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Crocs: Should We Buy in the 25-bagger When It Drops 50% in 3 Trading Days?

October 20, 2011 | About:
Crocs (CROX), one of the most darling symbols in the stock market, was a 25-bagger for only 2.5 years. Any investors that got into Crocs at the low end of 2009 and steadily held it through the times would fall in love with the stock. It advanced from $1.2 at the beginning of 2009 to more than $31 in July 2011.



However, on October 14, the stock price experienced a free fall from nearly $27 to $15 (more than 44% decrease) within just three trading days, just after it cut its third quarter estimate on America and Europe sales. And now at the time of this writing, the stock is hovering around $15.5 a share. So is it a good buy at the current price of $15, after the significant drop?

Crocs' business involves designing, manufacturing, distributing and managing a brand of footwear and accessories for men, women and children. More than 60% of the revenue has been coming from wholesale channels including sales to distributors and third-party retailers. Wholesales customers include retail chains, department stores, sporting goods and family footwear retailers. Inside the wholesale channel, the good thing is the diversification in customers. No single customer accounted for 10% or more of total sales for the three latest consecutive years. In terms of geography, it has three reportable segments: Americas (nearly 50% of sales), Asia (28-36%) and Europe (16-20%).

Just several days ago, Crocs cut estimates for two regions of Americas and Europe, saying that sales of spring and summer product lines in the Americas went well, but they had “some softness in our consumer direct channel in kiosk and outlet locations.” The company expected that sales would grow in the low teens compared to a year ago. The only region which enjoys such growth is Asia, whose sales backlog has grown around 30% from last year, and it is launching new products in this regions.

Crocs has quite a liquid balance sheet with $180 million in cash, taking around 26% of total assets, while it employs no debt, only capital leases and operating leases. The amount of cash would offset both the capital leases and operating lease the company is committing over the next five years. In addition, the good thing about Crocs is that the company keeps generating positive operating cash flow for the last seven years and positive free cash flow for the last three years. In the future, Crocs seems to have high probability of presenting good operating performance. However, with the TTM P/E of 12.8, and P/CF stays at 12.6, along with a lot of opportunities in retailing business selling at ridiculous low price out there, I might not consider Crocs at the moment. If the price drops more, then I might look again.

This is the subjective viewpoint of the author, and it is not the recommendation to buy, hold or sell the stocks mentioned in this analysis. Anyone who wishes to buy, hold or sell the stocks has to do his/her own analysis at his/her own risk.

About the author:

Anh Hoang
Money manager into global equities, especially with US and Vietnam markets. CFA level 3 candidate. Lecturer for Stalla - CFA course in Vietnam

Visit Anh Hoang's Website


Rating: 4.0/5 (22 votes)

Comments

Scottywhatty
Scottywhatty - 2 years ago


Crocs has been very good to me!
mcwillia
Mcwillia - 2 years ago
Crox is not an investment grade issue for many reasons. But significantly...

Over the long term CROX will be poor choice. Shoes are essentially a commodity, as Buffett discovered to his eternal chagrin, with Dexter Shoe. The oracle wrote "What I had assessed as durable competitive advantage vanished within a few years." When shoe businesses rely on fashions, they are especially ephemeral. Anyone who remembers "Jellies" from the late 70's can predict the long term fate of the main Crox products.

Volatility makes Crox a fun speculative device. But it fails to be a real value investment.

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