Rethinking Value: Is Crocs Doomed as a Brand?

If you just look at the math it doesn’t sound like too bad a disaster on the surface. After all, the company has still managed to grow its sales through time. Earnings and sales expectations were lowered for the existing quarter to $0.15 to $0.18 per share on sales of $285 million to $295 million. Its prior guidance was earnings of $0.20 to $0.23 per share on revenues of $300 million to $310 million. Again, that is the simple math using non-GAAP earnings.

So, if things do not sound too different on the surface, then why is this a potential severe brand damage? First off, this is another “death of growth” as its sales were $295.5 million in the same period a year ago. Second is that Crocs earned $0.37 per share in the year ago period. So for that comparable time its sales will barely be lower but it will create a wipeout of more than one-third of the earnings power from a year ago. If you use a Reuters figure from a year ago, that earnings comparison is even worse.

When earnings power compresses this much it generally pushes investors, even value investors, further away. We are going to leave it alone that Crocs somehow expects third quarter 2013 gross margins to be “generally in-line with prior year performance.” Maybe that the company hopes to soon be able to deploy $80 million to $100 million to fund potential stock repurchases or other strategic investments is helping smooth the negative reaction too.

Where we think things are getting bad for Crocs as a brand is because management specifically pointed out that the issue was lower than expected revenue in the Americas region and also in the performance in the direct-to-consumer channel while management was “very satisfied to date” with its Asia Pacific and Europe sales. We cannot help but to take issue with John McCarvel’s comments, who is president and chief executive officer. He said:

We are pleased with the early indications of strong demand from our wholesale customers for spring/summer 2014 product, as pre-books for these products are presently running ten percent ahead of last year. We believe our brand is well positioned to take advantage of our customers demand for colorful and fun footwear in 2014.

If order indications are so good for next year, why did the company need to adjust its figures so poorly for this quarter? Sure, they are different time periods. This just does not add up that its brand is “so well positioned.” At least not to us.

It was just over the summer that Crocs’ stock took a big hit from about $17 down to under $14. The good news for now is that the stock is not challenging its 52-week low of $12.00 even if shares hit a low of $12.65 earlier Tuesday morning. Crocs has a history of good hits followed by bad misses on its earnings situation, and that is why it trades at about 12 or 13 times expected earnings. even if it has managed to grow its sales.

There is a reason that this stock used to be up above $60 and $70 per share before the recession and is down around $13 now. Much of that reason is how much value that investors are willing to pay to own a piece of the Crocs brand.