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Crocs Inc. (CROX) Valuation

April 07, 2008 | About:

sapcap

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sapcap shares his view on the valuation of Crocs Inc. (CROX)

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)


Rating: 4.0/5 (44 votes)

Comments

itznuthin1
Itznuthin1 - 6 years ago
this company is a fad with no moat. Iv'e been extremely bearish on crocs forever. Cool shoes but never a business I would consider holding in my portfolio
kfh227
Kfh227 premium member - 6 years ago
I used to wear I.O.U. branded sweatshirts! Some of my friends even bought their socks!



I hope some of you get the correlation.
gav_sharma
Gav_sharma - 6 years ago
If u want to fast forward one year and see what CROX would look like in future..........just take a look at HLYS now.
lynch1000s
Lynch1000s - 6 years ago
Crox is a no go, but their financials and numbers are great.

Like said earlier, no moat!!! Check out their website.
peterod23
Peterod23 - 6 years ago
Does Nike have a moat? Does Timberland? If so what is it?
kfh227
Kfh227 premium member - 6 years ago
peterod23 Wrote:

-------------------------------------------------------

> Does Nike have a moat? Does Timberland? If so

> what is it?

Nike is a built up brand formed over decades that spans all age groups? I hope you are not trying to say Crox is like Nike. I will not comment on Timberland as Nike is the true example here.

Crox is a fad among 7 year olds? When the 7 year olds are 15, I can guarantee that none of them will wear Crox. Ironically, many of them will be wearing Nike shoes. This is also something I can guarantee.

And the new 7 year old age group in 5 years will be hooked on some other fad.

I will admit though, in all my years, I think I remember one adult wearing them. Exactly 1. Now that is built in brand loyalty!
kfh227
Kfh227 premium member - 6 years ago
gav_sharma Wrote:

-------------------------------------------------------

> If u want to fast forward one year and see what

> CROX would look like in future..........just take

> a look at HLYS now.

http://finance.yahoo.com/q/bc?t=5y&s=CROX&l=on&z=m&q=l&c=HLYS+

Any investors in Crox (one of Jim Cramers picks ironically) should takes their gains or losses and walk away.

alanb9
Alanb9 premium member - 6 years ago
kfh227 Wrote:

> I will admit though, in all my years, I think I

> remember one adult wearing them. Exactly 1. Now

> that is built in brand loyalty!

Walk into your nearest hospital and start looking at what nurses and doctors wear when on their feet all day. You'll see more than one pair of crocs/day on an adult.

But that fact is in no way an argument against your thesis!


sapcap
Sapcap - 6 years ago
Kfh227 Wrote:

I will admit though, in all my years, I think I remember one adult wearing them. Exactly 1. Now that is built in brand loyalty!

This to me displays the beauty of this investment thesis. Very few investors understand the company or take the time to carefully study the company. Kids represent about 27% of Crocs' market, therefore adults are wearing Crocs in large numbers. The comparison with HLYS is very common, in fact it is one I used in my own analysis; however, we are talking about a kids product designed for fun (an uncomfortable shoe with wheels)vs. a product designed for comfort. This is all about valuation, what was once overpriced is now underpriced.
yhlbb
Yhlbb - 6 years ago
My family has three pairs, and I saw neighbors (kids and adults) wearing them too. They are comfortable to wear. (I bought them mainly because I want to check out the product before buying the shares).

They are pricey and knockoffs are plenty. That's my main concern.
kfh227
Kfh227 premium member - 6 years ago
Please tell us all what your predictions for future cash flows over the next 10 years will be with certainty. If possible, please go out 20 years. Using your numbers I'll be more than willing to run a DCF analysis on this stock.



>> Very few investors understand the company

>> or take the time to carefully study the company.

The best ideas are the obvious ones. I don't know many value investors that would think a product based on a fad is something obviously worth pursuing.


I'm going to opt out of this conversation. I think I've made my point as good as I could. Instead I will toss on some comfortable leg warmers (early 80s reference). A nice I.O.U sweathshirt (late 80s). My tie died T-shirt from 1970 and some acid wash jeans from the 90s. All while being content in my decision to never buy Crox. Maybe I'll even listen to a cassette tape on my Sony Walkman as opposed to one of those silly Apple branded things (which I would also never invest in).

Now, if you would like to discuss the concept of barrier to entry, I am sure others would love to discuss Crox on that front.

I will do that DFC for you though, just give me the numbers.
kfh227
Kfh227 premium member - 6 years ago
OK, that is funny. yhlbb already started the discussion on "barrier to entry". Good work investors!
cm1750
Cm1750 premium member - 6 years ago
Like others, I just don't see the value.

CROX is like a dot com in 2000 - sure, its come down a lot from the peak, but no one can really value it. As they say - Fools know the price of everything but the value of nothing.
DaveinHackensack
DaveinHackensack - 6 years ago
A couple of points I made about Crocs when the stock was mentioned on the Small Cap Values board:

As far as it being a fad, I'm not so sure. Crocs are popular not because of how they look but because of how comfortable they are. Also, Crocs has diversified into a number of different models, e.g. the Crocs "Mammoth", a winter shoe lined with synthetic fur.


And

"What does Crox offer that others can not easily replicate for a lower price."







The proprietary material their shoes are made out of. From the Crocs website:





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, called Croslite™, enables us to produce a soft and lightweight, non-marking, slip and odor-resistant shoe. These unique properties make our footwear ideal for casual wear and for recreational uses such as boating, hiking, fishing or gardening, and have enabled us to successfully market our products to a broad range of consumers.






I own a pair of the islanders model, which I wore all last summer. Everything they say about Croslite™ has been true, in my experience.


That said, I don't currently own CROX. As I mentioned on the Potash thread, CROX is a value stock that doesn't have a macro trend at its back. It is a top-100 Magic Formula all-cap stock though. It if rises to the top-50 or top-25, I may consider buying in the future.
gurufocus
Gurufocus premium member - 6 years ago
CROX valuation by Krasimir Karamfilov of Pirgos Mirgos LLC:

Balance Sheet

CROX

2007

Cash

36,335,000

Securities (Investments)

0

Receivables

152,919,000

Inventory

248,391,000

Property/Equipment

100,000,000

Total Assets

537,645,000

Current Liabilities

167,448,000

Invested Book Capital

370,197,000

Total Liabilities

183,312,000

Net Asset Value (Equity)

354,333,000

Shares

80,759,077

BOOK VALUE/SHARE

4.39

Price Now

19.25

Price/Book Value Ratio

4.39

Income Statement

Sales

847,350,000

Cost of Sales

349,701,000

Gross Profit / Margin

497,649,000

58.73%

EBIT

240,326,000

Net Income / Margin

168,228,000

19.85%

Business Metrics

Return on Invested Capital

45.44%

Return on Equity

47.48%

EPS

2.08

P/E

9.24

Market Capitalization

1,554,612,232

Next Year

2007 Net Income

168,228,000

Return

0.45

Time (years)

1

2008 Net Income

244,675,567

2008 Revenue

1,232,409,835

Intrinsic Value

Free Cash Flow

162,506,000

Years

10

Future Value

1,625,060,000

Discount Rate

0.05

Present Value

997,645,872

Interest on Free Cash Flow

590,057,990

TOTAL PRESENT VALUE

1,587,703,862

John Krantz
John Krantz - 6 years ago
peterod23 Wrote:

-------------------------------------------------------

> Does Nike have a moat? Does Timberland? If so

> what is it?


The time-tested brands. Emphasis on time tested.

Nike's brand moat is obvious, and Timberland makes the only boot in the market that is hip to wear casually, and has been like that for years. "Tim's" has become a catchall phrase for "casual boot" just like "kleenex" is a catchall for paper tissues. That's a hell of a moat.

I just don't see Crox having brand strength like that. Its a clear fad to me.

kfh227
Kfh227 premium member - 6 years ago
Well, gurufocus came up with IV. Now what kind of margin of safety is needed for Crox? 50%? That means you should buy at what price?
DaveinHackensack
DaveinHackensack - 6 years ago
John Krantz,

"

Nike's brand moat is obvious, and Timberland makes the only boot in the market that is hip to wear casually, and has been like that for years. "Tim's" has become a catchall phrase for "casual boot" just like "kleenex" is a catchall for paper tissues. That's a hell of a moat.

I just don't see Crox having brand strength like that. Its a clear fad to me. "


I'm no branding expert, but my sense about Nike and Timberlands is that they are mainly 'urban' brands. For functional footwear, they don't have moats: hardcore runners are fine with New Balance and hardcore outdoor workers can wear Wolverines or other boots. What's different about Crox is that the brand isn't based on attitude or looks but on comfort and functionality. Although they were initially invented for boating and recreation, Crocs are popular with people who are on their feet a lot at work (and who can get away with wearing them): surgeons wear them while they operate (with socks on, of course); chefs wear them, etc.
whit324
Whit324 - 6 years ago
I'm new to this site and the post on Crocs caught my attention because I love these shoes. They are just the most comfortable. I am a novice investor so I am sorry if this is a remedial question. Gurufocus came up with an intrinsic value of 1,587,703,862? How does this translate into a share price? Does one divide this number by the shares outstanding?

Thanks all.
robinsonfunds
Robinsonfunds - 6 years ago
If you want to make money with crox. Short Crox.

JJINVEST
JJINVEST premium member - 6 years ago
I just recently looked into CROX. It indeed looks very attractive.

The new lines of product look completely different than the older Crocs. Much more stylish. Some seem to aim for a semi-formal look. The company is definitely not sitting on one-trick pony (i.e. the older styles).

The company owns 25% of the manufacturing capacity while third party manufacters account for the rest. it is taking great pain to get its own distribution channels in Europe and the emerging market. It is hiring talent to design shoes for 2009 and beyond. It is buying up smaller companies whose products would complement the core products. It is licensing extensively with Disney, professional sports, etc. precisely to combat the knock-off's (knock-off's simply can't print Yankee logo's on their shoes like Crocs can).

I don't see what kind of moat Nike has that Crocs doesn't. Many people would choose Reebok, Addidas, etc. shoes over Nike shoes depending on price. Nike shoes are not known to be more comfortable than other brands. Most of the Nike shoes are manufactured in third world country with cheap labors with the only thing differentiating that pair of shoes being the label. I would even argue that the name "Crocs" has crept into our culture as Nike or Google or others have.

Some issues are:

- inventory. Crocs is actually building up an inventory. If there is too much inventory, that can prove to be disastrous.

- how is the clothing brand going to take off? If it can do a great job in shoes, why does it have to diworsify itself into clothing so fast?

Really, save economic headwind, this company looks very good on the micro level.
kfh227
Kfh227 premium member - 6 years ago
I was just in this store called The Christmas Tree Shop. It's kind of a junk store as far as I am concerned. But what did they have? Some very soft, comfortable feeling Crox rip-offs.
JJINVEST
JJINVEST premium member - 6 years ago
Distinguishing fad from true trend is difficult. Why would someone buy $120 shoes from Nike (made in China) over $20 shoes in Wal-Mart (also made in China)? Why would somone buy $4 latte from Starbucks rather than preparing homemade coffee for $.5 daily? All these trends have been torn apart by various investors in beginning.

Crocs is slowly but surely slipping into everyday mindset. The word, Crocs, conjures an image immediately. One evidence is that you call those ugly shoes "crocs-knock-off" but yet you don't even know what knock-off brand that really is. It is like people say "Coke or Coca Cola" even though they simply mean soda or soft drink. They say "google" when they simply mean internet search.

Crocs has many newer fashion lines out that are completely different from the older crocs. knock-offs can't adapt that fast. knock-offs don't have the same rave review (comfort, antimicrobial action, etc).

Crocs is much closer to Nike, Timberland (Integrative company with set image and goals) than Heely's, Jones Soda, etc. I personally think that it is too early to consider Hans to be a fad or a trend.
kfh227
Kfh227 premium member - 6 years ago
TIme will tell who is correct. I have bigger problems right now. I can't seem to locate my Starter jacket?
cgabis
Cgabis - 6 years ago
Well looks like its down another 26% after hours!!
DaveinHackensack
DaveinHackensack - 6 years ago
"Well looks like its down another 26% after hours!!"

On lowered guidance from Crocs. According to the AP, even after the lowered guidance, Crocs still forecasts earnings of $1.54 for fiscal '08. That means that the stock is now trading at about 9x those forward earnings

As I said previously, Crocs looked cheap but lacked any macro trend that would cause it to go up. That still appears to be the case, and my preference remains for cheap stocks riding macro trends, but with Crocs trading at single-digit earnings multiples I may consider buying it as one of my Magic Formula stocks. That price decline is probably going to push Crocs into the Magic Formula top-25.
kfh227
Kfh227 premium member - 6 years ago
Dave,

Given the top 25, what are your other options? Any stocks with undeniable moats in there?
DaveinHackensack
DaveinHackensack - 6 years ago
kfh,

I've actually been broadening my MF universe to the top-100 MF stocks with a minimum market cap of $1 million. I don't know if you would consider any of them as having an "undeniable moat", but there are a few with macro-trends behind them (e.g., energy, ag, mining, infrastructure, etc.), and I've got my eye on a couple of them.
mccoy.mike
Mccoy.mike - 6 years ago
I run the same top 100 with a $1M min market cap. Take a look at Conn's... MF stock with a moat and growth. I valued it at $55/share.
DaveinHackensack
DaveinHackensack - 6 years ago
Thanks for the heads up. I'll take a look at it and let you know what I think.
Dr. Paul Price
Dr. Paul Price premium member - 6 years ago
ALL THIS COMMENTARY SOUNDS LIKE A CROCK OF SH*T, these analysts are useless.

Ahead of the Bell: Crocs Down on Outlook

Tuesday April 15, 8:58 am ET

Crocs Plunges After Lowering 1st-Quarter Outlook; Analysts Downgrade and Cut Estimates


NEW YORK (AP) -- Shares of Crocs Inc. plunged in premarket trading Tuesday after the casual footwear company lowered its first-quarter profit forecast, prompting a downgrade and lowered outlooks from analysts.



Shares of Crocs fell $4.83, or 27.2 percent, to $12.96 in premarket trading.

Late Monday, Crocs, based in Niwot, Colo., slashed its first-quarter outlook, blaming slower sales and expenses related to the closure of its Canadian manufacturing plant. Crocs is scheduled to report first-quarter earnings on May 7.

Shortly after Crocs reported its new guidance, Thomas Weisel analyst Jim Duffy downgraded the company to "Market Weight" from "Overweight." He also slashed his 2008 earnings estimate 37 percent to $1.70 per share from $2.70. For 2009, he cut his outlook by more than half to $1.50 per share from $3.25.

Analysts polled by Thomson Financial expect earnings, on average, of $2.63 for 2008 and $3.19 for 2009.

Duffy said Crocs' earnings would suffer throughout the year as it struggles to meet sales targets and makes structural changes to its business model. The company faces a "long and painful process," he said.

Separately, JPMorgan analyst Robert Samuels lowered his own 2008 outlook to $1.70 per share from $2.59.

Samuels said the company could fall even more if its sales turn negative, but maintained his "Neutral" rating, adding that the stock still "looks cheap."



kfh227
Kfh227 premium member - 6 years ago
Crox down 40% today.

http://finance.yahoo.com/q?s=CROX

I know commodity started a nwe thread on Crox, but lets keep this one going instead.
sapcap
Sapcap - 5 years ago
I first started accumulating shares of CROX in April just before management came out and lowered their guidance for the year. I have continued to buy the share below $10.00 and still remain optimistic on my investment, though less so on managements ability to communicate with shareholders. Management has lost credibility with the street; however despite their missteps the business continues to grow. In Q1 revenue increased 40%. International sales were up 79% representing 53% of CROX total business. European sales increased 109% while Asia increased 93%. Domestic sales were a drag, increasing only 12%. The biggest problem for the company is the rapid raise in costs and the deterioration in margins. The company now seems to finally be addressing these problems and is working to bring cost & inventory back down. The company is now calling for EPS for the year of $1.70 to $1.80.

The stock currently trades at $10.08 with a PE of 6.1x. Expectations for the company are very low and there is a huge short interest in the stock. I would argue that the stock is now priced for zero growth. If management is able to meet its lowered expectations I believe the stock will rebound significantly.

I own shares of CROX
DaveinHackensack
DaveinHackensack - 5 years ago
"If management is able to meet its lowered expectations I believe the stock will rebound significantly."

You're probably right. The $64,000 question is whether they will be able to meet them. I bought Heelys last year in my Magic Formula portfolio after it had dropped from the 30s to 9, with a similar idea in mind (Crocs is now a Magic Formula stock too). Heelys then missed its sales and earnings targets for the next few quarters and now it's trading at $4.28 per share, with a trailing P/E of 9.3. Back out the cash (Heelys has $3.70 in cash per share and no debt) and it's trading at an EV/E of 1.24.

I like the Crocs shoes, and own a pair of them. For the first time yesterday, I finally saw one of their knock-offs, "Doggers", selling for $10 per pair at my local CVS. Crocs claims that its CrosliteTM resin material is proprietary (although they haven't tried to patent it), and if this is true, this could be considered a moat, but after touching the material of the Doggers, it feels the same to me, and the label makes similar claims (e.g., that it's bacterial-resistant, washable, odor resistant, etc.). The Doggers package claims that they are "licensed" whether they are actually licensed by Crocs as a deliberate down-market strategy, I don't know. You might want to look into this. You might also want to visit Crocs's flagship store on the Upper West Side if you live near NYC and get a feel for the customer traffic there.

The main difference between Heelys and Crocs, as I see it, is that Crocs are still popular and growing sales but have a weak moat; Heelys has a strong moat with its patent portfolio (and recent legal victory against an imitator), but its popularity and ability to grow sales are questionable. My hope with Heelys is that it will at least generate sales from current wearers buying new ones as their feet outgrow the old ones.

Good luck with your CROX shares.
sapcap
Sapcap - 5 years ago
all good point. I've looked at HLYS as well and like the fact that at $4.28, no debt, and with $3.70 cash I have a clear idea of my downside risk. I recently visited a DICKs outside of Chicago and they had a great selection of Crocs and store manager said they are selling like crazy. Management is the big question mark with CROX now; however with expectations so low, as well as my cost basis now, I feel far more comfortable.
Dr. Paul Price
Dr. Paul Price premium member - 5 years ago
See this link for a relatively low risk way to play CROX.

http://www.gurufocus.com/show_forum_post.php?thread=25650
kfh227
Kfh227 premium member - 5 years ago
My brother in law this weekend showed me his new shoes. He is 32 and these were the words out of his mouth:

"These are the most comfortable shoes I have ever worn"

Of course, he could have only been talking about one thing. A pair of Crox ...... Clones. Yup, a pair of Crox rip-offs. In one single sentence he has re-affirmed my belief that there is no competitive advantage in Crox. As a side note, CROX today is down 5% hitting a new 52 week low.
DaveinHackensack
DaveinHackensack - 5 years ago
Two additional points about Crocs:

1) I suspect that the reason Crocs hasn't sought a patent on their "Croslite" material is because they can't get one on it.

2) Absent a patent on the material, Crocs will have to rely on patents on its footwear designs (which so far haven't helped, as knockoffs have been made with slight modifications), or the strength of its brand.

Regarding Crocs's brand, I saw a great full page ad by them in Vegetarian Magazine (my girlfriend subscribed to it, unfortunately right before we went on Atkins). It was an ad for the stylish, new womens' high-heeled Crocs. The shoe in the ad was red and was held by a model balancing the toe of it in her palm. The tag line was "Hard to believe the parents were ugly". The shoe in the picture cleverly had a little metal tag on the strap (similar to what you might see on a Coach product) with the word "Crocs" on it. Whether this fashion angle will work, or will be plagued by knock-offs, I don't know.

I also don't know if Crocs's specialized divisions (e.g., Medical) will successfully fend-off knockoffs. Too-hard pile for me.
yabz
Yabz - 5 years ago
Here is Asia, the knock-offs are such poor quality they aren't much of a threat. Also the high price of oil has meant that many more people are walking which will boost demand for shoes.

At the current price (7.8) CROX have got to be worth a punt.
DaveinHackensack
DaveinHackensack - 5 years ago
For those who aren't aware yet, CROX dropped 45% Friday after it radically slashed its guidance. Closed at $4.95.

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