Crocs Q3 2013 earnings: smoke and mirrors

Crocs’ latest earnings release is titled: “Crocs Inc. Reports Third Quarter Financial Results and Announces 15 Million Share Increase in Share Repurchase Authorization“.  The title clearly highlights the increase in the share repurchase authorization.  However, Crocs did not repurchase any shares in the last quarter!  The press release is trying to trick people into thinking that Crocs will aggressively buy back more shares, which is unlikely.  The intentionally misleading press release is not a sign of a CEO who is honest with shareholders.

I must admit that I am (probably) wrong about Crocs.  The CEO doesn’t strike me as the most honest guy.  Operationally, the company has deteriorated significantly.  Year over year, earnings for the quarter have dropped from $45M to $13M (down 71%).  Management is guiding to a loss next quarter.  I’m doubting John McCarvel’s skill in operating the business.

On the positive side:

  1. Earnings grew since McCarvel became CEO.
  2. Executives declined one of their bonuses due to bad performance.
  3. Crocs still has many fans among its consumers.
  4. Crocs has been coming out with many new non-clog designs that consumers like.

On the negative side:

  1. Management is promotional.
  2. McCarvel is hypocritical.  On CNBC, McCarvel said that the business is “recession proof”.  Now he is blaming the company’s poor performance on weak consumer traffic and other macroeconomic factors.
  3. A lack of share repurchases strongly suggests a lack of confidence in the company.
  4. Insiders have been selling some shares.
  5. Management reports non-GAAP earnings so that it can report higher earnings.  To say that expenses associated with the ERP implementation is a one-time thing is a bit of a stretch.  Nowadays, all companies have to constantly upgrade their IT systems.
  6. I am speculating here but the analyst downgrade a few days before earnings suggests that earnings may have been leaked to the analyst.  (Go read Confessions of a Stock Analyst by Dan Reingold for an explanation as to why this happens.)
  7. It doesn’t seem like management has identified any of its mistakes on the conference call transcript.
  8. Operating performance has been pretty bad.

Taking all of these factors into account, I don’t think that McCarvel is a CEO I want to bet on.  I will probably be selling my position in the near future.  I feel like a sucker for selling stocks at 52-week lows.  Usually it’s a good idea to buy stocks hitting 52-week lows, not to sell them.  But I think that my original thesis was wrong and that I need to sell.  If stock markets were to close down for 10 years, I would much rather own certain other stocks over CROX.

*Disclosure:  Long CROX and I may close out my position in the near future.  EDIT: Covered Nov. 1 at around $12.14.  Still long some call options.

EDIT:  Here are some interesting analyses on the company:

Sterne Agee report.  It argues that Duerden initiated an audit (of Crocs’ operations) and as a result wanted to fire McCarvel.  Instead of firing McCarvel, the board instead fired Duerden.

Correction to the Sterne Agee report.

VIC writeup.  (Yes, VIC is useful… especially for the comments.)

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