Ugly Shoes, Pretty Profits

Wall Street isn't a beauty contest. You can win with square-shaped burger patties, "cheap chic" retailing, and apparently even with holes in your shoes.

Crocs (Nasdaq: CROX  ) came through with another monster quarter Thursday night. Revenue more than tripled to $142 million. Earnings grew even faster, to $0.61 a share after a $0.17 per-share showing a year ago.

Silly analysts and their pretty shoes couldn't keep up with Crocs. They were expecting the company to earn just $0.49 a share on $113.9 million in revenue. Crocs investors should be used to looking back at Wall Street's pros. Beating the Street has become a quarterly occurrence since the niche footwear company went public last year.

EPS

Estimate

% Difference

Q1 2006

$0.17

$0.14

21%

Q2 2006

$0.39

$0.22

77%

Q3 2006

$0.53

$0.41

29%

Q4 2006

$0.51

$0.43

19%

Q1 2007

$0.61

$0.49

25%

Source: Thomson First Call

A company that went public early last year and has cleared targets with ease ever since? It does seem a lot like Rule Breakers recommendation Chipotle Mexican Grill (NYSE: CMG  ) , doesn't it? You won't confuse a burrito with a sandal, but each stock has been a huge winner for early investors.

Sometimes, you have to pay up for quality.

No holes in the income statement
Sure, the shoes are ugly. However, they're comfortable, lightweight, anti-microbial, and odor-resistant. The stock is pretty odor-resistant, too. Crocs shares have nearly tripled since the company went public.  

The company is pretty confident about its future, too. Declaring a 2-for-1 stock split is a zero sum event, but Crocs wouldn't be doing it if it felt that its stock was about to crater because its shoes were a passing fad.

Investors have been burned by fast fashion before. True Religion (Nasdaq: TRLG  ) shareholders found that out the hard way when consumer demand for the pricey designer denim waned last year. Today's hot apparel statement can always be tomorrow's abandoned Members Only factory.

This creates a compelling value for investors. Companies like Crocs and Heelys (Nasdaq: HLYS  ) -- which should report a strong quarter next week -- are obliterating Wall Street estimates, but they're trading at a steep discount to their growth rates.

Crocs is on fire, right? You don't grow the top and the bottom line by 217% and 259%, respectively, without a colorful blaze coming from your tailpipe. What kind of earnings multiple do you think the market is granting Crocs? Whatever you're thinking, it's probably too high.

Crocs is raising its guidance. It's now looking to earn $2.90 to $2.95 per share this year. In other words, you can buy into the company at less than 20 times this year's earnings. What kind of stocks do you usually find with forward P/E ratios in the high teens? Few are probably growing faster than Crocs right now.

Walking a mile in Crocs' shoes
Nike (NYSE: NKE  ) was able to milk the success of Air Jordan shoes to create a killer, somewhat diversified, franchise. What's stopping Crocs? The company already has dozens of shoe lines beyond the "beach" model that brought it success. The company has even struck a licensing deal with Disney (NYSE: DIS  ) , allowing it to put out shoes with Mickey Mouse head-shaped holes. A new line of Pirates of the Caribbean shoes is coinciding with the third installment of the Disney live-action blockbuster.

Until someone comes out with a better mousetrap -- or at least a better shoe -- why should Crocs fade away? Under Armour (NYSE: UA  ) has been successfully selling its sweat-spurning apparel for a couple of years now. Why? Because it works, and no one has topped it yet.

As we wait, Crocs continues to grow its business. It isn't just shoes anymore. It's selling jeweled accessories to personalize the shoes. It has made the logical step into branded apparel, like Nike. It is even making shoes for folks with medical conditions like diabetes and bunions. Yes, there is a market out there for that.

As long as Crocs keeps lapping Wall Street, tired analysts will agree that the backs of those Crocs shoes they're chasing are drop-dead gorgeous to look at. 

For more on the funky shoemaker, check out:

Under Armour and Chipotle are two recommendations in the Rule Breakers newsletter service. What makes them so special? Those answers and more can be had with a free 30-day trial subscription.

Longtime Fool contributor Rick Munarriz loves how Crocs come in college colors, too. He does not own shares in any of the stocks in this story. He is also part of the Rule Breakers newsletter research team, seeking tomorrow's ultimate growth stocks a day early. Disney is a Stock Advisor selection, and Motley Fool Hidden Gems recommended Chipotle's Class B shares. The Fool has a disclosure policy.


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