Insights

Crocs are making a comeback, and not just in fashion

16 March 2019  |  TRADING IDEAS

Highlights

  • Crocs reported $1.1 billion in revenue which is the first increase after 4years of decline, although the number of company-operated stores has decreased by 38% in the last 5years.
  • Revenue from e-commerce increased by 15.8% to $183 million in a year which accounts for 16.8% of total revenue.
  • Wholesale revenue streams increased in 2018
  • The number of retail stores in Asia decreased. On the other hand, revenue in American stores increased to $1.2 million USD.
  • The company shifted toward outlet stores to improve inventory turnover. Cash flow from operating activities increased to $114million
  • Market cap was $1.84 billion. Footwear market is predicted to become $164billion in year 2023

Company overview

Since Crocs originally introduced a single style clogs shoe with 6 colors in 2002, the shoes have become popular with their unique design and comfort and have sold more than 600 million pairs in over 90 countries worldwide. The company went public on NASDAQ in 2006 (symbol: CROX). The company had steep revenue decline after peaking in 2014 ($1.2 billion) and recorded operating losses from 2014 to 2016. More than 200 company-operated stores have been closed in the past 5years. However, recent figures suggest there may be a turnaround in the company.

Crocs used to operate heavily in the retail sector, with 619 stores in 2013, but has reduced to 383 stores by 2018. However, the company reported $1.1 billion in revenue which is the first year of growth after 4years of decline.

Revenue

Revenue increased by 6.3% to $1.1 billion and operating income increased by 264% to 63 million year-over-year. Operating margin ratio improved to 5.8% from 1.7%.

Compound annual growth rate (CAGR) over the last 4 years was 15.8%. Revenue from e-commerce has been growing and made $183 million in 2018 (+22.5% YOY) while retail and wholesale, the company’s primary sources of revenue, have been struggling.

E-commerce revenue has increased by 8.1% and retail revenue has decreased by 5.4% since 2014. Wholesale has decreased by 7.7% since 2010. The company has shifted weight toward e-commerce from retail or wholesale in recent years.

Crocs operates its own e-commerce site and provides the membership program ( Crocs Club) in 13 countries. The company also offers products through third-party marketplace such as Amazon aggressively.

E-commerce revenue is led by Americas; $99 million (+22.6% YOY) which accounts for 54% of total e-commerce revenue. Asia Pacific is also growing; CAGR over the last 8years is 27.7%.

Wholesales revenue turned positive for the first time in 5 years with $578 million, which accounts for 53.1% of total revenue. The wholesale channel is made up of E-retailers, distributors, and traditional brick-and-mortar accounts. E-commerce sites are operated by wholesalers, and in certain countries, also includes partner store operators.

Crocs has offices in approximately 30 countries, but distributes its products in over 90 countries across 54 distributors.

Wholesale revenue in the Asia Pacific region turned positive last year for the first time since 2013 at $203 million. A large reason for this growth was primarily due to the growth in distribution networks across the region.

Looking into the store numbers geographically, the company closed more stores in Asia Pacific in recent years and ended with 153 stores in 2018 (hit a peak in 2013 with 285 stores).

Looking into the revenue by regions, only Americas increased revenue in 2018 ($205 million, +8.7% YOY) which accounts for 62.6% of total revenue.

In Americas, revenue per retail store has kept growing and recorded $1.2 million in 2018.

In March 2018, Crocs introduced new collection called ‘LiteRide’ using new lightweight material which is 25% lighter than the traditional ’Croslite’ material. It contributed to the growth of retail revenue.

Cost of sales once at 53.2% in 2015 which was a primary reason for the operating loss. In response, the company reduced the production cost of shoes and as a result, cost of sales decreased to 48.5% in 2018. Selling, general and administrative expenses decreased to 39.4% over the past several years, and advertising costs have slightly increased, at in 6.3% in 2018.

Balance sheet and cash flow

Crocs valued cash and cash equivalents was at $123 million which accounted for 25.5% of total asset ($468 million) at the end of 2018. The company raised funds with debt and made stock buybacks to increase the shareholder’s return in 2018.

Cash flow from operating activities was $114 million which has been on the increasing strongly since2015.

Since after the company reached a peak with its inventories at $171 million in 2014, turnover period had slowed down. In 2018, turnover period was shortened to 42.7 days and they benefited through improved cash flow from operating activities.

The company has shifted toward outlet stores among retail channels, and that has contributed to improved turnover period.

Crocs reduced the number of full-price retail stores and kiosk/ store-in-stores (approximately half of 2013) while increased outlet stores to 195 which accounts for 50.9% of total number of retail stores.

Market Situation

The stock price peaked in 2007 and has fallen to below half of the high price. Tt has been on an upward trend again since 2017. EV is $1.83 billion and EV/FCF is 18.5 as of March 13, 2019.

In addition, the footwear market is predicted to have strong demand worldwide which is a positive factor for Crocs as well.

(Statista)

Footwear market exceeded $100 billion in 2017 and is predicted to expand to $164 billion by 2023. CAGR 2019-2023 is predicted at 8.3%.

In global comparison, 45.4% of revenue will be generated in China (22.3% in the U.S.).

According to the company’s presentation, the company still aims double-digit growth in e-commerce. The company regards sandals have the long-term growth potential as there are no clear market leader in the sandal market.

The company predicts to earn $1.16 billion in revenue in 2019 (+7% YOY) and also to improve selling, general and administrative expenses to 41% of revenues compared to 45.7% in 2018.


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The original article was published by Stockclip, Inc. on 07/03/2019.

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