CROX: Consider the Bone

In answer to the title, a bone = a stock near a buck. I realize that many institutions can't even consider a name like this. But that does not mean that I ignore it. The institutions that will end up caring the most are the strategic buyers.
Let’s accept a hard reality about Crocs. It is a brand. Period. Is it overdistributed, overhyped, and is the core product super ugly??? Yes, yes and yes. But where this company got itself into trouble is by not appreciating the core customer/business, and trying to grow it into fashion areas. Make no mistake – this is not like Ugg (which is better than Crocs). We don’t have to watch trends with the teenybopper crowd. They never wore Crocs anyway. Will a whole host of 8 year olds be wearing them this summer? You bet. Will a good international brand manager (the new CEO comes from Reebok Int’l – one of the few businesses at Reebok that worked) leverage that on a global scale? Why not?

I’m not saying that Crocs is a growth company. In fact, let’s assume the opposite. Let’s say that either the new CEO or a strategic buyer scoops up this company, takes the top line from the $847mm peak down to a core of $400mm and runs at an 8% margin (I can defend this rate six ways til Sunday). At $1.40, it suggests that this thing is trading at less than 2x EBITDA. Each 1x turn by that math is about $45mm in Enterprise Value. Not bad off a base of $86.

Is it scary to buy a name like this whose product is in a decline, management is in question, and 4Q financials have yet to be finalized? You betcha. Could there be accounting adjustments and charges under the new CEO? Probably. But this is a tough business to commit all-out accounting fraud to the extent that it will take an established brand with net cash and put it into bankruptcy.

I remain floored that no one has bought this at an $86mm EV.

If it’s not going bust, BUY THE BONE!

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