Those Shoes: Crocs' Lineup Makes Reaching $1.2B In Revenue Difficult, Susquehanna Says In Downgrade

Crocs, Inc. CROX, the maker of arguably the country's most-hated shoe, is a $1.2-billion company "at best," according to Susquehanna Financial Group. 

The Analyst 

Susquehanna analyst Sam Poser downgraded Crocs from Neutral to Sell and maintained a $12 price target.

The Thesis 

Crocs' share price assumes an unrealistic level of future progress at the company, Poser said in a Monday note. 

“We believe CROX will approach our $12 price target as it becomes clear CROX will not reach [the] lofty expectations implied by the significant run-up in shares,” the analyst said. 

The level at which Crocs shares trade show that investors expect the company to deliver $1 EPS and $1.2 billion in revenue by 2020, but several factors are hindering the shoemaker's growth, Poser said. 

Anticipated store closures are expected to weigh on revenue going forward, to the tune of $60 million in 2018, as Poser predicts Crocs will operate 17-percent fewer stores in fiscal 2018 than fiscal 2017. Susquehanna projects that closures will continue into fiscal 2019. 

Growth in sandals sales isn't enough to support $1.2 billion in revenue by fiscal 2020, the analyst said. 

“CROX believes it can double its sandals business over time and add $150 million in additional sandals revenue from $150 million in fiscal 2017. However, the sandals category is a very competitive, fragmented, price-sensitive, generally slow growth and seasonally restrictive category." 

More "aggressive right-sizing" of the Crocs store fleet is needed to hit higher levels of earnings power, and the company's product lineup does not have the strength to sustain a brick-and-mortar operation, Poser said. In many cases, Crocs has "bad" 20-year leases signed during former CEO John McCarvel's tenure, making it difficult to transition into a more focused direct-to-consumer business like many of its shoe company peers have done, the analyst said. 

“Product breadth has been and continues to be an issue with CROX’s retail store fleet," he said in Monday's note.

"While the elimination of some products, such as boots, has allowed the company to focus on products closest to the company’s DNA, CROX just doesn’t have the product breadth necessary to support efficiently operated brick-and-mortar stores." 

Price Action

Crocs shares were trading down more than 2 percent at $15.93 at the time of publication Monday. 

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