Crocs Inc. (CROX) Valuation
Crocs (CROX) was up +5% Friday on an upgrade by Wedbush Morgan Securities, and shares continue to trade higher today. Analyst Jeff Mintz said it appears sales growth has slowed among US retailers that carry Crocs, but markdowns are below most other brands and consistent with first quarter guidance. In a note to investors Mintz stated, "We expect typical seasonally strong sell through, especially as the weather gets warmer and drier around the country."
Shares of Crocs have fallen 53% in 2008, despite reporting strong earnings and sales figures for the fourth quarter and year end 2007. Sales for the fourth quarter increased 99% to $224.8 million (domestic sales increased 47% and international sales increased 221%). For the full year 2007, Crocs reported a sales increase of 139% to $847 million, with an increase of 82% for domestic sales and an increase in international sales of 264%. Net earnings for fiscal 2007 increased 147% to $168.2 million. In addition, management is sticking to its growth targets for fiscal 2008, projecting revenue growth of approximately 37% and net income per diluted share of approximately $2.70, a 35% increase. The big story out of Crocs is the incredible international growth. The company now sells in 90 countries through 19,000 doors, and increase of 137% YOY, and international sales now account for roughly 50% of revenues.
The main concern on Wall Street has been the build in inventory in the fourth quarter which increased 27 percent sequentially. But I believe management adequately addressed the inventory concern in its fourth quarter conference call. Crocs CFO Russ Hammer stated, "We have historically chased demand since inception and we believe we are properly positioned on a forward-looking basis to meet our first half forecasted customer demand." Ron Snyder Crocs CEO added, “We had a lot of indication from retailers across the board that they just didn’t get enough; they had tremendous demand for the spring ’07 product and they just didn’t get enough. So we’ve got good pre-bookings on those and we’re pretty optimistic.” Perhaps the bigger concern on Wall Street is that Crocs, like Frankie Goes to Hollywood, is a one hit wonder; however, the huge success of the new Mammoth product (US only), the fleece-lined winter moccasin, should ease those concerns. The company had expected to ship about 100,000 pairs of the product, increased their projections to 250,000 after their July shows, and ended up shipping close to 3 million by year end. Crocs will launch the Mammoth line internationally this fall season.
The bottom line, I think CROX is cheep trading at less than 10x 2007 earnings. The company has very little debt, industry-leading gross margins of 58.7%, and 51% return on equity. According to Zacks the average EPS estimate is $2.66 or 33% growth in 2008. I give CROX an intrinsic value of approximately $36.00 per share, assuming a 7% growth rate over the next five years.
Disclaimer: I own shares of Crocs Inc. (CROX)