Crocs Appears Well Positioned, Stock Is Cheap - Baird

Baird is out positive on Crocs (NASDAQ:CROX) following meetings with management over the past couple of days. Firm notes CROX has spent a lot of time discussing its inventory and continues to do so. But short of reporting a sequential drop in inventory, which isn't likely until Q308, it doesn't seem like investors will be convinced that CROX doesn't have an inventory problem. One thing to note about its higher inventory level is that the company's fill rates have improved dramatically, and this has improved its customer satisfaction ratings as well.

According to the firm CROX acknowledges that the U.S. retail environment has gotten softer and this is adversely affecting its business, as it is many other companies. However, CROX still reports that its product is selling well, and that there is a broader assortment of its product at retail, with many of its newer styles getting good traction. Additionally, the company is optimistic about its back-half prospects, based largely on its fall prebook orders, namely on the strength of its Fuzz Collection.

International is a bigger part of the company's growth story than the U.S. CROX continues to see opportunity in Europe, Asia and developing markets such as China, Brazil and India. Additionally, the company's international accounts were underserved in FY07, as supply was concentrated on satisfying U.S. demand. For FY08, CROX is now in a better inventory position across the globe and more of its international accounts are being offered a broader assortment of product.

Baird's price target is $50, based on a high-teens multiple of one-year forward EPS estimate of $2.82. Maintains Outperform.

Notablecalls: Well, Baird's not the 1st one to defend the stock. As many of you (painfully) noticed, Piper Jaffray was positive on them already yesterday. The stock gapped higher but took a beating.

To my surprise, the stock is up considerably this AM, erasing almost all of yesterday's losses. The market surely works in mysterious ways.

It reminds me of Hansen (NASDAQ:HANS) some weeks ago when Longbow was out with a superbly positive call but got no reaction (actually, the stock took a beating). The next day Goldman Sachs came out with their positive call (highlighting same stuff as Longbow the day before) and the stock ripped.

I think we're going to get similar action in CROX as well today.

Note CROX is currently trading 5.1x Baird's FY2009 EPS estimates.

Comments

[AndrewHorowitz]

WOW. It has been a ride. I have been screaming about this stock for 6 months. First WAY over value, now the opposite

www.thedisciplinedinve...

[Jack K]

I asked my wife & youngest if kids are still wearing Crocs. (We have 3 kids. 16,14,10). They said yes but there are more less expensive versions, and they are not "hot" anymore. Earnings may have difficulty keeping up. Too bad. It looked like a good buy after reading this article

[CroxSeller]

As a retailer of these shoes (many styles), I must say that they sell like crazy. There are about 10 new styles and all of them sell well. We can't get them in our store fast enough! I just bought some of this stock.

[johnyale]

I spent the holidays in Asia. Absolutely every European tourist was wearing CROX. The shorts and the "fad"mongers are going to get spanked on this one... this is a real brand with staying power!

[MEXX]

The real story with CROX is its international growth. CROCS is now well positioned to supply their wares to all corners of the world (e.g. CROCS sales in Japan are growing in the triple digits). I am bullish that we will see one more solid run up on this stock sometime this year.

[CroxSeller]

I believe that this is a new 'class' of shoe and will remain viable for the long haul, but will level off at a natural, non-fad resting point. If the company adjusts it's costs accordingly, it should be a good stock for a long time. Crocs is THE brand in this type of shoe and the knock-offs are not of the same quality or variety of style at this point.

[.crazylegs.]

croxseller - do you have any contact with other retailers that sell crocs and are they seeing the same things? it seems to me that the shoes have a utility to them that will give them staying power.

[DanielJacome]

"Crocs is THE brand in this type of shoe and the knock-offs are not of the same quality or variety of style at this point."


yeah, but have you been able to predict if they'll maintain pricing power as more knockoffs flood the market.

Typically, brands cannot maintain the same pricing power as more substitutes hit the street.

[Crocs Long]

Ceviche I have been following your responses to Crocs messages on this website. Why don't you declare yourself first a short and then post your garbage.

[CROXLong/ShortInvestor]

I've rode the CROX wave for over 1 yr, participating in their gains. However, right now, this stock is close to worthless. For those angry with this statement, please visit footlocker.com, champssports.com, or footaction.com and search for 'crocs'.

ALL of these retailers JUST received their initial orders of CROX products to stock their shelves THIS quarter, yet as you can see, almost EVERY pair is on clearance. Why? Because they cannot sell these gawd aweful faddish shoes anymore. Although the initial order fill for these large retailers may boost earnings in Q1, I believe this is already accounted for in the guideance. Further, the inventory situation I do not expect to improve over Q12008, as they are building their inventory to ship new product to 'meet demand', which, as judged by the amount of product placed on clearance currently, just isn't there.

Now, I do believe CROX will/has developed new styles that will be popular, boost earnings and raise the stock price down the road (such as the Santa Cruz, canvas sandal, ocean minded, worker shoes, etc.), however now is not the time to buy the stock. I expect the stock to go down to around the $10-$12 mark before the Q1 earnings release. At that point you can make a bet on whether you believe the Company's long term products will sell through sustainably.

[shoeman]

crox long/short investor

checked the shoe retailer sites you mentioned

the Licensed merchandise ONLY is on promotion
is it the shoe style, or the sports/college license that does not
sell.....what are the retail prices of other popular licensed categories?

Also, how do you know that current inventory consists of more
licensed product?
Manufacturers track their sku's and adjust for above or
below average sales per sku for inventory requirements

As well, how do you differentiate between last years inventory
and current inventory?

The above listed retailers are domestic USA only......have you had a
look at global retailer sell throughs?

Global retail sales will approach 50% of total revenue....

You are making some sweeping generalizations based on a
very limited observation

[Mikebrah]

Chairman of the board just bought $5M worth of stock at around $20/share. I understand this is not a foolproof reason to buy the stock, but compare it to something like Heely's (HLYS) where insiders are selling large chunks of stock even at ultra depressed stock prices and you have to at least think twice before dismissing CROX as a fad.

I agree the shoes are hideous, but they are apparently extremely comfortable and functional. As to the knock-off issue, I don't think that is a big problem for something that retails for $20-40. People buy Coach and Luis Vuitton knock-offs because they can't afford the hundreds (or thousands) of dollars to buy the real deal.

Even if CROX misses estimates and only grows at a "paltry" 15% for the next several years, this stock is way undervalued. 33% short interest is absurd, it seems pretty clear there are a couple big boys getting together to blast this thing, but how long can that work?

Anyway, just my $.02
Long CROX

[DanielJacome]

"Even if CROX misses estimates and only grows at a "paltry" 15% for the next several years, this stock is way undervalued."
----------------------...

Yeah dude, but tell me how much the St will pay for that 15% - you are assuming an inline to above line multiple story, may not be.

Staying away, CEO insider buying could be mere window dressing.

Only upside I see is a potential short covering burst since so many shorts have made a killing on this stock -

CROX better beat that 46c estimate on May 1st or its another round of "good night" for this resin garbage.

[SAP]

"Yeah dude, but tell me how much the St will pay for that 15% - you are assuming an inline to above line multiple story, may not be."

Company is calling for 20-30% growth over the next three years. 15% growth would be worth far more than the street is currently paying. As a long term investor I would be willing to wait for the street to come to its senses. It seems to me the only risk here is, is CROX a one trick pony? I think they answered that with the remarkable success of their Mammoth product. They predicted selling 100,000 units and I think they sold more than 1 Million units. Further, the street seems to be dismissing the success of their international market (50% of sales).

ROE 37.10%
ROA 24.2%
ROIC 36.80
Gross Margin 60.3%
Operating Margin 28.4%
Profit Margin 19.9%
No debt
P/E 9.5

I'll take that kind of low risk high reward investment any day!

[ConfusedDude]

I am a novice investor, and bought this stock last July because everywhere I looked, including in my own residence, Crocs appeared to be ubiquitous. I paid mid $40s for the stock and have watched it rise to the $70s, all based on solid fundamentals, only to take a bloodbath...Am i missing something? The increase in inventory wasn't of "stockpiling' nature and it was explained late last year as potentially preparation for expansion into Asia. What gives?

[DanielJacome]

CROX is down another 10% today, what a poor, fragile animal.

[DanielJacome]

CROX guides 22c lower than Q1 consensus -- what a dog!