Crocs Inc. (CROX) - What Happened?
After receiving some hate mail regarding my article on Crocs last month, I figured it would be wise to review the stock today and determine just what happened to cause this name to drop nearly 45% on Tuesday.
Before the market opened Tuesday, Crocs management issued a press release and hosted a conference call to update expectations for the recently completed first quarter. While the accountants are still dotting all the I’s and crossing all the T’s, it appears the first quarter is going to be significantly worse than previous expectations. This came as a major surprise to investors as less than 2 months ago, management painted a very rosy picture of growing sales and strong margins. The only hint of trouble was that the company had a large inventory level. Management explained that the high inventory would enable it to meet strong demand coming into the first part of 2008.
Something must have changed between that conference call on February 19th and yesterday’s announcement. Now management explains that Q1 revenue will be around $195 to 200 million with operating earnings of 8 to 13 cents per share. This is much lower than consensus numbers which were in the range of 40-50 cents. While the company tried to put a brave face on by explaining that sales are still higher than the same quarter last year, the result of the miss is that management has now lost all credibility with the street. Analysts find it very difficult to believe that the environment deteriorated so quickly that management was unaware of the issues 2 months ago, but the environment is now so much worse than expected. The bottom line is that there are two scenarios. 1) Management is incapable of projecting even short-term demand for their product, or 2) The economy is truly in a free-fall. Neither one of the scenarios brings much warmth to investors heart.
In response to the weakening demand, the company is shutting down its Canadian production plant which operated at a higher cost than many of its overseas production facilities. This will give the company less flexibility when ramping up orders for short-term demand (something management has struggled with in past quarters), but should cut out some fixed costs to allow margins to be a bit healthier. Secondly, the board has authorized a repurchase of 5 million shares (in addition to a current repurchase plan underway.) I would not get too excited about this repurchase announcement considering the fact that credibility is very low at this point, and the company is under no obligation to actually go into the market to purchase the shares. This is a tactic often used by a company’s board to prop up the share price by encouraging investors to believe they are actively purchasing the stock at current prices. In order for this to work, investors have to have confidence in management which is severely lacking in this scenario.
In the past, management has guided investors to expect 20-30% long-term revenue growth. When asked about this on the conference call Tuesday, management would not comment but expects to revisit this statistic during its official Q1 earnings release. This is another bad sign as I would expect management to vigorously defend this number if it were still part of the expectations. Inventories continue to be high and management expects to keep these levels relatively unchanged in order to meet demand (despite the fact that demand is falling). There were some sales to discount channels over the last quarter which drag down margins and raise additional concerns as to how effective the traditional sales channels are working.
So now that the stock is near $10, it is tempting to look at the name as a deep distressed value situation. This may be worthwhile over time, but for now the lack of investor confidence in figures given by management should keep one from putting much at risk in this name.
FD: Author does not have a position in CROX
Additional Reading:
keyword *sucked* . the price to sales ratio sucked. the gross profit sucked. the retail price point sucked. the brand sucked. the repeat customers revenue sucked. the management sucked. the plastic “breakthough foam” premise sucked. did Nike , Addidas and the global gang chew them up and spit them out?
April 16th, 2008 at 4:40 pmeven the brother company temperpedic- tpx crashed and sucked. this overhyped pile of crap cost was my first big bear market loser in November stock market. also sucked.
I agree Boris - the whole thing looks pretty ugly. I feel a bit misled by management up to this point. It’s hard to believe any projections for the rest of the year.
Hope you are diversified and have plenty of other things going well for you. Thanks as always for reading and for your comments.
April 16th, 2008 at 4:56 pmrequest for a review. you have done larger cap. alternative energy such as STP & Trina. consider ZOLTEK. a real company with $880 million market capitalization.. symbol zlot. ZOLTEK is leading carbon fiber producer. carbon fibers in super size 260 foot wind blades among other things. the shares have move to the lower part of the 3 year price range 20s/50s for a variety of issues. Boeing 787 ramp. Zoltek’s big expensive new factor has some construction snags. the question is does lower $20s have some appeal. the market capitalization is $880 miillion down from the $2 Billion peak. fell 60% from $50s/$20s.
April 17th, 2008 at 8:25 pmsymbol zolt
April 17th, 2008 at 8:27 pmextra. zoltek is a carbon fiber producer. so in a way it is a high technology next generation steel producer. so seeing steel stocks do well and the materials sector have positive investor sentiment improves the timeliness factor.
April 19th, 2008 at 12:35 pmThis sort of fall from favor can happen to a company that relies on a product line of one, and a very hyped product at that.
Now they can share investor infamy with JSDA.
April 26th, 2008 at 7:42 pm