Don’t go investing in something you don’t understand, that’s the Warren Buffett mantra. I don’t understand Crocs, Inc. (NASDAQ:CROX), I don’t see when anyone would want to wear them so I won’t be buying into the stock. Having said that, the company looks to offer an interesting investment opportunity.
Crocs could be an interesting turnaround story
After Crocs’ recent 25 percent decline, the stock looks appealing and it could be an interesting turnaround story. For a start, the recent diversification away from the much hated plastic shoes into new product lines, which look nothing like the old models should fool customers to buy into Crocs’ offering.
Secondly, Crocs, Inc. (NASDAQ:CROX) is now valued as if the company is about to go out of business. However, it is far from it. During the second quarter, the company reported record revenues of $363.8 million, with a gross margin of 55.3 percent – down slightly from the margin of 59.3 percent seen in the period the year before but this was partly down to heavy discounting the company had to undertake in an attempt to sell products after a unseasonably cold spell in Europe. The company’s expansion into new markets also meant that the cost of sales grew by 20 percent, further cutting into margins.
These are not problems that affect struggling companies. Forced discounting to clear inventory affects all retailers and expansion costs are if anything, something to celebrate not fear.
On a valuation basis, Crocs, Inc. (NASDAQ:CROX) trades at a price-to-sales ratio of 1, when the rest of the Apparel Footwear & Accessories trades at an average ratio of 2.
Crocs has an extremely strong balance sheet
Elsewhere, the company has an extremely strong balance sheet. $290 million in cash easily covers all liabilities, which total $251 million and there is only $9 million of debt. The company is also cash generative, producing around $50 million a year in cash for the last five years.
Of course with a balance sheet this strong and falling share price, Crocs, Inc. (NASDAQ:CROX) will come under pressure from investors to boost returns, either in the form of a dividend payout, or continuation of the company’s 2007, 3.5 million share buyback, which has still not been completed. Personally, with so much cash burning a hole in Crocs’ balance sheet and earnings falling, I would bet on the buyback over dividend. An aggressive $100 million buyback would hardly tax the balance sheet and reduce the number of shares in issue by 8.5 percent. A dividend with a 20 percent payout ratio would indicate an annual payout of $0.40 a yield of 2.9 percent.
Both the dividend and buyback are very realistic options and ones that Crocs, Inc. (NASDAQ:CROX) will come under pressure to do if the company’s stock continues to underperform.
Heat wave in Europe should make stronger sales
So, Crocs, Inc. (NASDAQ:CROX) has the firepower to turn itself around, half the company’s market cap is cash and a new product range has already been released. Moreover, there is currently a heat wave in Europe, so the company should expect stronger sales for this quarter. However, if earnings don’t return to growth this quarter, then I would start to worry.
Still, the hot summer, new product lines and expansion into new markets makes Crocs, Inc. (NASDAQ:CROX) look attractive. Moreover, with 20 percent ($3.30) of the company’s stock price in cash, declines are somewhat limited and the strong balance sheet puts pressure on the company to return cash to investors after a poor performance.
All in all, an interesting value play, but one I personally will not be taking up.