The Year’s Top Turnaround Story, Yet Shares Are Still Undervalued
It may be one of the fastest implosions in the history of corporate America. Reviews of the company’s products shifted from (and these are actual quotes): “The only shoe I will ever wear again” and “I love them and never wear anything but,” throughout 2007, to “They’re big and foamy…why did they even make them?” and “The footwear that spells doom for humanity,” after 2008.#-ad_banner-#
The company? Some may have immediately recognized it as Crocs Inc. (Nasdaq: CROX), the maker of foam rubber, clog-like sandals that are as ugly as they are comfortable. The shoes were all the rage leading up to 2007, as was the stock. But beginning in 2008, the fad disintegrated for a handful of reasons.
To give credit where it’s due, Crocs did drive huge sales growth after the product’s debut in 2003. Revenue was only $1 million that year, but reached $847 million in 2007 as consumers went berserk over how comfortable the foam clogs were. What we then saw happen to Crocs, though, is something we’ve seen time and time again — the faddish success soon invited critics and competition.
Sure enough, the fad quickly turned cold. By 2009, sales had shrunk 24%, reaching $645 million. Net income of $168 million in 2007 turned into a loss of $185 million by 2008.
The stock, however, declined even more than both measures. Shares had soared from an early-2006 IPO price of $21 to more than $75 by October 2007, only to come crashing down to a price — and this isn’t a misprint — below $1 a share in November 2008. That’s a 98% tumble in about a year.
The abruptness of the implosion soured investors, many of whom to this day want nothing to do with the company.
But that’s a mistake.
Since that painful hit, the company has been quietly diversifying its product line, making itself a viable player in the footwear industry. More important, the current sales and profit trends say the Crocs revival is well underway.
In retrospect, it’s clear Crocs started with a product that became such a quick hit, that management struggled to keep up. A limited product line that didn’t have patent protection didn’t help. After all, while Crocs was cranking up sales of a decidedly-unique product, it should have been seeking out the world’s best patent lawyer. In early 2008, it lost a key patent case in Europe. Competitors then took advantage of styles and designs that weren’t patent-protected, when they flooded the market with an inferior product, but a product that stole market share nonetheless.
But things are changing for the company, starting with a new management team that came on board in 2011 and 300 new shoe launches. Many of the designs look traditional, but they all can capitalize on the Crocs brand name. The company’s also waded waist-deep into direct retailing too, as it currently operates more than 400 retail locations where it can better control the customer experience.
The real litmus test, of course, is sales and earnings. Fortunately for investors, these numbers have also made a positive turn since 2008’s bust.
Sales have rebounded incredibly from 2009’s $646 million to $1 billion in 2011. The top line for 2012 is on pace to reach $1.14 billion, and is projected to reach $1.3 billion next year. The same trend applies to earnings. After losing 76 cents a share in 2008, this year’s expected profit of $1.51 a share would be the company’s second-best. Next year’s projected $1.74 per share puts it within striking distance of 2007’s peak income of $2.00 per share.
Of course, investors could chalk one or two compelling quarters up to luck. Four years’ worth of improvement though, which coincided with widespread management changes at the same time the product line was tremendously improved, can hardly be dismissed simply as chance. The turnaround effort has taken hold.
Risks to Consider: While the rebound is getting traction, there’s little the company can do patent-wise to ward off similar, foot-friendly competition. Though no other companies have quite matched Crocs’ comfort, that’s always a possibility.
Action to Take — > Investors hardly forget the past of some companies, especially when that past was an excessively scary one. But, stocks aren’t priced based on their underlying company’s past. They’re priced for where the company’s going.
Now that the dust has settled for Crocs, we can see the company has found the balance between fad and function. More than that, at a forward-looking price-to-earning (P/E) ratio 9.8, the stock’s got a great shot at advancing as much as 50% by the end of 2013.