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Croc Season Approaches

By Glenn Curtis

Tickers in this Article: CROX

Boy, what a difference a couple of months can make! This summer it seemed that footwear maker Crocs (Nasdaq:CROX) could do no wrong. Every other day the stock was either flirting with new highs or the company was making news, and then the bottom dropped out.

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Crocs missed third-quarter revenue expectations and released lower-than-expected guidance for the full year. And now, to top it all off, it seems as though the company may be facing some legal trouble. The company could take a beating in the next few months, but over the long haul, Crocs could make for a nice bottom-fishing play.

Lawsuits Filed
Earlier this month, two press releases from Brower Piven and Kirby McInerney LLP revealed that class action lawsuits had been filed on behalf of Crocs shareholders. Essentially, the suits allege that some of the company's executives made false and possibly misleading statements and that they failed to disclose certain adverse information about the company.

For the record, the company has said that these claims are without merit and that it plans to fight them. But that really doesn't matter at this point.

No matter what the outcome is, defending against these claims will cost the company a lot of money and time. And in the interim, until the cases are settled, I think they provide just one more reason for investors to stay away from the stock.

Also consider that the competition in footwear remains quite fierce, the novelty of Crocs footwear could begin to wear off in the U.S. and the company now seems to have a black mark on its record, having disappointed some investors in the third quarter. Tax-loss selling could put an even bigger damper on the share price until the end of the year.

Bottom Fishing
My sense is that these lawsuits will ultimately be settled, and that over the long haul they'll probably be little more than a blip on the radar screen. After all, Wall Street currently expects the company to earn $1.99 a share in 2007, $2.70 a share in 2008, and to grow at a more than 26% pace per annum over the next five years.

With such rosy long-term projections, I would consider the stock an attractive turnaround play... at some point. However, because of the recent loss of momentum in the share price, and the above-mentioned near term risks, I would not be comfortable holding a bullish opinion on the stock until the New Year.

The Bottom Line
The recent lawsuits, the competitive challenges and the potential for tax loss selling have rendered Crocs shares essentially damaged goods in the near term. I think the shares could become an attractive turnaround play, but only after the New Year, when investors get to hear more about the company's outlook for 2008 and beyond.

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By Glenn Curtis

Glenn Curtis started his career in the 1990s as an equity analyst for a regional firm in New Jersey. There, he covered companies in the technology, entertainment, and gaming industries. Curtis has since worked as a financial writer at a series of both web and print publications, including TheStreet.com and Registered Rep Magazine. He has held his series 6,7,24, and 63 securities licenses.

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