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Published: August 9, 2010
Walking by my firm's trading desk in 2008, I overheard some
chuckling. Turns out, a pair of traders were having a laugh
fulfilling a client's seemingly foolish "buy" order for shares
of Crocs (Nasdaq: CROX). They wondered if the client had
heard that the plastic shoes had been a fad that came and went.
When I saw the shares eventually plummet to around $1.10 in
early 2009, I assumed they were still laughing.
Not anymore. Shares have staged a remarkable comeback, with
Friday's +10% move capping a +1,200% gain in 15 months.
He who laughs last, laughs best. As it turns out, these plastic
shoes may be a fad, but the fad has staying power after all.
Sales of these shoes had fallen at double-digit clip in 2008 and
2009, and thanks to a bloated cost structure, steadily rising
profits quickly turned to losses. Management eventually took a
hatchet to costs, and suddenly this former highflyer once again
looks like an
earnings powerhouse.
A Slow Turn
Gutsy investors saw the turn coming, even as shares were heading
down to the magical $1 mark. Back in the third quarter of 2008,
year-over-year sales comparisons turned slightly positive,
although the prospects of full-year profits dimmed and Crocs was
destined to lose plenty of money in out-of-season quarters.
Yet investors soon saw signs of the company's sharp cost cuts.
The company slipped back into the red in the next quarter, but
the quarterly loss shrunk by 70% from a year earlier, giving a
clue that profits could be respectable once the company moved
back into its seasonally strong quarters. Sure enough, Crocs
earned $6 million in the seasonally weak first quarter.
Fast forward to last Thursday, and Crocs is no longer just a
cost-cutting story. Second-quarter sales rose a hefty +31%,
which led to a nice turnaround in profits. Second quarter
profits of $32 million, reversed a similarly-sized loss from a
year-ago. That profit performance was nearly +70% better than
analysts had expected. And thanks to current demand trends,
management thinks sales will be up another +24% in the current
quarter as well.
All of the sudden, analysts' forecasts look very
conservative. They had been modeling for +10% to +12% sales
growth in 2010 and 2011, which in and of itself is an impressive
feat when you think about sales trends from a few years ago. But
it now looks like sales growth could top +25% this year. Equally
important, per share profits could approach $0.80 or even $0.90
this year -- well ahead of the 2010 consensus forecast of $0.47
a share. Add in another +15% sales growth in 2011, and profits
could approach $1.25 a share. Shares trade for about 11 times
that projection.
Action to Take --> When a
company is in the sweet spot of a fad, shares can climb through
the roof. But if the company loses its mojo, it will never quite
regain the luster it once had, even if sales rebound back to
that former peak -- and that's why shares are unlikely to ever
touch the $75 mark again as they did back in 2007.
But there's no reason that Crocs can't trade for 20 times
forward earnings, as it looks as if this current sales run is
sustainable, and perhaps more reflective of a loyal customer
base and not just fickle customers seeking the latest fad.
Despite running from $1.10 to $14 in the past 15 months, shares
could power into the low to mid-$20s once more investors
re-visit this "new" growth story.
-- David Sterman
Staff Writer
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