Crocs (CROX) is an international supplier of footwear made of a resin made by Croxs called CrocLite. This enables CROX to produce soft, comfortable, lightweight, superior-gripping, non-marking and odor-resistant shoes.
In this article I'll briefly look back at the 2012 and 2013 results and its balance sheet. Thereafter I'll discuss the outlook for the company for the next few years, which will lead to my investment thesis at the end of this article.
The 2012 financial results
Crocs announced its financial results for 2012 in March of this year, revealing a record revenue of $1.12B, up 12.2% from 2011. Net profit came in at $131.3M or $1.44/share, which means Crocs is currently trading at approximately 11X the 2012 earnings, which isn't too expensive.
Let's look at some operational ratios now. The net profit margin (net profit/revenue) for FY 2012 was 11.69%, which is a tad higher than the net profit margin of 11.27%. Later in this article I'll compare the net profit margins from 2010 until Q1 2013 and provide a guesstimate of the future margins based on analyst revenue and profit expectations.
The balance sheet at the end of 2012 looked extremely robust with a working capital in excess of $450M, which is one of the main reasons why I'm extremely interested in this company. I'll provide a more in-depth analysis of the balance sheet later in this article.
At the presentation of the FY 2012 results, CROX issued a guidance for Q1 2013, stating it expects an EPS of $0.32-0.34/share on a revenue of $305-310M. Let's now see how the actual results compared to Crocs' estimate.
The Q1 2013 financial results
The Q1 2013 results were in line with the guidance given by the management at the presentation of the FY 2012 results. Revenue was slightly better than expected as CROX had revenues of $312M versus the expected $305-310M. EPS came in at $0.33/share, which is exactly within the range of $0.32-0.34 the company was aiming for.
All in all, this was a good quarter, as the first and fourth quarter are usually the weakest quarters for Crocs because they are heavily depending on seasonal sales. That's why the net profit margin in Q1 came in at only 9.3%, and this number should increase considerably during the summer months.
This table provides the net margin data from the past three years, and the expected net profit margin based on analyst revenue and profit estimates. As you can see, Crocs' Net Profit Margin is expected to remain very robust and will continue to hover around the 10% mark. I also think, based on the Q1 results and the Q2 guidance, that the 2013 net profit margin will be higher than the analyst expectations.
Net Profit Margin
Outlook for 2013
Crocs currently doesn't provide a FY 2013 guidance, but updates its investors on a quarterly basis. For Q2 2013, CROX expects to report a net profit per share of between $0.60 and $0.63 on revenues of $360-370M.
The analysts expect an EPS of $1.39 for this year and $1.60 for next year meaning CROX is currently trading at 11.4X 2013 earnings and at 9.9X next year's earnings, which is quite cheap for a growth company.
The Balance sheet
The balance sheet looks extremely robust at the end of Q1 2013. Crocs' working capital increased to $459.7M and the quick ratio (current assets/current liabilities) is an extremely healthy 3.46 (everything above 1 is good). As CROX essentially is a producer of goods, it might be a good idea to use the acid test ratio here and deduct all inventories from the current assets. The acid test ratio for CROX at the end of Q1 2013 was 2.50, which is still an excellent result. It's actually too good, because an acid test ratio higher than 1.5-1.75 indicates the company isn't using its working capital efficiently enough. This leads me to the next subtitle of this article.
What will Crocs do to please the shareholders?
CROX has two possibilities to keep its shareholders happy. On the one hand it can buy back its own shares and destroy them, on the other hand it can institute a dividend.
Crocs has purchased 834k shares in Q1 for approximately $12.5M in cash (paying approximately $15/share). This share buyback program started in 2007, and Crocs is allowed to acquire 2.6M additional shares, which I expect it to do throughout this year. I expect this program to cost it between $40-45M. After this buyback will have been completed, CROX will have reduced its amount of outstanding shares by approximately 3% (thus increasing the EPS by 3%).
Once it will have finished the 2007 buyback program, I think CROX will launch another share repurchase program to acquire another 4.25M shares, which would decrease the amount of outstanding shares by another 5%. If we use an average price of $17/share, this buyback program would cost it an additional $72.5M. If the company spreads this out over two years, it would only spend 26% of the net profits on share buybacks, which isn't very high.
A more direct way to reward shareholders is by distributing a dividend. If CROX would instate a dividend in 2014 using a payout ratio of 30% of its net profit, the stock would have a dividend yield of approximately 3%, as the annual dividend would then amount approximately $0.48 per annum. If the company would be able to effectively buy back and destroy 8% of its outstanding shares, this dividend would increase to $0.52, which would be a 3.3% yield.
As CROX offers exposure to a continuously growing business with one of the safest balance sheets I have ever seen, I think it definitely deserves a place in a well-balanced portfolio. Even though the company isn't very expensive at the current share price of $15.46, it might be attractive to write some put options as well. In particular the P14 September at $0.60 looks interesting, as well as the P12 Decembers at $0.50 and the P10s for January 2015 at $0.90.
I currently don't have a position in CROX, but I might write some put options at various strike prices and expiry dates.