Crocs: A Bona Fide Growth Story

Crocs (CROX) went public in February 2006 and has had to face a barrage of negativity and skepticism. "These shoes are ugly", " No way this company makes it past a year", " it's a fad and will pass quickly", etc. Well, they say numbers don't lie and even more prescient, the margins at Crocs tell the story.

Crocs released its second quarter results and they were stunning. The Street was expecting revenues of $192 million and EPS of $.44; Crocs reported revenues of $224 million and EPS of $.58. The more revealing part of the numbers was the operating margin, the ultimate barameter, hit 30% for the quarter and appears sustainable.I am raising my numbers, as is every other analyst, significantly for this year and next. For 2007 I expect revenues at $825 million and EPS of $1.96, up from $1.58; 2008 revenues at $1.1 billion and EPS of $2.55. Fads don\'t do $1 billion of revenues.

Crocs is expanding its product offering to include a more expensive range of shoes and boots, upping the price range to as high as $300. The basic shoes still retail for $29.99 to $59.99. The add-on Jibbitz accessories retail for $2-3 a piece, but kids adorn their shoes with 5-6 Jibbitz characters per set. High margin, high popularity.

Crocs knows that long term, sustainable growth depends on new product flow. Crocs has launched a series of products that "go north of the ankle" like backpacks, headbands, ponchos, t-shirts, etc. Crocs has also licensed its products to over 100 Universities and to the NFL and the NHL. Marketing and partnering alliances are key to broadening the brand and maintaining growth levels at a healthy 30% plus.

The stock has been a rocket ship this past 12 months. On a pre-split basis the shares have gone from $44 in February to over $115. The shares split 2 for 1 back on June 14th giving Crocs 82 million shares outstanding. Short-sellers have gotten annihilated in this name and the short position as of June was at a ridiculous 33% of the float. Covering outstanding short positions will keep the stock bouyed up at this $50 plus level. Any short term dips short covering will immediately re-lift the shares back up.

The stock closed at $50 on Thursday as the numbers were about to be released. Then, in spite of Thursday and Friday's horrible stock market performance, Crocs weathered the storm and lifted to $59.71 before settling in at $55.42 as of Friday's close.

The strength of Crocs lies with its enviable margins. Young, emerging growth companies typically have operating margins in the single digits. The expenses tend to be heavy in the sales and marketing and research and development lines, with operating margins expansion viewed "down the line". With Crocs spending accordingly in both key segments, the operating margins still come in at a juicy 30%. This is the most important measuring stick to the Crocs story. The company has successfully grown distribution/retail-outlets, and can still generate operating margins at this high rate.

With over 27,000 distribution- retail outlets, the company has more than doubled this number over the past 12 months. The goal is to get that number over 50,000 by the end of 2008. With Crocs not having physical bricks and mortar but leveraging off "other people's infrastructure" the margin scenario will stay as strong.

Crocs can and should command a 30-35 PE ratio. With the high growth rate of its revenues and earnings, coupled with the operating margin resting at 30%, my price target on Crocs is $80 for the next 12 months.

Disclosure: Author has no position in CROX

CROX 1-yr chart:

Comments

[borisb:]

i totally agree. based on asp of $16.75 CROX is due to sell 48.36 million pairs in 2007 and estimates for 2008 have immediately racheted up to 70+ million pairs. Georges, i wonder how much you expect ASPs to uptick in 2008 based on fast expanding number of new designs beyond "beach" and "cayman" that do seem to be selling quite well. How powerful do you expect the penetration to be in the global rollout?

2007 Jul 30 10:28 AM

[Jim Glazen:]

what do the numbers tell you about the future? how many current Crox owners plan to buy another pair.

The numbers tell you about the past and how many lemmings went with the fad.

2007 Jul 30 12:41 PM

[shopperjohns:]

Have you tried a pair? I have 5 and don't want to wear much else. They give good support and are helping with my friends' foot and back problems. Walk a mile in my moccisins. shopperjohns

2007 Jul 31 07:42 AM

[borisb:]

arent the crocs the most ergonomic shoe out there, and this theraputic factor is $30 to $60 rather then $200-$600 for heath care shoes?

2007 Jul 31 11:26 PM

[borisb:]

Crox has newer factory capacity to sell 6 million pairs of shoes a month , equal to $300 million worth of shoes per quarter. is it possible crox is now about to have a $300 million per quarter run rate? all they have to do is sell 18 million pairs of shoes to 7 Billion!!.

2007 Aug 15 05:58 PM