Is CROX Doomed?

Crocs, Inc. was one of the market's biggest losers today, shedding 10.7% of its value after a disappointing earnings call. Although revenue and earnings estimates were beat for the last quarter, management announced that it expected an approximate $100 million drop in revenues over the next quarter. The iconic footware company ended the day at $69.08, but is still well above its 52 week low of $46.08 and is 22.76% below its average target price of $89.44. Over the last 12 months, Crocs is down -50.9%, and has underperformed the S&P 500 by 44.5%. The stock has an average analyst rating of buy.

Crocs has a trailing 12 month price to earnings (P/E) ratio of 5.8, which corresponds to its share price divided by its trailing earnings per share (Eps) of $11.96. The company's forward P/E ratio is 6.1 based on its forward Eps of $11.26. By way of comparison, the S&P 500 has historically had an average P/E ratio around 20.

Earnings refer to the net income of the company from its sales operations, and the P/E ratio tells us how much investors are willing to pay for each dollar of these earnings. Whether the company's P/E ratio is within a high or low range tells us how investors are currently valuing the stock's earning potential, but it doesn't tell us how its price will move in the future.

Crocs's year on year (YOY) quarterly earnings decreased at a rate of -19.0% and its YOY quarterly revenue grew at a rate of 43.5%, which shows that the company's margins are narrowing because of an increase in cost of goods sold. So although its valuation in terms of earnings looks attractive as it has a low P/E ratio, the company's margins are shrinking, which can indicate a rough patch ahead.

The company's gross margins are still 60.5%, indicates that it enjoys a solid competitive advantage over its peers. Indeed, no one makes footwear quite like Crocs -- for better of for worse. Such high margins indicate that the company has significant freedom in how it chooses to price its products, which indicates a lack of serious competition in the market. But investors are clearly spooked by the prospect of these margins narrowing in the future.

Another metric for valuing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present value of the company if it were to be liquidated today (i.e. if it sold all of its assets and paying off all debts). Crocs's P/B ratio of 12.2 indicates that the market value of the company exceeds its book value by a factor of five or more, so the company's assets may be overvalued compared to the average P/B ratio of the S&P500, which stands at 4.5.

CROX's levered free cash flow is $199,707,504. Often touted as a general yardstick for a company's financial health, this number represents the sum of inflows and outflows of cash from all sources, including capital expenses. This is the pool of liquidity that the company can use to reinvest in its business and pay its equity investors a dividend. The stock does not currently pay a dividend, however.

With strong margins, a low P/E ratio, and a positive cash flow, Crocs may look like a good opportunity at first glance. But its inflated valuation in terms of its assets (P/B ratio), declining revenues, and narrowing margins could be signs of troubles ahead. Crocs shows the need for investors to sometimes look beyond the numbers and to perform a qualitative analysis. Is this a solid business that will prosper and grow in the future? Or will Crocs sandals fade away, remembered only as curious footnote in the history of fashion? Most of us know the answer already.

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The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.