That's A CROC!

By Chad Henage - July 21, 2012 | Tickers: CROX, DECK, NKE, UA | 0 Comments

• Email
• Print

If you're a Crocs, Inc. (NASDAQ: CROX) investor, this might sound mean and I apologize up front for that. Your brand, might be the most made fun of on the Internet today. While some would say this is not a big deal, and fashion trends change on a regular basis, let me assure you the future of this company is dependent on changing public perception. In a recent article on The Motley Fool by Alyce Lomax, she gave “3 Reasons To Buy Crocs.” Unfortunately, there is one good reason to avoid the company and that is one of their primary markets absolutely despises the brand.

One of the 3 reasons that Alyce gave for buying the stock, was the company's increased innovation away from the old school Crocs that most people know. While I will say I've seen some of their newer shoe designs, and the company has moved toward a more diversified brand, this isn't enough. A second reason she gave for buying the stock, was the relative value of Crocs versus several of their competitors. Crocs faces some serious competition from the likes of Deckers Outdoor (NASDAQ: DECK), Nike (NYSE: NKE), and Under Armour (NYSE: UA). Let's take a look at the difference between Crocs and these other competitors on just a few metrics to see what Alyce is talking about:

(free cash flow adjusted for one-time items in each case, free cash flow and debt-to-equity numbers using most recent quarterly reported figures) 

You can see that on a P/E basis, Crocs has one of the most inexpensive shares among the four companies. In addition, if analysts are to be believed, Crocs should see significant growth in EPS in the next several years. While it's only one quarter, the company also produced the highest free cash flow per $1 of sales. To top it off, Crocs keeps up with its competition, showing no long-term debt on its balance sheet. If these were the only numbers, I might be able to suggest that Crocs could be a good deal. However, two measures in particular are worrisome.

For example, the company's operating margin varies drastically quarter to quarter. In the last year, the company's operating margin has been as low as 3% and as high as 23%, primarily due to the difference in selling general and administrative expenses. When SG&A can make such a huge difference in a company's results, and sales are consistently growing, it's a worry for me. It would make sense if this line item were growing steadily along with sales, but seemingly every three months the number changes with no predictable pattern. In addition, the market obviously doesn't believe that Crocs will produce the type of earnings growth that analysts expect. The perfect example, is the comparison to Deckers. With both companies sporting a forward P/E ratio of between 9 and 10, and with expected growth of 17% to 18%, they both look like bargains. However as I found out with Deckers personally, just because analysts expect growth doesn't mean it will materialize. Even if Crocs produces the type of earnings growth short term that analysts expect, longer-term the company has a challenge that will be difficult to overcome. That challenge is the lampooning of the brand on multiple social media sites.

The best example I can give, is the website tumblr., which has become a popular personal blog for many teenagers and young adults. The site allows individuals to publish pictures, quotes, video, music, and more. It operates similar to Twitter, in the sense that each person has the opportunity to follow multiple other bloggers. For many young adults, this site is where they go to express their true feelings and opinions, whereas sites like Facebook are where they say what they're expected to say. To say that Crocs' brand is made fun of on tumblr. on a regular basis, would be a vast understatement. Just a search for the word Crocs on the site brings up thousands of jokes, and pretend conversations making fun of the company's product. As one example, a more popular post recently said, “wow, that's a nice looking pair of Crocs, said no one ever.” With millions of younger users, tumblr. helps to shape brand awareness and loyalty for this demographic. When your brand is the butt of thousands of ongoing jokes, it doesn't bode well for future sales. While there might be multiple reasons to consider buying the stock at these prices, the fact that millions of younger buyers despise the company's product enough to create a constant stream of jokes, is the one reason investors should be cautious.

The situation reminds me a lot of the scene in the movie “Rain Man” where Tom Cruise tells Dustin Hoffman's character that, “Kmart sucks.” The popularity of this movie, and this particular comment, put a negative stamp on the Kmart brand that still lingers today. I fear for Crocs investors that the ongoing stream of jokes at their expense is, creating the same type of negative connotation that this long ago line had for Kmart. Though the numbers look promising, if the current run of jokes has the same effect on Crocs that this one line had on Kmart, no avalanche of promising numbers will be enough.

• Email
• Print
• Feedback