Seeking Alpha
Long/short equity, special situations, value
Profile| Send Message|
( followers)  

Investors in Crocs (NASDAQ:CROX) are happy that investment firm Blackstone joined the company late in 2013, making a $200 million investment in the firm. The fact that the company ousted its CEO was applauded as well with investors being disappointed with the strong, but less profitable global growth in the company's store base.

These developments are a net positive for the company in the long term and should be good for shareholders as well.

Blackstone's Preferred Stock Investment

Crocs announced last week that it is tying up with Blackstone. The investment firm will invest $200 million in Crocs through a convertible preferred stock investment.

On top of this, the company announced many other important items. This includes a hiked share repurchase authorization to $350 million and the retirement of CEO John McCarvel. The preferred stock investment allows Crocs to revise its capital structure, by reducing the outstanding float by some 30% through repurchases at levels before the deal has been announced. Given the 20% jump following the news, this number will come closer to 25% at current levels.

The stronger and long-term shareholder base provides a better long-term base, with expected lower volatility in the stock. Repurchases are expected to start in the first quarter of 2014. Note that Blackstone's preferred stock investment carries a 6.0% dividend rate while being able to be converted at $14.50 per share, a 9% premium to the closing levels of shares of Crocs before the deal has been announced.

Once converted, Blackstone could hold up 13% of the diluted share base outstanding. If within three years from now the share price of Crocs will trade above $29 for 20 days in a row, shares will be automatically converted into common shares. Note that Blackstone will furthermore be entitled to two board seats.

Outgoing CEO McCarvel led the turnaround of Crocs over the past decade, creating a diversified company with a strong balance sheet. Yet investors are not happy with the growth strategy of the firm in recent years.

Updating The Fourth Quarter Guidance

Crocs now sees fourth quarter revenues at the low end of the $220 to $225 million guided revenue guidance. Diluted losses per share are seen at the low end of the guidance of losses between $0.20 to $0.23 per share.

Note that costs associated with the Blackstone transaction, cash repatriation charges, impairment charges etc. are excluded in this guidance. These charges could be as high as $47 to $52 million in the fourth quarter, of which $20-$25 million are incurred as actual cash expenses.

Crocs' Financials And Financial Position

Back at the end of October, Crocs released its third quarter results. Cash and equivalents stand at $332.5 million. Total debt, including capital lease obligations stands at just $13.6 million, resulting in a strong net cash position of $319 million.

Revenues for first three quarters of the year totaled $964 million. This is up by 7.3% on the year before on new store openings, while the decline in comparable sales is hurting profits. Net earnings fell by nearly 43% to $77.4 million, partially on higher effective tax rates.

Following the updated outlook, full year revenues are seen at $1.18 billion, as earnings could evaporate for the full year, including all the one-time charges. Excluding these, earnings could come in around $50-$55 million.

Factoring in the huge gains on the back of the news, with shares trading at $16.00 per share, the market values Crocs at $1.42 billion. This values operating assets of the firm around $1.08 billion, the equivalent of 0.9 times annual revenues and roughly 20 times non-GAAP earnings.

Looking Back At Recent Years

Shares of Crocs rose to highs of $70 during the hype about its colorful shoes in 2007. In the years following, shares fell to levels of just $1 before a restructuring of the company resulted in a strong turnaround.

Shares did eventually recover to levels around $30 in the summer of 2011, yet shares have lost half of their value again in the meantime. Investors are not happy with the aggressive expansion plans, eating into earnings.

Between 2009 and 2012, Crocs increased its annual revenues by a cumulative 75% to $1.12 billion. The company has returned to profitability and reported solid earnings in the past three years.

Implications For Shareholders

Investors are relieved that Blackstone came onboard and that Crocs' CEO has been ousted. The focus on growth, has resulted in top line revenue growth. Yet this growth was entirely being attributed to store openings as comparable store sales actually fell significantly this year.

This obviously is a very bad mix for margins and earnings, despite top line growth, and consequently earnings fell hard again this year.

For this reason, investors are happy with comments from Chairman Thomas Smach. He notes that the company will focus on better financial performance in the US and Japan, enhancing the global retail execution. As part of this, Crocs may moderate the pace of investments in its retail stores.

The implicit higher leverage by allowing the firm to repurchase roughly a quarter of the current share base at current levels, combined with improved operational performance should drive significant growth potential, at least for the shares.

Investors are very happy with the $200 million cash infusion into the company, which is applauded by the big jump last week. With Blackstone onboard, holding a tighter lid around management's actions and accountability, long-term holders should have better days to look forward to.

Source: Crocs - Better Days Ahead With Blackstone Onboard