Crocs' Turnaround Is Floundering: Time to Look Elsewhere

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

Crocs (NASDAQ: CROX), just like its feature product, is a love-hate company. The stock's valuation, compared to the rest of the sector, looks attractive (on a historical basis anyway). The company has tried to reinvent itself by putting new products on the market, but so far, according to the company's most recent results, this strategy is not working.

The fashion world is fickle and highly competitive, and for a company to become well-established and profitable, a unique selling point (USP) is needed. Crocs had this USP, but unfortunately, this turned out to be its main failing.

Sales are struggling

Crocs has its die-hard fan base, but this has not been enough to keep sales high and growing, so the company has tried to start again with a new range of products. So far, this has not gone to plan. Earnings fell 43% for the first quarter, while revenue expanded 10%, signifying that the company is spending heavily to try and ramp up sales growth. Management blamed this decline on colder-than-normal temperatures, which while true, is not reason for a near 50% drop in earnings. Management remains optimistic, but based on the fickle nature of Crocs' customers and over-reliance on the weather, I would not be overly optimistic because it appears that the company has no control over its sales growth.

In addition, Crocs' new line of products is similar to that of many other producers, with no identifiable difference apart from the Crocs brand/logo, and as already shown, this is not the company's strongest point.

Still, Crocs is well-positioned for a turnaround with a debt-free balance sheet and $290 million in cash. The company's gross margin stands at 46%, so Crocs continues to have plenty of cash flowing in (cash inflows have averaged $61 million per quarter for the last year).

In comparison

In comparison, Nike's (NYSE: NKE) biggest selling point is its brand name and the swoosh. The company's multiple selling lines and diversification offer multiple income streams, so dependence on one range of products does not limit the company. This is where Nike has been able to expand rapidly over the past year or so, while Crocs has floundered. In addition, Nike's size and economies of scale have meant that the company has been able to expand margins while driving for revenue growth. At the end of the second quarter, net profit margin was up 1% year-over-year, while revenue expanded 7.4% in the same period.

For this growth, investors must pay a premium. In particular, Nike trades at a 7% premium to the sector average P/E of 21.8 on a trailing 12-month basis, and on a forward P/E basis Nike trades at a 28% premium to its sector peers (Nike trades at a forward P/E of 18.1, while the sector average stands at 14.2). Still, with a globally recognizable brand, strong balance sheet (almost no debt), and expanding profit margins, Nike could be a good bet.

Hedge your bets

Unfortunately, both Nike and Crocs are exposed to the world of branding, which can be a risky business if a PR mistake is made. Without risk of branding and the fickle fashion world, Foot Locker (NYSE: FL) appears to offer growth at a reasonable price. With the company's EPS estimates being revised consistently higher throughout the past year, analysts are extremely bullish on the company. Foot Locker is low-priced on a forward basis, trading at a forward earnings multiple of 11.6 compared to the sector average.

Foot Locker does not achieve the same sort of returns as the likes of Coach and Nike, which are its sector peers. However, the company generates a return on shareholder equity of 17.5%, only slightly below the sector average. The company has $7.2 in cash per share, and discounting this from its stock price, the valuation looks even more appealing.

Additionally, Foot Locker's management proactively closed 39 poorly performing stores during the last quarter, with an additional 88 closures planned for this quarter. All in all, these stores will be replaced by 98 new stores and 64 store renovations. The proactive closure and opening of stores shows management's drive to proactively create shareholder value, and this is showing through in sales and EPS growth - something Crocs is struggling to achieve.

Foolish summary

Overall, it might be time to jump ship at Crocs. The company is struggling to turn itself around, but it's haunted by its old image and nature of the Crocs style. Indeed, while management is working hard to improve the situation, there is not showing through in either revenue or earnings growth. On the other hand, Foot Looker presents a hedged, well-diversified play on the apparel sector. Trading at a low valuation, Foot Looker looks attractive and the proactive management team should continue to generate shareholder returns.

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Fool contributor Rupert Hargreaves 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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