Could Crocs Be a Turnaround Play?

Crocs (CROX) is one of the favourite whipping boys on internet discussion boards. I remain grateful that someone prompted me to dig deeper into Crocs' deteriorating margins before diving in. That was about a year ago, when the stock had dropped from over $75 to $10. CROX went on to a low of $0.79 and closed Tuesday at $3.28. Check out this chart to see the wild roller-coater that is the CROX share price.

I think CROX just may be a turnaround candidate and is worth keeping an eye on.
The downward sales trend appears to be flattening out and they are attempting to right size their business.

My main reason for keeping an eye on CROX is I'm a contrary guy and with everyone declaring it dead and a one trick pony, I decided to try and look at it from a different angle.

There is no question that Crocs were a fad, but that by itself does not mean it is a one trick pony. I recall many pundits declaring Nintendo a fad as the sales of the NES declined in the late eighties. My point is that investors confuse products with companies. Products are fads, not companies. Since 2004 Crocs has invested $850M into SG&A. A slice of that went into advertising and creating a brand, maybe $100-200M (I'm still working on getting a better feel for that number). The Crocs brand lives on and that is the opportunity current management will be trying to capitalise on.

This quote from the Q1 conference call highlights that the new CEO John Duerden is focused on the brand.

"But what I've also learned is that there are 100 million consumers out there in 125 countries that absolutely love our product. I've also found that the Crocs brand in only five years has become almost as well known as Nike and Adidas. It is already an icon. And whether people love it or hate it, they talk about it."

The bar is set pretty low for Crocs. Analysts see them losings money all this year and next. As they continue to right size their business and incur large one-off costs they will continue to show earnings losses. The opportunity is ahead as they roll-out new products, continue to push their online sales and further streamline their business. They have already shows excellent improvement in cash and inventory management, reducing their days sales outstanding (decreased to 40.4 days in Q1 from 70.9 days in Q1 of last year) and inventory levels through better supply chain management (inventories at March 31, 2009 decreased to $131.2 million compared to $265.5 million a year ago. Some of this decline is attributable to the $70 million in inventory writedowns during 2008; however, $54 million of this decline came because we were able to move footwear inventory on hand).

The balance sheet has been improving and they appear to have staved of bankruptcy. If they continue to improve business they may one day launch their 'Wii'.

Crocs is both a great story to keep an eye and a fascinating story for managers and investors to learn from.

• Q1 2009 10Q
• Q1 Transcript
• Financials
• Key Stats
• SEC Filing
  

Q2 results are due 3-Aug-09 - 13-Aug-09.

Disclosure: Neither I or Fusion Investing have a position in CROX, never have and currently have no intention taking a position.

Comments

[OldiesLover:]

Well, well, well... Finally a financial guy who can look past blog stupidity.

First, let me first mention that I am a CROCS dealer, and I'm an independent mom & pop retailer, who sold 30,000 pairs of CROCS last year, and I'm ahead of LY so far this year. I think that's important background for my opinion here.

Second, let me give a big picture insight. The retail footwear market is very difficult to get a foothold in. CROCS did it by opening up a ton of storefronts. However, they came to us LY and said that they were going to close off a huge number of them because they were not properly assorting the line. That by doing this, they were not only going to take a temporary hit on the sales line, but that this strategy would also make their inventories and payables go out of wack for awhile. (Of course, this was pre-meltdown.)

They did this, and their predictions came true. We hung in there, and we are still selling a ton of CROCS.

Third, customers of all types and sizes... love CROCS. Especially children and women. They don't care about financial bloggers, they just care about how great their CROCS feel on their feet. period. Currently, one of my biggest problems is getting my other lines to perform properly with so many CROCS being sold.

Fourth, CROCS is a material story... not a fad story. Sure, there's a fad element to it, but the foundation to CROCS is their material that cannot be faked. Not for long. The minute a financial blogger says plastic or rubber, I know they don't know anything about this product.

Fifth, do I love everything CROCS company has, and are doing? No. I wish they weren't working with big boxes and department stores so much. These retailers DO NOT merchandise, sell and support this line properly. Yet, I do understand why CROCS has to do it.

I wish they weren't so aggressive with their online business, especially with discounting. I believe in the longrun, they are going to lose retail pricing credibility. Yet, I do understand why CROCS feels they need to do it. I simply hope they get past this process, soon.

Finally, my ultimate wish... I wish they would go back to being private so they could get back to making lots of CROCS for me to sell, and pay no attention to the financial bloggers who haven't spent a single hour on a retail floor selling CROCS to hungry customers.

Oh, by the way... I sold almost 300 pairs of CROCS last Saturday. I have to get back to writing purchase orders, now.

Bye!

Jun 24 07:01 PM

[Dean Morel:]

OldiesLover, thanks so much for your great insights, it's really generous of you to share your valuable inside perspective.
Good luck with your future sales. Here is Australia Crocs are very popular. One example is how Croccasins have replaced moccasins as the footwear of choice amongst bogans.
I'll dig into your comments on store closures.

Jun 24 11:36 PM

[Danny Furman:]

Nice article and comments above. I agree entirely that CROX is a material/technology play, not to mention the shoes are exceedingly popular with those who value function over form. I bought a few shares around $1.15 and still haven't sold, but would not recommend speculating on this funky company with any more than a few call options unless the market tanks badly enough for shares to trade under $2 again. The unique material and popularity in Asia make sustainability a mild concern at most, and operations seem to have more direction now than a year or two ago.
At the very least CROX is a better speculative play than the frequently pumped joke that is SIRI!

Jun 26 12:20 AM

[OldiesLover:]

Well Dean, we're going through another wave of anti-CROC BS from newspaper articles and bloggers here in the States of late, and again, they are constantly showing their lack of knowledge and research regarding this Company, and more importantly, their Products.

Again, they're called, "Plastic, Rubber and Foam Clogs." Which of course means... the authors are downright ignorant. All they talk about is the Original Clogs (Beach/Caymans), which is only one style of over 60 different styles CROCS offers.

They produced a wedge sandal for this Summer's Season, that I CANNOT keep in stock. (It's called, Patricia by the way.) They have additional new styles such as the Havana, Electro, Santa Cruz, Yucon, Cove... need I go on(?), and they are all selling very very well. No other shoeline comes close these days. Plus their Work Shoes continues to sell too, especially Bistro.

Yes, there continues to be a shake-out of dealers, but that's OK.

By the way, CROCS came up and spent a full day with us last week reviewing all sorts of things, including their 2010 line-up, which by the way, in my opinion (And I'll match my expertise with this line with any other retailer out there, let alone Blogger.)... Is the STRONGEST assortment I've ever seen from them.

Additionaly, one of the things these articles are talking about is the "supposed" fact that CROCS don't wearout. This cannot be further from the truth. They do wearout over about the same length of time as a Nike, and just as important, children outgrow them and are right back year-after-year for a new pair (Or 2 or 3 pairs.).

Anyways, thought this info might be helpful to you.

Thanks,

OldiesLover

Jul 30 10:11 AM

[OldiesLover:]

Hey Dean, You did buy CROCS at $3.28... Right?

OldiesLover

Aug 10 12:33 PM

[Dean Morel:]

I wish OldiesLover, I wish. All your information was a great help and I got very close to buying as it dipped under $3, but choked when it came to placing an order. I guess I still have self-doubt issues.

I hope your business is rockin' and Crocs are walking out the door. If you're right about the 2010 then you and Croc shareholders should have a good start to the new decade.

Aug 20 01:21 AM