Footrace to Zero: Heelys vs. Crocs

Oh boy, this is one ugly race, with the finish line possibly being bankruptcy for both participants. I never owned a pair of either Heelys (HLYS) or Crocs (CROX) and never will. It's not that I don’t get sucked into fads every now and then (I rocked a yellow LIVESTRONG bracelet throughout most of 2003-2004), it's just that sneakers with wheels for an adult are ridiculous, and unless you’re Chef Mario Batali, rubber clogs are straight-up fugly.

On to the stocks themselves…

Heelys, Inc. is the perfect example of why one shouldn’t drink while underwriting an IPO. From jump street, bringing a one-product concept public as a standalone company has always been a mistake, but a sneaker on wheels? Really? That’s a public company? If the bankers at Bear Stearns and Wachovia (remember them?) that took this thing public in December of 2006 weren’t laughing their heads off, I’ll eat my hat. Their giggles must have intensified to belly laughs when the the initial pricing went from $16 to $21 per share and I’ll bet someone needed a time-out to catch their breath when the stock kissed $30 on the first day of trading.

The problem with HLYS is that according to the company's latest quarterly filings, it has a ton of cash (almost $100 mil) and zero debt. The stock currently trades at about a buck and a half, which unfortunately means that the company can linger around forever, burning cash trying to restart the craze and launch new models into the face of Chinese knock-offs and a lack of interest from US consumers, who aren’t much in the mood for roller-frolicking these days. It may not see zero, but one day, I think someone will buy this brand for next to nothing after years of frustration.

Crocs Inc. is, by comparison, a much bigger company and way more screwed up. The stock, currently just above a buck a share, has destroyed any investor who has gotten anywhere near it during a virtual free-fall since its summer ‘07 high of almost $70 per share. Plenty of shorts were dismantled during the first 18 months of Crocs’ existence as the stock rallied higher almost every month despite growing short interest and a tightening float. Turns out the shorts were dead right, if way too early initially. This is a fad and a one-trick pony and unlike UGG Boots, made by Decker’s (DECK), the brand just doesn’t translate to other iterations outside of the basic Croc.

OK, so that’s the bad news on Crocs Inc. Want the even worse news? Just the other day, its auditor, Deloitte & Touche, issued a “going concern” opinion, casting doubt on the company’s ability to survive.

OK, but here’s the really, really horrible news:

From Reuters:
Crocs, which had $51.6 million in cash and cash equivalents as of Dec. 31, is trying to extend its current credit facility, which matures on April 2, under which it has $22.4 million in borrowings.

Basically, Crocs has to get this extension by Thursday of this week, even if the terms are terrible or it uses some sort of asset-backed guarantee. One way or the other, the prognosis is not pretty.

I’ve spilled a lot of ink here discussing two companies I couldn’t care less about, but for a good reason. When they were initially trotted out, they looked nearly irresistible. They also initially abused the short-sellers, defying gravity for way longer than they should have been able to. The lesson here is to keep from getting caught up in the hype and to stick to your guns when everyone around you is being absurd.

Good luck, holders of CROX and HLYS, and don’t be shy about scalping the bounces that may come your way, they will likely be ephemeral.

Full Disclosure: I am neither long or short any of the companies or stocks mentioned. Please do not view the opinions expressed here as recommendations to buy or sell any securities. The information presented in this post is a statement of my opinion only. Please see the Terms & Conditions of this site before taking action on anything you’ve read here.

Comments

[tgreen56:]

Crocs makes a opretty good shoe.

Mar 31 01:32 PM

[technozero:]

that's what i say


On Mar 31 01:32 PM tgreen56 wrote:

> Crocs makes a opretty good shoe.

Mar 31 02:03 PM

[mattm:]

It is debatable about Crocs shoes being a fad. My wife wears them and she says they are very, very comfortable. We have seen many health care professionals that wear them due to this very fact. This author, who does not own a pair of Crocs (and probably does not know anyone that does), however; feels comfortable with his knowledge about the shoe to claim that it is a fad. What a bunch of BS. I hope he does not get paid for his writings like the other so-called stock wizard journalists. I suppose Bill Gates does not know what he is doing since he owns approx. 8% of this company (the last I knew). Get a real job.

Mar 31 03:12 PM

[Think-About-It:]

Why waste our time talking about shorting these companies now. It is too late. All you did was tell us about historical events. Complete waste of our time.

Mar 31 03:41 PM

[Capt Herlock:]

My wife owns a pair (which I think are hideous), and she loved them at first, but never wears them anymore. In the case of Crocs, in this climate it's got to be hard for people to justify a $20 to $30 purchase of something that can't cost more than three or four bucks to manufacturer. There are plenty of comfortable shoes on the market that are a better value, and frankly, are better looking. I agree with the author, just a fad except for die hard fans. You knew they had jumped the shark when all the ugly 'crocs' style cel phone cases, bags, and other accessories started to appear on the market from other companies trying to cash in. The market potential of the original 'Crocs style' shoes was way over estimated by investors.

Mar 31 04:28 PM

[Welcmhm:]

The problem wasn't that there was no conceivable market for these products, it was just that there was a small, defined market, with little growth opportunity, and the stock price got far too inflated for what the companies could each support.

However, while it is admirable for one to try to "stick to your guns," as the author puts it, in the face of broad investor irrationality, John Maynard Keynes said it best, "the market can remain irrational longer than you can remain solvent." And therein lies the problem.

Mar 31 06:03 PM

[aimtomakemoney:]

Obviously the writer has NEVER worn a pair of Crocs. I knew something was great when my 2 year old granddaughter tossed her regular shoes the minute she came to our house to put on her Crocs!
Got several pair for myself and they are by far the most confortable shoes and sandals that I own. They are wonderful for anyone with back and foot problems to ease pain in back and feet.
Physicians are prescribing them for diabetic patients. Many physician office staff who are on their feet all day long and hospital staff also wear Crocs.

Mar 31 08:17 PM

[vanyali:]

Crocs aren't going to get all that far on comfort. People bought them for kids because the kids could put charms in the holes in the shoes. Then someone decided the charms were a choking hazard. Now all of those kids have grown out of the things and you don't see them around anymore. So I think "fad" is a pretty good assessment.

Mar 31 11:57 PM

[Joshua Morg...:]

judging by the comments, i may not have made my point the way i wanted to:

I am not arguing whether or not Croc's are comfortable! LOL...who cares? Wearing pajamas to work would be pretty comfy, too...nopt sure what the relevance of that is, though.

The point is that just about anyone who has the desire to buy them, owns them and they are being knocked off in China like you wouldn't believe. They can be manufactured by anyone and sold in 2/3rds of the world as fakes with almost zero consequences. the legit Croc's are piled yards high in bins waiting to be bought at half-off at any sporting goods, mall, drug store etc you can think of.

Im sure they are comfortable, but thats not a reason to invest or not invest...

as far as shorting, i dont believe i've made any indication that i think its a good idea or a bad idea to be short, my piece is simply an analysis of what is plaguing these once hot stocks...

thanks for reading, guys

JB

Apr 01 08:32 AM

[tgreen56:]

I dont know about that. At the risk of sounding like a shill for Crocs you need to check out Crocs web site. They are twice the quality of that chinese junk. They have a new CEO who helped recreate the Rebok shoe. I think he has a good shot at recreating Crocs. Crocs actually have some shoes that are kind of stylish. There no longer just selling those flouresnet clugs. I dont know too many men that would buy those but they do have styles now that I think men would actually buy. If they can tap into the mens market I think they would be on to something. I actually bought a pair of Crocs with a suede top and a pair of Crocs golf shoes with a velcro strap so they fit tight and dont flop around. The comfort they provide is well worth my golf buddies ridicule.


On Apr 01 08:32 AM Joshua Morgan Brown wrote:

> judging by the comments, i may not have made my point the way i wanted
> to:
>
> I am not arguing whether or not Croc's are comfortable! LOL...who
> cares? Wearing pajamas to work would be pretty comfy, too...nopt
> sure what the relevance of that is, though.
>
> The point is that just about anyone who has the desire to buy them,
> owns them and they are being knocked off in China like you wouldn't
> believe. They can be manufactured by anyone and sold in 2/3rds of
> the world as fakes with almost zero consequences. the legit Croc's
> are piled yards high in bins waiting to be bought at half-off at
> any sporting goods, mall, drug store etc you can think of.
>
> Im sure they are comfortable, but thats not a reason to invest or
> not invest...
>
> as far as shorting, i dont believe i've made any indication that
> i think its a good idea or a bad idea to be short, my piece is simply
> an analysis of what is plaguing these once hot stocks...
>
> thanks for reading, guys
>
> JB

Apr 01 11:06 AM

[tgreen56:]

One more thing. If this new CEO can somehow get a suprestar like Tiger, Lebron James or David Beckham to throw on a pair of Crocs these things will be flying off the shelves. He probably has some connections from his Rebok days.

Apr 01 11:28 AM

[Joshua Morg...:]

hey man, hope you're right, they seem like a nice company and I hate seeing people's investments go bad

Thx for reading
JB


On Apr 01 11:28 AM tgreen56 wrote:

> One more thing. If this new CEO can somehow get a suprestar like
> Tiger, Lebron James or David Beckham to throw on a pair of Crocs
> these things will be flying off the shelves. He probably has some
> connections from his Rebok days.

Apr 01 07:24 PM

[Tomcat101:]

I had to take my daughter to the emergency room today. I too, am wondering what will happen to this company. So I noticed out of the 4 or 5 medical staff who came in our room, one doctor and one nurse was wearing Crocs. My wife wears them and loves them. My mom has a pair or two. Both my daughters have some.

I think they are hideous shoes myself.

Bottom line: In my small circle of family and friends, Crocs are still very popular as a percentage of the people who's shoes I notice.

My concern is that I've noticed lots of generic copycats in drug stores, Wal-mart, etc. I wonder how many people are content getting the copycats compared to paying for the "real" Crocs.

I'm afraid of the stock. Since I'm not buying, that almost guarantees that it will go up 100% or so from here.

Apr 25 08:36 PM

[LAZERFISH:]

I can't say about America, but in Japan where I live, the fake Crocs are being sold everywhere, even in major sporting good stores and shoe stores. A fake pair go for 600yen (6bucks). While the real Crocs cost 3400yen (about 34bucks). You'd be hard pressed to tell the difference if you weren't right up close.

That being said, me son bought a pair of Sponge Bod Crocs, last summer in Canada. Loves them!

Now as a stock, if you bought around a buck, you're sitting pretty with a 100% plus return. But would I take a chance and buy now?? Nope.

Apr 28 11:17 AM

[Tomcat101:]

CROX recently went from about $2 up to $4 or so and then back in the $2 range after earnings came out. I say they will be under $2 again soon.

May 09 02:33 PM