The demise of Crocs (CROX), it seems, may have been greatly exaggerated.
Remember the company’s signature product? Close to a decade ago, those colorful, clunky resin clogs were all the rage. The company that made them couldn’t sell the things fast enough, at one point reaching sales of 50 million pairs in 2007. Then fashion moved on, as it always does, and the economic slowdown started to bite into sales.
Crocs plunged from a $168 million net profit in 2007 to a $185 million loss in 2008. In 2009, the company nearly ran out of cash and had a hard time making payroll.
But Crocs’ fortunes have improved. In its most recent quarter, the firm posted a loss, but it was narrower than the market was expecting. And it’s found an investor that believes in its future — private equity giant Blackstone Group (BX), which recently provided a $200 million cash investment in return for a block of preferred shares eventually convertible into a stake of around 13 percent of the company. Perhaps the time has come to take those old clogs out of the closet, dust them off, and slip them on for a stroll.
Stepping It Up
Fashion is highly susceptible to consumer whim. The hot item is never hot for very long, and once consumers move on, it can be hard for the company to recover. In Crocs’ case, this was exacerbated by its limited product line — almost exclusively the clogs.
The company learned from its mistakes. Since consumer tastes moved out of clog-land, Crocs has significantly broadened its product line to 300 styles. It now offers boots, flip-flops, deck shoes and slip-ons akin to the casuals from VF Corp.’s (VFC) Vans subsidiary.
In terms of profitability, Crocs recovered quickly from its time in the fashion wilderness. From that 2008 bottom-line deficit of $185 million, the company sliced its loss to $42 million the following year, then stepped back into the black in 2010 (to the tune of $68 million). After two straight years of declines, revenue started to pick up in 2010, rising a nice 22 percent on an annual basis and advancing in every subsequent financial year. In fact, 2013’s top line came in at nearly $1.2 billion — around $350 million higher than the firm’s big glory year of 2007.
In the Black(stone)
This kind of performance helped attract the Blackstone Group, which likes to buy its assets cheap and (eventually) exit when the going gets better.
Blackstone’s $200 million cash investment late last year equated to a cash infusion of around $2.26 per share, and the stock promptly rose by slightly more than that amount after the deal was announced. It seems that shareholders welcome the presence of Blackstone and were encouraged by the vote of confidence it implies. But has that boost in value made Crocs too pricey for the market?
At the moment, the stock trades at nearly 28 times expected fiscal 2014 earnings. That’s notably more expensive than the 16 times expected earnings of Deckers Outdoor (DECK), which, like Crocs, manufactures a product (Ugg boots) that saw a wild surge of popularity before falling out of fashion. Another pure-play footwear company, Skechers (SKX), can be bought for 19 times current fiscal year earnings.
On that basis, Crocs stock is even more expensive than Nike (NKE), arguably one of the best apparel stock plays on the market. Shares of Nike, a master at keeping pace with trends in its fitness niche, trade for just under 26 times anticipated current fiscal year earnings.
With the fresh involvement of Blackstone — which now holds two seats on Crocs’ eight-member board following its investment — it’s hard to gauge Crocs’ strategic direction. Another question mark is the firm’s leadership — CEO John McCarvel is due to retire “on or about” April 30.
At the moment, given how expensive the stock is and the uncertainties going forward, Crocs stock is probably not a screaming buy. However, the company has shown a propensity to recover from expired trends and grow while it’s at it.
Crocs isn’t doing at all badly these days. And even though its clogs aren’t the flavor of the month anymore, we can’t say the firm has completely fallen out of fashion.