Crocs Enters Dangerous Territory

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Crocs (Nasdaq: CROX  ) spooked investors with an early Halloween "trick" last week. Shares in the shoemaker fell 20%, after the company reported soft 3Q earnings, and projected an even rougher fourth quarter ahead.

In the wake of that news, Crocs CEO John McCarvel told Reuters that the company plans to offer fewer promotions this holiday season. While that's a good long-term move, Crocs has more immediate problems that should be concerning investors.

First, lets take a look at those scary earnings. The big picture didn't look all that bad. Crocs reported EPS of $0.49 on $296 million in revenue, a record amount of 3Q sales. The company kept up its physical growth, and now has 499 stores, a 22% boost from last year. Crocs was also able to notch a 1% gain in same-store sales and a hefty expansion of gross profit, to 54.4% from 53.5% in the year-ago quarter.

Notably, Crocs dodged the cost pinch that has plagued industry competitors Deckers (Nasdaq: DECK  ) and Nike (NYSE: NKE  ) . Nike's costs grew at a faster pace than revenue last quarter, up 11%. Meanwhile, Deckers was smacked with an 80% jump in sheepskin and other input costs, contributing to that company's earnings miss. In contrast, Crocs' costs actually shrunk as a percentage of sales.

But, despite the good news, Crocs' report was overwhelmed by two pieces of particularly bad news: a drop in Asian sales, and a weak forecast for the fourth quarter. 

Crocs logged a 6% drop in same-store sales in Asia. That's important because the Asian market has been a big source of growth for the company, and it represents over 38% of revenue, putting it just behind the U.S. region, at 45%. Any weakness in Asia threatens not only to impact overall sales, but also to damage a critical piece of Crocs' growth thesis.

Now, about that forecast: It was bad. Crocs guided to zero profit in 4Q, on $220 million in revenue. The company sees Europe and Asia remaining weak. Worst of all, it guided to full-year profitability that will fall short of its 15% target.

Crocs' guidance shows that the company hasn't met its goal of turning the brand into a four-season product. Despite all the effort to expand the product line beyond summer styles, the company is still vulnerable to a big drop in revenue at exactly the wrong time: the holiday quarter, when merchants are eager to clear out inventory, and customers are expecting markdowns.

Which brings us to the company's plans to offer fewer promotions this holiday. McCarvel told Reuters that Crocs would be having closer to 20 different promotions this year, far lower than the 58 it ran last holiday season. He said that the company wants to disabuse customers of the idea that "everything is on sale all the time, which isn't the case."

I think that's the right move and, over time, it should help smooth out Crocs' earnings, so that 4Q isn't such a painful dip every year. But it won't help this holiday season. Crocs is in for another rough winter, and I think investors should steer clear of the company until it can diversify into four quarters of consistent annual growth.

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Fool contributor Demitri Kalogeropoulos owns shares of Nike. 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 may not 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.

Read/Post Comments (3) | Recommend This Article (2)

Comments from our Foolish Readers

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 November 03, 2012, at 7:32 PM, MARIOROSSI612 wrote:

    Forecast for Q4 2012 is 10% grater than Q4 2011. They would earn .15 cents per share but they are opening 30-40 new stores in Q4 (see CC). I am tired of writers trying to shock investors with sensational headlines and poor analysis. If Nike had this continued increase in revenue quarter after quarter their stock price would soar.

  • Report this Comment On November 04, 2012, at 7:03 PM, sliput14 wrote:

    Who writes this garbage... if you listen to the conference call and follow the industry it is apparent that all manufacturers are seeing weakness in the same areas as CROX. Actually their #'s and % changes in key areas are better than many competitors.

  • Report this Comment On November 08, 2012, at 6:34 PM, wishiwaspsychic wrote:

    Basing a buy decision on whether a spring/summer shoe company can show consistent four quarter annual growth? Sounds kind of like avoiding a winter coat company because it isn't doing great business in July. I much preferred when Motley Fool articles covered notions like valuation and long-term earnings growth and potential when offering opinions on whether or one should be considering a stock...

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