Business as Usual: Crocs: Ugly Shoe, Uglier Stock

Putting aside the hideous look of the foam clogs that are somehow considered footwear, the valuation of Crocs’ stock is anything but attractive. After becoming a publicly traded company in 2006, Crocs (NASDAQ: CROX) quickly gained popularity among consumers, with revenue increasing from 355 million dollars in 2006 to 847 million the following year. I actually recall buying my first (and only) pair of bright green Crocs during a vacation with my grandparents at a Payless Shoe Store in Naples, Florida, in the late 2000s. More than ten years have passed, and I have since arrived at the realization that 1) the only fashion statement Crocs make is to showcase what not to wear and 2) a decision to invest in CROX is a very risky play. This analysis will focus on the latter realization.

The first major problem with an investment in CROX is that the company itself is entirely cyclical, creating a greater amount of risk. In other words, Crocs themselves are reliant on rapidly changing consumer preferences. Already difficult on a macro level, the fashion industry is especially difficult for firms to adapt to such changes. In a society which relies so heavily on trendsetters and prominent fashion figures to lead the way, it is very easy for a product like Crocs to quickly be neglected and forgotten by the public.

However, it just so happens that Crocs are currently popular and are favored by many consumers, especially among young adults. To give an example, when Crocs rose to fame in the mid-2000s, CROX was bid up to extraordinary levels. The stock went from a price of 12.59 dollars in June 2006 to 75.21 dollars in October 2007. However, once the Great Recession arrived, consumer incomes decreased, sending down demand for Crocs altogether. This resulted in its stock price plunging to a low of 0.79 dollars in November 2008. Though partly a product of lack of demand, the weak fundamental structures of the business played a large role as well.

In terms of its valuation, CROX is a very expensive stock with lackluster metrics to justify such a steep price. Currently, CROX is trading at a Price/Book value of 19.39, representing a significant premium to potential investors. In addition, the stock is trading at 22.18x EV/EBITDA, which is a rich valuation for any sector of the overall market. The company also reveals a current ratio of 1.74, indicating the firm may have difficulties meeting short-term financial obligations if a global slowdown were to drive down sales and compress margins.

To put these metrics into perspective, I will describe the ideal range of figures that a value investor looks for when scoping a potential investment. Value investors typically seek out stocks with a Price/Book value of less than 3.0, an EV/EBITDA ratio of below 12.0 and a current ratio of at least 2.0. Based on the three metrics previously outlined, it is obvious that CROX is a very rich stock on a quantitative level.

On the qualitative side, there are not many concrete concepts to justify such a steep price tag. As noted earlier, Crocs are known for selling one specific product: a foam clog shoe. As a result, there is not much product diversity behind the company’s business model, making an investment even riskier.

All in all, I would not recommend initiating a long position in CROX. In fact, as a value investor, the downside potential heavily outweighs the upside potential. Due to this vast discrepancy, a short position (betting the stock price will decrease over time) would be the preferred position to take at this point in time.