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Why CROX failed?

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By now it’s no secret that CROX stock failed. After it issued horrendous 2Q 08 preliminary results and full year guidance yesterday afternoon (refer to MarketWatch for more details). I don’t want to dive into the numbers and add salt to injury. I traded the stock last year until this Feb. when I realized it was time to sell. Besides my doubts on its financial and fashion, I could not understand why a company claims its success from logistics got “inventory” problem. For fashion retailers excessive inventory is a common problem but it’s also the worst. There are many factors account for the quick bust of CROX, some will argue those kinds of stocks always fail. Over the years I have seen Travel Zoo, OverStock, Hansen (drink), Jones Soda, Heelys. I think fundamental reason is that their business is not sustainable, because of its fickle fashion nature, or flawed business model.

Catalyst for the fall
The short sellers, esp. the naked short sellers. Short sellers have been bashing this baby since its IPO in early 2006. They have been losing money until Nov. 1 2007 when CROX 3Q 07 missed street expectation. After that it’s obvious there is not much risk, esp. considering SEC recently started banning naked shorting on Fannie/Freddie and 19 primary brokers. In other words, SEC was saying go naked shorting oil, coal, retailers,…we will not prosecute you.

How often do you mark to market?

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The warning signs of Crocs

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Crocs (CROX) lowered its Q1 number yesterday. I sold all my CROX shares a while back after its Q4 earning announcement, because I thought the fundamental is still bad, not to mention the potential cash flow problem I talked earlier.

Since I am talking about the financial media lately, I think one really does not need to know accounting or finance to figure out CROX will fail. Just look at the following two things from media recently.

1) Crocs per capita (a fancy name for the average dollar spending per person), this is shown in its Jan. ICR Xchange conference. My initial thought was it is quote innovative for them to come up with such a cool name. But looking back, isn’t it a typical wall street trick to get people excited? We have heard the Home Inns said “China top 10 hotels has 6% of market share, US top 10 hotels has 60% of market share” back in Oct. 2006. We know what happened to HMIN now.


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My Q1 2008 grades

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(Update Apr 2) Another news to make myself feel better, Chinese A share mutual funds declined 22% on average (read this Chinese news from Money-Courier). For comparison, Shanghai Composite index dropped about 34%, from 5261.56 to 3472.71 in the period. Note that index is not a good benchmark index because it’s skewed by some big cap stocks such as PetroChina (601857.SS).

(Original Apr 1) I was a decent student in elementary school, but from time to time I did get bad grade in an exam. The tough part for me was getting the report to my mom 🙁

The most miserable quarter
I’m sure lots of money managers will share my “most miserable” comments. My little portfolio shrinked about 25.23% from Dec 31, 2007 to March 31, 2008. Thanks to my bone headed bets on LFT and CROX stocks. For comparison: “In the first quarter of 2008, the Dow fell 7.55% and the S&P 500 index lost 9.92%. The Nasdaq was by far the worst performer among major U.S. equity benchmarks in the first three months of the year, dropping 14.07%.” (source: Business Week). To make myself feel slightly better, note GOOG and AAPL dropped about 33% and 25% in the same time period, respectively.

Lesson learned
1) In early Jan. I told my wife I need to unload LFT and CROX, so that I can sleep well in the night. I finanally was able to pull the trigger on them (LFT in Jan and CROX in Feb). A bit too late (CROX went from 75 to 19 in 3 months). But I’m glad I fufilled my words to my wife on this one (see below what if).

2) Trading cost: 7*45 = 315, not significant, but still sizable. Looked at other discount brokers such as TradeKing, IB but have not decided to switch. I will reduce trading times and increase the size of trading (make more sure bets), to reduce the trading cost.

Good things
Finally I was able to get back to In value I trust. I also got back to more solid stocks such as CHL, RIMM, SYT. And I was able to take some profits when I saw opportunity (don’t want be a pig).

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Croc-less for now

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I sold the remaing few CROX shares today. Not because I was scared of the bad news from mortgage and banking industries, and general worsening US economy. It’s because I think the Crocs story is over, for now.

Lessons learned (this is related to my previous Stock Lessons series…)
1) When someone claims some new company is going to be next Microsoft, Google, etc. Run, not just walk away from it. On May 26 2007 our friend “expert” Georges Yared wrote a piece saying Crocs is the next Nike. Well, it looks more likely Crocs is the next Heelys 🙂

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Crocs released 10K year 2007

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Here is some interesting stuff I read (auditor’s opinion):

“We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2007 of the Company and our report dated February 29, 2008 expressed an unqualified opinion on those financial statements and included an explanatory paragraph regarding the Company’s adoption on January 1, 2007 of the Financial Accounting Standards Board’s Interpretation No. 48, Accounting for Uncertainty in Income Taxes, and the adoption on January 1, 2006 of Statement of Financial Accounting Standard No. 123(R), Share-Based Payments.”

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Two strikes on CROX

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Last two quarter earning report has dragged Crocs stock from $75 to around $25. Many analysts, bloggers, pundits, pretty-much-everybody-wears-shoes (and consequently knows the shoe business) think the stock price is reasonable now.

That is, assume Crocs can unload its massive $250 million inventory successfully. By success I mean they did not give it away to charity, or dump it to PayLessShoes.

Let’s forget the financial analysis, technical analysis for a minute, just think a shoe company attributes its very success to sophiscated supply chain management, got an F grade on it. A lot progress has made in global supply chain management in last 10 years: many great companies have cut inventory level down (think DELL?). Some Japanese car maker (Toyota) even tried Just-In-Time manufacturing (zero inventory). Oh well, one can argue they are mostly manufacturers not retailers. But Crocs has been mostly a manufacturer too.

The bottom line is Crocs got two strikes in a row, one more strike they are out.

(update Feb 25) I read this article about CROX from theStockMasters. Very funny article, but I don’t think CROX is a stock worthy of our long term portfolio.

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CROX: bull case, bear case

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I decided to take some CROX off the table. Too much controversials on the stock after yesterday’s earning report. Here are some of the bull case and bear case.

Bull case
Management is optimistic on the international expansion, and new products (jibbitz, Bite, OceanMind etc.), but which company’s management is not bullish on their company’s growth prospect?

Analysts fell the valuation is more attractive now, mostly from PE, 2008/9 growth rate point of the view.

Bear case
Revenue sequentially decline: Q4 2007 vs. Q3 2007 ($224 m vs. $256 m), this is reverse of trend compared to 06. Crocs out of fashion in the US?

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Second shoe dropped at CROX

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To be fair, Crocs reported a good quarter for Q4 2007. But, the outlook did not please the street, let me quote Reuters:

The company based in Niwot, Colorado, whose vibrantly colored shoes, clogs and boots have become a fad in recent years, also backed its 2008 profit outlook of $2.70 and revenue view of $1.16 billion.

Analysts were expecting a profit of $2.72, before items, on revenue of $1.16 billion.

The stock dropped about 10% after hour. I am not sure if it will recover like AMZN did after its earning couple weeks ago. As I was listening the Conferece call, one analyst asked if people under-appreciated Crocs’ infrustructure, he even said Crocs is like a global supply chain company happens to make and distribute shoes. Interesting point, Crocs has 5,000 employee worldwide as of now.

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Things to look for Crocs earning Feb 19

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Crocs scheduled the Q4 2007 earning report on Feb 19. Couple things I anticipated and will pay attention to:

1) I don’t think this will be a strong quarter due to seasonality: it’s winter in Europe and Japan, and in winter they don’t wear Crocs as the American do.

2) Inventory: if the 1) holds, the inventory (classics and Cayman) they built up last quarter will not reduce dramatically. The managment also said in last CC they expect those inventories to ship for Spring 08. This is not good news.

3) Cash flow: they will not have cash flow statement in press release; they will have it in the 10-Q, 10-K afterwards. But don’t expect too much from it. As I said in my earlier post titled “stock option helped Crocs cash flow”, this magic will not work any more now that the stock is beated down.

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Most Crocslized country

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By Crocslized I meant the penetration rate of Crocs shoes. From today’s Crocs presentation at ICR XChange, Australia claimed the No. 1 spot in term of dollar spent on Crocs per capita (a.k.a., per person). Canada is second. US is not too far behind. China is also shown in the figure. So, take Australia as an example, on average each person spent $1.40 on Crocs in 2007. A big increase from $0.30 of 2006.


The CEO Ron Snyder is saying Germany, French, Japan and China are increasing doors (retail outlets) rapidly. With the slowdown of US economy and consumer spending, obviously international market is becoming key to Crocs sales in the near term. This is echoed by the new assignment for CFO Peter Case. Peter is going to be SVP for Retail Operations.

Expect seeing more Crocs in China this summer 🙂