What Happened to Crocs?

After receiving some hate mail regarding my article on Crocs (CROX) last month, I figured it would be wise to review the stock today and determine just what happened to cause this name to drop nearly 45% on Tuesday.

Before the market opened Tuesday, Crocs management issued a press release and hosted a conference call to update expectations for the recently completed first quarter. While the accountants are still dotting all the I’s and crossing all the T’s, it appears the first quarter is going to be significantly worse than previous expectations.

This came as a major surprise to investors as less than two months ago, management painted a very rosy picture of growing sales and strong margins. The only hint of trouble was that the company had a large inventory level. Management explained that the high inventory would enable it to meet strong demand coming into the first part of 2008.

Something must have changed between that conference call on February 19th and Tuesday’s announcement. Now management explains that Q1 revenue will be around $195 to $200 million, with operating earnings of 8 to 13 cents per share. This is much lower than consensus numbers which were in the range of 40-50 cents.

While the company tried to put a brave face on by explaining that sales are still higher than the same quarter last year, the result of the miss is that management has now lost all credibility with the street. Analysts find it very difficult to believe the environment deteriorated so quickly that management was unaware of the issues two months ago, but the environment is now so much worse than expected.

The bottom line is that there are two scenarios. 1) Management is incapable of projecting even short-term demand for their product, or 2) The economy is truly in a free-fall. Neither one of the scenarios brings much warmth to investors' hearts.

In response to the weakening demand, the company is shutting down its Canadian production plant which operated at a higher cost than many of its overseas production facilities. This will give the company less flexibility when ramping up orders for short-term demand (something management has struggled with in past quarters), but should cut out some fixed costs to allow margins to be a bit healthier.

Secondly, the board has authorized a repurchase of 5 million shares (in addition to a current repurchase plan underway.) I would not get too excited about this repurchase announcement considering the fact that credibility is very low at this point, and the company is under no obligation to actually go into the market to purchase the shares. This is a tactic often used by a company’s board to prop up the share price by encouraging investors to believe they are actively purchasing the stock at current prices. In order for this to work, investors have to have confidence in management, which is severely lacking in this scenario.

In the past, management has guided investors to expect 20-30% long-term revenue growth. When asked about this on the conference call Tuesday, management would not comment but expects to revisit this statistic during its official Q1 earnings release. This is another bad sign, as I would expect management to vigorously defend this number if it were still part of the expectations.

Inventories continue to be high and management expects to keep these levels relatively unchanged in order to meet demand (despite the fact that demand is falling). There were some sales to discount channels over the last quarter, which drag down margins and raise additional concerns as to how effective the traditional sales channels are working.

So now that the stock is near $10, it is tempting to look at the name as a deep distressed value situation. This may be worthwhile over time, but for now the lack of investor confidence in figures given by management should keep one from putting much at risk in this name.

CROX Notes

Disclosure: Author does not have a position in CROX.

Comments

[junger4]

I questioned last fall this strategy of trowing in the market an avalanche of new models. This , in my opinion is the rooth of the problems. How can retailers choose what models to sells amongs all these models? Then they have to choose the colours and the sizes AND the quantity!!!! This situation create a nightmare for production people, marketing staff and the results are large inventories and receivables.

Management have to come back to a strategy of concentrating on winners.
Coming back from Europe , I saw colourfull Croc stands on the street ready for the tourits and locals to buy, on these stands, one or two models,4-5 colours and few of each sizes.This is the way to rotate your inventory many times a year like Nike and Decker.

[Boulder Biker]

Never touched the stock, up or down, until last month. Now I wished I stayed away. Took a 31% loss in only 4 weeks.

I should have known better. This train wreck is going to 5 bucks....

[realthinker]

What a buy this is. This company is saying it sold 200m of a summer shoe in the coldest 3 months of the winter instead of their guidance of 225m and investors start selling off their stock? Look at it this way, they show a 40% increase over last years unbelievable sales on track for 1 billion, shoe retailers will tell you it's their best seller and cant keep enough in the store and no knock off brands can’t match the comfort of Croslite, their proprietary material that has yet to be copied.
All victories breed hate. And people love to hate Crocs. The winners this year will once again be the retailers who carry them and the lucky few who will buy the stock in the single digits.

[Tao]

My whole family decided they wanted Crocs last fall. I thought they were ugly and wasn't too wild about the idea.

My husband picked up a pair for everyone, but the shoes didn't fit their long narrow feet. The pair they picked up for me were perfect for me. I wore them all winter as house shoes around the house. Total comfort. I wash them in the washer or sometimes in the sink. Totally washable. I am a crox fan, now.

They say you can buy less wide croc type shoes at Walmart, but I don't know about the comfort.

[Grumann]

Does anyone know when insiders can buy the stock? There is probably a blackout period around the Q1 results. When it opens, it will be a tell if the insiders come back in. They made hundreds of millions last year selling. If they come back in, then I'm in. Overseas growth cannot be ignored. PS my family (especially the 80 year olds and the healthcare workers) swear by the comfort of these shoes.

[Eddie Erickson]

CROX is down but not out. International sales are still growing like crazy, and CROX is just now tapping into the Chinese market. The PE ratio could easily expand 3-fold. The company has little debt and plenty of potential customers world-wide.

[Ceviche Fund Partners LP/Dan Jacome]

CROX is down and IS out

seekingalpha.com/article/72369-no-hope-l...

Those are our thoughts and we reit our $9 PT

[semuren]

CROX may or may not be wonderful shoes, I don't know. But do not count on them being strong based on sales in the Chinese market. The real CROX will be swamped by fakes, and the genuine article will only appeal to a very few consumers here.

[Advisor55]

I wear the shoes and still love them. Just got a pair with canvas uppers...As for the stock, they fooled me.

[WAKEUP]

"The bottom line is that there are two scenarios. 1) Management is incapable of projecting even short-term demand for their product, or 2) The economy is truly in a free-fall." BOTH. EXIT CROX, RUNNING.

[bearboy]

This company is not a ship headed for the rocks in a fog bank. It has already hit the rocks, with gaping holes in the bow. This company is the defininition of POS. When they report at the end of the month, look for another big haircut.

[bearboy]

This company is not a ship headed for the rocks in a fog bank. It has already hit the rocks, with gaping holes in the bow. This company is the defininition of POS. When they report at the end of the month, look for another big haircut.

[BMWTwisty]

Grumann sez, "Does anyone know when insiders can buy the stock?" The problem is all of the insiders have already dumped their stock a long time ago. That was the presage of the problem and at that time _I_ should have taken notice. I didn't and lost a bunch of money. I sold the stock at $32 and boy am I glad. The company is run by inept crooks.