|Shares Out. (in M):||90||P/E||8.7x||7.5x|
|Market Cap (in $M):||1,350||P/FCF||8.9x||7.4x|
|Net Debt (in $M):||-275||EBIT||151||167|
Crocs today is a solid value play, trading under 9x earnings, generating 25% ROEs, and growing revenue in the high single digits. With a net cash balance sheet of $3 per share, the stock trades at a 10.3% FCF yield on TTM figures, and almost 12% on 2013 FCF (that is including growth capex too). CROX’s 9.4x forward P/E ratio is substantially lower than its peers who trade today on average at 15.6x 2013 numbers, despite better margins and higher ROEs at CROX.
Debt, net of cash
Total Debt, net
Cash / Share net of repatriation taxes
Price ex Cash
TEV / EBITDA
From the website:
“Celebrating its 10th anniversary in 2012, Crocs, Inc. is a world leader in innovative casual footwear for men, women and children. Crocs offers several distinct shoe collections with more than 300 four-season footwear styles. All Crocs™ shoes feature Croslite™ material, a proprietary, revolutionary technology that gives each pair of shoes the soft, comfortable, lightweight, non-marking and odor-resistant qualities that Crocs fans know and love. Crocs fans "Get Crocs Inside" every pair of shoes, from the iconic clog to new sneakers, sandals, boots and heels. Since its inception in 2002, Crocs has sold more than 200 million pairs of shoes in more than 90 countries around the world. The brand celebrated reaching $1 billion in annual sales in 2011.”
Croc’s sells roughly 48mm pairs (or units) of shoes per year. It’s an asset light business model today, with almost 80% of manufacturing outsourced, much to China and all in low cost countries. Crocs cost roughly $9 per unit to manufacture, with average selling prices around $22. Contrary to popular belief, Crocs is no longer a fad company, with sales of the classic clog representing only 16% of units today. The clog shape accounts for less than half of revenue (46%), and in total the company sells over 300 different styles of footwear. A significant number of units are sold to the healthcare industry as well including over 1,350 podiatry offices.
As far as distribution, the company sells it footwear through 3 channels: 1) wholesale (e.g. to Dicks Sporting Goods, doctor’s offices), 2) the Internet, and 3) company operated stores & outlets. Crocs operates 500 locations today, which account for 38% of sales. The wholesale channel accounts 52% of revenue, with web based sales accounting for the 9% balance. Generally the company earns 50% incremental EBITDA margins through the wholesale channel, and approximately 70-75% margins through its operated retail stores.
Given the margin disparity and the ability to broaden the product offering through company operated locations, management has been building out its store base over the past two years, with impressive results. 2008 and 2009 saw terrible declines in revenue under prior management, as too much focus on the clog footwear product, as well as heavy reliance upon the wholesale channel (who cut inventory to the bone during the crisis), caused revenue to drop from a peak of $847mm in 2007, to $646mm in 2009.
Today, there is a much wider assortment of product, and lower margin wholesale channel revenue has declined from 91% of revenue in 2007, to 53% in the most recent quarter. EBITDA margins have improved from 2% in 2009 to almost 17% for 2012.
Given the mishaps that brought the stock from a peak of $70 a share to $1.50 amidst the great recession, management has been revamped with John McCarvel named CEO in March 2010. Since then, the company has been closing its US kiosk locations and opening high traffic mall type store locations, particularly in Asia as well as a handful in the US and Europe. Management also continues to migrate customers to higher average per unit priced goods.
The price range of their products is generally in the inexpensive $20 to $50 per unit range, with an average selling price of $22.77 in the September quarter. That compares to 2010 average pricing of $17.69. Next year, management is expecting ASPs to increase by 8%, partly from mix and partly from higher prices.
Third Quarter and 2013
Q3 was a disappointment to the street, despite a 3% increase in ASPs and a 6% increase in unit sales. For Q4, management guided to 9% constant currency growth, again lighter than Street figures. The stock is in the classic transition phase away from growth investors, who were buying this at 20x+ earnings with topline growing at 27% in 2011, to the value crowd who I assume likes a stock growing at 8-12% at 9x earnings.
Overall, expectations are for a flat EPS number for Q4, which isn’t too surprising given that CROX seasonality is the opposite of most retailers who make their money in Q4. Also of note, with 35-40 new stores opening in Q4, the cost base, but not the revenue is hitting the P&L. Inventory is up 24% yoy too, but explained easily by 1) the new stores, 2) higher ASPs than a year ago, and 3) some earlier shipments that the company received compared to 2011.
Croc’s also sell better in the warmer months. Sales tend to weaken with rainy and cool weather too, meaning some lumpiness for example in the Americas, where comp store growth was up 9.3% in Q1 (warm winter), down 1.2% in Q2 (rainy, sales pulled forward to Q1), and up 5.5% in Q3 (decent weather).
For the full year 2012, adjusting out certain tax benefits recognized in Q3, EPS should end up around $1.38. FCF / share using normalized tax rates, including all capex looks to be around $1.34. Backing out the $3 per share in cash (NET of repatriation taxes which on a PV basis are far lower than the $38mm I assumed), implies that investors are only paying 8.7x earnings, and investing in the business at a healthy 11.2% FCF yield.
The stock has sold off from a high of $22.30 in April 2012, to its current level around $15. EPS was $1.24 last year (2011), will be around $1.38 in 2012, and I expect $1.60+ in EPS in 2013, somewhat higher than the Street based on share buybacks and 10% growth overall. Given the low multiple on the stock today, and the declining share count, I do not believe that CROX at 9x earnings is really pricing any meaningful growth in 2013.
The company amended their credit facility last month, raising borrowing capacity from $75mm to $100mm, with the potential to add another $25mm. Borrowing costs were reduced by 50bps to L+125, and Crocs can also utilize up to $75mm of drawings on the revolver to buy back shares. Given that most of their cash is held overseas, management is smartly borrowing at exceptionally low rates to avoid a costly repatriation tax. Covenants are extremely loose at 3.25x D/EBITDA given that the company is in a net cash position. The facility now matures in December 2017.
Since 2007, CROX has had a 5.5mm buyback program in place. As far as I could tell, the program was not utilized until Q4 this year when management bought back 1.1mm shares, leaving 4.4mm remaining. A 4-5% reduction in the share base, at what I deem to be attractive prices, will be well deployed capital in addition to the company’s growth plans for stores. I do not believe that a reduction to share count has been factored into street estimates for 2013.
It is also noteworthy that Jeff Lasher, the CFO, spent 5 years at AutoNation, a company notorious for its heavy share buybacks.
Generally, it costs $240,000 to open a store in the US, and $140,000 in Asia. Management expects to open 70 to 95 stores in 2013 (down from 100 in 2012), which should cost $13-18mm depending on the store’s size/locations. US stores average 1500 sqft, Asian stores a bit over 1000 sqft. Revenue should reach 750k/store year by year 3, at 20% operating margins. That is $155k in EBIT by year 3. Management expects that in they can generate well over 35% ROIs on new stores.
Comps / Valuation
I get it that CROX can be viewed as a fad stock, not for the long term, and subject to fashion trends that can change yearly (or monthly). However, Croc’s has evolved from a fashion statement to a comfort brand. They are appealing to anyone that wants a shoe that is easy to wear, wash, and lasts a long time. While competition from non-branded clog shoes exists, consumers will seem happy to pay $20-30 for a real, well-designed Crocs shoe that lasts a long time. The moat here is in the brand, and Croc’s knockoffs have been around for years now, unlikely to add to margin pressure or take share.
With a fad $200+ shoe company like Deckers trading at 10.5x next years EPS, I ask the question, is CROX really worse than DECK (whose revenue was down 9% in the Sept quarter)? The consumer value proposition is important, particularly in tough economic times, and for that reason I think Croc’s is a brand that will continue to appeal to a wide audience, with really less fashion volatility.
Here are the comps:
From a valuation perspective, if the company executes on its 2013 plans, then it seems plausible the stock can trade to a 15x P/E level, which with cash would imply a $25 stock (I added $2.65 in cash per share after buybacks, down from $3). $10 upside or 65%. It is noteworthy that just 18 months ago CROX traded as high as 24x current year earnings, at $30 per share.
The downside I view as a missed 2013 number, at say $1.40 to $1.50 in EPS, and a terrible 7.5x P/E multiple. That equates to a $12.50-13.50 stock, down $2 from today’s levels.
- Europe represents only 2% of company’s operating earnings, despite the fact that it represents 13% of revenue. There is a turnaround story perhaps if Europe ever pulls out of its recession, although admittedly it’s hard to see the light at the end of that tunnel.
- 2013 EBITDA I used $220mm, which is roughly 10% higher than its TTM EBITDA of $200mm. New stores coming online in Q4 should add 4-6mm of EBITDA, ASPs should be up 3-5% (although management has suggested 8%), and unit growth ex new stores (comp stores) should be in the 1-3% range, similar to trend.
- Against $220 of EBITDA for 2013, I assume $27mm of maintenance capex next year, $16mm of growth capex, $2mm of interest expense, and $36mm of taxes (20% tax rate per management). That is $138mm in FCF or $1.62 in FCF/share. Using only maintenance capex, I get $1.71 in FCF/share for 2013, which seemingly should support a $17-20 stock price today.
- Backlog is booked by wholesale buyers, and was up 33% at the end of September compared to Sept 2011. While early ordering likely added 10-15% to this, at least the wholesale channel appears to be healthy still despite fiscal cliff concerns impacting consumer spending in the US.
- Risks include fashion trends, which as MJS27 pointed out in his write up on DECK, are impossible to predict longer term. Consumer spending in Asia could slow, and a recession here (or anywhere for that matter) could cause revenue and earnings to fall.
|Subject||RE: Insiders selling|
|Entry||01/04/2013 01:15 PM|
The chairman and director sales to me weren't of large size, maybe 20-30k shares, and its hard to read too much into that I'd suggest. The CEO sale in May was large, over $1MM, but then, he is a guy is paid far more in stock & options than cash, ie his salary is 800k give or take, plus 2.5mm in stock last year. So, while impossible to really know, seem likely that his sale at $18 in May probably indicated a desire for some liquidity as opposed to a negative view on the stock at that price.
|Entry||08/07/2013 11:52 AM|
Gandalf - any thoughts on the quarter and the guidance? Stock appears to be very cheap, if management can stop shooting themselves in the foot.
|Subject||RE: Updated thoughts?|
|Entry||08/07/2013 04:14 PM|
ElmSt14-I know this was not addressed to me but I have a position and have been following. A few things stuck out:
1) CROX should stop giving quarterly guidance. Other seasonal/weather-sensitive retailers have stopped. The business is too unpredictable in the short-term, due to weather and currency. This appears to be a self-inflicted wound.
2) The shock and subsequent sell-off seems to have resulted from ~400bps of gross margin compression YoY. This was a result of two factors (as far as I can tell). 1) An unseasonably cold spring and 2) the depreciation of the Yen (150 bps). I hate blaming the weather, but the US suffered the coldest spring on record since 1996 and the 38th coldest spring since in the past 119 years. The Midwest suffered the rainest spring in 40 years. The UK had the coldest spring in 50 years. The unseaonably cold weather invariably hurt CROX at-once wholesale business (~20% of the entire wholesale business, I believe) as inventory that was ordered early in the quarter based on a forecasted level of demand predicated on normal weather conditions had to be sold at a steep discount later in the quarter. It makes sense that CROX was especially hurt by the cold and wet weather, given the brand is highly dependent on warm-weather footwear. The weather-related volalitility is an unfavorable characteristic of a seasonal wholesale footwear business (witness DECK last year in the unseasonably warm weather). But over the long-term, the weather patterns should not affect the fundamentals.
*Noteworthy that they did repurchase a single share of stock in the quarter, which was good.
To me, this is an Asian story (Asia Pacific to be specific). I think an argument can be made that the Asia Pacific business could be worth more to a private market buyer than the entire market value of the Company (at today's EV of ~$1B, net of all cash). From 2009-2012, CROX compounded sales in Asia Pacific at ~24% ($237MM-$457MM) and operating profit at ~34% ($57MM-$140MM). The Asia Pacific region has a younger customer profile, higher operating margins (~30%) and is less dependent on the clog-silouette (only 30% of sales in Asia according to Piper Jaffray vs ~50% in the US-very important as new product introductions in more crowded categories in US threatnes historical margin structure). Crox only entered China in 2006, and is forecasting sales of $100MM this year. The unique combination of quirky style, utility (light, breathable and comfortable), accessible price, and brand awareness, seem to provide a strong foundation for comntinued growth in other developing markets (India, Africa, Middle East). The Asia Pacific business is not mirred by the same "ugly clog" fashion stigma as is the business in the US.
Apologize for the long response but I have been following.
|Subject||RE: RE: Updated thoughts?|
|Entry||08/08/2013 11:12 AM|
Thanks WinBrun. I agree with some of your points below, but I think this management team is pretty inept, so I blame them more than I do the weather.
The Sterne Agee downgrade today raises a few troubling points, but I think this could still be a good long investment:
The potential related party transactions and board cronyism are obviously negatives, but I find it interesting that this same analyst had a $40 price target on CROX when it was earning $1.20 in 2011, but now thinks it's worth $10 based on 8x 2014 EPS of the same $1.20.
So while I agree with you on the value of the company (particularly the Asian operations), I think this company needs some activist adult supervision to get its act together.
|Subject||RE: RE: RE: Updated thoughts?|
|Entry||08/08/2013 12:47 PM|
I agree on the activist point. It would be nice if Lee Cooperman at Omega would get involved. They have a sizable stake I believe. At the current price, CROX has close to 25% of the market capitalization in cash. That seems extreme. If the recent pullback is the result of 1) weather; 2) currency movements; and 3) unfounded analyst allegations, then now would be a good time to send a message to the market that the stock is undervalued. A large accelerated share repurchase would be a good start. There is no reason that a growing, profitable footwear business with no debt should be holding this much cash in light of one-off, exogenous factors that have depressed the share price.
As an aside, I think the analyst at Sterne Agee may be somewhat of an alarmist. I do not know enough to refute the specific allegations that he has made in his note. But, I do know that he tends to be dramatic. He was quite the alarmist during Decker's struggles last year.
|Subject||RE: Sterne Agee|
|Entry||08/08/2013 01:41 PM|
I read the note and am pretty shocked at the level of the allegations. Corporate backdealing and a firing potentially predicated on the board's refusal to follow up on a preliminary internal audit and fire the current CEO. These are serious charges that would be legally actionable. If the charges are untrue or based on rumor, it is highly irresponsible. Not to mention it is causing an unwarranted sell-off.
|Subject||RE: RE: Sterne Agee|
|Entry||08/08/2013 02:00 PM|
Bruno/WinBrun - the Sterne Agee analyst held a call to discuss his note today. Not sure if you guys were on the call but he said that the "audit" issue had nothing to do with financial reporting or accounting or anything like that, it was "just a question of how things got done at the company." And regarding the third-party licensing, in response to a question, he conceded that its actually accretive to the company (ie. it's not detrimental to shareholders) but they could make more money by licensing the insoles to a large drug store company instead of to some crappy website run by former colleagues. He also said more than once that he thinks the brand is real.
So, all-in-all, it is a pretty over-exaggerated note from an analyst who tends to be pretty extreme with his calls (for example, as WinBrun mentioned, his $130 buy on DECK in Oct-2011 to his $32 sell on Sept-2012 or his $27 buy on FINL in Mar-12 to his $16 sell in Mar-13).
However, his main point is valid: management is inept.
Lastly, Bruno - to your point about a buyback, given that so much of the cash is held overseas, it would be costly to repatriate it for buybacks, though the company could issue some debt for those purposes.
I hope that managements' phone is ringing now with angry shareholders.
|Subject||RE: RE: RE: Sterne Agee|
|Entry||08/08/2013 03:02 PM|
Elm-wondering if you could elaborate why you think management is inept? they do a poor job communicating and they consistently issue optimistic guidance. But in term of execution, I think have they done a commendable job profitability growing abroad, as well as introducing good new products. The operating performance since McCarvel took over in 2010 is pretty solid. Maybe more an issue of PR than execution?
|Subject||RE: RE: RE: RE: Sterne Agee|
|Entry||08/08/2013 03:31 PM|
I have several issues with management:
1. I think they do a very poor job of communicating - whether its the guidance or explaining the results and what is or is not included in the results, they sound like bumbling idiots with no handle on their business.
2. I'm not sure capital allocation has been great. While the business has grown, I am a bit concerned that they are pursuing international store growth not because its a great investment, but because the overseas cash is trapped there and they compare growth returns to what it earns in a foreign bank account.
3. I have heard that they are not in as close contact as they should be with their wholesale distribution partners. This may be part of the communication problem, but it seems like they call Amazon or Zappos or Dicks the day before the quarter ends and realize that they have cut orders, instead of having a close, ongoing dialogue with them.
All of these issues are fixable, but I think management here is subpar.
BTW . . . speaking of alarmist:
Clarification and correction of our CROX note this morning,
|Subject||RE: Updated thoughts?|
|Entry||10/31/2013 11:07 AM|
I know this was not addressed to me, but I will weigh in as someone who has owned the stock and watched. At this point, I don't think management should be afforded one iota of credibility. They consistently issue guidance and miss (unless you figure out how to forecast the weather three months out- stop giving guidance!); they are expanding in the US, the most competitive retail environment in the world, without giving the consumer any compelling reason to come into the stores. Retail is a not a build-it and they will come business. Pre-tax income breakout in the 10-K suggests they actually make very little money in the US-why expand their fixed cost structure in a market where they have no clear competitive advantage? These guys are not merchants-they are supply chain engineers. That works fine when you have the hot product, or need to right size your cost structure after the Great Recession-but it does not work when you no longer have the hot product and are competing for finite discretionary dollars in a ferociously competitive market. In that instance, you have to have a merchant. If they had great products, retailers would be ordering them.
Not sure why an investor would have any faith in their ability to opportunistically execute a buyback if they have so little visibiltiy in the business that they even get a quarter right. at this point, I would prefer they mailed me a check.
I was interested because I thought the Asian business was probably worth more than EV. Growth and profitability were impressive. functionality of the shoe made it more than purely style-based purchase. But by expanding in the US, there are making it harder for a strategic to absorb the business. They should be deploying all the capital into growth in developing markets where the returns on capital are higher, competition is less fierce, their products are less stigmatized, and the customers are eager for affordable, functional American brands. The margin structure is going to continue to compress if they keep up the push in the US. They had a privileged position with the clog. Only game in town. Not so with boots, wedges, etc. What is the marketing strategy? looks to me the are just throwing darts.
The stock screens cheap. by far cheapest in the space. maybe expectations get so low it will pop 20% on a good quarter. but what is the stategy to generate profitable growth? and what is the margin of safety?
|Subject||RE: updated thoughts|
|Entry||12/30/2013 12:12 PM|
the news today seems positive
|Subject||RE: RE: updated thoughts|
|Entry||12/30/2013 12:30 PM|
Definitely good news . . . the big issues with this stock were management and capital allocation. Today's news resolves both of those.
True to form, the Sterne Agee analyst upgraded the stock from Underperform to Market Perform today.
|Subject||RE: RE: RE: updated thoughts|
|Entry||12/30/2013 01:20 PM|
Small relief to see it rallying. Buyback is 25% of shares outstanding at these prices and will ramp up in Q1 - havent seen buyback % this high except in rare cases (STX comes to mind).
|Subject||RE: Sterne on DECK/CROX|
|Entry||01/03/2014 11:11 AM|
A few things. A) Sam came out with a note on CROCS in August of 2013 that was inappropriate. He basically accused the company of corporate backdealing (http://ww2.cfo.com/capital-markets/2013/08/crocs-tussles-with-wall-street/).
Also, he was a bit of an alarmist on Decker's (http://www.marketwatch.com/story/is-ugg-losing-some-of-its-brand-cachet-2012-09-18).
An investor should expect gross margins to compress. With clogs, CROX was the only game in town. In new categories, they will face more competition. the model of fewer molds in less competitive categories with cheap input costs probably is not sustainable.
Hopefully Blackstone's will double-down on the international business while reducing the Company's focus on US retail. The international business is the real opporutunity-the price point; brand recognition and fuctionality of the shoes create a compelling propsotion for a variety of international markets. The company should not play in the US sandbox; its too crowded and the brand is still fairly stigmatized. The international business has a better growth profile. India, Africa, China, Southeast Asia the Middle East can all be good markets.
It is time for a merchant to run the company. The merchandising and marketing have been deficient. the brand can be reinvograted under a great merchant.
|Subject||RE: Sterne on DECK/CROX|
|Entry||01/03/2014 05:41 PM|
cnm3d - I don't know or speak with Sam but I know that he does have a pretty strong following as an analyst and I don't disagree that he may well be "one of the best footwear analysts" on the Street. But being a sellside analyst is different than being an investor. Sam, as a dedicated footwear guy, knows the ins and outs of every footwear stock, but in my experience, he isn't very good for a generalist trying to make a dollar in some out of favor footwear stocks.
Yes, he did "nail the absolute crap" out of DECK when he went bearish at $80, rode it down to $40, then turned bullish at $40 and rode it back up to $80. But you forget he had a buy rating and a $130 price target based on 20x $5 in peak earnings right before that.
And for every DECK, I can remember a handful of times when I looked at random footwear stocks (as a generalist) because a particular stock was beaten up, and there was Sam Posner, downgrading to Neutral/Underperform after having a Buy rating on it earlier:
Nike in mid 2012: Buy at $50, Neutral at $44 when Nike (Nike!!) was down 10% on earnings . . . and then upgrade to buy at $74
FINL in late 2012: Buy at $20+ in 2011/2012, downgrade to $16 price target when stock is at $18 (and trading at 9x earnings ex-cash), upgrade to neutral when stock is at $27
CROX we've mentioned
Look, I get it. This guy is the #1 rated II analyst, blah blah blah . . . but he's too focused on short term trends and probably one of the reason that markets are inefficient. So as a generalist value investor, we should all hope there are more Sam Poser's out there.
|Entry||12/18/2014 10:31 AM|
Given the new CEO announcement, some recent insider buying pattern (though selling by CFO), buyback executed well-above current price, potential benefit from oil decline (presumably a potential beneficiary of large COG derivative oil input?) and upgrade by perceived strong sell-sider, wonder if you have an updated perspective that you can share. Stock not participating in melt-up rally so perhaps expectation of some fundamental weakness in near-term but seeking any updated medium/longer-term perspective. Thanks in advance.