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Overview

On July 24th, Crocs (NASDAQ:CROX) reported Q2 earnings that disappointed the street and sent shares tumbling by around 20%. The company also issued guidance that made many concerned about the outlook for the business in the future. On the conference call, company management mentioned that weather was a contributing factor to the disappointing earnings report. The weather impact is considered to be one-time in nature. Crocs is often overlooked by many simply for the distaste of the company's products as well as copyright issues relating to the ease of producing knock-off versions particularly in emerging markets. While the signature Crocs footwear is not extremely popular with the fashion-conscious members of society, the company has found a few segments of the market where it is able to sell product effectively. Particularly in the children's shoe market, Crocs is looked upon for the ease in cleaning in addition to comfort. Additionally, they are popular with medical professionals and those in the food industry. However, Crocs is not limited to its signature product line and has recently diversified into shoes that are more marketable to consumers who are adamant about shoe style. This includes flip-flops, rain boots and more recently, golf shoes. This diversification seems to have helped the company in recent quarters as it offers consumers more choice, which is vitally important given the push that the company has made into developing its retail stores. At the end of Q2 of this year, the company operated 305 retail stores around the globe in addition to 145 outlet stores and another 125 kiosk/stores in store locations. Crocs is making a large push in trying to become a globally-recognized footwear chain and the recent Q2 report has sent shares of the company significantly lower which, given the low valuation, could make the company a good investment over the long term.

CROX Chart

CROX data by YCharts

Disappointing Q2 Report Sends Shares Lower, But Makes For Attractive Valuation

As I mentioned earlier, earnings for the second quarter of this year for Crocs were rather disappointing, however investors were more concerned by the guidance provided by the company for its important Q3 earnings. The company said that it expects revenue to come in at between $300-310 Million for the quarter in addition to earnings per share of $0.20-0.23. This guidance for Q3, which includes the pivotal summer months of July and August, has spooked investors and sparked a rather large sell-off in company shares. However, as I will discuss, valuation remains attractive for prospective long investors and the sell-off could present a good opportunity to initiate a position in the company. The post-earnings sell-off in shares of Crocs has left the company trading for around 13.1x 2014 earnings estimates. This quite a cheap valuation, especially when you consider both the market valuation and the valuation of other footwear companies.

Strong Balance Sheet Provides Crocs With A Cushion

In terms of Crocs' balance sheet, at the end of Q2 it held a very minimal amount of debt with the majority of its liabilities coming from accounts payable and accrued expenses. Total company liabilities stood at just over $250 million while the company held just below $290 Million in cash and cash equivalents alone. In total, Crocs has over $667 Million in equity, which with the limited debt load positions the company quite well should it need to finance future growth or endure any sort of business slow down. This is very advantageous especially if the company decides to make acquisitions of smaller companies as it would be able to tap the debt markets with relative ease. Additionally, management would likely have an easier time selling the company if it decides to pursue such opportunities as potential acquirers would be intrigued by the strong balance sheet in addition the earnings potential of the company.

Conclusion

While the outlook for Crocs' earnings in the near future remains challenged, the company is trading for a cheap valuation and company growth over the long term could make Crocs a compelling investment at current levels.

Source: Crocs: Post-Earnings Sell-Off Presents Opportunity