Crocs: The Right Steps to a Turnaround?

05/30/2016 7:00 am EST

Focus: STOCKS

George Putnam

Editor, The Turnaround Letter

Our latest featured turnaround idea makes the iconic “Crocs” brand of casual footwear; its proprietary Croslite material gives the shoes a soft, comfortable, lightweight quality, explains George Putnam, editor of The Turnaound Letter.

Since its founding in 2002, Crocs (CROX) has sold more than 300 million pairs of shoes in more than 90 countries.

Crocs’ initial public offering in 2006 at $21 came just as the shoe was gaining immense popularity.  Sales surged from $109 million in 2005 to nearly $850 million in 2007 – driving the share price to a high of $74.75 in 2007. 

If Act One of the Crocs story was its meteoric rise, Act Two was its even faster decline and early attempts to recover.

As the fad faded and the global financial crisis emerged, the share price collapsed 99% to a post-crisis low of $0.94. 

In 2014, private equity firm Blackstone stepped onto the stage with a $200 million investment through convertible preferred stock, and it took two seats on the board of directors.

This investment opened Act Three -– a renewed focus on profits and basic execution. Blackstone’s first step was adding shoe industry veteran Greg Ribatt to the board, and then it installed him as CEO in January 2015. 

Prior to joining Crocs, Ribatt was largely responsible for building Sperry Shoe’s growth. Ribatt has replaced much of the senior management with highly-experienced shoe executives.

Meanwhile, he has slashed the product count by 50%, closed unprofitable stores, terminated weak distribution partners and improved overall execution. 

Much remains to be done, but we like the direction Crocs is headed. The shares currently trade near their six-year lows. 

Valuation on estimated 2017’s still-depressed cash flows of $101 million is modest at 5.9x. Similarly, the shares trade at 14.9x depressed 2017 estimated earnings of $0.59 a share. 

With a successful turnaround, we would expect to see considerably higher earnings and cash flows, along with higher multiples. 

Blackstone has a $14.50 conversion price on its preferred stock, which further incentivizes the management and board to produce shareholder value. We recommend the purchase of Crocs stock up to $13.

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By George Putnam, Editor of The Turnaound Letter

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