Why is the Market Rewarding Crocs?

Resin shoe manufacturer Crocs (CROX) reported so-so earnings on Wednesday afternoon and the stock saw a massive squeeze in Thursday trading, with the stock up 16% as I write this. Results were nowhere near great, contrary to what yesterday’s trading action was telling you. They missed consensus estimate for EPS and came in at the low end of their guidance.

Although CROX came in above expectations for sales, their international revenue growth was nothing to cheer about. They only grew this figure 80% YoY to $106M, compared to last quarter when sales increased 220% YoY. Crocs is having issues growing its international markets, which our buy side contacts say is the only reason one would want to be in this name at all. In addition, gross margins were down to 42%, lower than analyst expectations of 46%. Wednesday’s conference call was essentially a non-event, since all CROX did was reaffirm their previous guidance.

Other tidbits from the Q1 conference call:

• International Sales represented 53% of their sales with Japan representing the strongest region.
• Regarding costs, CROX will be increasing advertising spend.
• CROX expects Cap EX to be approx $85 million, down to previous expectations
• Generally speaking, sell through rate was less than expected but still remains encouraging and “well positioned” for a strong 2009. CROX wants to beat industry growth in 2009 and beyond. Company will drill down on cutting costs going forward.
• Crox believes inventory will be down 10-15% by the end of Q2; will continue to pull it down at the end of the next quarter.
• They did guide for Y08 gross margins in the range of 54-56% for Y08 (Comment: this is nonsense, as management has guided high GMs like this before and failed to execute).

Bottom line: Despite falling short of EPS estimates for the first time in its history, shares of CROX are ramping up the tune of 16%. CROX reaffirmed its second quarter and full year guidance, which are currently slightly above consensus estimates. However, CROX has not yet put a headlock on its inventory and margin issues, and on top of that, international sales are decelerating: that has us worried, especially because CROX management has pitched the international scene as their main avenue for growth going forward.

The question we need to be asking ourselves right now is: has management pulled down numbers far enough? The international figures were not what we were looking for and we’d stay away from this stock altogether.

Disclosure: none

Comments

[CrossProfit]

This sounds like 'gut feeling' valuations.

What exactly is your formula for evaluating this stock and how do you derive at a target price?

"They only grew this figure 80% YoY to $106M" - obviously a ttm P/E of 7 is too high for your method.

"The international figures were not what we were looking for and we’d stay away from this stock altogether."

Where have you published the 'figures' that you were anticipating, what were they and what were they based on?

Are you in the 'one trick pony camp' or do you see diversification into other products over the next year or so?

Thanks in advance.
CrossProfit

[farfignewton]

Dead cat bounce. Crocs are so over.

[mcadoo3312]

CrossProfit, I commented on the last entry this clown made about Crocs. Obviously he is not familiar with the term "short squeeze" which is exactly what happened. The stock has pared down since then, but still has close to 38% short interest as a % of float. No matter what he thinks, inventories will be reduced and cash flow will increase. Regardless is Crocs is over as a fad IN AMERICA, they are still generating huge growth overseas. You don't have to stick around forever to generate a profit by trading intelligently.

[DanielJacome]

"Crocs is over as a fad IN AMERICA, they are still generating huge growth overseas"

COMMENT: That is not what the last quarter suggested -- intl sales decelerated, our experience is that if this is supposed to be the next "inflection point in the firm's S curve," numbers should be accelerating, not slowing down.

[CrossProfit]

mcadoo3312,

Thanks for your comments on both articles. Please note that the word 'clown' was superfluous and that your point is just as valid when replacing 'this clown made' with 'Dan made'.

Apparently we agree in principle that CROCS was not headed towards $9 in April, though it came close, as we both disagree with the author. I question though how much more upside there is from $11 over the next two months...perhaps $12.20, but that's about it until next earnings report.

Investors are still way too nervous after the fall from the $75 high and still regard CROCS as a one trick pony. Should management unveil a new product, as in a real new product and NOT accessories to the old one, the stock could double.

We simply have no information on this, one way or the other. CROCS has to diversify in order to stay alive, let alone flourish. Maybe they will make 'no sweat' office chairs or indestructible dishes (for toddlers) and compete with corning ware? I have no idea of the composition of the material, so take the above as conjecture at best.

Saul Sterman
CrossProfit

[DanielJacome]

"Apparently we agree in principle that CROCS was not headed towards $9 in April, though it came close, as we both disagree with the author. I question though how much more upside there is from $11 over the next two months...perhaps $12.20, but that's about it until next earnings report."

Sounds like you're waffling, what happened to the strong CROX defense you showed a month ago?

CROX is back down to $10 by the way.

[DanielJacome]

CROX about to hit out $9 price target.

[DanielJacome]

CROX just hit our $9 price target this morning and actually saw a low of $8.92

[DanielJacome]

CROX hit an all time low today and stock is down 25% since our article was published

[DanielJacome]

Stock down 55% after hours