crocs inc. (crox) pitch
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CROX Long pitchTRANSCRIPT
Crocs, Inc.
Ticker: CROX | Price: $13.47
Recommendation : Buy below $15.00
August 13th, 2013
Geoffrey Horton
From The Maker of Those Shoes
Crocs is a footwear designer, manufacturer, and distributor that found fame a little more than a decade ago
with the release of their unmistakable colorful clogs that utilize their patented Croslite technology. The
clogs offer the freedom found with sandals and combine it with the therapeutic relief that less hip,
podiatrist-approved shoes offer. As quick as everyone and their grandmother had bought a pair, the shoes
caught the “ugly” disease and the general public moved on. That initial success has allowed Crocs to
survive, though, and experiment with new designs that appeal to an ever-changing audience.
With a focus now on combining their technology with current fashionable trends, Crocs is showing they
can still strive in a post-hype environment. With P/E and EV/EBITDA multiples trading well below
competitors like Sketchers and Deckers, revenue expanding at a 4-year CAGR of 15% while managing a
30% increase in the average price of shoes over the same period, a large uptick in demand of new and old
products overseas, and a management team willing to stay flexible, I believe the lousy results from last
quarter has squeezed the growth premium out of the stock and is now offering a great buying opportunity.
Cro
cs, In
c. (
CR
OX
)
2010A 2011A 2012A 2013E 2014E
Revenue 790$ 1,001$ 1,123$ 1,245$ 1,375$
EBITDA 119$ 175$ 183$ 159$ 189$
FCF 80.4$ 114.7$ 88.6$ 82.3$ 95.7$
EPS 0.80$ 1.25$ 1.46$ 1.04$ 1.25$
Gross Margin 53.8% 53.1% 54.1% 53.3% 53.8%
ROE % 18% 23% 21% 20% 24%
Market Profile
52-Week High 18.60$
52-Week Low 12.00$
Avg. Daily Vol. 1.5 mm
Market Cap 1.23 bn
Beta 0.27
P/Sales (TTM) 1.1x
EV/EBITDA (TTM) 5.6x
P/E (TTM) 11.5x
ROE (TTM) 16.9%
Source: Company filings and Bloomberg consensus estimates
Source: Bigcharts.com
Background
Founded in 1999, Crocs launched their first clog line in 2002 at a boat show in Florida. Quickly
finding success, Crocs purchased the Canadian company that held the patent for Croslite, the
rubbery-type material found in most Crocs products, in 2004 and finally initiated their IPO in early
2006. The company has made three acquisitions since, adding an accessories component to their
products as well as beefing up their internal design group with an established team in Italy. The
U.S. Ergonomics approved shoes are sold in over 90 countries today.
Business Overview
Their footwear products produce most of the revenue, while accessories and apparel historically
account for 3% to 4% of total sales. The company sells products through two channels: wholesale
(62%) and directly to the consumer through retail stores (30%) and the internet (8%). As seen in
Exhibit 1, the largest increase in revenue by region has come from Asia, where the wholesale
business accounts for most of the sales. Recent currency devaluations have hurt sales in Japan,
though, where margins have historically been the highest out of all the regions. Growth in China,
however, has buffered the setback and I fully expect this trend of a growing customer base
overseas to continue as customers over there remain responsive to both new and old products.
Due to the sheer volume of sales, clogs have historically made up most of the product sold through
the wholesale channel. With the original clog line’s sales decreasing from 25% of revenue in 2008
to less than 10% in 2010 and sales to adults accounting for over ¾ of total sales, though, Crocs
needed a change. Their focus since has been investing in new, fashionable products that still utilize
their Croslite technology. Some regions are now seeing 50% of their revenue come from newly
introduced footwear. As Crocs transitions their focus to new products, which require consumers to
get up and close with the shoes, the retail business has been heavily invested in all across the
world. The year 2013 alone will have a total of 70 to 90 net stores open. I expect Crocs to focus
primarily on the retail business in America and Europe for the next few years, while continuing to
introduce their new products to the already strong wholesale channel.
August 13th, 2013
Cro
cs, In
c. (
CR
OX
)
$-
$50,000
$100,000
$150,000
$200,000
$250,000
$300,000
$350,000
$400,000
2009 2010 2011 2012 2013
Americas Asia Europe
Exhibit 1
Revenue by region in Q2, 2009-2013
Source: Company Reports
10% CAGR
11.6% CAGR
19.1% CAGR
$-
$50,000
$100,000
$150,000
$200,000
$250,000
2009 2010 2011 2012 2013
Wholesale Retail Internet
Source: Company Reports
Exhibit 2
Revenue by channel in Q2, 2009-2013
While new product sales have been successful thus far (accounting for ~35% of revenue), this last
quarter shows that earnings can be volatile if the weather does not cooperate. Crocs received less
than anticipated at-once business from wholesalers since weather was colder than expected in
spring. Not wanting to carry over the products into late 2013 and 2014 spring/summer season,
management used discounting to reduce inventory by $161mm (down $11.6mm from 2012). The
company did note, however, that sales significantly increased later in the quarter as things warmed
up and all regions, except Japan, achieved positive same-store sales growth. Management expects
revenues of $300mm and EPS to be between $0.20-$0.23 for the next quarter.
Competitors
As the retail business for Crocs grows, comparisons to Sketchers and Deckers are becoming more
prevalent. They all sell footwear products, though they tend to excel in selling different types of
shoes. Sketchers is a heavy-hitter in the athletic sporting shoes market, while Deckers is known for
their winter UGG boots. All three companies derive roughly 65% of revenue through a wholesale
channel, both domestically and internationally. The latest quarterly results for each showed that
while the retail segment was up an average of 15%, Crocs was the only company to see positive
growth in the wholesale channel in all regions. Looking at Deckers specifically, their summer
sandal lines also saw backlog issues due to poor weather. They even saw a big decline in the
revenue from their boots as compared to last year and are struggling to create products that work
well between the transitioning of seasons. Sketchers improved their margins and grew revenue
above expectations mostly due to their men and women’s sportswear line. Their only footwear line
seeing negative growth came from the sales of children shoes.
I believe the weakness shown by Deckers is similar to Crocs’ situation. However, not considering
weather issues, Crocs’ sales of new and old products have been much better and are still growing.
Sketchers is a good example of what wear-all-the-time footwear can do in terms of sales, but they
do not appeal to children the same way Crocs does. Furthermore, Crocs is planning for the release
of their own athletic shoe line in later 2013. This, along with other planned non-seasonal footwear,
will provide the company greater stability from quarters like this.
Cro
cs, In
c. (
CR
OX
)August 13th, 2013
Exhibit 3
Revenue versus average footwear price, 2010-2013
$-
$5.00
$10.00
$15.00
$20.00
$25.00
Q2 2010 Q2 2011 Q2 2012 Q2 2013
$-
$50,000
$100,000
$150,000
$200,000
$250,000
$300,000
$350,000
$400,000
Revenue Avg Footwear Selling Price
Source: Company Reports
Crocs currently trades at discounted levels across a number of multiplies when compared to
competitors (DECK, SKX, SHOO, WWW, VFC). I believe this is due to a lack of faith that the
company’s transition will actually pan out and other more established companies won’t continue to
grow market share. Seeing that the company has already shown it can succeed with newer
products and confident it can continue to do so, I believe the shares are undervalued by 30%. Once
non-seasonal products have been introduced and better plans for weather are in place, the stock
could trade at 20x earnings, or between $17-$18 a share. Subtracting out cash, you could pick up
the company for a measly 8.7x current earnings today.
Observations
To better understand what consumers prefer to wear for the summer months, I conducted an hour
long study in a high traffic area of Central Park and counted the different types of footwear people
were wearing as they walked by. While New Yorkers are some of the most unique individuals in
the world, the diversity of footwear was lacking. Of the hundreds of women that walked by, an
overwhelmingly large majority wore sandals with varying strap designs. Men, for the most part,
wore tennis shoes and sandals. Children wore a variety of footwear, though I found them to be the
biggest users of the originals clogs. I only found three adults that dared to wear the shoes.
While the study was far from scientific, it gave me insight into current trends and provided me an
understanding of what Crocs should be designing and marketing. To see if the shift in focus of
products was actually taking place, I visited the SoHo Crocs store. The trendy 2-story building had
an immediate focus on new products for the summer before I even walked in the store. Also, the
section in front of the door was solely dedicated to new products, a majority of which were
women’s sandals with different strap designs. About 50% of customers were located in this area.
Cro
cs, In
c. (
CR
OX
)August 13th, 2013
Exhibit 4
Storefront display of new sandal products
Exhibit 5
Storefront display of new women’s summer footwear
P/E P/Sales EV/EBITDA ROE % Cash/Share Debt/Equity
CROX 11.5x 1.1x 5.6x 16.9% $3.16 0.38
SKX 51.5x 0.8x 11.7x 15.7% $6.62 0
DECK 18.1x 1.4x 9.4x 15.7% $1.43 0.49
Industry Avg. 25.7x 1.3x 10.9x 17.3% $4.03 0.80
As I walked through the first floor, I noticed the children’s section in the back fully stocked with
clogs and accessories hanging on appropriately sized racks. With children sales accounting for ¼
of total revenue and from what I saw in Central Park, it made sense. On the second floor, I found a
section specifically dedicated to new products for men. This was the most empty section in the
store in terms of people. In the back of the 2nd floor, I finally found the mountain of adult-sized
clogs. It was fairly obvious when someone came to the store to only purchase a pair of these
(which was few).
While trying to make sure I was not labeled a stalker by store employees, I learned a lot about the
store’s product placement. Considering the overall revenue breakdown, as well as the emphasis on
new designs, the store’s layout flowed nicely. My biggest concern came, though, from the
overabundance of stock in clogs. As seen in the pictures above, it seemed like things had barely
been touched in the adult section, even with a new celebrity-endorsed clog. I also felt alienated as
a man since the front of the store only showcased women’s summer wear and unisex sandals. A
customer may have never known they sold men’s footwear had they not gone upstairs.
Risks
The largest risk lies in the ability to keep consumers adopting all of these new products, especially
the non-summer footwear. A company that relies on innovation to drives sales can be severely
damaged by a hiccup in a new product line. Crocs received fame because of their clogs and may
have a branding issue with those consumers who do not realize Crocs has more to offer.
I believe management is also having to consider how much longer they want to continue pushing
for the die-hard clog fans. Though total sales of all of the clog variations make up 47% of revenue
today, the inventory for the products can quickly become a hazard to the bottom line when weather
is poorer than expected.
Another concern lies in the fact that there are many competitors in this space that offer similar
products. While Crocs can be differentiated by their Croslite technology, it might not be enough if
a competitor’s shoes are a little more fashionable and can be worn all year round.
Cro
cs, In
c. (
CR
OX
)August 13th, 2013
Exhibit 6
Children shoe section of SoHo store
Exhibit 7
Adult shoe section of SoHo store