jeffrey keene [email protected] crocs, inc. (crox) – designer, manufacturer, & retailer...

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Jeffrey Keene [email protected] Crocs, Inc. (CROX) – Designer, manufacturer, & retailer of footwear that is built with comfort on the mind.

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Page 1: Jeffrey Keene jkeene2@gsb.uchicago.edu Crocs, Inc. (CROX) – Designer, manufacturer, & retailer of footwear that is built with comfort on the mind

Jeffrey [email protected]

Crocs, Inc. (CROX) – Designer, manufacturer, & retailer of footwear

that is built with comfort on the mind.

Page 2: Jeffrey Keene jkeene2@gsb.uchicago.edu Crocs, Inc. (CROX) – Designer, manufacturer, & retailer of footwear that is built with comfort on the mind

Significant Turnaround Story

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Crocs went public at $10.50 (adjusted for 2007 stock split) and traded up to $69 by October of 2007.

However, the stock was trading at $1 just 13 months later.

Since then, management has done a great job rebuilding the company. The stock now sits at $26.

(In millions) 2007A2008A

Total Revenue

$847 M

$722 M

Growth 139% -15%

Operating Margin

28% -8%

EBITDA Margin

30% -6%

Net Income $168 M

-$62 M

EPS $1.99 -$0.75

Page 3: Jeffrey Keene jkeene2@gsb.uchicago.edu Crocs, Inc. (CROX) – Designer, manufacturer, & retailer of footwear that is built with comfort on the mind

Now A Fundamentally Different Company Went public offering less than 10 styles – built around its core clog

product.

Crocs now offers a large array of styles (over 250) – sandals, sneakers, flats, hiking, boots, and heels.

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Page 4: Jeffrey Keene jkeene2@gsb.uchicago.edu Crocs, Inc. (CROX) – Designer, manufacturer, & retailer of footwear that is built with comfort on the mind

Croslite - A Competitive AdvantageSince the beginning, Crocs has been about

providing comfortable shoes.

To meet this end, the firm created a proprietary material called Croslite – which is comfortable, lightweight, and odor-resistant.

Competitors have been unable to create a meaningful alternative.

The comfort that Croslite provides has allowed the company to be successful offering additional styles outside of its classic clog product.

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Page 5: Jeffrey Keene jkeene2@gsb.uchicago.edu Crocs, Inc. (CROX) – Designer, manufacturer, & retailer of footwear that is built with comfort on the mind

MindshareCrocs’ clog product have been one of the most

discussed footwear offerings.

Opponents hate the look while proponents love the comfort allowed.

Crocs has a bit of a cult following – fans typically own multiple pairs and often look to the firm when they need a new shoe.

Either way, the company is talked about frequently – a positive that has created significant brand awareness.

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Page 6: Jeffrey Keene jkeene2@gsb.uchicago.edu Crocs, Inc. (CROX) – Designer, manufacturer, & retailer of footwear that is built with comfort on the mind

New Styles ResonatingA number of different analysts have recently

commented that sales are performing well above expectations (as proved in this quarter’s results

announced on Wednesday).

In particular, the newer translucents, sneakers, and sandals are leading the charge.

The newly offered Chameleon color-changing kid’s shoes is supposedly off to a great start.

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Page 7: Jeffrey Keene jkeene2@gsb.uchicago.edu Crocs, Inc. (CROX) – Designer, manufacturer, & retailer of footwear that is built with comfort on the mind

Amazon’s Best Selling Shoes Ranking

Overall Top 4 pairs; 9 of the top 20; 18 of the top 50Men’s 3 of the top 5 and 5 of the top 20Women’s 2 of the top 4 and 6 of the top 20Girl’s Top 4 pairs; 6 of top 7; 9 of top 20Boy’s Top 3 pairs; 4 of top 5; 9 of top 20

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Page 8: Jeffrey Keene jkeene2@gsb.uchicago.edu Crocs, Inc. (CROX) – Designer, manufacturer, & retailer of footwear that is built with comfort on the mind

Growth Opportunities• Evolve the brand.

• Design innovative collections.• Drive higher ASPs.

• Invest in wholesale growth – globally.• Right partners, right regions.

• Strategically invest in direct to consumer – globally.• Retail in the right locations.

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Page 9: Jeffrey Keene jkeene2@gsb.uchicago.edu Crocs, Inc. (CROX) – Designer, manufacturer, & retailer of footwear that is built with comfort on the mind

Risks• Fashion risk – demand changes would significantly

disrupt Crocs’ model (albeit not as much as previously); also the company must be successful developing new styles.

• Competition – new comfort shoes are sure to be brought to market, especially if Crocs is able to continue to grow quickly.

• Inflation – can the company continue to be successful raising prices/watching inputs to counter inflationary pressures?

• Channel and retail expansion – management wants for it to be deliberate and successful, but will it be? 9

Page 10: Jeffrey Keene jkeene2@gsb.uchicago.edu Crocs, Inc. (CROX) – Designer, manufacturer, & retailer of footwear that is built with comfort on the mind

Recent Quarterly Performance

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  Revenue (in millions) EPS

  Actual Expectation Guidance   Actual Expectation Guidance  

Q2 2011* 296 282 280 Beat $0.61 $0.43 $0.43 Beat

Q1 2011 227 216 215 Beat $0.24 $0.19 $0.19 Beat

Q4 2010 179 166 165 Beat $0.05 $0.02 $0.02 Beat

Q3 2010 216 206 205 Beat $0.25 $0.24 $0.22 to $0.24 Beat

Q2 2010 228 221 210 to 220 Beat $0.37 $0.22 $0.18 to $0.22 Beat

Q1 2010 167 160 155 to 160 Beat $0.09 $0.01 $0.00 Beat

*Announced on Wednesday

Page 11: Jeffrey Keene jkeene2@gsb.uchicago.edu Crocs, Inc. (CROX) – Designer, manufacturer, & retailer of footwear that is built with comfort on the mind

Broad Base Growth

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growth rates Q3 10 Q4 10 Q1 11 Q2 11Wholesale 30% 27% 37% 26%

Retail 35% 36% 33% 38%Internet 19% 43% 36% 30%

Americas 57% 42% 35% 17%Europe 21% 38% 42% 51%

Asia 15% 24% 33% 37%

Page 12: Jeffrey Keene jkeene2@gsb.uchicago.edu Crocs, Inc. (CROX) – Designer, manufacturer, & retailer of footwear that is built with comfort on the mind

Financial Overview - Quarterly

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Fiscal Year End: December 31 1Q10A 2Q10A 3Q10A 4Q10A 2010A 1Q11A 2Q11A 3Q11E 4Q11E 2011E

Total revenue 166.9 228.0 215.6 179.2 789.7 226.7 295.6 291.1 224.0 1,037.4

Cost of goods sold (CGS) 80.1 96.1 96.8 91.6 364.6 107.5 125.4 130.7 114.2 477.8Gross profit 86.7 131.9 118.8 87.6 425.1 119.2 170.2 160.4 109.8 559.6

SG&A 74.5 93.2 91.4 80.9 340.2 91.0 105.4 110.6 91.8 398.8Operating Income (EBIT) 12.2 38.7 27.4 6.8 84.9 28.2 64.8 49.8 17.9 160.7

Depreciation and Amort. 8.0 9.6 9.1 10.4 37.1 10.1 10.3 10.8 11.3 42.5EBITDA 20.2 48.3 36.5 17.1 121.9 38.3 75.1 60.6 29.2 203.2

Interest income / (expense) (0.1) (0.2) (0.2) (0.2) (0.7) (0.2) 0.0 0.5 0.6 0.9Other non-operating income / (expense) (0.2) 0.3 (0.1) (0.9) (0.9) (0.1) 0.0 0.0 0.0 (0.1)Pretax income / (loss) 11.8 38.9 27.2 5.6 83.3 28.0 64.8 50.3 18.5 161.6Income taxes 4.4 6.6 2.2 0.9 13.1 6.5 9.3 10.1 3.7 29.5Non-GAAP net income 7.4 32.3 25.0 4.7 70.3 21.5 55.5 40.2 14.8 132.0

Non-GAAP EPS 0.09 0.37 0.29 0.05 0.79 0.24 0.61 0.43 0.16 1.44

Weighted avg. diluted shares outstanding 87.2 87.5 87.3 89.3 87.6 91.0 90.8 92.5 93.5 92.0

One time charges, net 2.5 0.0 0.0 0.0 2.5 0.0 0.0 0.0 0.0 0.0

GAAP net income 4.9 32.3 25.0 4.7 67.7 21.5 55.5 40.2 14.8 132.0

GAAP EPS 0.06 0.37 0.29 0.05 0.76 0.24 0.61 0.43 0.16 1.44

Page 13: Jeffrey Keene jkeene2@gsb.uchicago.edu Crocs, Inc. (CROX) – Designer, manufacturer, & retailer of footwear that is built with comfort on the mind

Financial Overview - Annual(In millions) 2007

A2008

A2009

A2010

A2011E 2012E 2013E

Total Revenue $847 M

$722 M

$591 M

$790 M

$1,037 M

$1,349 M

$1,669 M

Growth 139% -15% -18% 34% 31% 30% 24%

Gross Profit Margin

59% 42% 39% 54% 54% 54% 54%

Operating Margin

28% -8% -7% 11% 16% 18% 20%

EBITDA Margin 30% -6% -1% 15% 20% 22% 24%

Net Income $168 M

-$62 M

-$40 M

$68 M

$132 M

$200 M

$268 M

EPS $1.99 -$0.75

-$0.4

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$0.78 $1.44 $2.06 $2.60

Growth 139% na na na 84% 43% 26%

FCF -$48 M

$17 M

$43 M

$74 M

$140 M

$210 M

$275 M 13

Assumptions – 2012 revenue growth should benefit from full launch of Chameleons and translucents, increased supply of styles to Kohl’s, and the lack of a devastating earthquake in Japan – flat gross margins as they are already the highest in the footwear industry and will be difficult to increase given the higher costs of some of the newer styles and inflationary pressures – SGA should go down as a percentage of revenue as no new large infrastructure projects are needed and the number is spread over a larger base, leading to some operating margin expansion – tax rate is at the 20% mentioned on the most recent earnings call and share count is up slightly, in line with previous quarters.

Page 14: Jeffrey Keene jkeene2@gsb.uchicago.edu Crocs, Inc. (CROX) – Designer, manufacturer, & retailer of footwear that is built with comfort on the mind

Sensitivity Analysis2012 Revenue Growth

Operating Margin

10% 20% 30% 40% 50%12% 1.13 1.23 1.33 1.43 1.5414% 1.31 1.43 1.55 1.67 1.7916% 1.50 1.64 1.77 1.91 2.0518% 1.69 1.84 2.00 2.15 2.3020% 1.88 2.05 2.22 2.39 2.5622% 2.07 2.25 2.44 2.63 2.8224% 2.25 2.46 2.66 2.87 3.07

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2013 Revenue Growth

Operating Margin

10% 20% 30% 40% 50%12% 1.38 1.50 1.63 1.76 1.88 14% 1.61 1.76 1.90 2.05 2.19 16% 1.84 2.01 2.17 2.34 2.51 18% 2.07 2.26 2.45 2.63 2.82 20% 2.30 2.51 2.72 2.93 3.13 22% 2.53 2.76 2.99 3.22 3.45 24% 2.76 3.01 3.26 3.51 3.76

One additional percentage point of revenue growth adds an additional ~$0.01 to EPS in 2012 and 2013.

One additional percentage point of operating margin adds an additional $0.09 to EPS in 2012 and $0.12 in 2013.

Page 15: Jeffrey Keene jkeene2@gsb.uchicago.edu Crocs, Inc. (CROX) – Designer, manufacturer, & retailer of footwear that is built with comfort on the mind

Valuation - 2011

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*Short interest is 1.4 days.

Calendar 2011 Price Market Cap EPS P/E Earnings Growth PEG

Crocs (CROX) 25.98$ $2.3 B 1.44$ 18.0 84% 0.2Nike (NKE) 85.33$ $39.9 B 5.22$ 16.3 8% 2.0Deckers Outdoor (DECK) 91.18$ $3.5 B 4.81$ 19.0 19% 1.0Steve Madden (SHOO) 34.40$ $1.4 B 2.18$ 15.8 20% 0.8

Page 16: Jeffrey Keene jkeene2@gsb.uchicago.edu Crocs, Inc. (CROX) – Designer, manufacturer, & retailer of footwear that is built with comfort on the mind

Valuation - 2012

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Calendar 2012 Price Market Cap EPS P/E Earnings Growth PEG

Crocs (CROX) 25.98$ $2.3 B 2.06$ 12.6 43% 0.3Nike (NKE) 85.33$ $39.9 B 6.01$ 14.2 15% 0.9Deckers Outdoor (DECK) 91.18$ $3.5 B 5.82$ 15.7 21% 0.7Steve Madden (SHOO) 34.40$ $1.4 B 2.59$ 13.3 19% 0.7