Piper Jaffray is upgrading Crocs (NASDAQ:
) to Overweight from Neutral with a $7.50 target price (prev $3)
Piper expect share price appreciation to accompany consistent fundamental improvement & profitability potential in next 12 months. Q2 results outpaced estimates and guidance; clear signals that company is achieving early turnaround success.
1) Strength in consumer demand (on lowered expectations) is encouraging; brand equity remains high; visibility limited but improving.
2) Wholesale/retail, U.S./int'l, and product mix all contributing to better margin profile; mgmt reiterated its med-term mid-teens op margin target.
3) International markets represent 60%-plus of revenues; Asia strength a key driver.
4) Direct to consumer platform mitigates risk tied to domestic wholesale order volatility; DTC exceeds 50% of U.S. revenues; growth of 20%-plus is reasonable.
5) Company is bank debt free; $60M in cash ($0.70/share); receivables collection much improved and inventory levels nearer to sales needs; 2.2M in carryover inventory remains of 8M excess.
Confidence in direction of sales and margin; visibility into specific quarterly results remains limited: Firm notes they are upgrading to Overweight based on the premise that key concerns surrounding the company's fundamental health have been alleviated and early signs of a successful turnaround exist. It's much too early to assume peak sales and margins are achievable but we do believe steps have been taken to establish a reasonable trajectory toward achieving profitability in 2010.
Raising estimates; model evolving toward direct to consumer with higher margin profile: They are raising their FY09 & FY10 estimates, predicated on a higher degree of confidence in sales prospects and ongoing efforts to right size and refocus the operating infrastructure toward a rapidly growing direct to consumer model. If we assume that retail & Internet sales represent 40%-50% of total and grow at a rate of 20%, the legacy wholesale business could show little or no growth and the company could still achieve 5%-10% top-line growth in 2010. Firm's revised model assumes operating margin in the mid-single digits (6%), generating earnings of $0.30.
Notablecalls: It's quite obvious the results were a surprise to most market participants (especially the short kind).
I think the stock can reach $6+ level in the very n-t.
