Crocs Marching to $100
Jon Markman
06/08/07 - 07:36 AM EDT
Editor's Note: Jon D. Markman writes a weekly column for CNBC on MSN Money that is republished here on TheStreet.com.
Crude oil, fertilizer, titanium, delirium. The businesses of the top-performing stocks this year are dull enough to make your head buzz from absolute ennui.
What ever happened to the good old days, when the market's hottest companies were in fascinating businesses and run by mouthy chief executives who provided some color and texture to the game?
Well, it turns out that there is one high-momentum company this year that actually makes stuff that comes in colors bright enough to light the dark corners of your closet. And as well as it has done, with a 90% move this year alone, there is probably quite a bit of upside left ahead.
That company is
Crocs(CROX Quote), manufacturer of the ugliest line of shoes in America -- and also, ironically, one of the most popular. If you have never heard of them, just ask any woman of a certain age or her daughter. They probably have at least one pair -- maybe more.
Crocs went public in February 2006, without a lot of fanfare. Most straight-thinking analysts and investors on the Street figured that its line of funny-looking but comfortable, low-slung plastic molded shoes were a fad with the half-life of a marshmallow, and its shares tripped along between $20 and $30 for seven months.
Very few figured this thing for the next
Nike(NKE Quote) or
Starbucks(SBUX Quote), which is to say companies that invented categories of products that were derided as mere fads before their sheer popularity and marketing skills won the day.
Then a funny thing happened. The
ta-da moment, if you will. By the fall of 2006, Crocs' first full year of earnings reports as a public company showed that it was a phenomenal grower and that it wasn't just generating profitless revenue like an empty-headed dot-com. It was making massive fistfuls of money with its wacky little shoes.
Check this out: In 2002, records show that the company earned a gross profit of $1,000. In 2003, $27,000. In 2004, $6.3 million. In 2005, $60.8 million. In 2006, $200.6 million.
Now that is the kind of hypergrowth that gets investors to look up from their lattes and take notice. And that is when the stock started to move like a running shoe rather than a clog. From September of last year until today, shares have tripled, going from $25 to $80, while the broad market is only up 15%.
Gotta Be the Shoes
Now, the remarkable thing about the Crocs story is that even after this fantastic move, there may be a lot left in the tank. Because for one thing, it is an extremely profitable company that is only getting more profitable as it scales up its manufacturing and distribution, providing a return on capital of 43% in an industry where the norm is around 20%.
Just to give you an idea of how strong a number that is, Nike, which knows something about the shoe biz, posts a return on capital of 18%, while
Google(GOOG Quote), which is a super-profitable company, earns a return on capital of 24%. A return of 43% is off the charts, and it shows that management deploys funds provided by the capital markets in an extremely efficient, income-generating, shareholder-friendly way.
Looking at this another way, consider that Crocs' gross margins are the highest in the footwear industry at 56.5%, vs. 47.3% for its next-best peer,
Timberland(TBL Quote), and 44% for Nike. Operating margins are the best in the industry, as well, at 26.9%, vs. 22.1% for the next-best, which is
Deckers Outdoor(DECK Quote), maker of Teva sandals and Ugg boots.
By now you're probably wondering whether these shoes cure cancer or malaria -- or at least make you look 10 pounds thinner. But no, they are just comfortable, lightweight, colorful, antimicrobial and cheap enough to encourage multiple purchases, and they are popular with all genders and all ages, not to mention doctors, nurses, baristas and store clerks who spend a lot of time on their feet.
They are also easily customizable by kids with charms sold at extremely high margins by company subsidiary Jibbitz. Plus, the company has had great success at obtaining licenses from colleges, sports leagues and entertainment companies to jazz up the shoes with NFL and NCAA team logos and colors, Spider-Man and Mickey Mouse.
Most of the skepticism about Crocs stems from the fact that they appear to be so easily ripped-off by discounters. But analysts insist that the company's unique "Croslite" closed-cell resin technology has allowed Crocs to provide a combination of foot-happiness and durability that no imitators have been able to duplicate. The formula for Croslite is a company secret along the lines of the Coca-Cola syrup recipe: Resins and dyes used in the process are bought from several different synthetics manufacturers, then mixed at a third facility under strict supervision.
Crocs executives -- who are manufacturing experts, not fashionistas -- went the trade-secret route rather than a patent to keep competitors from learning its magic mix. According to analysts, all imitations so far are heavier and less comfy, cause blisters and attract scorn from foot fetishists.
Big Footprint
When growth investors assess a company such as Crocs, they want to know the size of the opportunity. To do that, we can start with a potential market of the entire world population of 6.6 billion people, since prices are low enough, at $20 to $60, to appeal to virtually all income brackets and ages. The worldwide footwear market does around $160 billion in sales. If a single company can capture 2% of that, it's worth $3.2 billion in revenue.
Is that possible? Yes, actually it is. Let's just look at the U.S., where the footwear industry sells $46 billion worth of goods, split 60%-40% between fashion and athletic. Of the former, about 55% is shoes, 25% sandals and 21% boots. J.P. Morgan analysts figure Crocs' molded shoe category fits somewhere between shoes and sandals and therefore has a $21 billion playground in which to wrest market share from incumbents.
It's not unusual for a strong company to grab as much as 10% of a category -- Nike, for instance, owns 19% of all athletics sales -- so figure the company could theoretically do $2 billion in sales in five years, up from $452 million currently.
Note that the company just added a women's fashion line and add in the fact that the company is already selling very well in Europe, Japan and Brazil. Slap on some apparel and accessories sales -- the company recently hired away the top designer at athletic apparel maker Under Armour to jump-start that side of its business -- and you can see there's an opportunity for a very large business here.
If it can achieve $3 billion in worldwide sales, and earn a price/sales multiple similar to that of Decker at three times, then you could be looking at a $9 billion market cap by around 2010, which would be a triple from the current price. J.P. Morgan actually thinks $10 billion in sales is ultimately achievable on the distant horizon.
Even at the current quote, it is only trading at 17 times my 2008 estimate of $4.75 in earnings per share despite growth north of 30% a year. That is incredibly cheap for an emerging category-killer. Figure that Crocs will shoot to at least $100 by the end of the year. My target is $120 by mid-2008, about 40% higher than the current quote, so slip on a pair and buy some shares on any dips to come over the summer.
