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.

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GameStop (GME) – A buggy whip manufacturer

GameStop is a leading bricks and mortar retailer of video games. This business is in a slow decline due to online competition.  The short thesis is simple… and quite subjective.  Online delivery of video games offers more value than physical delivery of games.  It’s cheaper, more convenient, and the copy of the game can’t get damaged or lost.  In my opinion, it’s inevitable that most video games will be distributed over the Internet.  GameStop’s revenues and profits will be a fraction of what they are today.

Unfortunately, predicting GameStop’s future revenues will be incredibly difficult as there isn’t a historical precedent to base predictions on.  Inflection points are hard to predict precisely.  However, GameStop’s high valuation provides some margin of safety.  If GameStop makes $400M after-tax annually (this is a little generous) and has a market cap of $6B, then its P/E ratio is 15.  That P/E ratio is too high if GameStop’s revenues were to shrink to a fraction of what they are today.

Crocs Q2 2013 earnings

Crocs stock is down over 20% today as it released bad earnings.  Its Japanese operations continued their decline and had terrible results.  Comparable store sales for Japan dropped a whopping 19.5% quarter over quarter (on a constant currency basis).  Something is seriously wrong with their Japanese operations and I haven’t been able to figure out why.  As well, Crocs’ SG&A costs have gone up significantly while gross profits have stayed flat.  The overall result is that net income has dropped a third from $73.8M last quarter to $49.6M this quarter (-33%).

Pacific Sun (PSUN) – overvalued and losing money

PacSun is an apparel retailer that targets the fickle teen market.  I’m going to keep this post short and simple.  Since Gary Schoenfeld became CEO in June 2009, PacSun has been consistently losing money.  The CEO has had 3-4 years to turn the company around.  A good CEO would have turned around the company by now.  Of course, PacSun continues to report losses.  If the future resembles the past, then this company will continue to lose money and go bankrupt in a few years.  In YE2013, the company had GAAP losses of 77 cents/share versus a book value of 95 cents/share.  While the company has a lot of debt ($1.17/share at YE2013), the debt is probably not that dangerous as most of it matures in 2016 and (as far I can tell) doesn’t have financial covenants.

Market cap: $273M
Earnings yield: -22%
Price/book: 6.87
Short % of float: 15%
Short % of outstanding: 8.2%

*Disclosure:  Short PSUN common stock.

Crocs (CROX): A wonderful company at a fair price

Crocs has very high returns on capital (~31%), is growing, and is trading at a P/E of around 11.98 (or 12.45 based on my adjustments).  They bought back shares in the past two quarters.

Retail and reversion to the mean

In investing, some people often make the argument that the profitability of a company will move away from the extremes towards the average of its (public) peers.  I see it often on valueinvestorsclub.com.  For example, this writeup on Aeropostale argues that Aeropostale’s profitability should trend back towards its past.  I think that this is a dangerous and flawed argument.

Lululemon: one of the greatest retailers of all time?

Lululemon has pre-tax returns on capital (well) above 70%.  This is pretty insane.  Imagine you could invest in bonds that yielded 70%/year- you would become filthy rich pretty quickly.