CROX: Is Crocs the new Starbucks or the old Arby’s?

Is Crocs (CROX) the new Starbucks (SBUX), a producer of a forgotten luxury item that can be done without, or is it the new Arby’s, another commodity producer that must fight for attention in a very price competitive market? Crocs’ first quarter earnings call transcript is here.

At this point, Crox is a mixed picture, reporting sharply lower earnings despite still booming sales. While it’s promising to make a nice profit in 2008, its 15% to 20% sales growth projections for the full year are sharply below the almost 40% sales growth reported for the first quarter. In this economy, disappointments are more likely than nice surprises. Slowing growth hurts a stock’s price. At the moment, CROX closed Thursday at $11.40, up 14.46% in response to what traders consider a rosy forecast.

After reporting a loss of 5 cents a share, down from 31 cents a year earlier, Crocs showed its optimism by predicting that it will grow its business this year and earn between $1.54 and $1.64 a share. Earnings from continuing operations were 9 cents a share, but who knows what kind of non-recurring items will be reported for future quarters? Similar skepticism has been expressed here. Reuters’ summary page offers access to Crocs’ press releases and full reports on its earnings here. Crocs is the ninth largest company based in Colorado.

What this may mean is that while the Crocs fad has popped in America, it’s just beginning to bloom in other parts of the world. How long the Crocs fad will last in Europe and Asia is beyond my crystal ball.

But in the U.S., as expected, Crocs is facing knock offs by Lands End, a subsidiary of Sears Holding (SHLD), and other manufacturers. Their versions of Crocs’ expensive flip flops are prominently displayed almost everywhere you shop.

Why Crocs looks like a new Starbucks is that its shoes cost more than its competitors’ knockoffs, just as Starbucks is charging more than McDonald’s does for coffee. And Crocs’ shoes are much less sensually distinctive than a Starbucks, which means it’s much more vulnerable to fashion changes than the coffee chain. Both Crocs and Starbucks are losing sales to soaring gasoline prices and inflating food prices as well as to a sour mood about just everything and everyone who walks in this country. It’s hard to buy fun stuff when the cost of commuting and eating is making you feel poor, even if you’re not.

Certainly the owners of CROX stock are feeling poor if they’ve owned it very long. Despite Thursday’s price spike, CROX at this writing is still down about 2.45% for the week, 48% for the last month, 73% year to date and 71% for the last 12 months.

And based on analysts’ earnings projections for the next five years, which have to be taken with a huge grain of salt, the stock looks extremely cheap. The PEG ratio, which is the price earnings ratio divided by the five-year projected growth rate, is only 0.25. Most under valued companies trade at PEG ratios of 0.7 or so. The average PEG ratio for the 47 largest Colorado-based companies is 1.47, according to Morningstar.com data.

Historically, CROX has been a terrific performer, according to the ratios shown by Reuters. It’s trailing 12 months return on assets was a spectacular 26.8%, and its return on equity was a tremendous 51.6%. For the top 47 Colorado stocks, the average return on assets was a miserable 4.1%, and the average return on equity was a mediocre 9.4%, according to Morningstar.

Don’t be surprised if Crocs’ profitability over the long term comes back to earth, which is otherwise known as the mean.

Here is the impact graph in the Crocs news release:

Revenues for the quarter ended March 31, 2008 increased 39.8% to $198.5 million compared to $142.0 million for the quarter ended March 31, 2007. For the quarter ended March 31, 2008 domestic sales rose approximately 11.7% to $92.6 million compared to $83.0 million for the same period a year ago, and international sales increased 79.5% to $105.9 million from $59.0 million for the quarter ended March 31, 2007. The Company reported a net loss of $4.5 million, or ($0.05) per share, compared to net income of $24.9 million, or $0.31 per diluted share for the quarter ended March 31, 2007. On a Non-GAAP basis, excluding a portion of the $12.1 million after-tax charge associated with the shutdown of the Company’s Canadian manufacturing operations, the Company reported net income of $7.6 million, or $0.09 per diluted share in the first quarter of 2008. Net loss per share and net income per diluted share and for the quarters ended March 31, 2008 and 2007 are adjusted to reflect the two-for-one stock split that took effect in June 2007. Gross profit for the first quarter of 2008 was $84.2 million, or 42.4% of revenues, compared to $84.5million, or 59.5% of revenues for the first quarter of 2007. Selling, general and administrative expenses for the quarter ended March 31, 2007 were $77.0 million, or 38.8% of revenues, compared to $47.3 million, or 33.3% of revenues in the quarter ended March 31, 2007.

Full disclosure: I have no interest CROX or SBUX.

For educational purposes only. Investigate before you speculate.

 

 

 

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