Why Staying Away from Crocs Makes Sense

Shoe maker Crocs (NASDAQ: CROX  ) has gotten off to a disappointing start this year. Its fourth quarter was upsetting due to many factors, and competition from Wolverine World Wide (NYSE: WWW  ) and Deckers Outdoor (NYSE: DECK  ) is a thorn in the flesh for Crocs. So, does all this make Crocs a company to stay away from?

A closer look at the results
Crocs performed well despite unfavorable macroeconomic conditions. It reported record sales of 54.3 million pairs of footwear, resulting in a 9% rise in revenue in 2013 as compared to 2012. Internet sales also rose 10%.

Crocs performed very well in Asia and Europe as a result of wholesale expansion and market recovery in these regions. This resulted in a combined 12% increase in sales in Asia, while in Europe it posted a 46% increase in revenue for the quarter. In the retail segment, Crocs exceeded its own expectations and enjoyed handsome revenue as a result of more focus on the retail channel.

Due to a soft wholesale market and slow sell-through of inventory, however, the wholesale segment's revenue dropped 15%.

Meanwhile in America, lean inventory in wholesale accounts hurt Crocs. In addition, import restrictions, currency devaluation, and lower demand in Latin America caused the company's revenue to shrink. Also, Crocs' international sales were affected by currency devaluation in Japan, resulting in a revenue loss of $30 million. 

The way forward
Looking ahead, Crocs expects 2014 to be a year of transition. The company is planning to focus more on long-term strategic plans, one of which includes installing a new CEO. Moreover, as it saw weakness in retail channels in America and Japan, Crocs is focusing on maintaining its margins. It is undertaking aggressive strategic plans to improve operations in America and Japan in 2014. 

Crocs is focusing on retail stores by limiting investments in new retail stores and focusing on consolidating the existing stores. Crocs is planning to expand more in Asia and Europe in 2014 as well. It sees good sales in the summer and spring seasons, driven by new product categories and segments. Crocs also expects its loafer shoe business to do well in 2014. The Easter holidays are expected to be another growth driver for the company, but getting more customers into the stores isn't going to be easy for Crocs due to stiff competition from rivals. 

A look at the competition
In order to lure more customers, peers like Wolverine World Wide are concentrating more on innovation. Wolverine will launch a new Sperry Apparel collection, which contributed the most to its recent quarterly revenue growth. In addition, the Rockford-based footwear giant has also collaborated with celebrities like Taylor Swift and Kate Spade to propel sales of its Keds category. However, Wolverine's growth was primarily driven by its October 2012 acquisitions, while revenue from its Heritage group has been disappointing. As a result, Wolverine's shares have lost nearly 20% this year.

On the other hand, Deckers has mirrored the performance of Wolverine and has lost nearly 20% since it offered a disappointing earnings outlook. Deckers expects 6% revenue growth in the first quarter, while analysts were looking for 11.6% growth. On the earnings front, Decker's expects a loss of $0.16 per share, falling well short of analysts' target of $0.10 per share profit. Deckers has always been conservative about its guidance, but the outlook was too weak and it didn't go unpunished.

Wolverine looks to be a more credible threat for Crocs since Deckers is struggling a lot. However, Crocs' expensive valuation can scare value investors away from the stock. It trades at an expensive 130 times last year's earnings, which is very high considering its slow growth rate and the fact that it incurred a loss last quarter. In comparison, Wolverine trades at a cheap 28 times earnings and posted superior revenue growth last quarter.

All in all, it can be concluded that Crocs posted disappointing results and it is facing numerous headwinds. Moreover, its high valuation doesn't make it a good investment, especially when peer Wolverine trades at a much cheaper valuation. All told, it would be better for investors to stay away from Crocs.

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