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Why Crocs and Deckers Shares Are Taking a Beating

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On Thursday, Crocs (Nasdaq: CROX  ) got battered after an earnings miss. Apparently, Deckers Outdoor (Nasdaq: DECK  ) felt bad and decided to give Crocs some company. Third-quarter results from the makers of Uggs disappointed everyone, and the outlook for the rest of the year is horrible. Sales of Uggs were hurt by an increase in raw material costs, which Deckers tried to pass onto a skeptical public. With the damage done, is there any reason to jump on this bandwagon?

Disappointing third-quarter earnings
Getting things off on the wrong foot, Deckers' revenue for the third quarter fell 9% to $376.4 million. It's no surprise that the fall was largely due to a decrease in Uggs' sales. The brand made up 88% of the company's total revenue, and sales of the sheepskin boots were down 11.6% from last year. Deckers' However, the brands make up such a small portion of the company's portfolio that the increases had almost no effect.

Deckers has been fighting the rise in raw-material costs, specifically sheepskin, for the past two years. The company claims that it has seen raw-material prices rise by 80% over that timeframe, and the company has continued to increase prices to keep margins up. But the increases seem to have backfired, and Deckers' operating margin dropped 600 basis points to 16%.

While the company's revenue fell, its cost of goods sold increased 3%, and the combination wreaked havoc on the bottom line. Earnings per share fell 26%, compared with last year. The stock suffered mightily and was trading down 18% at midday on Friday.

The ghost of Christmas future
As if the bad third-quarter results weren't enough, Deckers also forecasted a dismal end of the year. EPS are expected to fall 14% in the quarter, while previously the company had forecasted a 22% increase. That revision plus this quarter's failure has caused the company to revise its full -ear outlook as well. Deckers said that it now expects to end the year with only a 5% increase in total sales and a 33% decrease in EPS. Originally, it had been predicting around a 10% fall.

That hesitation about the fourth quarter mirrors what Crocs said on Thursday. Crocs blamed its upcoming woes on Europe and Japan, instead of citing cost and pricing issues . The company is now expecting to break even in the fourth quarter . Unlike Deckers, Crocs increased revenue and EPS in its third quarter.

Competition comes calling
Crocs and Deckers are both battling in a well-worn trench, and the shoes that have flattened the dirt belong to Nike (NYSE: NKE  ) and, more recently, Skechers (NYSE: SKX  ) . Nike's last earnings release was downbeat but not beaten down. The company increased revenue but saw a 12% drop in income , because of increased costs and ad spending. Skechers increased EPS and said that sales should increase in the low to mid-double digits in the fourth quarter . The company's stock jumped after the announcement but has since fallen back because of overall pessimism in the industry.

All four companies are hoping for a solid season of Christmas sales, although it looks like only Skechers is really ready for it. With a few new lines and its toning, lifting, shaping nonsense behind it (pardon the pun), I think Skechers might have a good run of things over the next few quarters. The market seems to agree, and Skechers is sporting the highest forward P/E around 20. Both Crocs and Deckers look to have fallen into bargain-bin territory, with forward P/Es below 10. But if you're looking to buy on the cheap, I'd still stay clear of Deckers, which has too much resting on one irreplaceable commodity and one brand.

Nike continues to be a strong American brand, and it's made The Motley Fool's list of 3 American Companies Set to Dominate the World. The other two are spelled out in this special free report for Fool readers. You can get all the details on the companies' expansion plans, and what to look for in the future. Click here to claim your free copy, today.

Fool contributor Andrew Marder has no positions in the stocks mentioned above. The Motley Fool owns shares of Crocs and Nike. Motley Fool newsletter services recommend Nike. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 27, 2012, at 4:13 PM, MARIOROSSI612 wrote:

    You failed to point out that crox beat the Rev and forecasted for an increase. Rev for Q4 2012 will be up 10% from Q4 2011. They are spending $ on opening 30-40 new stores this Q and that is why the earnings will be 0 (see CC). Projections are for greater Rev. for 2013. If this was Apple the stock would be up. What is the problem?

  • Report this Comment On October 28, 2012, at 11:17 AM, laKitKat wrote:

    ""That revision plus this quarter's failure has caused the company to revise its full -ear outlook as well""

    You might want to edit this--full-year

    These digital articles tend to hang around forever haunting you with the ghost of Christmas Past typos

    Any editor job openings available?

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