Crocs auditor raises a red flag


Not so long ago, Crocs Inc. (NASDAQ: CROX) was riding high as its rubberized clog-like sandal shoes were the hottest thing in retail.

Now the fad has died, sales have fallen through the floor, the economy has tanked and worst of all, the company's auditors have "expressed substantial doubt" about the "company's ability to continue as a going concern." Here's the full-text from the company's newly filed 10-K:


The accompanying consolidated financial statements for the year ended December 31, 2008 were prepared under the assumption that we will continue to operate as a going concern. The report of our registered independent public accounting firm on our consolidated financial statements for the year ended December 31, 2008 includes an explanatory paragraph concerning conditions that raise substantial doubt about our ability to continue as a going concern. We incurred losses of $185.1 million in the year ended December 31, 2008 and experienced a decline in revenues from $847.4 million for the year ended December 31, 2007 to $721.6 million for the year ended December 31, 2008. Continued operations are dependent on our ability to secure adequate financing and maintain a reasonable level of liquidity such that we can timely pay our obligations when due. As of December 31, 2008, we had $22.4 million in borrowings under our loan agreement with the Union Bank of California, N.A. ("Revolving Credit Facility"), which currently has a maturity date of April 2, 2009, and we had $51.6 million in cash and cash equivalents.

The stock tanked on the news yesterday and it's hard to see Crocs' operating results rebounding anytime soon. But here's the thing: Even after the huge loss, Crocs has a book value of $287 million. The current assets are $279 million with total liabilities of $169 million, giving the company a net current asset value of $110 million. The market cap is just $95 million -- and you also get the company's brand and property, plant and equipment.

The issue for Crocs is liquidity in a tight debt market, not solvency. Given that, Crocs appears to be a very strong acquisition target for a strategic buyer who could cut overhead dramatically. But with the company bleeding cash, there is a certain urgency to getting a deal done. The company's board of directors needs to act quickly to find a bigger, better-financed white knight and preserve what's left of Crocs' shareholder value.

The company's days as a hot growth stock that was destined to be the next blue chip are over, but there may be some upside here, if the company will do the right thing. The auditor's "going concern" notice may be just what's needed.

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