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Investors seemed to lose confidence in the hot footwear company on Thursday, sending its shares tumbling
Are Crocs (CROX) an entirely new kind of footwear that's here to stay? Or just a fad?
On Nov. 1, after an extraordinary run for Crocs's stock, investors seemed to be screaming "fad." Shares fell more than 34% on the day after Crocs reported earnings. The stock moved from $74.75 to just above $49 by mid-afternoon.
But many equity analysts, who study Crocs' operations closely, saw nothing particularly amiss in Crocs' quarterly earnings report.
"It is our belief that Crocs has created a category in footwear and has outgrown its fad stage," wrote Peter Saleh, an analyst at Nollenberger Capital Partners. "The velocity of the brand remains outstanding."
Well-respected retail analyst Jeffrey Klinefelter of PiperJaffray (PJC) said this would be a good time for long-term holders of the stock to buy more shares. "We remain highly confident in management's ability to execute to its growth strategy," he wrote. That shouldn't be "called into question over minor sales slippage."
Still, investors may be selling on suspicion that Crocs have been over-hyped. Through Oct. 31, the stock had more than tripled this year.
The reasons for this run-up may be obvious: People do really love to buy Crocs. The shoes may be ugly to many eyes, but they're made of a special material designed to make them soft, odor-resistant and especially comfortable to wear.
The company, which only started in 2002, now says it has the capacity to make 6.8 million pairs of Crocs per month.
In the third quarter, Crocs reported revenues of $256.3 million, vs. $111.3 million a year ago. Earnings were 66 cents per share, vs. 27 cents a year ago. The firm expects earnings to rise another 35% to 40% next year.
There are a couple ways to interpret the sharp sell-off in Crocs shares.
First, Crocs may be a victim of its own success, showing strain from its popularity. The company is spending heavily to meet demand, especially overseas. In fact, demand was so strong in some markets last quarter that Crocs found itself without enough product.
"We just haven't been able to catch the wave of demand for our product, primarily in some of the new markets," president and chief executive Ron Snyder told analysts, citing Europe, Japan, China, Southeast Asia and the Middle East.
Crocs tend to be a seasonal product — for warmer weather only — so by missing that demand, it missed out on profits and revenues.
It rushed to meet demand by distributing more shoes, but by then the season was over. Crocs ended up building up lots of inventory in its warehouses — inventory was up 220% from a year ago — and many are shoes that it won't be able to sell until next year.
That's OK, executives and analysts said, because the extra inventory will help it meet the strong demand expected next year. But investors may be worried that demand won't be there next year, or concerned about problems demonstrated in Crocs' distribution system.
Second, a mediocre quarter might have offered Wall Street an excuse to deflate some unreasonable expectations. The stock was trading at a price-to-earnings ratio of 35. Nike (NKE), a shoe company that's much larger but also slower-growing, has a price-to-earnings ratio of about 20.
The key question may be whether Crocs can indeed become like Nike, a long-term player in the shoe business. Crocs is expanding worldwide, introducing new products using its special technology, and selling in more and more stores, including now Foot Locker (FL). But all that will be worth nothing if next year, or the year after, customers decide they've had enough, and Crocs go the way of other fads like the pet rock.