Is it Time to Chop Up Crocs?

By Ryan Guenette - September 4, 2012 | Tickers: CROX, DECK, NKE, SKX, SHOO | 0 Comments

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As the summer draws to an unfortunate end, I observe less and less people sporting the iconic Crocs shoes. Crocs Incorporated (NASDAQ: CROX) is a designer, manufacturer, and distributor of footwear and accessories for men, women, and children. As of the year ending on December 31^st, 2011, Crocs sold its products in more than 90 countries through retailers and distributors operating stores, outlets, kiosks, and web stores. Over the past 5 years the company has declined 70.07%, vastly underperforming the S&P 500 which only declined 4.61% during this period.  So is it time to chop up crocs?

Snappy Fundamentals

In 2010, Crocs reported earnings per share of $0.76. In 2014, the average analyst consensus believes the company will derive $1.90 per share from its business operations. This represents a 150.00% increase in earnings per share over 4 years. Based on these statistics, Crocs’ compound annual growth rate (CAGR) is 25.74%, an impressive projected feat. However, it is noteworthy to mention that Crocs’ 2007 earnings per share were $2.05, presenting the fact that earnings are to not set to eclipse 2007’s high until 2015 or later. Crocs growth is consistent during this period, but is by no means recession proof. Their company is very vulnerable to any economic shifts as their products are more a luxury item than a necessity. Their products are not inexpensive, and in my opinion are more of a niche item. Crocs and their products are not for everyone, but the people that are into their products buy when the economy is rolling. Currently, Crocs does not pay out a dividend and has not expressed any plans to do so in the future. From this we can Crocs financial strength in times of economic prosperity.

The chart below displays Crocs’ sales, operating profit, net income, net margin, operating margin, and earnings per share over the coming years.

A Climate Change in Crocs Favor

Crocs’ products are ideal for summer time use. They are light, airy, and in every sense of the word, summer. So it is of no surprise that Crocs favors warm weather, and derives the majority of its revenues from the summer season. The more days in the year that are hot, the more money Crocs will make. While we have all heard about the global warming that is enveloping our world, the entire world is truly heating up. As the chart below displays, the global temperature is rising, and has been for the better part of the last decade.

With the temperature rising, more people will be rushing to get Crocs’ products, which help keep them cool. If Crocs is able to innovate their technology and create new products that have the purpose of keeping cool, they will reap the benefits of the warming world. 

However, Crocs must innovate its technology and focus more on keeping the customer cool, if they do not, they will not take advantage of this shift. A possible way the company could achieve this is by developing a new line of products pinpointed on keeping cool. In the past Nike and Under Armour have developed lines that cater to this need, and I do not find it as a huge stretch that Crocs could do the same in the future.

While a warming world driving sales may be a long-term trend that could not fulfill itself for decades, a more immediate shift that Crocs will benefit from is the dwindling UGG craze. Years ago when UGG boots were introduced to the market, every girl in America needed a pair. However as Decker's has recently reported, the volume of boots that retailers are requesting is dwindling. Millions of parents will still have to foot the bill for these boots, however cheaper alternatives have sprouted up, such as Crocs' berryessa collection. While Crocs’ penetration of this market will have minimal effect on the company at first, over the long-term more and more girls should be attracted to these stylish boots, at half of the price of UGGs.     

The average price to earnings ratio on the S&P 500 is around 16. Crocs possesses a price to earnings ratio of 12.79. Even though the company’s price to earnings ratio is below the average, the company possesses a growth rate well north of the average. This represents that Crocs stock was pushed down well past where it truly should be trading at. The chart below displays the historic low multiple Crocs is not trading at, as well as the company’s ability to bounce back it earnings from the 2008 lows.

Who Rules the Feet?

Compared to some of Crocs’ most prominent competitors, such as: Deckers Outdoor Corporation (NASDAQ: DECK), Nike Incorporated (NYSE: NKE), Steven Madden Limited (NASDAQ: SHOO), and Skechers USA Incorporated (NYSE: SKX), Crocs compares relatively favorably.

In terms of growth, Crocs leads the industry, while Skechers is the laggard in the sector. Nike is the only company in the industry that pays out a dividend. In the fundamental ratio comparison, Nike appears to be trading at a premium to its peers, while Deckers appears to be in the bargain aisle. When growth is taken into account, Skechers appears to be trading at a bargain, while Nike once again appears pricy. In the net profit margin comparison, Skechers stands out to the downside, while Deckers stands out to the upside.

The Foolish Bottom Line

The Crocs’ business is very seasonable, with its products being highly sought out in warm weather months. However the company is relatively diversified, with the company being valued above $1 billion. Its financial strength is rebounding from the lows seen during the great recession, and its growth is moderately impressive. The company’s annualized growth rate should remain in the double digits into the future. Additionally, the company should benefit from the increasing global temperatures, and the company is trading near historic all-time lows. While I would not run out to buy shares at current prices, a shareholder of Crocs may see decent return rates over the coming years.     

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