How Crocs is outpacing the pack

By Jon Markman

Crude oil, fertilizer, titanium, delirium. The businesses of the top-performing stocks this year are dull enough to make your head buzz from absolute ennui.

What ever happened to the good old days, when the market's hottest companies were in fascinating businesses and run by mouthy chief executives who provided some color and texture to the game?

Well, it turns out that there is one high-momentum company this year that actually makes stuff that comes in colors bright enough to light the dark corners of your closet. And as well as it has done, with a 90% move this year alone, there is probably quite a bit of upside left ahead.

That company is Crocs (CROX, news, msgs), manufacturer of the ugliest line of shoes in America, but also, ironically, one of the most popular. If you have never heard of them, just ask any woman of a certain age or her daughter. They probably have at least one pair, and probably two.

Crocs went public in February 2006, without a lot of fanfare. Most straight-thinking analysts and investors on The Street figured that its line of funny-looking but comfortable, low-slung plastic molded shoes were a fad with the half-life of a marshmallow, and its shares tripped along between $20 and $30 for seven months. Very few figured this thing for the next Nike (NKE, news, msgs) or Starbucks (SBUX, news, msgs), which is to say companies that invented categories of products that were derided as mere fads before their sheer popularity and marketing skills won the day.

Then a funny thing happened. The ta-da moment, if you will. By the fall of 2006, Crocs' first full year of earnings reports as a public company showed that it was a phenomenal grower, and that it wasn't just generating profit-less revenue like an empty-headed dot-com. It was making massive fistfuls of money with its wacky little shoes. Check this out: In 2002, records show the company earned a gross profit of $1,000. In 2003, $27,000. In 2004, $6.3 million. In 2005, $60.8 million. In 2006, $200.6 million.

Now that is the kind of hypergrowth that gets investors to look up from their lattes and take notice. And that is when the stock started to move like a running shoe rather than a clog. From September of last year until today, shares have tripled, going from $25 to $80, while the broad market is only up 15%.

Gotta be the shoes

Now the remarkable thing about the Crocs story is that even after this fantastic move, there may be a lot left in the tank. Because for one thing, it is an extremely profitable company that is only getting more profitable as it scales up its manufacturing and distribution, providing a return on capital of 43% in an industry where the norm is around 20%. Just to give you an idea of how strong a number that is, Nike, which knows something about the shoe biz, posts a return on capital of 18%, while Google (GOOG, news, msgs), which is a superprofitable company, earns a return on capital of 24%. A return of 43% is off the charts, and shows that management deploys funds provided by the capital markets in an extremely efficient, income-generating, shareholder-friendly way.

Looking at this another way, consider that Crocs' gross margins are the highest in the footwear industry at 56.5%, versus 47.3% for its next best peer, Timberland (TBL, news, msgs), and 44% for Nike. Operating margins are best in the industry as well, at 26.9%, versus 22.1% for the next best in the industry, which is Deckers Outdoor (DECK, news, msgs), maker of Teva sandals and Ugg boots.

• Video: Crocs ka-ching

By now you're probably wondering whether these shoes cure cancer or malaria -- or at least make you look 10 pounds thinner. But no, they are just comfortable, lightweight, colorful, anti-microbial and cheap enough to encourage multiple purchases, and they are popular with all genders and all ages, not to mention doctors, nurses, baristas and store clerks who spend a lot of time on their feet. They are also easily customizable by kids with charms sold at extremely high margins by company subsidiary Jibbitz. Plus, the company has had great success at obtaining licenses from colleges, sports leagues and entertainment companies to jazz up the shoes with NFL and NCAA team logos and colors, Spider-Man and Mickey Mouse.

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