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PC Upgrades on Byte-Size Budgets -- Savings ExperimentYesterday after a horrible day in the market, Crocs (NASDAQ: CROX) released its second quarter results and they were absolutely stunning. Crocs reported earnings per share of $0.58 versus consensus estimates of $0.44 on revenues of $224 million versus consensus of $192 million.The shares were trading up nearly $10 in the after market to $58. The phenomenon known as Crocs is certainly in place.
I have written several articles about Crocs since I picked up coverage of the company back in February. The stock was trading at $40, and now on a pre-stock split basis the shares are trading at $116 (Crocs had a 2-for-1 stock split effective on June 14th), nearly a triple. I have detailed that Crocs has the opportunity to be the next Nike (NYSE: NKE), which in itself continues to be a phenomenon.
I realize that many readers feel it is a passing fad and/ or the shoes are ugly -- which I will leave to the wearers' discerning tastes -- but this company is NOT a fad. With a revenue run rate approaching $1 billion, this company jettisoned the fad category about $700 million ago. Crocs is a veritable phenomenon and will continue to have superior growth characteristics. The company has indeed gone "north of the ankle" with new apparel gear and many other accessories...sound like Nike? Crocs now distributes its products with 27,000 retailers of which 15,000 are internationally based.
Crocs' distribution model will serve as the distribution-model for other new companies to emulate. The beauty of Crocs is no bricks and mortar. Crocs is a vendor to the retail stores and other selling outlets world-wide, thus keeping its costs down significantly. With the popularity and sustainability of the brand, retailers are now seeking Crocs out for distribution arrangements.
Then comes those juicy, incredible margins. One of the guiding principals of growth investing, especially with newer companies, is the operating margins (pre-tax profits) should grow over a 5 year time frame to "mature levels". Typically, younger companies have lower operating margins due to heavy investing in research and development (R&D) and/or sales and marketing (S&M), and hope to harvest those two points of leverage later in their life-cycle. Crocs has broken the rules. The operating margins are a stunning 27-28% , even hitting 30% this second quarter, and yet there has been no apparent sacrifice in R&D or S&M. In other words, Crocs is a cash machine.
The company guided Wall Street to even higher numbers for the third quarter. Management endorsed $0.58-0.62 of earnings per share on revenues of $240-250 million. The consensus was $.43 on revenues of $195 million. The company also endorsed an annual earnings per share of $1.89 to 1.93 versus consensus of $1.56. I estimate that Crocs can earn $2.50 on revenues of $1.2 billion for 2008.
Crocs stock will open around $56-57 today, up $7 from yesterday's closing price. The shares are still a buy as this company should command at least a 30-32 price-to-earnings multiple on 2008 expectations of $2.55 in earnings per share. That being said, my new price target for Crocs is $80 ... the phenomenon is in place.
Georges Yared is the CIO of Yared Investment Research.
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Reader Comments (Page 1 of 1)
7-27-2007 @ 10:49AM
boris said...
georges managments projection of 810m+ implies about 51 million pairs of shoes. your 1.2$ Billion on '08 implies about 75 million pairs at a stable average wholesale price of $16.75. How are they going to sell 75 million pair of shoes?
7-29-2007 @ 2:07PM
im_the_real_greg_brady said...
Crox is most definitely a fad, just like Pokemon and Krispy Kreme. The main reason their results have looked so amazing in recent months, is the currency benefits of a garbage-priced dollar. (They appear to derive almost 50% of their revenue internally).
Long shareholders better watch the value of the dollar, because as the dollar goes up, Crox results will begin to look much worse. Also check their balance sheet, which shows possible of channel-stuffing. (Accounts receivable look high in relation to cash).
Get out of this stock before the insiders do, because it is heading for $30, and maybe worse.
7-29-2007 @ 10:32AM
janekane said...
folks in europe have been wearing clogs FOREVER. they also favor the truly ugly birkenstock shoe. crocs shoes are a natural fit (forgive the pun) across the pond. if the chinese start wearing these suckers ...
crosite - "Anti-bacterial, anti-fungal, anti-microbial and odor resistant" - if that's true, we've got a huge plus.
then there are those "footbed circulation nubs" that "stimulate blood flow" - yup, they would do.
the heel strap is key - people fall off clogs without straps, and that hurts their footers.
you can sterilize them in bleach and water. they've got a shock-absorbing sole.
when does crox become commoditized? well, is nike commoditized? after all, heck, they're JUST SNEAKERS.
decorate 'em with jibbitz. they're partnered with disney! THEY MAKE FLIP FLOPS. the "YOU" line is pretty, but i'm not sold on the wedge heel (i've fallen off too many wedge heels). one of the YOU shoes is called "With A Twist". that scares me. however, since CROSITE "molds to the unique contours of your feet", just maybe i wouldn't fall off 'em.
the FURY line is hockey. SPORTS gear.
finallly, i'm a shoe freak. i wrecked my back over the years with a never-ending procession of wedges, pumps, dansko clogs (stint as a pastry chef), stilletos, spike heels, platform shoes and boots, lace-up granny boots (broke my ankle), the HORRIBLE dr. scholl's sandals. just recently cried uncle and went to sneakers.
and ... i'm looking at these crocs - and i don't think they're UGLY. perhaps i've grown accustomed to the look after 20 years in NYC, which entails a parade of europeans, turks, egyptians, yoga instructors, wealthy effete poseurs, etc., in similar looking shoes.
i've talked myself into scaling into CROX on pullbacks, to keep as a core holding. that'll make my core AAPL and CROX, for the time being.
i like 'em, i understand 'em, and i think they've got it going on.
back to the chinese - what have the masses been wearing for a very, very long time? slippers and sandals, that's what. not a stretch to get to crocs.