Crocs: Value Building or Value Trap?

During the second half of last year, there were heated debates over the merits of a small shoe manufacturer making waves in a dull industry. Crocs Inc. (CROX) manufactured lightweight summer shoes with swiss cheese holes worn by a growing number of loyal consumers. As sales levels and earnings grew quarter after quarter, the stock gained momentum and its investor base became as loyal as the population that wore the shoes. Expectations of future earnings continued to grow as the company acquired Jibbitz which manufactured small ornamental “buttons” which fit into the holes of the shoes and provided CROX with an additional revenue stream. Colleges and professional sports teams soon began printing their logo on the footwear courtesy of licensing agreements which added more strength to Crocs sales growth.

Despite all the positive headlines, some investors began to grow wary of the high stock price relative to earnings. Late in the summer, more and more short sellers became involved and yet the stock burst easily through the 50 dollar level, the 60 dollar level and eventually traded as high as 75. During this time many who sold the stock short were stopped out with very difficult losses.

And then it happened. The bubble popped. The company stumbled and all of the sudden no one wanted to own this darling. The issue revolved around management’s inability to project growth for the most recent quarter and the resulting inventory crunch that caused sales to be missed. It wasn’t the end of the world as the company still reported a very healthy quarter, but the confidence was shattered and CROX began its long, shameful round trip. The stock is now trading at levels not seen since 2006 when the company was a brand new IPO. Inventory concerns remain an issue and furthermore, the economy is in flux and consumer spending is expected to be much weaker. The cards seem stacked against this colorful and dynamic company.

Yet digging behind the headlines, a funny thing is happening. The company itself continues to grow with quarterly sales numbers up 100% or more consistently and earnings showing robust increases each period. While sales growth levels in the US are less than what was seen last year, numbers are still impressive. At the same time, international sales levels are up to extraordinary levels and will likely eclipse domestic sales in the first half of 2008. The company has flexible manufacturing capabilities using third party partners which helps reduce the capital requirements of owning plants and gives the company flexibility as to when and how to ramp up production. Inventory levels are high leading into the spring selling season and initial checks point to strong demand for shoes this year.

Still while Analysts project earnings of $2.69 per share for the current year and $3.22 for 2009, the stock is now trading at a very depressed price. It appears that the market is pricing in a complete failure of the company this year despite the fact that earnings should be 35% higher than last year’s record breaking performance. 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. Over time, I believe we will see the stock double which would only put the price at levels seen in February. Still, this is a nice return for taking a position in a cash flow positive company. I would watch the pattern closely and look to buy on any significant strength in the overall market or in the consumer discretionary sector. Crocs shoes may be a fad, but the company should continue to post impressive profits. Management is actively diversifying the product line to keep from being a “one trick pony” and should be successful in guiding this company through a difficult market and economic environment.

CROX Notes

Disclosure: Author does not have a position in CROX.

Comments

[Loco Money]

JimmyC's brother? xD

I'm in baby... I keep looking at Croc's catalog and their newer shoe models look great! Checked some of the knock-offs by Sketcher's and although some where very good looking, the material is just not the same...

Buy before the 6-month mandated quiet period expires (in which the company executives will grab the stock cheap again)

[Ceviche Fund Partners LP/Dan Jacome]

"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."

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]

"Do you honestly see CROX going from 20 to 75?"

It did once already, from its 2006 IPO to its 2007 peak. Who can predict if history will repeat or not? If CROX can put out a few more positive quarters and show that the inventory misstep was an aberration, perception will change for the positive...along with the stock price.

[turbo471]

I'm long and wrong, but with six grandchildren and Spring approaching I am hopeful!
Thanks for your thoughtful piece.
Turbo

[turbo471]

I'm long and wrong, but with six grandchildren and Spring approaching I am hopeful!
Thanks for your thoughtful piece.
Turbo

[Ceviche Fund Partners LP/Dan Jacome]

DJ said:

""Do you honestly see CROX going from 20 to 75?"

Dinger said: It did once already, from its 2006 IPO to its 2007 peak."

DJ replies:

Of course, but look at high growth concepts like this over the last decade, MANY never return to their all time highs. So you think CROX will post a 3.5x return over the next 12 months???

[VegasBob]

These shoes are the ugliest things I have ever seen! The way to make money on CROX isto short this turkey all the way down to zero.

[notsosmart]

we dont buy them anymore since thet are made in china.the canadian &fla. shoe was better.

[twilightglisten]

I work at a kiosk selling these shoes. And even though some think they are ugly, have you seen what has come out lately? People are loving them. People in the work force who have to stand so many long hours are buying these in quantity. I have seen people line up before we are open just hoping to get what they desire. A good feeling shoe that is so versitile . I know I will buy stock.. just because I cant see them as being a fad. People need these shoes.

[Ceviche Fund Partners LP/Dan Jacome]

"People are loving them. People in the work force who have to stand so many long hours are buying these in quantity. I have seen people line up before we are open just hoping to get what they desire. A good feeling shoe that is so versitile . I know I will buy stock"

CROX is down another 10% today, what a poor, fragile animal. I hope you liked your $17+ print b/c it is @ 15 today and $12.50 is the next stop.

[mkreisel]

It's back to 17.

If CROX gets its inventory under control this quarter, it will easily double.

[Zachary Scheidt]

All good thoughts and I appreciate the lively commentary.

DJ, I have one thought for you. What if the company earns 3.00 in 2009 (below estimates) and simply trades at a 15 multiple. That is still $45 which is an exceptional return for the time period held. And it's not too far of a stretch to assume a 15 multiple on this type of growth.

Definitely one to keep an eye on.

Zach
zachstocks.com

[CroxMan]

Nice call Zach. Now we are all broke !!!! How could you be so wrong on CROX ???????

[Paul Price]

Why in the world would you [or anyone] advise buying 'on general market strength' as opposed to buying something you like when it was selling cheaper?