Trader’s Narrative

At the end of June I wrote about Crocs (CROX) and Heelys (HLYS), two faddish shoe companies that I didn’t think had any longevity.

Back then Crocs’ shares were in the low $40’s and Heelys were in the mid $20’s (red arrows below). Heelys’ chart looked much worse as it was in a clear downtrend and had just fallen through intermediate support. Not surprisingly it fared worst among the two. Today it closed at $6.19 a share.

Crocs fared better as it rose to a high of $75 but since then it has fallen to the high $30’s. The damage is in the broken uptrend:

Even Maddox got in on the action and landed a few punches. As you’d expect, insiders have been selling like crazy. The insider selling wasn’t a tipoff since anytime you have a huge runup, insiders can’t resist taking free money. The actual tipoff was that the product is a fad and offers no real benefits which competitors can not emulate at a much cheaper price.

Here’s a tale of two shoe companies: one is an injection moulded clog with holes while the other is a children’s sneaker with a wheel embeded in the heel.

Both sound a little ridiculous but both are public companies based on only that one product line. But beyond being a fad, the two companies part ways. While Crocs (CROX) has become a darling of the mo-mo crowd, Heelys (HLYS) slumped to an all time low yesterday.

Of course, companies based on only one fad product are nothing new to Wall Street. Bowling alleys, drive in movie theatres, cabbage patch kids, Pokemon, etc. The list is long (much longer than my patience to mention them all).

Crocs and Heelys have different things to worry about though. While having a wheel embedded in your heel might sound ‘cool’ (if I was 11 years old), the status of ‘cool’ is so ephemeral that you can’t build a company around it. Certainly not one based on one product. Crocs on the other hand isn’t about being ‘cool’ as much as practicality and comfort. So there’s some longevity there.

But their problem is that their margins are unsustainable. Just a week ago my brother picked up a pair of immitation Crocs for $5. Had he bought genuine Crocs, the pair would have run him around $50. The really scary thing is I can’t really see a difference between them. The Chinese have a knack for imitation (and capitalism). I wouldn’t be surprised if

Now, I’m not really a fundymentalist investor (I only play one on the net sometimes) but I can’t see how Crocs will come out of this in one piece. They can’t really branch into other products - after all, that’s what they are known for. That’s their brand. And who would want to buy a t-shirt or pants from Crocs? Maybe if they were injection moulded t-shirts and pants.

This reminds me of Krispy Kreme (KKD). Remember them? In the aftermath of the bubble they came public with one product: donuts. But these weren’t regular donuts. Oh no. We were told that these were manna from heaven. Glazed with the very nectar of the Gods. They were baked fresh in each store. Right in front of your eyes on these conveyor belts while you watched! How else to explain the crazy valuation?

The stock zoomed almost fivefold from $10 at IPO to a high of $49.74. Then it came back to earth. Right now it is around $10 again. Turns out it wasn’t mana but regular dough and sugar. My point is that valuation does matter but it may take time to kick in.

Crocs
Market Cap: $3 billion
Price/Sales: 7.6
Profit Margin: 18%
Short Ratio: 3

Heelys
Market Cap: $600 million
Price/Sales: 3.0
Profit Margin: 16%
Short Ratio: 14