Crocs: Benefit From Market Inefficiency

Jan.16.12 | About: Crocs, Inc. (CROX)

Most investors are aware of the boom-bust cycle which occurred in Crocs (NASDAQ:CROX) in the last couple of years. When its funny shoes were the trend in 2007 shares peaked at $70 a share before falling back all the way to just over $1 in 2009. From that moment on, restructuring efforts paid off and the stock started a long term recovery with shares trading at $25 in the beginning of summer 2011.

What Market Efficiency?
From this moment on Crocs first lifted its guidance for the third quarter in July and consequently lowered it again in October 2011. Last week it gave an upbeat guidance for the final quarter of 2011. Despite a 9% rally on that latest guidance update shares still trade 30% lower compared to 6 months ago.

July 2011
The company expects third quarter revenues to come in at $280 million, on which it expects to earn $0.40 per share. This triumphed analyst expectations who expected revenues to come in at $265 million and expect the company to earn $0.32. As a result the stock price jumped from $27 to $31, up 15% on a single trading day.

October 2011
Just three months later the company warns that it will not be able to meet its third quarter goals. It now expects revenues to come in at $273-$275 million on which it expect to earn $0.31-$0.33. Note that the earnings are exactly in line with analyst expectations before the upgrade in July while revenues come in a bit higher. In the meantime it expects low single-digit revenue growth (year-on-year) for the final quarter. Yet the share price drops like a stone and closed the day 39% lower closing at around $15.

January 2012
Last week Crocs came up with an earnings update suggesting the fourth-quarter revenues come in at the high end of the $200-$205 million revenue guidance range, implying a 12-15% growth rate (year-on-year). This compares to a low single digit growth rate it expected in October. Shares trade up 9% on the news closing around $18.

Benefit from the efficiency
Management's attempt of setting accurate and ambitious targets for the near term future undoubtedly created a lot of artificial volatility in the stock over the last six months. Essentially nothing much changed on a fundamental level, we just learned the management has less visibility on short term developments of the business than than previously thought. Yet the stock trades at a 30% discount compared to the summer of 2011 offering investors, that can handle a fair bit of volatility, with an excellent entry point.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.