing good at investing their money.
Looking at their debt, I would say it's average, with their net debt to EBITDA ratio at 1.3, as we like it to be at least under 2 and 1/2. So, so far, so good. No big red flags. Now, looking at their revenue for the last 10 years, we see that they were fairly flat between 2016 and 2020, then quick high growth in 3 years and now it has flattened at around 4 billion annually.
Now this is a picture of their net income and overall we see a trend that is going up. But just like the negative price earnings ratio indicated last year, they actually lost money. Now I wonder, how are their gross margins doing? So let's compare them to their earnings. And actually surprisingly they seem to be going up over time as they went from below 50% in year 2016 to over 58% last year.
This is actually a thing I have completely forgot and definitely like to see. Now this is a graph of Crocs free cash flow over the last decade. And just like net income, the trend seems to be fairly positive. Even though we see this decrease in last year, the overall trend still looks good. Now this is a graph where we see how Crocs returns value to its investors.
This is a graph of their shares outstanding. And as you can see, they have been buying back shares pretty much every year fairly aggressively. As they bought back close to 30% of their shares outstanding in just 10 years. What does that mean? Well, in simple terms, the same one share you used to own now reflects around 30% higher part of the company.
Now this is a graph of analyst estimations for Crocs revenue. And as you can see for the next four years, analysts do not expect a lot of growth as they see their revenue growing from 4 billion to four and a half. Now looking at net income, the picture is similar, pretty much flat. But in 2029, we see a bit of a spike.
But here's the thing, if we would look at their earnings per share estimates, we see that analysts expect them to steadily grow over time. It's not much, but it's around 4 to 5% annually. Now you might think to yourself, how is that possible if their net income is expected to be flat? And that is exactly the beauty of share buybacks, because when Crocs buy back their shares, while the company's net income isn't growing, your part of that net income is increasing, simply because there are less shares outstanding.
So, what did we find in Crocs financials? Well, simply put, this is a company that is no longer showing the growth it once used to. In fact, lately it seems like it's pretty much stagnating, which kind of explains why the stock is trading at relatively low multiples. But actually, it's not all negative.
They still have a very high return on invested capital, and even though their margins have declined slightly, they are still at a decent level. And one thing I really like about the company is the fact that they are consistently buying back shares, which basically helps to increase shareholder value over time.
Now, in my opinion, the important part is this: even a not growing company is still worth something. I recently talked about this on my video about HP. A flat business can still be a good investment if you're buying it at the right price. So, the real question is not whether Crocs is growing. The real question is what is it actually worth today?
And based on that, should I hold my position, buy more, or sell and run as fast as I can? So, this is my intrinsic value calculator, and let's start by adding Crocs' ticker symbol, which is CROX. Let's get the current price, and let's do a few analysis. Let's do it around their normalized EPS, which was around $12.15.
And let's start with a pessimistic analysis. Let's say that Crocs EPS will actually decline for the next decade, and let's say that it will decline at minus 2% every year. Now, let's give them the standard expected return of 10%. Also, since the company is declining, I would expect the terminal multiple to to even more, so let's give them a six and let's click calculate.
And as you can see, for a 10% annualized return with these assumptions, it is overvalued, but actually not that far. So, let's try seven. Click calculate. Okay. So, even if Crocs' EPS declines by 2% over the next decade and their terminal multiple shrinks to six, it seems like you could still expect around a 7% annualized return, which in my opinion is definitely not bad for such pessimistic assumptions.
Now, let's adjust these assumptions to a bit less pessimistic. Let's say that their EPS will stay flat and will not shrink. And let's say that their terminal multiple will stay the same at around eight. Let's adjust the expected return back to 10 and click calculate. And as you can see, even if the company doesn't grow for the next decade and their terminal multiple stays at eight, you could still expect over 10% annualized return over the next decade.
Actually, I think you could probably even expect 11. Yes, because as you can see, for 11%, the intrinsic value is actually pretty much the same as the current market price. Finally, let's do a more optimistic assumption. Let's say that Crocs will grow their EPS at around 4% annually for the next decade.
And since the company is growing, their multiple expands to 12. Let's click calculate. And as expected, we see it's undervalued. So, let's try to find the expected return. Let's try 15. Still undervalued. How about 17? Still undervalued. 18? Okay, around 18%. And again, these assumptions aren't that crazy.
Crocs would just need to grow their EPS at 4% annually and their terminal multiple would have to expand to 12. So, when you put everything together, the investment case for Crocs becomes a bit mixed, but still interesting. This is definitely not the most attractive company. Growth has slowed down, margins are under pressure, and the Hey Dude part of the business is struggling.
But at the same time, it's not a broken business, either. The core Crocs brand is still holding up, and they are consistently returning capital to shareholders through buybacks. Now, based on an intrinsic value calculation, even on a fairly conservative scenario where earnings decline slightly over the next decade, you could still be looking at around 7% annualized return.
And if things go a bit better, if earnings grow modestly at around 4%, and the valuation expands, then the returns could move closer to 15-17% annually. So, realistically, the outcome is probably somewhere in between the pessimistic and the optimistic assumptions. And that's exactly the key idea here.
This is one of those boring companies. Not much growth, not much excitement, but at the right price, it can still deliver solid returns. So, what am I doing? Well, I'm still holding my position, but I am not adding more. I'll also be curious to see if Leelu is still holding his position after this recent run-up when the next 13F filings come out.
Now, if you're looking for higher growth opportunities, I recently made videos on other stocks that I own and I think are good opportunities. You should be able to see those videos somewhere on the screen or in the description down below. Now, if you enjoyed this video, consider subscribing, leaving a like, and consider joining the Discord community, which is completely free.
And as always, guys, thank you for watching, and I hope to see you in the next one. Bye.
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