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Crocs (CROX)
Does Crocs Just Have Too Many Holes In It?
Crocs turned having holes in your shoes into a fashion statement and now it is Wall Street that is poking holes into the jaw-dropping growth story that many investors thought Crocs represented. The Boulder, Colorado based company that went public in early 2006 at a split-adjusted price of $12.58 per share and proceeded to reach an all-time high of $74.75 in the fall of 2007, angered shareholders last night by ratcheting down its expectations for revenues and earnings. Predictably, the stock got hammered after the announcement in after-hours trading and the slide continues today. So is the stock now so cheap that it becomes compelling or is there further room on the downside?
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Just in case you somehow managed to never come across an ubiquitous pair of Crocs, it is a shoe made with proprietary resin material that is slip-resistant, odor-resistant and has a non-marking sole. It also supposedly offers a number of medical benefits especially for people who spend a lot of time on their feet (e.g. nurses). And yes, it has swiss-cheese type holes on its front, which give it that distinctive look. This shoe and its numerous variations are the flagship product of Crocs Inc., a company that had a monster run on the stock market for about 20 months (Feb 2006 - Oct 2007). The magic started to wear off when the stock lost 30% on November 1st after the shoe-marker put out disappointing guidance for future numbers.
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Crocs is a fairly divisive product both with consumers as well as with stock analysts. Some consumers think the shoe looks hideous while others rave about its comfort, lightweightness and medical benefits. It's also become popular among teenagers because they think it looks good. Similarly some analysts are bullish on the stock citing high margins, strong-brand identity, efficient distribution model while others view the company as a fad that will disappear into oblivion sooner or later. Obviously, the bulls won out for the 5-6 quarters of the company's public history as Crocs consistently beat earnings expectations. But the bears got their first big chance to pounce on the company last fall after the guidance miss. Pretty much the same thing happened last night. Crocs put out a release saying sales for the quarter ended Mar 31 have been softer than expected and hence, it now expects earnings for the first quarter (the results for which will be officially released on May 7) to come in between 8 to 13 cents a share (previous estimate was 46 cents a share) on revenue of $195 to $200 million (previous revenue estimate was for $225 million). Crocs also announced that it plans to close its Canadian manufacturing facility (laying off 600 workers in the process) and it will take pre-tax charge of 13 cents a share this quarter to account for closing costs. Therefore, taking this charge into account, Crocs expects to lose between 5 cents a share and break-even. Full-year earnings were also revised downward.
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So where does Crocs go from here? The stock has lost about 42% of its value since the close of trading yesterday. Some analysts are viewing this as a buying opportunity now that the stock is trading at P/E multiple of only 5. Despite the lowered projections, Crocs still expects its US sales to grow by 13% this quarter. Its overseas business is stronger especially given the weak dollar. And the board has also authorized a buyback of about 5 million shares. All this points to the current stock price of $10.42 as being somewhat of a floor. But having said that, there are still numerous risks to the downside. These include credibility problems for management (they reiterated their guidance numbers in Feb 2008 before sharply reducing them only 2 months later) and a recessionary US economy which is seeing consumers cut back on discretionary spending. But arguably, the biggest problem for Crocs is that it hasn't shown that it can successfully diversify beyond footwear (hence, all those Nike (NKE: Charts, News, Offers) comparisons are off-base) and not enough people are convinced that its core product (i.e. the shoes) is more than just a temporary fad especially since teenagers make up a bulk of the clientele.
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