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Crocs Inc., Case Solution & Answer

Crocs Inc., Case Solution

Executive Summary

Analyst Stacy Yeung at Rock wood Asset Management, was interested in the stocks of Crocs Inc. The company went public in February 2006, and the analyst was following the stock performance of the company and believed that the company had a sustainable new brand, and the stock prices would increase.The industry in which Crocs is competing is the shoes or footwear industry that is an attractive industry located in the United States1. Within a few months, the stock prices reached the high ends and confirmed the analyst’s judgment. However, in October 2007, the share prices of the company fell sharply and an investigation was required analyzing the roots of the fall that would be incorporated into the workings of the analyst to estimate the price of the company’s share.The reason for the fall could be the fall in the purchasing power of the citizens which would lead to a decrease in sales of lavish items. Along with it, share prices are driven by the investors’ confidence, a way to measure the investor’s confidence is by analyzing the price to earnings ratio. The ratio explains that how much an investor is willing to pay for one unit of earning; a higher P/E ratio indicates higher confidence. As witnessed above the results of Zumiez were better as compared to Crocs and Lululemon but still the price of the Zumiez securities was lower as compared to the two2. This is solely because of the falling investor’s confidence. The investors might significantly be falling for Crocs, and thus, the price of the shares declined sharply.3

Looking at the financial performance of the firm using ratio analysis, the overall liquidity position of the firm is efficient, with improved liquidity ratios. Along with liquidity, the profitability position of the firm is also effective with high net profit and gross margins. However, the firm has ineffective asset management with high inventory turnover and asset turnover4. The firm also has an irrational capital structure with only 4% of debt ratio in 2006, which deprive the firm to gain an interest tax-shield advantage. However, overall position of the firm is improving from 2005 to 2006 as seen in the ratio analysis.5

The valuation by the analyst provided with the value of the share at $85, which is quite high and the assumptions made are improper. The sales amount is assumed to grow at a very high rate. The growth in sales incorporated with the inflation effect is 20% in 2008 and 2009, the growth will then fall to 15% for the next two years and in 2012 the growth will be 10%, after which the sales will grow by 5% in perpetuity. 5% growth represents the nominal growth in the US economy. The value of a share according to the new assumptions is $11.35, which is lower than the prevailing price of the share.6

From the above analysis, management at Crocs is suggested to increase the firm’s dividend payout ratio by generating cash from selling its stock of inventory at discounts. This discounted inventory could be sold in new potential markets with low purchasing power. In this way, the firm could increase its consumer base by exploring new markets, reduce its inventory by selling it at discounts and increase the investors’ confidence by high dividends and low inventory level.7

1 Exhibit 1: Porter’s Five Forces

2 Exhibit 2: P/E Ratio of Comparable Companies

3 Exhibit 3: Reasons for Decline in share Prices

4 Exhibit 4: Ratio Analysis

5 Exhibit 5: Trend of Ratios

6 Exhibit 6: DCF Valuation (Revised)

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