Crocs, Inc.
(NDAQ: CROX) shares fell sharply today after the company announced an
84 percent jump in profits on revenues that nearly doubled on
international demand, but reaffirmed a 2008 outlook below Wall Street
expectations. Momentum stocks like these trade largely on expectations
in addition to physical numbers. Unfortunately, there were problems
with both today as the stock sank more than 10 percent mid-day as
shareholders consider whether or not the company will be able to keep
up its stellar track record of success. So, is Crocs a stock worth a
look now or is there more downside?
The first thing to consider is valuation. The valuation of a
high-growth company is often set by its expected growth in addition to
its actual performance. This is why high-growth companies like Crocs
can drop when reporting spectacular results - it depends largely on
expected growth rather than actual performance. The reaffirmed 2008
guidance in this case was not what many investors were expecting. This
is clearly visible if we take a look at the company’s historic PEG
ratio, which shows in plain view that investors were expecting much
faster growth. Meanwhile, if we take a look back at the company’s
earnings announcements, we see that its earnings surprises are slowly
declining and now risk being flat or negative with a reaffirmed
guidance.
Crocs’ earnings call also gave some valuable insights into why the
firm’s shares dropped so dramatically. Analysts were most concerned
about a 27.2 percent rise in inventory build-up during the third
quarter. The company ended the fourth quarter with $248.4 million - up
$195.3 million from the end of the third quarter. Management defended
the build-up by arguing that they have chased demand since inception
and felt that the planned build-up was necessary to meet first half
forecasted customer demand. However, the carry cost of excess inventory
- that is, warehousing and distribution costs - can be steep and may
end up costing the company big money if they are wrong during future
earnings announcements.
All of that being said, Crocs currently trades at just 10x forward
earnings, which is far below that of its peers. The company also has a
strong product line and expects to see continued growth through 2008
despite a decline in the U.S. economy through strong international
growth that is already showing up in today’s announcement. In the end,
Crocs carries a lot of risk with its slowing earnings and large
inventory, but the stock is trading at historically cheap levels. In
the end, it is clear that growth is slowing but the concern is that
management may not realize it and be overbuilding inventory…
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