Crikey! Crocs Isn’t a Crock

Dan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Not too long ago, Crocs (NASDAQ: CROX) took the world by storm. Clogs became a household name, and the stock sprinted higher. Unfortunately for Crocs, that kind of momentum is now a distant memory. For example, the stock has depreciated 11% over the past year. And clogs aren’t the hottest thing in footwear anymore. On the surface, it looks like the stock should be avoided at all costs, but the story runs deeper.

Cold here, hot there

Weak consumer spending in the United States, Europe, and Japan, has hurt sales. Despite these trends, Crocs has shown positive comps in the Americas, Asia, and Europe. In the Asia-Pacific region, Crocs continues to exceed expectations.

This is a very important point, because if you live in the United States and you don’t wear Crocs, then it most likely seems like a fad. However, if you live in the Asia-Pacific region, you wouldn’t look at it that way at all. This also helps explain why revenue and earnings have consistently improved over the past three years.

You should also keep in mind that Crocs has moved well beyond clogs, offering different types of croslite footwear. (Crostlite allows for softness, comfort, a light weight, and odor-resistance.) Globally, there has been strong demand for its Huarache, A-Leigh, Beach Line Boat, and Retro brands.

While everything sounds fine and dandy so far, not all is well on every front. For instance, at the end of June 2013, the backlog declined 6.7% compared to one year earlier. This is likely in the anticipation of weaker fall spending, mostly based on a weaker-than-expected spending environment in the spring. 

Contrary to popular belief, Crocs has future potential. This company is growing, and it has only been around for 11 years. Furthermore, the balance sheet is in excellent shape, which will allow for more opportunities. Unfortunately, the stock has performed poorly, and Crocs must erase the reputation generated from its own past success -- Crocs is about more than just clogs.

Other options

Deckers Outdoor (NASDAQ: DECK) is all about uniqueness and developing niche brands. Deckers has seen top-line growth over the past three years. Though Deckers missed on the top line in the second quarter, its loss was narrower than expected.

Deckers is dealing with softness in its UGG, Teva, and Sanuk brands. On top of that, it’s dealing with increased costs for sheepskin. On the positive side, Deckers is constantly developing new products in order to help drive growth, it’s looking to expand in Asia, e-commerce sales just jumped 34.2%, and management upped its outlook for 2013. Revenue growth is now expected to be 8% versus a previous expectation of 7%, and EPS growth is now expected to be 8% versus a previous expectation of 5%.

Skechers USA (NYSE: SKX) has also enjoyed tremendous e-commerce growth. In this case, e-commerce sales increased 37.2% in the second quarter. And Skechers is also enjoying strong international sales, with the most demand stemming from China, Chili, and Canada. As expected, Europe has been the weakest performer. However, despite that negative, comps increased 16.8% internationally, as well as 16.5% overall.

Other positives for Skechers include effective cost-containment measures, global expansion (35-40 stores planned to open by the end of the year), and the upcoming back-to-school shopping season.

On the negative side, Skechers is the only company of the three covered here that saw revenue decline in 2012. Furthermore, earnings have been inconsistent, and the stock is trading at a lofty 48 times earnings.

Conclusion

All three companies have potential, primarily based on international expansion. However, all three stocks are highly sensitive to broader market corrections. Therefore, any investment should only be treated as a speculative play.

Skechers might be on the right track, but with revenue declining in 2012 and the stock trading at 48 times earnings, this would be a high-risk investment.

Deckers is by far the best all-time performer of the group when it comes to stock appreciation. Margins are good, top-line growth is present, and guidance is impressive. However, weakening brands are a concern.

Crocs is somewhat of an enigma. It has been the most consistent company of the three in regards to revenue and earnings over the past three years, yet the stock hasn’t done much. Margins are solid, debt management has been excellent, and international expansion looks to have sustainable potential. On the other hand, a declining backlog could indicate softening demand.

None of these companies present safe investment opportunities over the next few years, as we don’t know how the broader market will react when (or if) Ben Bernanke backs off monetary stimulus and interest rates increase.

On the other hand, that could be a long time from now. And within that time, all three stocks have the potential to deliver substantial returns. Just keep in mind that these are speculative/higher-risk plays. Sticking with larger, steadier companies with less downside risk is a better avenue for building long-term wealth. 


Dan Moskowitz has no position in any stocks mentioned. The Motley Fool owns shares of Crocs. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus