Is There Upside for This Footwear Business?

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

Recently, shares of Crocs (NASDAQ: CROX) dropped significantly, from $17.30 per share to only around $13.70 per share. The recent decline in its share price was due to the sluggish second quarter earnings results, which were much lower than management’s guidance. At the current trading price, Crocs seems to be quite cheap at only 5.5 times its trailing EBITDA (earnings before interest, taxes, depreciation and amortization). Let’s take a closer look to see whether or not investors should buy Crocs now.

Significant drop in second quarter earnings

In the second quarter 2013, Crocs managed to grow its revenue by nearly 10%, from $330.94 million last year to $363.83 million this year. On a constant currency basis, revenue increased by 12.5%. However, net income experienced a free fall, from $61.5 million in the second quarter 2012 to only $35.36 million this year. The lower net income was mainly due to the higher cost of sales and higher SG&A expenses. Diluted EPS came in at around $0.40 in the second quarter 2013. On the constant currency basis, Crocs increased its comparable store sales in nearly all of the regions except Japan. The highest comparable store sales growth was Asia Pacific, at 8.3% while Japan’s comparable store sales declined by as much as 19.5%.

What I like about Crocs is its strong balance sheet and historical share buyback activities. As of June, Crocs had more than $667.6 million in equity, $289.3 million in cash, but only $6.9 million in long-term borrowings and capital lease obligations. Moreover, Crocs is considered a good cannibal, repurchasing around 2.7 million shares since November 2012 at an average price of around $13.80 per share. In 2013, the company expects to build more stores in Europe, Asia and the Americas, with 2013 total global retail store growth of around 90 net stores. Looking forward, the company should grow its Back To School business in the U.S. market, and expand the business footprint in contra-seasonal markets including Latin/South America, Middle East and Asia Pacific. The company expects to generate around $1.26 billion in revenue and $91 million, or $1.04 per share, in profit.

Crocs is the cheapest stock

Crocs is trading at $13.70 per share, with a total market cap of more than $1.2 billion. As mentioned above, its EBITDA multiple is only 5.5. Compared to its peers including Deckers Outdoor (NASDAQ: DECK) and Nike (NYSE: NKE), Crocs is the cheapest valued among the three companies. At $54.90 per share, Deckers Outdoor is worth around $1.9 billion on the market. The market values Deckers Outdoor at 8.72 times its trailing EBITDA.

Deckers Outdoor has similar characteristics with Crocs. It also possesses a strong balance sheet with little leverage. As of June 2013, it had $718.2 million in equity, $49.1 million in cash and only $26 million in short-term borrowings.

 Its main product, UGG, was a fashion phenomenon. However, 2012 was quite a challenging year for the company, with the negative impact of warm weather, a difficult macroeconomic situation in Europe, and high sheepskin prices. Looking forward, the company will keep growing UGG Australia with the expansion of products and categories, increasing the international exposure and growing its retail business. The company has managed to grow sales by 80% in Japan. The company still views Asia as a huge growth opportunity. For the full year, Deckers Outdoor expects a year-over-year growth of 8% in revenue, with diluted EPS growth at 8%, higher than the previous guidance at only 5%.

Nike is the largest business with the highest valuation. It is trading at $62.90 per share, with the total market cap of around $56 billion. The market values Nike at 13.80 trailing EBITDA. In fiscal 2013, Nike has experienced good growth in both top line and bottom line. Revenue increased by 8% to $25.3 billion while the net income jumped by 12%, from $2.22 billion last year to nearly $2.5 billion this year. The diluted EPS came in at $2.69, 11% higher than the EPS of $2.42 in the fiscal 2012. 

For 2014, the company estimated that it would experience a low double-digit rise in EPS, instead of the previous mid-teen growth guidance. Revenue growth is expected to come in at the upper end of its high single-digit target range. Wall Street estimated a nearly $27.2 billion in revenue and $3.01 EPS for fiscal 2014. Income investors might prefer Nike with its consistent increasing dividends. At the current trading price, Nike yields around 1.3%, with the payout ratio of 30% supporting future increases. 

A potential buyout candidate might demand a premium offer

As I wrote in my previous article, Crocs could be considered as an acquisition target. If it was taken private, it could demand the EBITDA multiple of as high as 9, a bit higher than Deckers Outdoor's valuation. With an EBITDA multiple of 9, Crocs could get a buyout offer at $22.40 per share, a nearly 64% premium to its current trading price.

But even if a takeover does not happen, Crocs could be a good stock for investors at its current trading price, due to its cash generating capability, strong balance sheet, low valuation, and a history of enhancing shareholders’ value via share repurchase activities. 

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Anh HOANG has no position in any stocks mentioned. The Motley Fool recommends Nike. The Motley Fool owns shares of Crocs and Nike. 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!

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