My portfolio was largely:
I lagged the S&P 500 index but still had a profitable year.
I was wrong about John McCarvel. The way I judge a CEO’s operating ability is by looking at his or her prior track record. McCarvel had a run of a few very good years immediately after he became CEO in Feb 2010. In this situation, extrapolating from the past did not work. Currently, it seems like McCarvel was riding off of the momentum from the prior CEO (John Duerden) and is on track to slowly destroy Crocs. His decision to mislead investors with the share repurchase fakeout is bizarre and stupid. He is quickly destroying his credibility. And why exactly does he feel the need to mislead investors?
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.
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%).
On the surface, it seems that measuring key metrics for a business can lead to improvements. Many businesses will try to quantify their operations instead of relying on qualitative goalposts. This is probably a good idea in most situations. However, the real world is messy and difficult. Sometimes employees will game the metrics used to measure their performance.
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.
