For $6, you can buy a pair of sandals that looks identical to Crocs which retails for $30. You can now buy a share of CROX stock for less than $5. There may be differences in how these two feel, but it is not easy to find the differences in the look. How can Crocs expect to retain its market share at such price premium? It can't.
No one can expect to defend their price premium when close substitutions are available. Add to this, the current tough economic conditions. Crocs is not going to find it easy to convince customers that value-add from its resin technology is worth the high price.
Crocs pre-warned that it will barely break even for this quarter and the outlook isn't positive for the rest of the year. It reduced its earnings forecast from 43 cents to 3 to 7 cents, at almost the same revenue levels of $220 million. Its profits are expected to drop 93% while its revenues are expected to be down only 10%.
Crocs is obviously reeling under high cost of goods sold from high oil prices and high cost of sales and marketing. But these two alone are not enough to justify such a lopsided change in operating margin. There is more hidden in its books, and this makes the stock unattractive even though it is trading close to its book value (assets less liabilities).
As I wrote last time, there are serious red flags in its accounting. It is much better off to look for other investments. In the words of Benjamin Graham, buying shares of Crocs now is not investment, it is speculation.
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