For Crocs, it's all about the ugly
Posted
Apr 18 2008, 04:05 PM
by
Robert Walberg
Hard to believe but there's actually something uglier than Crocs' shoes -- the performance of its stock. This one-time fave of momentum traders has seen its share price plunge by 86% over the last six months alone. The most recent bloodbath came earlier this week when the company guided sales and earnings estimates sharply lower.
For investors the question is simple -- were Crocs merely a fad, or is the company and the brand merely experiencing some very nasty growing pains? How you answer that question will determine if you think the freefall represents an interesting long-term growth opportunity, or if there's simply more room to short the stock on its way to fad junk heap along with Snapple, Krispy Kreme and Zubaz (no they aren't making a comeback!!).
Now I've never been a fan of Crocs, as the brightly colored, hole-filled shoes were simply too ugly for me to even bother trying on. Yet lots of people love the things, and not just kids. I've heard from teachers, nurses, retail workers (folks that spend lots of time on their feet) and the message is always the same: don't knock 'em until you've tried 'em because they are the most comfortable shoes they've ever owned. Maybe, but I still can't get past the ugly part. Too vain, I guess.
My personal feelings aside, the reality is that Crocs are popular for reasons other than style and that suggests the shoe company's products aren't merely a fad. Fashionistas can cringe all they want, but these babies are here to stay.
That said, the question becomes if and when to buy the stock. While valuations appear cheap -- the price-to-sales ratio has gone from more than 10-to-1 in October to about 1-to-1 now. The problem is that investors and analysts have no confidence in future forecasts as managment has done a miserable job of providing accurate guidance. High inventory levels also pose a problem, as the only way to move that merchandise is with a surge in demand (unlikely) or with lower prices. Lower prices will cut into the company's margins, thereby impacting earnings growth rates.
In other words, it will take time for Crocs to work off excess supply and then to get the production targets back on track with the current demand picture both domestically and internationally. Figure a good nine months left of relatively weak numbers.
Much of that bad news is already priced into the stock, however, so for the stock to go up it really only needs to stop grossly missing consensus estimates. That will be easier now that everyone and their brother has seriously marked down future-growth estimates. Just as overly ambitious projections undercut the stock at the top, overly bearish sentiment is setting the stage for a recovery rally, as roughly 38% of the stock's float is being shorted.
It's too early to jump back in as the stock is stilll searching for a bottom, but the Crocs story isn't over yet and by the end of summer it might just be time for bargain hunters to take the bait and bite into Crocs.
