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1. In year 2007 the company management decided to increase production capacity due to
a high demand growth for company products. Unfortunately the change in world
economic climate during 2008 lowered the demand for Crocs products which in turn
left the company with overcapacity in factories and increased cost of goods cold.
2. During the years 2008 and 2009, Crocs Inc. recorded significant impairment costs for
their assets and goodwill. The company had focus on restructuring their business and
building new organization regarding their core products. Impairment costs have
1
AAFA, American apparel and footwear Association: http://www.apparelandfootwear.org/statistics.asp (2010-09-09)
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increased the total operating costs of the company.
3. Selling, general and administrative expenses increased dramatically during years 2008
and 2009. The increase is primarily due to marketing expenses.
When analyzing the balance sheet of Crocs Inc. we observed a significant decrease in
accounts receivable (see Appendix 4). In 2008 and 2009 accounts receivable corresponded
to 8% and 12% of total assets, whilst during previous years accounts receivable corresponded
to over 20% of total assets. At the same time the company’s accounts payable decreased
relative to total liabilities. In 2008 and 2009 accounts payable amounted to less than 10% of
total liabilities. Before 2008, accounts payable corresponded to significantly more than 10%
of total liabilities. These changes in the balance sheet composition imply that the company
management made efforts to decrease the total working capital needed to run operations.
A significant amount of Crocs Inc. capital is financed through off balance sheet leases2. The
total sum of leasing obligations that are not reflected on balance sheet, amount more than 170
million USD, which is more than 41 % of the company’s total assets.
3
historical figures indicated that the average equity to enterprise value ratio was 75%, thus
25% of the enterprise value consisted of debt. We estimated that the future capital structure
will be the same as the historical. As of today, Crocs Inc. benefits from the tax shield since
lease payments are tax deductible. When excluding the off-balance sheet arrangements the
equity-to-enterprise-value ratio equals roughly 100%.When compared to competitors such as
Wolverine World Wide and Skechers Inc. it seems that the industry does not rely much on
debt.
Growth assumptions
During the five past years Crocs Inc. revenues have grown with an average of 43% per year.
Our assumption is that the revenues growth will decline during the explicit forecast period
and stabilize to a somewhat normal rate of 6 % annually during the continuing value period.
Growth rate is based on competitors’ growth indicators (see Appendix 4) as well as forecasts
for future GDP growth in the US3. We predict that the company will expand primarily by
organic growth. The company made big impairments on acquired goodwill and downsized the
organization to match its core business. We expect that the company will not make any
acquisitions that will build up the goodwill account on Crocs Inc. balance sheet.
Crocs Inc. had great gross margin during the years 2005 to 2009 compared to their
competitors. We assume that the high gross margin is primarily due to the company´s unique
product portfolio. Invention of Croslite™ material made it possible to differentiate the
company’s products and increase revenues. Crocs Inc. had an average gross margin of 50%
during the last five years. It can be compared to competitor’s average gross margins between
40 and 43 percent. If Crocs Inc. can remain its profile towards unique footwear products then
it is possible that the company can remain its high rate of gross margin.
The forecasted growth is primarily based on growth in total revenues. During the past
years the company had relatively fixed proportion of costs in relation to revenues. We assume
that these proportions will remain constant in future. Future balance sheet proportions are
derived from the analysis of historical balance sheet and also dependent on revenues growth.
We assume that the average proportions for the last 5 years will sustain in the future.
3
OECD ”ECONOMIC OUTLOOK NO. 87, MAY 2010”
http://www.oecd.org/document/4/0,3343,en_2649_33733_20347538_1_1_1_1,00.html (2010-09-10)
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Our assumption is that the corporate tax rate is 40% in spite of the fact that last year’s tax
rates have been significantly lower than this rate. Crocs Inc. will probably generate profit
during the explicit period and accordingly pay higher taxes.
As we mentioned earlier Crocs Inc. has substantial lease obligations that are not recognized
on the company’s balance sheet. For our future forecast we have assumed that leasing
obligations will grow proportionally to the company’s revenues. We believe that this
connection will sustain even in future.
Valuation Summary
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This valuation indicates that Crocs Inc. share price should be in the range of 14.58 $ - 16.91 $.
Compared to the market share price at 5.95 $ (2010-01-04)4, we state that the stock is
undervalued and therefore recommend investors to buy.
4
http://uk.finance.yahoo.com/q/hp?s=CROX&b=01&a=00&c=2010&e=04&d=00&f=2010&g=d