Crocs Downgraded At Piper Jaffray On 'Dead Money' Thesis

• Crocs, Inc. CROX shares have plunged 21 percent over the last 5 trading days, declining from a high of $15.01 on September 25.
• Piper Jaffray’s Erinn E. Murphy downgraded the rating on the company from Overweight to Neutral, while reducing the price target from $17 to $12.
• While the company has reduced its Q3 guidance, the eventual recovery of its performance may take longer than was anticipated, Murphy said.

Crocs reduced its Q3 sales guidance from $280-$290M to $270- $280M on account of an incremental currency headwind of $4M and an impact of $6M from the trends in China being softer than expected.

Analyst Erinn Murphy commented, “During the session, we learned more about the positive inflection in the SS16 orderbook, concentrated focus on global marketing, cost saving initiatives and supply chain opportunities. To be clear, the long-term potential in this turnaround is there: it will just take longer to prove given the environment.”

The EPS estimate for FY16 has been reduced from $0.67 to $0.15. This seemingly “staggering” reduction reflects:

1. 4 percent sales growth
2. 100bps of gross margin contraction
3. SG&A dollars leveraging by 190 bps or up by a marginal 3 percent on a dollar basis
4. A 23 percent tax rate
5. Buybacks of 3.2M shares

While the near-term concerns related to China and currency pressures were expected, Murphy pointed out that long-term guidance had been pushed out further than anticipated.

In the report Piper Jaffray noted, “While we believe in the Crocs brand, favor the new product direction and leadership changes, we are operating in a market environment where turnaround names that have controversial histories are being scrutinized more than most.”

Taking into account the latest Q3 figures and prospects for FY16, the long-term guidance implies “sales growth accelerates into 2018 which to us appears challenging to support in this environment,” Murphy said, while adding that the company’s shares would probably be "dead money" until there are stronger evidences of sales acceleration.