Crocs Valuations Wearing Out Faster Than The Sandals

For $6, you can buy a pair of sandals that looks identical to Crocs which retails for $30. You can now buy a share of CROX stock for less than $5.

There may be differences in how these two feel, but it is  not easy to find the differences in the look. How can Crocs expect to retain its market share at such price premium? It can’t.

No one can expect to defend their price premium when close substitutions are available. Add to this, the current tough economic conditions. Crocs is not going to find it easy to convince customers that value-add from its resin technology is worth the high price.

Crocs pre-warned that it will barely break even for this quarter and the outlook isn’t positive for the rest of the year.  It reduced its earnings forecast from 43 cents to 3 to 7  cents, at almost the same revenue levels of $220 million.  Its profits are expected to drop 93% while its revenues are expected to be down only 10%.

Crocs is obviously reeling under high cost of goods sold from high oil prices and high cost of sales and marketing. But these two alone are not enough to justify such a lopsided change in operating margin. There is more hidden in its books, and this makes the stock unattractive even though it is trading close to its book value (assets less liabilities).

As I wrote last time, there are serious red flags in its accounting. It is much better off to look for other investments. In the words of Benjamin Graham, buying shares of Crocs now is not investment, it is speculation.

Follow up on two short sells I recommended

It is not difficult to make predictions in a down market. In May  I made calls on two stocks, CROCs Footwear and Ruby Tuesday Restaurants. They both had just released their Q1 earnings and I made a call by spending some time with their 10-K and their proposed strategy. While 3 months is a short time to check back, a quick view of their current market prices justify the short call.

RT is now trading at $5.8 down 21%  from $7.35
CROX is now trading at  $8.25 down 30%  from $11.81

Compared to this S&P 500 is at 1283.6 down 8.1% 1397.68.

So not all weakness in these two stocks are due to market downturn. Motley Fool’s Tim Hanson called Crox attractive at current prices. But given  the red flags in their accounting it is good to stay out longer.