3 Reasons Crocs Still Looks Flimsy
Demitri is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Investors in Crocs (NASDAQ: CROX) over the last couple years have been through a wild ride. The stock rallied almost 300% in 2007 as the company's signature molded clogs became a huge hit. Less than two years later the stock had fallen 96% on an epic collapse in demand, and talk was over a possible bankrupcy filing. Since then the company has pulled itself back from the brink and is profitable again. Given recent growth, Crocs may even look cheap. But while sales and profitability have been expanding, there are good reasons to stay skeptical that this turnaround has legs.
There are three main problems with the growth that Crocs has been reporting.
1. It's too focused on China.
Geographic diversity is one thing, but what's happening to Crocs' revenue is a whole different animal. The company reported $45 million in additional revenue last quarter and nearly two thirds of that figure, $28 million, was attributable to growth in Crocs' Asian market. Where the company booked just over half of revenue in the U.S market in 2007, that figure stands at less than 40% now, and falling. The company isn't so much expanding internationally as it is becoming a one-market story.
Competitor Wolverine Worldwide (NYSE: WWW), by contrast, logs a 60/40 split between U.S. and international sales. Deckers (NASDAQ: DECK), too, got 70 percent of its revenue from the U.S last quarter. So, for investors worried about the potential fad status of the Crocs brand, the fact that the company's recent growth isn't geographically broad-based is no consolation.
2. It's too dependent on price hikes.
On top of geographic worries, Croc's increased sales figures have also been propped up to a large extent by price hikes. While unit sales volumes did tick up, Crocs' footwear prices rose even more. That's an uncomfortable trend that has been going on for some time: over the last year Crocs' unit sales were up 12 percent but the company's sales prices were up 13.3 percent.
The ability to raise prices is an important indicator of brand strength, but even some of the most powerful brands don't push the envelope that far. Nike (NYSE: NKE), for example, reported revenue growth that was primarily driven by unit growth of its footwear last quarter, and bolstered by a smaller increase in average prices too.
Crocs can't keep raising prices without sacrificing sales growth at some point. The company's growth won't graduate from fad status until it's driven by more shoes flying off the shelves, and not just higher prices at the register.
3. It's too seasonal.
Which brings us to the third worry: the timing of all those sales. Despite the company's attempts to build up a cold-weather catalog, sales are still heavily focused on summer and spring styles. Because of the significance of warehouse distributor pre-orders, that makes Crocs' first and third quarters revenue heavy.
Unfortunately, that also sets up the winter quarter as doubly challenging for Crocs. The seasonal dip in demand tends to hit during the highly promotional holiday season that pairs consumers shopping for bargains with wholesalers eager to clear out inventory. The worry is that a turn in consumer sentiments could hit Crocs particularly hard during these times, when the company is exposed to slower sales and less favorable pricing trends.
If the shoe fits
It's true that all of the issues I flagged could be read as growing pains, or even as essential parts of a corporate turnaround. International sales growth, expanding profits, and high quarterly sales are usually great signs for your average retailer. So if these issues don't worry you, Crocs should look like a steal at just around 10 times forward earnings estimates.
But for my investing dollars, considering that the company almost imploded just three years ago, Crocs is not your average retailer. That gives the bearish reading of these issues more weight. Crocs hasn't proven to be a year-round retailer that can book persistent, high quality growth. Until it does, it's best to leave this one on the shelf.
SigmaSwan owns shares of Nike. The Motley Fool owns shares of Nike. Motley Fool newsletter services recommend 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.If you have questions about this post or the Fool’s blog network, click here for information.
