Monday, January 27, 2014

Crocs Shares Rise as Blackstone Takes $200 Million Stake- 01/03/2014


  1. Company overview:
    Total Rev in 3Q13 is 288M, Revenue breakdown by geographic segments: Americas 40%, Asia pacific 13.5%, Japan:14%, Europe 19%. Total Earnings is 50M, 36% from Americas, 27% from Asia pacific, 23% from Japan, 14% from Europe.
    Same period comparison with 2012: Revenue decreased 2.4%, Gross profit decreased 4.5%,SG&A increased 12.4% (result of companies retail channel expansion and promo expenses), Income from operations decreased 55%, NI down by 71% (ForEx loss, and prior period of tax benefit used up).
    Comps: Deckers outdoor, Sketchers, Steven Madden,Wolverine World Wide: average forward P/E 18, Crox 16.6 trades at a discount, however the forecast revenue growth is lowest 6.2% comparing to a average of 9.5%
    1. Management plans to expand product line from current Crocs classic design (mainly flip-flops in summer) to become a four-season brand. Hard to tell the potential as for now.
    2. Limited cash resources in the US, repatriation of cash from international locations will incur 53M taxes. Company plans to use the cash for share repurchase rather than acquisition or expansion.
    Current D/E=2%, why not borrow debt? (to conserve NI so that EPS will look nice).
    3. CEO departure, outcome will be neutral since transition phase also hurdles revenue growth. Company revenue growth struggle is more about the company limited product lines, images and customers' switch of taste rather than mismanagement.

    1. ForEx change, especially the Yen/Dollar rate will likely to negatively impact Crocs.
    2. Bad macroeconomic environment makes customers price-sensitive.

    "As of September 30, 2013, we held $323.6 million of our total $332.5 million in cash in international locations. This cash is primarily used for the ongoing operations of the business in the locations in which the cash is held. Of the $323.6 million, $72.3 million could potentially be restricted, as described above. If the remaining $251.3 million were to be immediately repatriated to the U.S.

    Haohan Xuwe would be required to pay approximately $53.4 million in taxes" (2013 3Q)

    Conclusion (Sell):
    Crocs were struggling with revenue growth and missed street estimates many times. Share repurchase boosts EPS but does nothing to the Revenue nor the NI. Current market price was pushed up by speculators already which leaves little room for price increase.

  2. Financials-
    Can also breakdown to footwear, accessories, and sales and marketing.
    Channels Revenues:
    Wholesales Percentage
    Americas $235,988.00 36.5%
    Asia $298,350.00 46.2%
    Europe $110,947.00 17.2%
    Other Business $574.00 0.1%
    Total Wholesale $645,859.00 100.0%

    However, the wholesale revenue is decreasing yoy.

    Americas $196,711.00 52.5%
    Asia $143,062.00 38.2%
    Europe $35,052.00 9.4%
    Total Retail $374,825.00 100.0%

    Americas $63,153.00 61.5%
    Asia $15,999.00 15.6%
    Europe $23,465.00 22.9%
    Total Internet $102,617.00 100.0%

    Total revenue of 2012 is $1,123,301.00

    Debt-to-Equity Ratio:

    Crox 0.02
    Skechers USA 0.14
    Nike 0.12
    According to Goldman Sachs, theirs LBO analysis indicates that a possible IRR range of 16%-36% can be generated if Crox could leverage at 5.5 multiple
    With regard to the leverage, Crox should utilize the debt because:
    1, strong growth in Asia
    2, LBO by PE firms have expertise especially in the retail industry.

    Competitive Advantage:
    Unique about Croslite:
    1, croslite material is very good at leveling the loads across the foot. It’s 30% better than any other foam exists in the market.
    2, It’s also very good at absorbing shock, which is 40% better than the other regular shoes.
    (Load leveling is the ability of material to take the high pressure of a point and spread away from your foot and spread them out over a broader area.)

  3. 3 reportable segments:

    • Americas: 44.1%, Operating Income: 34%
    • Asia: 40.7%, Operating Income 57%
    • Europe: 15.1%, Operating Income 9%

    Asia is the most profitable market for the Crocs. America and Asia are expanding now but Europe is shirking.
    • 10.7% sales increase in America segment from 2011 to 2012 with 21.3% profit increase.
    • 19.8% sales increase in Asia segment from 2011 to 2012 with 13.6% profit increase.
    • 0.8% sales decrease in Europe market from 2011 to 2012 with 41.6% profit decrease.

    3 Channels:
    • Wholesale: 57.5%
    • Retail: 33.4%
    • Internet: 9.1%

    • Improved Liquidity: CA: 16.71% increase from 2011 to 2012 because of the increase in company cash and short term investments.

    • Robust product portfolio: Crocs offers over 300 four season footwear styles and apparel and accessories.

    • Geographic landscape: mitigate various risks related to economic, political and social conditions of any particular area

    • Growth prospects in online shopping.


    • Counterfeit goods market

    • Increasing debt: the company’s debt to equity ratio increased from 0.22% in 2011 to 1.07% in 2012

    • Change in management is still in concern. In the short term, Crocs is hard to get their revenue growth in the future. We still don’t know about the effect of management change.

    Conclusion: Share buyback increase the EPS and indirectly boosts Market price. Theoretically, although buyback will not change the market price but it is the signal of the price increase. In addition, since the higher EPS will attract the investor to invest in this company, the more investor investing in this company and the higher market price will be. My opinion is that the company market price will be increasing in the short term and whether the market price will still be increasing is totally depend on the change of management team and their strategy in the future.

  4. Crocs, Inc.

    - Business Structure
    • Footwear 96%
    o The clogs; 47 percent of sales
    • Accessories 3.5%
    • Apparel 0.1%

    - Geographic sales
    • Americas 44%; sales slid 12 percent
    • Asia 41%;
    • Europe 15%

    - Biggest problem
    Weak market demand in U.S. and Japan. Bloomberg Business Week
    • Old and clunky style. Hate crocs blog online. Ugly shoes.
    • Competition from knockoffs
    • Marketing failure
    • Summer season sales

    - Response to the problem. 10-K and management statement
    • Purchasing other brand
    • Spending on R&D to develop new material, design and style
    • Crocs Wants Customers to Forget About Its Clogs
    • Aggressive expansion. Added 106 company-owned stores, or 29% increase
    • The response is not so effective in U.S. market, sales slid 12 percent.
    • Bringing more trouble such as the higher operating expense (lower net profit margin) and less free cash flow.

    - Free cash flow. MorningStar
    • 68m 2012; 6% of revenue
    • 101m 2011; 10% of revenue
    • 59m 2010; 7% of revenue
    • Sharp decrease in 2012 due to purchasing, R&D, expansion and marketing

  5. Crocs designs, develops, manufactures, markets and distributes footwear, apparel and accessories for men, women and children. It’s a straightforward business. Crocs’ operating segments are broken down by geography: in terms of revenue, North America, 44%, Asia-Pacific 41%, and Europe 15%.
    Crocs signature product is based on a foam, clog design with various colors. The shoe had originally been developed as a spa shoe, and is majorly considered to be used in spring/summer time. The article suggests that the company’s struggling sales may result from a loss of interests in customers. And if that’s true, the main objective for the company to increase top-line is to expand its product portfolio so that the company offers shoes for all season. I think the reason why the company is slowing down its investment in new stores is that they are not making a lot money. The fact highlights the company’s strategic focus on improving financial performance, especially boosting its bottom-line.
    The company will look to improve profitability in the Americas and Japan. From the data, Japan is not as profitable as Asia Pacific, and Americas is a lot less profitable.
    Analysts suggest that Blackstone’s purchase may be pure investment and are not indications that Blackstone believes in a complete turnaround of the shoemaker. CEO McCarvel graduated from college in 1985, and is probably in his late 40s or early 50s, the prime age for chief executives. Blackstone probably helped in pushing out the CEO. I didn’t really find out what missteps his management team had taken previously.
    I agree with Haohan and Jason on foreign exchange risks, and macro-economic environment, but not that much on counterfeits. I think there is little counterfeits in the U.S. and Japan, and they may not hurt the company by that much in developing economies like China. In luxury market, counterfeits is bad because it takes away the exclusivity, but for products like Crocs, counterfeits is really free advertisements. I think at least the company is doing better in Asia Pacific, excluding Japan, but including China.

  6. Business Overview:
    -Revenue by channel in 2012:
    Wholesale: 646m, 10% increase in constant currency from 2011
    Retail: 375m, 23% increase from 2011
    Internet: 103m, 9% increase from 2011
    -Revenue by segment in 2012:
    Americas: 496m, 44% of total revenue, 12% increase in constant currency from 2011
    Asia: 457m, 41% of total revenue, 20% increase from 2011
    Europe:169m,15% of total revenue, 6% increase from 2011

    Financial Highlights:
    -Q3 strong performance in Asia Pacific segment, improvements in Europe segment; overall weakness in Americas and Japan segments
    -Q3 revenue decreased 2.4%; gross profit decreased 4.5%; mainly due to soft wholesale channel
    -Q3 net income decreased 71% driven by increased cost of sales, the implementation of ERP system, the impact of a higher tax rate in 2013, and a one-time net expense in the second quarter of 2013 of $6.1 million related to the resolution of a statutory tax audit in Brazil
    - Free Cash Flow: generated 38m free cash flow in Q3; 332.5 m- end of Q3, 294m- end of 2012

    - Excess Cash for shares buyback- boost earnings per share in the short run

    -Disappointing Revenue Growth: lower than analysts’ expectations, fourth-quarter revenue will be at the low end of its guidance range of $220 million to $225 million and its diluted loss per share may be at the wider end of its forecast of 20 cents to 23 cents
    -Excess Inventory: weak sales through the back half of 2013 will leave the company with excess inventory. That will probably force the company to sell some items at a discount, which will pressure margins and earnings into 2014
    -Limited cash resources in US: $323.6 million of total $332.5 million in cash in international locations. If repatriated to the U.S, high tax duty.

    Conclusion: hold in the short run, sell in the long run