As previously reported, both Moody’s and Standard & Poor’s placed Crocs’ credit rating under review after the American clog producer announced the $2.5 billion acquisition just before Christmas of Hey Dude Shoes (or Heydude), an Italian casual footwear brand that is primarily distributed in the U.S. Both agencies expect that the deal will have a negative impact on the company’s credit rating because more than 80 percent of the purchase price would be funded with debt.
Moody’s placed Crocs’ on review for a downgrade, and S&P Global placed Crocs on “CreditWatch Negative,” as the takeover will raise Crocs’ debt/Ebitda leverage to just over three time from 1.2 times. Crocs’ saw its share price drop by more than 15 percent to around $123 before recovering in part to around $133 in the past two weeks. It still remains way below a 52-week high of $183.88 reached in November, after the release of excellent results for the third quarter.
The implied valuation of almost 15 times Ebitda given to Hey Dude might seem a bit heady, but the recent IPOs of On Running and Allbirds show that the market puts a lot of value in a fast-growing footwear brand. Hey Dude generates the same sort of loyalty among its customers as those two hot brands, with a “net promoter score” of 72 compared with On’s 66 and Allbirds’ amazing 86. The company’s revenues are expected to grow from $570 million last year to between $700 and $750 million this year, and they will be accretive to Crocs’ already strong operating margins. The target for 2024 is $1 billion, with much of the growth coming from the internationalization of the brand, which still generates about 95 percent of its sales in the U.S., in spite of its Italian roots.
Taking on another distinct brand identity can add distraction to a strongly brand-focused company—as Adidas found after years of struggling with Reebok to help grow in the U.S. —but Hey Dude’s market position and sales momentum may prove uniquely beneficial for Crocs. The clogmaker has been trying for years to diversify away from its core style, adding sandals, fabric uppers and more conventional shoe styling over the years. The pandemic helped bring clogs back into fashion, sending sales soaring but undermining all those efforts at broadening the assortment. Hey Dude brings to the table a casual brand that in many ways is what Crocs has been trying to become.
From an operations standpoint, Hey Dude is also a lot like Crocs, with a 43 percent digital sales penetration versus Crocs’ 37 percent and wholesale distribution through many of the same channels and retailers. The brand will increase Crocs’ importance as a wholesale partner, and is a perfect fit for Crocs 364 retail stores, more than half of which are in EMEA and Asia Pacific, where Hey Dude is underpenetrated. Crocs plans to invest in Hey Dude’s digital marketing and brand building, and will also look for synergies in the supply chain, with an eye on improving its efficiency.
