Crocs, Inc. Case Study: Valuation, Growth, and Profit Margin Analysis

This case study analyzes Crocs, Inc., addressing key financial questions related to valuation, growth, and profit margins. The analysis begins by identifying comparable companies, both at the time of the case and projecting five years into the future, using market capitalization and EV/EBITDA multiples. It then evaluates reasonable, high, and low growth estimates for 2008 and the long run, calculating percentile-based growth rates. The study proceeds to value the company under different growth scenarios and assesses the impact of growth assumptions on the stock price. Finally, it critiques the assumed profit margins, suggesting alternative assumptions and their potential impact on the valuation. The document includes detailed calculations and analysis, offering insights into the financial performance and future prospects of Crocs, Inc.

Crocs, Inc.
For the Crocs case please address the following questions:
Question 1
Which of the comparable companies appears to be a good match to Crocs at the time of
the case? Which would be a good match in five years? Use these multiples to provide
additional estimates of the value of Crocs (in other words, calculate a value for Crocs
using a current multiple, and calculate a value for Crocs using Yeung’s cash flow model
but with a terminal value based on a a multiple).
Answer
On the basis of data provided in Excel Sheet, there are 14 comparable data with
different market capitalization. The company current market capitalization is
approximately 7,154 Million US dollars. Thus, companies with similar market
capitalization shall be a good comparable company. Only one company shall satisfy the
said filter i.e. VF Corp which has a market capitalization of $. 8304 Millions. Further, if
we consider the EV/EBITDA Multiple Under Armour (25.93) is the best suitable
comparable as the ratio for both the companies are similar. Thus, Primary Apparel
companies are the most comparable companies
In addition to above if EV/Sales are considered for the purpose of selecting
comparables none of the companies shall come as comparable among which the most
nearest comparable shall be Lululemon (11.86).
In the time frame of 5 years, the market capitalisation of the company shall be double
from the present value based on the current multiple of 27.74 as computed under
exhibit 6. Thus, the market cap shall be approximate 15000 Mio Dollars and the
comparable industry shall be Primarily Footwear.
If the Enterprise Value is kept constant then the EV/EBITDA ratio shall change to 9 and
the comparable companies shall be Timberland (9.29), Columbia Sportswear(8.70), VF
Corp (9.31), Phillips Van-Husen (7.95) and Warnaco Corp (8.91).
If the Enterprise Value is kept constant then the EV/sales ratio shall change to 2.12 and
the comparable companies shall be Volcom (2.28) and Zumeiz (2.07)
Question 2
What would you consider reasonable, “high,” and “low” growth estimates (median, 25th,
and 75th percentile growth estimates) for 2008 and for the long run?
Answer 2
Based on 14 comparable data as provided in Exhibits, the 5 year weighted average
growth rate of the companies has been arranged on the basis of ascending order and
the percentile is computed based on same. The computation of 25th Percentile is 5.1%,

Crocs, Inc.
computation of 75th percentile is 36.2% and median is 12.1%. Thus, the highest growth
that can be expected is 36.2% and lowest growth shall be 5.1% based on data of
comparable companies. The computation is provided as under:
Sl. No. Company 5 year Weighted Average Growth Rate
1 Jones Apparel -2.3%
2 Liz Claiborne 4.3%
3 Warnaco 4.5%
4 VF Corp 5.1%
5 Timberland 7.1%
6 Van Heusen 10.7%
7 Nike 11.1%
8 Columbia 12.1%
9 Quiksilver 20.3%
10 Deckers 32.0%
11 Zumiez 36.2%
12 Volcom 37.7%
13 Under Armour 71.7%
14 Lululemon 101.8%
25th Percentile 14*25/100 3.5
5.1%
75th Percentile 14*75/100 10.5
36.2%
Median 14+1/2 7.5
12.1%
Question 3
Value the company under your best estimate of future growth rates and at the high and
low estimates from assignment question 2. What changes in the growth assumptions
would rationalize the new Crocs stock price?
Answer 3
The growth rate used in the computation of share price of the company is exorbitantly
high and should be rationalized based on the computation above. Based on high growth
rate assumption of 36.2%, the market capitalization of the company shall stand at 6057

Crocs, Inc.
US Mio $ and the share price shall be $71.26. Thus, based on the percentile method
the valuation proposed in exhibit 6 seems infeasible.
Further, for 25th percentile the growth rate is 5.1% which is lower than the return
expected by equity shareholders and the valuation of the company shall stand at 2456
million Dollar and the share price shall be $28.89.
The growth assumptions shall be realistic given the scenarios of comparable
companies. Thus, company should use a growth of 36.2% as the base growth as
increased by 5%-10% on the basis of the company own capacity to grow. Thus,
company should expect a growth of 40% over the period of 4 years for valuation
Question 4
What is your opinion of the assumed profit margins? What alternative assumptions
would you consider reasonable?
Answer 4
The COGS to sales proportion of company is much lower than the margin of
comparable companies where in the COGS/Sales percentage is roughly 55%. As far as
SGA expense is considered, the same is in line with the comparable companies. Thus,
the opinion of assumed profit may not seem reliable in the given scenario as the Gross
profit of the company may fall down to 45% and an impact of 10% shall drop down the
valuation of the company very drastically. Thus, the assumption of 55% Gross margin
may seem unrealistic.
The alternative assumption that should be taken by the company is reducing the margin
gradually over the period so that the surplus enjoyed by the company is eliminated over
the years as in the long run company many not earn anything higher than the
comparable companies.