Bear Of The Day: Crocs

Aug. 8.13 | About: Crocs, Inc. (CROX)

Crocs (CROX), a Zacks Rank No. 5 (Strong Sell), manufactures and markets footwear products. The company recently disappointed investors reporting June quarterly profits of 48 cents per share against a Zacks Consensus Earnings Estimate of 64 cents. The 25% negative earnings surprise contributed to a sharp price decline, and has left the stock struggling near a six-month low.

Earnings Estimates Are Falling

Earnings estimates for Crocs have declined sharply over the past 30 days and paint a negative picture. The Zacks Consensus EPS Forecast for 2013 has declined 37 cents to $1.02, while Zacks Consensus EPS Forecast for 2014 has dropped 39 cents to $1.22. The chart below displays the downward trend in analyst revisions.

There have been no estimate increases for either 2013 or 2014 over the past 30 days, and seven estimate decreases over the same period.

Gross Margins Are Under Pressure

Gross margin has been eroding in recent quarters. It has declined from 54.6% in the quarter ended September 2012, to 53.7% in the quarter ending June 2013. Gross margins were the lowest since 2010. A decline in the order book of 6.7% and a weak consumer environment in the U.S. and Europe look to be generating headwinds to the outlook for sales and gross margin.

Valuation

Valuation is not expensive at 12.4 times forward 12 month earnings, but the PEG ratio is 1.00 and over the 10-year median of 0.90. Concerns over profit growth and margin erosion may justify a depressed-looking P/E ratio.

Alternatives

Those looking for exposure to the apparel industry may want to think about Hansbrands (HBI), a Zacks Rank No. 1 (Strong Buy). Unlike Crocs, earnings estimates for Hansbrands are being revised upward. Gross margins are also expanding, and are near the top end of the historical range. When it comes to Crocs, this shoe does not seem to fit into your portfolio.

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