From the s-1:
"We are a rapidly growing designer, manufacturer and marketer of footwear for men, women and children under the 'crocs' brand. All of our footwear products incorporate our proprietary closed-cell resin material, which we believe represents a substantial innovation in footwear comfort and functionality. Our proprietary closed-cell resin, which we refer to as croslite, enables us to produce a soft and lightweight, non-marking, slip- and odor-resistant shoe."
CROX are the very colorful shoes with holes in them, the 'footwear of the future' as CROX print ads state. Often referred to as 'plastic shoes', as mentioned above they are actually made of a resin CROX developed called croslite. CROX currently manufactures and sell 11 models in 18 different colors. They feel they've created a new category in the casual footwear market and are a differentiator to their retail customers. CROX currently sells directly in the US and is available in an estimated 6,200 retail outlets with price points between $30-$60. Retail outlets include footwear, sporting goods, department stores, outdoor stores and many specialty shops. A cross section of places in which CROX are available include, Dicks Sporting Goods, Nordstroms, Whole Foods, Dillards, college bookstores etc.... Unlike many casual footwear products, CROX seems to have quite a cross section of outlets. Dillards accounted for 14% of '05 sales.
CROX began life as a boat shoe in 2002 and the 2 original products the 'Beach' and 'Cayman' accounted for 85% of 2005 revenue. CROX recently kicked off a kids line in June 2005 as well as offering 5 new products in 4th quarter 2005. 2006 will bring an additional 6 new products including a Crocs flip-flop expected to be a big seller. CROX also manufactures and develops a Crocs RX which has been approved and recommended by the APMA, the Podiatrist Association.
CROX believes their products are not just for the fashion conscious, but also for those that spend long hours on their feet. Must say I really do like how they've gone about marketing these shoes to many different retailers and for many different uses.
In the summer of '05 CROX commenced sales in Europe and Asia. CROX utilizes a direct sales force in countries such as the UK, France, Japan, Singapore, and Australia while using distributors for approximately 40 other countries.
CROX manufactures their shoes in Mexico and Canada while contracting with Asian manufacturers for additional supply.
Strongest quarter in 2005 was the third quarter as the open toes and holes curtail winter buying. Full year 2005 CROX sold 6 million pairs of footwear.
$1 a share in cash, no debt post-offering.
CROX was essentially at start-up stage in 2002 and posted just $1.2 million in revenue in 2003. Since than revenue has exploded, to $17 million in 2004 and $108 million in 2005. That is over a 500% revenue increase in '05.
Gross margins here are solid at 57% for 2005 and should increase a bit more as revenue climbs. Operating margins in 2005 came in at 27%. Operating margins should expand as well, as CROX did a nice job of not letting SGA climb as fast as revenues. SGA for '05 did increase over 200% from '04, but that is a much slower pace than revenue grew.
Net margins for '05 after tax were in the 17% ballpark, again quite strong. Comparing to two very successful apparel IPOs of 2005, VLCM pre- IPO had 13% net margins, UARM 8%. I would also expect CROX net margins to expand as revenue expands further. At a $25- $60 price point, CROX is not getting their fat margins from mark-ups they are able to manufacture cheaply.
CROX made approximately 45-50 cents a share in 2005, at mid-range would be coming public at 29 X's 2005 earnings.
Looking into 2006, I think growth will continue to be very strong. CROX is just tapping the coastal US and the rest of the world, I would expect strong revenue increases for '06. I would think that CROX can at least can come close to doubling their revenue in 2006. Sales really took off for them the back 1/2 of 2005, which accounted for 66% of annual sales. CROX should be able to substantially increase year to year comparables the first and 2nd quarter of 2006. With a company this young and growing this fast, revenue estimates for 2006 are an educated guess. Let us assume CROX will be able to hit the $190- $200 million mark in '06 revenue. I also think they will be able to slightly improve net margins. Making these two assumptions I think CROX could earn $1 per share in 2006.
CROX at mid range would be trading at 14 X's '06 earnings. This for a company in hyper growth with stronger net margins at IPO than both Volcom and Under Armour.
VLCM currently trade 34 X's '06 expected earnings with a 33% top-line forecast growth rate.
UARM trades at 77 X's '06 expected earnings with a 30% forecast top-line growth rate.
Clearly if one is going to put CROX in the camp of those two fast growing apparel manufacturers than there is quite a bit of room for appreciation from pricing. I think you need to put this CROX if not on a par with those two, at least in the same ballpark. The growth and margins are there.
The big risk here is CROX ability to manage their hyper growth. They have experienced a few growing pains including supply shortages throughout 2005. CROX is adding manufacturing capacity briskly to meed demand. This is really though a good 'risk' to have. I don't foresee any issues with sales going forward the next few years, these shoes are in heavy demand and CROX has plenty of natural growth outlets remaining. Looking further out there is of course the possibility that CROX is simply a short term fad. However that is not a problem at the moment, and again this is another good worry for a company to have.
Also there were material weaknesses in accounting for inventories in 2002/ 2003/ 2004. These don't appear to be anything problematic going forward as most of the issues occurred when CROX was essentially a start-up company revenue wise. Still something to note.
The price to trailing revenue here does look hefty at 5 X's. However if CROX is able to double revenue in 2006 price to current year revenues comes in at 2 1/2 on a mid-range pricing. VLCM/ UARM both trade roughly 7 X's trailing revenues. Each of those are carrying a billion plus market cap, I'd expect CROX to have the same at some point.
Very good IPO, the $13- $15 offering range is too cheap for the hyper growth and net margins here. I expect this to definitely trade into the $20s, potentially mid- $20's mid-term.