A Sale on Crocs

Shares of funky footwear maker Crocs were beginning to show some life -- that is, until they got clobbered February 5, along with the rest of the market.

Crocs stock splattered like a rotten pumpkin the day after Halloween, as investors responded to the company's third-quarter earnings report. It continued to fall until it steadied in January, then started inching its way up again recently.

Bargain hunters may be thinking that, just as the company was ridiculously expensive at $75 a share before its crash, it’s looking mighty tempting at less than half that price now. The Croc hunters may be right.

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Crocs's had the kind of story and numbers of which both fashion and stock fads are made. Its brightly colored shoes, which are light, waterproof and porous, first took off as beach and boat wear. They were so comfortable that nurses and others professionals who spend lots of time on their feet started wearing them. A few years ago, the shoes became a fashion statement, against all reason, and sales soared.

The shoemaker posted sales of $45 million for the quarter ended March 2006 (Crocs' first as a publicly traded company). Sales soared to $256 million in the quarter that ended September 30, 2007. Profits, meanwhile, have grown even faster, from $6.4 million in that first quarter to $56.5 million in the most recent quarter (from 17 cents per share to 66 cents).

Although Crocs's earnings beat analysts' estimates by 3 cents a share in the third quarter of fiscal 2007, its revenues came in $2 million short of analysts' expectations. The company also said inventories had quadrupled from the same period a year earlier, raising fears that it might have to cut shoe prices. (Some of the extra inventory, Crocs said, resulted from changes at its European and Japanese warehouses.)

The stock (symbol CROX) plummeted November 1, after the disappointing report, and continued to fall until it hit $26.32 in January 2008. The stock closed at $32.93 on February 5, down 8%. Both the NASDAQ composite index, on which CROX trades, and the Dow fell about 3% February 5.

If you took a bath on Crocs, you can’t say we didn’t warn you. In our September 26 Stock Watch, we said: "It's a good thing Crocs are buoyant because, at its current price, the stock is surfing on market foam."

Crocs investors must be anxiously awaiting the company's fourth-quarter report, scheduled to be released February 20. If the company follows its pattern of under-promising but over-delivering, the stock could get an enormous boost. But if it merely meets analyst expectations -- currently at 44 cents a share -- don't expect any fireworks.

Also, don't read anything into the stock's 33% rise from its close January 15 through February 1. That simply could be investors realizing they overreacted by pushing the price down much too far.

Unless Crocs is experiencing a system-wide meltdown, it is still a growth company -- and a cheap one at that. The stock trades at just 12 times estimated 2008 earnings of $2.71 per share.

A Zacks Equity Research report says that, based on its conservative 2008 earnings estimate of $2.61 a share and a defensible price-earnings ratio of 17, this should be a $44 stock. That P/E ratio is less than the P/E ratios of other apparel makers with much more modest growth rates. The company itself forecasts 2008 earnings of $2.62 to $2.77 a share.

Even if the Crocs shoe fad blows up in the U.S., plenty of people in other countries are eager to defile their feet in the porous clogs. And Crocs has introduced several lines of shoes that look, well, like normal shoes, with the same squishy comfort of its traditional neon-colored footwear.