Comfort Trumps Fashion - The $1B Shoe Company

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

What is it about shoes that gets people so worked up?  And how can arguably the ugliest shoes generate such huge sales potential?  The Aussies were hip enough to figure it out when they created Ugg Boots.  Surfers around Byron Bay began wearing sheepskin footies to keep their feet warm and dry between surf sessions. The fashion trend caught on in Southern California in the 1980s when girls began proudly wearing their surfer boyfriends' sheepskin boots like a letter jacket. They were comfortable and unique.  By the early 2000s it became a true fashion trend. The UGG Australia brand became so fashionable that the company was eventually bought by Deckers Outdoors (NASDAQ: DECK)

Now the UGG Collection has diversified their offerings to the point of offering Italian leather boots that even the most fashion-conscious models would be proud to strut down the catwalk in.

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Fast forward to Boulder, Colorado in the year 1999.  While most people were partying like the world was about to end, some clever entrepeneurs decided to create comfortable clogs for boating that were full of holes and made out of brightly colored, rubberized plastic.  Actually, it's a proprietary closed-cell resin, called Croslite™. The Croslite™ material enabled Crocs to produce soft, comfortable, lightweight, superior-gripping, waterproof, non-marking and odor-resistant shoes. 

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A few strange people began wearing them to work in the yard, or as a comfortable alternative to tennis shoes or sandals.  After a while the funky shoes caught on as a fashion trend and in 2005 the company changed its name to Crocs, Inc.  (NASDAQ: CROX)

The company went public in 2006 and the stock became a Wall Street darling.  Shares reached into the high $60s in October 2007, then came crashing down (with the rest of the market) in 2008 bottoming in the $1 range in March 2009.  In 2008, revenue dropped to $721.6 million, from $847.4 million in 2007, and the company posted a $185.1 million loss; in 2009, revenue dropped to $645.8 million, for a $42.1 million loss.

Things began to gradually improve and the company regained its footing and returned to profitability after a difficult couple of years.  In late 2010 the company opened storefronts and kiosks in shopping malls, expanding the brand recognition and diversifying into boots, sandals, and other shoe styles including golf shoes.

Today, CROX trades for $18.40 with a forward P/E of 12.5 and PEG ratio of 0.6.  With $220M in cash and $1.2M in debt the stock looks under-valued.  This week it announced that the company expects to surpass $1B in revenue in FY 2011 (after less than 10 years in existence!). Crocs sells shoes in more than 90 countries and continues to expand both their product line and their customer base.  Personally, I think the shoes are ugly but the stock looks very attractive.

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