Could Crocs Inc be a Turnaround Play?

Crocs (CROX) is one of the favourite whipping boys on internet discussion boards. I remain grateful that someone prompted me to dig deeper into Crocs’ deteriorating margins before diving in. That was about a year ago when the stock had dropped from over $75 to $10. CROX went on to a low of $0.79 and closed today at 3.28. Check out this chart to see the wild roller-coater that is the CROX share price.

I think CROX just may be a turnaround candidate and is worth keeping an eye on.
The downward sales trend appears to be flattening out and they are attempting to right size their business.
My main reason for keeping an eye on CROX is I’m a contrary guy and with everyone declaring it dead and a one trick pony, I decided to try and look at it from a different angle.

Does it smell like a pile of crocsThere is no question that the orginal Crocs were a fad, but that by itself does not mean it is a one trick pony. I recall many pundits declaring Nintendo a fad as the sales of the NES declined in the late eighties. My point is that investors confuse products with companies. Products are fads, not companies. Since 2004 Crocs has invested $850M into SG&A. A slice of that went into advertising and creating a brand, maybe $100-200M (I’m still working on getting a better feel for that number). The Crocs brand lives on and that is the opportunity current management will be trying to capitalise on.

This quote from the Q1 conference call highlights that the new CEO John Duerden is focused on the brand.

“But what I’ve also learned is that there are 100 million consumers out there in 125 countries that absolutely love our product. I’ve also found that the Crocs brand in only five years has become almost as well known as Nike and Adidas. It is already an icon. And whether people love it or hate it, they talk about it.”

The bar is set pretty low for Crocs. Analysts see them losings money all this year and next. As they continue to right size their business and incur large one-off costs they will continue to show earnings losses. The opportunity is ahead as they roll-out new products, continue to push their online sales and further streamline their business. They have already shows excellent improvement in cash and inventory management, reducing their days sales outstanding (decreased to 40.4 days in Q1 of this year from 70.9 days in Q1 of last year) and inventory levels through better supply chain management (inventories at March 31, 2009 decreased to $131.2 million compared to $265.5 million a year ago. Some of this decline is attributable to the $70 million in inventory writedowns during 2008; however, $54 million of this decline came because we were able to move footwear inventory on hand).

The balance sheet has been improving and they appear to have staved of bankruptcy. If they continue to improve business they may one day launch their Wii.

Crocs is both a great story to keep an eye and a fascinating story for managers and investors to learn from.

Q1 2009 10Q
Q1 Transcript
Key Stats
SEC Filing
Q2 results are due 3-Aug-09 – 13-Aug-09.

Neither I or Fusion Investing have a position in CROX, never have and currently have no intention of taking a position.

[Update: Further working notes.

From 2008 10K “Advertising expenses were $16.8 million, $5.5 million, and $1.2 million for the years ended December 31, 2008, 2007, and 2006, respectively and are included in selling, general, and administrative expenses.”
“marketing expenses of $22.3 million, of which $5.4 million is related to corporate sponsorship”

From 2007 10K “including an increase in selling and marketing expenses of $40.4 million”

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