Crox Could Rise on Piper's Inventory Comments

Piper Jaffray is positive on Crocs (NASDAQ:CROX) following two days of meetings with management. Crocs addressed concerns including near-term sales rates, inventory levels, distribution segmentation, pricing, and margin sustainability. While it is reasonable to assume that U.S. sales growth is moderating (as modeled) and international sales are accelerating, PJ thinks the company is taking steps to further balance production and inventory levels heading into its peak selling season. At the same time, the global infrastructure is being fine-tuned to best maximize efficiency and minimize cost in order to preserve margin during all economic cycles.

JP is comfortable with its $225M (v. $230M Street) top-line estimate in FQ1, given evidence of more conservative inventory planning at the retail level. Crocs continues to work toward a higher pre-book rate near 40% (v. ~20% LY), with the balance of sales being derived from in-season deliveries.

Approximately 70% of current inventory on hand is aligned with the company's top seven selling styles where fashion risk is low and, over time, future orders will be placed against existing inventory. By flexing and contracting capacity utilization based on sales, they think the company can sustain mid-50s gross margin long-term.

Depreciation in CROX shares of late, they believe, is a result of an exhausted shareholder base, lack of clarity around sales & inventory relationship, and anxiety with respect to fad speculation. As they revisit their model, the firm remains comfortable with current assumptions, believing that underlying demand remains firm and growth rates are reasonable.

They reiterate Buy and $67 target. CROX remains on the Alpha List.

Notablecalls: I very much like this call. The stock has been destroyed lately but Piper does a good job explaining why/how things could be getting better. This is the type of note that will bring nice gradual buy interest. The focus is on the inventory/booking comments.

Short interest still stands at 30%+

I'm almost tempted to call this one Actionable.

Comments

[jmar44]

Crocs inventory will turn out to be in their favor as the peak selling season arrives. They will have inventory ready for immediate shipment and won't have wonder if suppliers can meet the demand.

[mahony]

Kids don't buy Crocs anymore...and the knockoffs for $4 are everywhere. Follow Crocs into the trash with Piper. No thanks on the buy high sell low tip.

[DanielJacome]

Stock is dead - read a book called "Monster stocks" - CROX fits the criteria of "blowups" contained in the book -- inventory will further balloon and this'll be another HLYS. Piper is dreaming and doing best to stop the bleeding of a company they took public in 06

[mahony]

Aaaah...now I see, Piper is the shill for Crocs. That makes the recommendation understandable.

[Larsky01]

Inventory is only a concern if it goes obsolete, spoils, or can be made/purchased cheaper in the future. None of these are true, in fact with oil higher, cost of goods sold increases, which increases the value of the current inventory!

[DanielJacome]

"Inventory is only a concern if it goes obsolete, spoils, or can be made/purchased cheaper in the future"

or can't be sold at all b/c a fad is not a trend and CROX is a fad. Demand will dry up, mgmt is pitching the "overseas will save us" mantra to save their stock

It's trading at a PEG of < 1 for a reason.

[pablovian]

CROX is a bargain here, even if their grow decelerates... If the inventory issue is the show stopper, they buy, buy, buy because it is all in models that will absolutely sell... I agree that there is a fad element to this company's products because of fashion, HOWEVER, their international sales are growing and the fad is not fading in those areas AND they have and will continue to innovate as this is also a "technology" company (resin)... With the strong Euro and Yen, and increasing exports these guys will do incredibly well for the coming 12 months... I bought, and will continue to buy more at these low levels because the numbers will eventually justify a significantly higher stock price (based on valuation)... I hit over 100% on this already, sold at almost peak, and with my sub $20 cost, I expect to hit a double banger! - I am recommending this stock as a "strong buy" to all of my clients and friends.

[bearboy]

I am torn on this call. I am still mystified at how this stock has been punished this past 6 months -- they posted some pretty impressive numbers, and are still growing bigtime. And they are priced like a company with no profits, declining revenues, and no real business model. I would buy leaps here if I had the courage.

[Just a Hick]

Piper must be drinking the same koolaid. Inventory has gone sky high to almost 40% of total assets.The turnover ratio is going to be terrible going forward. Plus if they see any sort of sales slowdown then the margins will compact like you won't believe-I think gross margins will hit the mid thirties for this year.Their cash generation doesn't even begin to match the net income they book.They employ aggressive accounting practices and lease all their facilities.This means if a cash crunch comes, they have nothing to borrow against- and I do think a cash crunch is going to hit these guys this year.Bottom line,the stock is heading south of $10.

[DanielJacome]

CROX didnt bunge on the 400+ rally on the Dow, I repeat my sell rating on CROX. No way that sort of business model survive on an ugly tape like this.

When the Dow comes out of its coma, leaders will emerge, yeah, but CROX will not be one of them.

If you are suggesting clients to buy this, you are worse than the PMs I worked with this past summer who bought the crap in the summer.

Fact: sales are decelerating. That's a sell signal right there, grade F to management for not selling to NKE or someone else when they could've gotten a peak, mammoth price tag

[Advisor]

If CROX is only a fad, then why are people, especially college age women and children still buying new pairs for the new season and add to the fact that they have significantly broadened their product line. Even on lower earnings, this stock is screaming to be bought, because the stock is worth 3 times it's current price.

[Say What?]

Ceviche Fund needs to stop the MBA and re-fresh his english. "obsolete" mean "can't be sold at all b/c"

[DanielJacome]

"If CROX is only a fad, then why are people, especially college age women and children still buying new pairs for the new season"

Nah, not here in the US. DKS is selling less CROX, HLYS lost the DKS contract and CROX is next

CROX has no moat around their business, gross margin compresson needs to reverse, and soon: until that happens, 9-12x forward PE should be expected.

[DanielJacome]

FROM ANOTHER SEEKING ALPHA ARTICLE ON CROX (WE GOT 2 TODAY!!!)

"At the current price, CROX certainly seems to be a bargain, but investors should be cautious about current sentiment as that may have more bearing on the stock price than fundamental earnings for now."
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You answered your own question and crystallized why the stock is dead: perception. You may get a 15x PE but no way the stock's PE will match its EPS growth rate. Say it gets up to 25x 09 numbers. and say the St is right -- likely they wrong. If CROX earns $3/sh in 09, and 25x * $3/sh = $75 stock price. Do you honestly see CROX going from 20 to 75?

I think not. As someone just emailed me, "CROX is tainted"

Mgmt will likely hire a Tier 1 in 2H 08 and stop the bleeding before the St pumps em full of more bullets.

[Dinger]

Making some strong proclamations there on CROX, Mister Jacome.

Given the speculative nature of your comments and of the Ceviche Fund Partners LP ("an actively-managed, student-run fund that capitalizes on unusual option activity and rigorous technical analysis") which you represent, I'd be of the opinion that you own a short interest in CROX.

And your comments are quite a contrast to the style and manner of your own authored Seeking Alpha columns. Why would that be?

[Compound]

for the love of God, when are you people going to stop comparing crocs to heelys? Heeleys sells to kids between the ages of 7 to 15 - and more than half of those kids have parents who will never buy them because they value the health and safety of their own children. Crocs sells shoes, and damn good ones btw, to all ages. They continue to expand their VERY loyal customer base, they continue to expand their profits - but i guess these are bad signs to the experts. You're only exposing yourselves for the complete frauds that you are when you call a product like Crocs a "fad". Are there cheaper knockoffs? Sure. Guess what, there's also about 10 MP3 players that are better than and cheaper than the beloved (and overpriced) iPod, but how many of you rushed out and bought the samsung yp-u3 instead of the new nano? Apple survives based solely on the fact that it's dedicated fan base wears blinders. Undeterred by the fact that they're overpaying for a product that only does half of what it should do, simply because they have great commercials and owning a mac may actually make you cool! Tell you what, go buy a samsung and a couple of pairs of crocs with your savings. You'll be extremely happy with both purchases.

Sooner or later the light will eventually shine on the companies that have great products with mass market appeal. Someday that will actually have more influence than some self interest promoting blowhards who've never seen an honest days work in their silver spoon fed lives.

[Gove]

Buy Buy Buy...This one is a no brainer...The stock is severly undervalued, a bargain. The US market for this product is a drop in the bucket for the product of this company. It's a big planet and because it's always summer somewhere, these shoes will always be in demand around the globe all year long. It won't look like a USA summer company much longer. Demand will be all year long all over the world. Their new catalog looks amazing! Overseas markets are ripe. They make a fine product and continue to expand. Buy.

[G Halverson]

Can anyone post Pipers findings?

[DanielJacome]

"It's a big planet and because it's always summer somewhere, these shoes will always be in demand around the globe all year long."

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Ummm, no, dude -- that is like saying people always need to drink water so I should start a water comnpany and make billions overnight. When you model demand, you have to model complements/substitute... as well and how they impinge on volume/pricing....

It's called threat of substitutes and you'll see hit CROX in the inventory bloat and lower sell thru rates sooner rather than later

[JeremyElliott]

The comparisons to the iPod are close, except that I'd argue that iPods (and Macs over Samsungs, for that matter) do deliver a much more pleasurable user experience dollar-for-dollar than competitors. To say there's no moat on Crox and that models should dump 40% of future sales growth to substitution from knock-offs is to to say "I don't own a pair". There's something real about Croslite--it's not just hype. The knock-offs make you feel like a broke-back hooker looser. To say growth is dead and it's a fad is to say "I've never traveled overseas and I'm an ugly American wearing blinders". The is an international story now, beginning last Q when Int sales trumped Domestic. Think you got an eye for international fashion? Shorts want to absolutely crush this stock because they absolutely hate the appearance of the shoes--they let their contorted American sense of fashion muddy the strong fundamentals that completely support a PE double of what it is today. And, if you listen to the last call, Just a Hick, you'd have heard a detailing of how Mgmt has resisted the cheap-growth temptations, such as leasing all facilities. No, my short friend, they have purchased a great many of their warehouse and distribution facilities so that margins will continue to improve. I feel like were rushing into Iraq here looking for WMD again--all this made-up negative hype that's completely unsubstantiated. Who's drinking whose own koolaid when the fundamentals continue to blow all the shorts nay-sayings out of the water, Q after Q? Inventory? CROX has seen sales lost to depleted stock and margins cut due to a need for overnight air time and time again after demand has somehow exceeded even their highest of projections--they SHOULD be inventoried up over 40%. The last 5 QTRs has seen sales lost to depleted stock events, but the high inventories are the only string that the fashion-wary shorts have to cling to on this call. Could you imagine being wrong about a stock and about a sense of style at the same time?

[DanielJacome]

CROX - 11% today

[DanielJacome]

Briefing.com is the only outlet that knows the real deal:
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CONTX CROX approaching the $15 level that it first printed at in early 2006 -Update-

I've got the initial print at $15 exactly before it melted down to $10 over the following month and a half. There will probably be some buying interest protecting the level and there could be an opportunity for a bounce play off of $15, though I think the stock will trade lower over the longer term as it follows the path of HLYS and other fad stocks before it.
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