Crocs, Inc. (CROX) is a footwear designer, manufacturer and retailer that offers its products in over 125 countries worldwide. This company is dedicated to offering comfortable footwear to its customers across the globe while also maintaining sustainability standards and philanthropic efforts. Based out of Niwot, CO this company was named ColoradoBiz Magazine's 2012 top company. CROX is showing strong profit margins and is the leader in the industry when compared to competitors, as we will explain later. Moreover, CROX is forecasted to maintain these profit levels. While the company is not expanding drastically, they are providing modifications to current styles, as well as starting to branch out into consumer goods like totes and packs. We believe that CROX proves to be a healthy company that will continue to grow, which is why we rate this company again as a "Buy."
CROX is currently operating with a 9.8 P/E and the same 9.8 future P/E. These numbers show that investors believe the company will maintain its current numbers and do not predict any growth. This valuation is lower than the industry average at 20.7. Is this valuation fair and taking into account what we can predict of CROX's future?
During Q3, CROX increased net revenue YoY by 7.5% to $295.6 million. Net income also increases by 33.1%. These numbers support the moderate growth represented in the 9.8 P/E. Our price target analysis projects 12% growth in operating income over the next five years. CROX has shown steady growth across the board in many key areas like ROA, ROE, and ROIC.
Since its conception, CROX has seen steady increases with some uncertainty around 2008 and 2009 to bring their EPS to 1.24. Their ROA is a solid 17.6%, even higher than competitors Steve Madden's (SHOO) ROA at 15.3%, Decker Outdoor Corporation's (DECK) ROA at 13.5%, and Nike's (NKE) ROA at 13.9%. CROX is also showing strong numbers in ROE 21.1% and ROIC 24.7%. They again beat competitors SHOO who operates with ROE at 14.8% and ROIC at 21.4%, NKE with ROE at 20.8% and ROIC at 20.0%. CROX has a higher ROIC than DECK at 18.0% but DECK has the strongest ROE at 22.3%. The vast majority of the time, CROX is leading the market in key ratios like ROA, ROE, and ROIC, yet they have the lowest valued stock by far. We believe this stock is currently undervalued and makes for a solid investment.
Because CROX is allocating resources to side projects that don't directly affect manufacturing and production, they may not be seeing the extreme growth numbers they could be. In the company's Q4 results, John McCarvel, President and CEO explained that in 2013, CROX would be focusing on expanding consumer awareness through a 33% or 15 million dollar increase in marketing. The company anticipates a 13-15% increase in revenue in the first quarter due to increased marketing and return from 107 new stores created in 2012. Since the company has seen lower numbers during off-season quarters, alongside their Q3 results, CROX also announced plans to focus on the continual evolution of the company to a four-season brand especially during the fall and winter seasons. CROX plans to market their products during the "back-to-school" season, which is a great opportunity for revenue during one of their traditionally slower quarters.
What is maintaining CROX's price target at a Buy? As previously explored, CROX has a history of small movements, whether positive or negative, although recently, this has only been positive, their numbers should continue to follow this trend. In 2011, CROX introduced its line of golf footwear, a good example of their past expansion efforts, and now we are seeing this line will soon be available for purchase online. As previously stated, 2012 was an expansion year where CROX opened 107 new stores. 2013 will be the year we see return on that investment, as well as the year the company increases marketing by 33%, hoping to encourage global consumer awareness of their products. CROX is continually offering new styles and colors, providing the customers with variety to keep coming back. Their children's line has partnered with other franchises like Disney and Legos to create kid-friendly styles. CROX has also expanded into high-heel styles for women in a variety of colors and heights, but still providing comfort with their CrosliteTM material. CROX is also slowing beginning to expand into products other than shoes like backpacks, key chains, and totes. This company is continually innovating and introducing new styles based on comfort, practicality, and style.
Any successful company has an impenetrable economic moat that protects their corner of the market. The aspect of CROX that we see as an economic moat is their unique material, CrosliteTM. This is a material exclusive to CROX that is found in all of their products. It is comfortable, durable, lightweight, and odor-resistant. CROX's business model is based on a product whose unique features come from the material they are made of, a material only CROX uses. As long as CROX can maintain its barriers to entry with this material, and customers are coming back for this product, they should prove to have a unique product, although we do believe that this company has a fairly light economic moat. Other shoe retailers can offer similar qualities in their products, perhaps not all at once, but do serve as an alternative to CROX.
Revenue and EPS Outlook
The table below shows CROX's operating income to show a modest yet positive growth of 12% over the next five years. In the next year, we can anticipate CROX's EPS to increase from 1.24 to 1.34, again modest positive growth. Another encouraging projection is that by 2016, CROX could have a P/E as high as 15.0, a strong number that isn't too inflated. Across the board, CROX is showing continued steady growth that will maintain itself into 2016.
Price Target Analysis
The following price target was configured through a 5-year projected discounted cash flow analysis. The model projects operating income, taxes, depreciation, capital expenditures, and changes in working capital. Using that information, we can project what the company is worth. We can then use that projection and compare it to current prices.
Here is how to calculate price targets using discounted cash flow analysis:
(all figures in millions)
Project operating income, taxes, depreciation, capex, and working capital for five years. Calculate cash flow available by taking operating income - taxes + depreciation - capital expenditures - working capital.
Available Cash Flow
Calculate present value of available cash flow (PV factor of WACC * available cash flow). You can calculate WACC, but we have given this number to you. The PV factor of WACC is calculated by taking 1 / [(1 + WACC)^# of FY years away from current]. For example, 2016 would be 1 / [(1 + WACC)^4 (2016-2012).
WACC for CROX: 6.05%
PV Factor of WACC
PV of Available Cash Flow
For the fifth year, we calculate a residual calculation. This number is calculated by taking the fifth year available cash flow and dividing by the cap rate, which is calculated by taking WACC and subtracting out residual growth rate. Residual growth rate is typically between 2-6%. 4% is average growth for industry. Companies with high levels of growth have higher residual growth, while companies with lower growth levels have lower residual growth. This is why higher growth companies tend to have higher P/E ratios. We will give you cap rate.
Cap Rate for CROX: 3.05%
Available Cash Flow
Divided by Cap Rate
Multiply by 2016 PV Factor
PV of Residual Value
Calculate Equity Value - add PV of residual value, available cash flow PVs, current cash, and subtract debt:
Sum of Available Cash Flows
PV of Residual Value
Interest Bearing Debt
Divide equity value by shares outstanding:
Profit/Value Industry Comparisons
Q1 - Q3 2011
Return on Equity
CROX is currently showing fair profitability. They are hitting healthy numbers in operating margin at 16.8%, and increase from the previous year, in gross margin at 55.8%, again an increase, and ROE, a slight decline to 21.1%, although a very good ratio. These positive numbers are factoring into CROX's current rating at a buy. We anticipate these trends to continue. How does CROX compare the competitors: Foot Locker, Inc. (FL), Steve Madden , Wolverine World Wide (WWW), and Deckers Outdoor Corporation . SHOO is currently reporting an operating margin at 14.2%, a gross margin at 63.3%, and ROE at 14.8%. FL has an operating margin at 9.6%, gross margin at 33.1%, and ROE at 12.8%. WWW reports operating margin at 10.7%, gross margin at 39.3%, and ROE at 12.7%. Lastly, DECK has an operating margin at 5.4%, gross margin at 43.4%, and ROE at 4.5%. CROX is clearly the current leader in profitability among its competitors beating out similar companies in operating margin, gross margin, and ROE.
Let's compare CROX to the competitors:
SHOO operates with an 18.3 P/E and a 15.1 future P/E. FL operates with a 14.3 P/E and 12.3 future P/E. WWW operates with a 19.8 P/E and a 15.1 future P/E. DECK operates with a 10.9 P/E and an 11.9 future P/E. CROX is the lowest in both current and future P/E, but when combined with their positive profitability we are confident in their rating as a Buy.
Because CROX does not have any concrete plans for expansion or change for the near future, its success hinges on maintaining current profitability. Unless CROX makes intentional plans to evolve to a four-season brand, the continued profits will only come from current consumers' brand loyalty. We also see that the company has a fairly light economic moat, which means potential risk for future profits. In early December 2012, CROX did announce one new move that could have either positive or negative effects on the company. The announcement was that the company increased their revolving-credit agreement with PNC Bank from $70 million to $100 million. As shown in our price-target analysis, CROX currently does not have any interest-bearing debt, an advantage that could change their stock price if this new credit agreement changes that fact.
The Bottom Line
The Oxen Group works to identify healthy companies that show signs of continuing this activity. CROX has been a growing company that is turning a profit year-after-year. Their continued dedication to a global presence selling a quality product has set them as one of the leaders in their industry. Our analysis has forecasted enough of an increase from their current stock price to maintain their rating at a Buy. We are confident that given their history of profits combined with their continued efforts to expand their products and their markets will show a steady increase in profit margins over the next five years.