2. 1
Introduction
This report is to analyze operating condition of two prospective lending candidates which are
Crocs and Deckers Outdoor Corporation. By comparing the database from each company’s
December 2012 Form 10-K, we will draw a conclusion to which company should be accepted as
a loan candidate. We will start with both companies general business description, headquarters
and manufacturing locations.
Crocs
General business description:
Crocs, Inc. is a designer, manufacturer and retailer of footwear for men, women and children
under the Crocs™ brand. All Crocs™ brand shoes feature Crocs’ proprietary closed-cell resin,
Croslite™, which represents a substantial innovation in footwear. The Croslite™ material
enables Crocs to produce soft, comfortable, lightweight, superior-gripping, non-marking and
odor-resistant shoes. These unique elements make Crocs™ footwear ideal for casual wear, as
well as for professional and recreational uses such as boating, hiking, hospitality and gardening.
The versatile use of the material has enabled Crocs to successfully market its products to a broad
range of consumers.Crocs™ shoes are sold in more than 125 countries and come in a wide array
of colors and styles.
Headquarters
Crocs’ corporate headquarters are located in Niwot, Colorado Americas
Manufacturing Locations
Manufacturers primarily in Shenzen,China and Leon, Mexico
Deckers Outdoor Corporation
General business description
Deckers Outdoor Corporation is a global leader in designing, marketing and distributing
innovative footwear, apparel and accessories developed for both everyday casual lifestyle use
and high performance activities. Deckers Outdoor products are sold in more than 50 countries
and territories through select department and specialty stores, 105 Company-owned and operated
retail stores, and select online stores, including Company-owned websites. Celebrating the 40th
anniversary of its founding in 2013, Deckers Outdoor has a history of building niche footwear
brands into lifestyle market leaders attracting millions of loyal consumers globally.
Headquarters
Deckers’corporate headquarters are located in Goleta, California.
Manufacturing Locations
Deckers do not manufacture their products; they outsource the production of our brand footwear
to independent manufacturers primarily in China, Vietnam, US and Latin America.
3. 2
Discussion: Financial Statement Analysis
Common-size income statement analysis
Crocs
Through the vertical common-size income statement analysis for Crocs, we can see that Crocs
has a positive trend in its operation.
Gross profit increased from 53.66% to 54.12% between 2010 and 2012. This caused by the
decrease in cost of sales. The percentage of cost of sales decreased because revenue growth,
which was driven by increased sales volume and focused improvements on average footwear
selling prices with new product styles. Also the revenue growth can offset higher costs primarily
from the expansion of their product offerings in 2012 utilizing traditional materials, such as
textile fabric and leather, and increased offerings of discounted products and promotional items
through our wholesale and direct-to-consumer channels.
Selling, general and administrative expenses all most the same in 2011 and increased slightly
from 40.44% in 2011 to 40.99% in 2012. Selling, general, and administrative expenses continue
to increase because the company continued to increase our retail store locations and continue to
make strategic purchases to improve the operational efficiency of the company.
Net income increased from 8.58% in 2010 to 11.69% in 2012. This is due to higher operating
results and to a lesser extent a lower effective tax rate which was primarily due to a reversal of
certain tax provisions and the release of certain valuation allowances associated with deferred tax
assets. However, the tax rate in 2011 is materially higher than 2010 resulted from a change in an
international tax treaty which reduced certain taxes for which accruals had previously been made
in the third quarter in 2010.
4. 3
Decker
Through the vertical common size analysis for Decker, we can see that Decker has a negative
trend in its operation.
Gross profit decreased from 50.24% to 44.69% between 2010 and 2012. This caused by the
increase in cost of sales. The percentage of cost of sales increased because revenue reduced.
Wholesale net sales of UGG, Teva and other brands decreased primarily due to a decrease in the
volume of pairs sold, partially offset by an increase in the average selling price while the Net
sales of our eCommerce business, Sanuk increased due to an increase in the volume of pairs sold
primarily attributable to the UGG brand, partially offset by a decrease in the average selling price.
The decrease in the average selling price was primarily due to the addition of Sanuk brand sales
which carry lower average selling prices.
Selling, general and administrative expenses materially increased from 25.36% in 2010 to 31.48%
in 2012. Selling, general, and administrative expenses continue to increase because the company
increase retail cost related to 30 new retail stores which were not open as of 2010 and 2011 as
well as the expenses for Sanuk and UGG brand. What’s more, the Decker also increased the
expenses related to increased marketing and advertising.
Net income remarkably decreased from 16.02% in 2010 to 9.12% in 2012. The reasons for the
net income reduced consist of several part. The decrease in income from operations of UGG and
Teva brand wholesale was primarily the result of the decrease in net sales and decrease in gross
margin primarily related to increased sheepskin and other material costs of approximately as well
as an increase in the impact of closeout sales in the US and lower sales in Europe, which
generally carry higher margins. The increase in income from operations of our eCommerce
business was primarily the result of the increase in net sales and increase in gross margin. What’s
more, the effective tax rate increased, which was primarily due to the increase in our annual US
5. 4
pre-tax income as a percentage of worldwide pre-tax income, as income generated in the US is
taxed at significantly higher rates than most of our foreign jurisdictions.
Ratio Analysis
Current ratio
Current ratio indicates how many current asset the company own to cover its current liabilities.
Crocs’s current ratio increased from 3.38 in 2011 to 3.88 in 2012 while Decker’s decreased from
3.52 in 2011 to 2.59 in 2012. Both of them are beyond the guideline for the minimum current
ratio which has been 2.00. Comparing both companies, we can see Crocs’s current ratio is higher
and has a positive trend while the Decker’s has a negative trend. Crocs has a better ability to
cover the current liabilities.
Quick ratio
Inventory is removed from current assets when computing the quick ratio. Quick ratio pay more
attention to the cash, cash equivalent and accounts receivable. Crocs’s quick ratio increased from
2.55 in 2011 to 2.84 in 2012 while Decker’s decreased from 2.43 in 2011 to 1.47 in 2012. Both
of them are beyond the guideline for the minimum current ratio which has been 1.00. By
comparing both companies, we can see Crocs’s quick ratio is higher and has a positive trend
while the Decker’s has a negative trend. Crocs has a better ability to cover the current liabilities.
Accounts receivable turnover
Accounts receivable turnover indicates the liquidity of the receivables. Crocs’s accounts
decreased by 0.81 from 9.11 in 2011 to 8.30 in 2012 while Decker’s decreased by 1.24 form 8.74
in 2011 to 7.50 in 2012. By comparing both companies, we can see they both have a negative
trend in accounts receivable turnover, but Decker has a bigger decrease and less accounts
receivable turnover. Crocs has a better liquidity of the receivables.
Inventory Turnover
Inventory Turnover indicates the liquidity of the inventory. Crocs’s inventory turnover decreased
by 0.16 from 3.26 in 2011 to 3.15 to 2012 while Decker’s decreased by 0.87 from 3.32 in 2011
to 2.45 in 2012. By comparing both companies, we can see they both have a negative trend in
inventory turnover, but Decker has a bigger decrease and less inventory turnover. Crocs has a
better liquidity of the inventory.
Operating cycle
The operating cycle represents the period of time that elapses between the acquisition of goods
and the final cash realization resulting from sales and subsequent collections. Crocs’s operating
cycle increased by 7.82 days from 152.03 days in 2011 to 159.85 days in 2012 while Decker’s
increased by 45.95days from 151.70 days in 2011 to 197.65 days in 2012. By comparing both
6. 5
companies, we can see they both have a negative trend in operating cycle, but Decker has a
bigger increase and longer operating cycle. Crocs has a faster operating cycle.
Times interest earned
Times interest earned indicates a firm’s long-term debt-paying ability ability from the income
statement view. Crocs’s times interest earned increased from 123.97 in 2010 to 161.25 in 2011
and to 174.89 in 2012 while Decker’s increased from 442.89 in 2010 to 1,146.63 in 2011 and
dramatically decreased to 48.95 in 2012. By comparing both companies, we can see Crocs has a
positive trend in times interest earned while Decker’s has a fluctuant one and a negative trend.
Crocs has a better ability to pay the firm’s long-term debt.
Fixed charge coverage
Fixed charge coverage ratio, an extension of the times interest earned ratio, also indicates a
firm’s long-term debt-paying ability from the income statement view. Crocs’s fixed charge
coverage increased from 4.50 in 2010 to 5.86 in 2011 and decreased to 5.24 in 2012 while
Decker’s decreased from 33.99 in 2010 to 26.56 in 2011 and to 13.09 in 2012. By comparing
both companies, we can see Crocs has a positive trend from 2010 to 2011 and has negative trend
from 2011 to 2012 while Decker has a negative trend from 2010 to 2012. The Decker has a
better ability, but Crocs has a better trend.
Debt to tangible net worth
Debt to tangible net worth indicates how well creditors are protected in case of the firm’s
insolvency. Crocs’s debt to tangible net worth decreased from 0.52 in 2010 to 0.46 in 2011 and
to 0.38 in 2012 while Decker’s increased from 0.24 in 2010 to 0.49 in 2011 and to 0.64 in 2012.
By comparing both companies, we can see Crocs has a positive trend during these three years
while Decker has a larger debt to tangible net worth and has a negative trend from 2010 to 2012.
Decker is risker.
Gross profit margin
Gross profit margin gives a measure of gross profit dollars generated by each dollars of sales.
Crocs’s gross profit margin slightly decreased form 53.66% in 2010 to 53.59% in 2011 and
increased to 54.12% in 2012 while Decker’s decreased from 50.24% in 2010 to 49.30% in 2011
and to 44.69% in 2012. By comparing both companies, we can see Crocs has a negative trend
between 2010 and 2011 and has a positive trend from 2011 to 2012 while Decker has a less
percentage and has a negative trend from 2010 to 2012. Cross has a better gross profit margin.
Net profit margin
Net profit margin gives a measure of net profit dollars generated by each dollars of sales. Crocs’s
net profit margin increased from 8.58% in 2010 to 11.27% in 2011 and to 11.69% in 2012 while
7. 6
Decker has a negative trend from 16.02% in 2010 to 14.66% in 2011 to 9.12% in 2012.
Comparing both companies, we can see Crocs has a positive trend from 2010 to 2011 and has
negative trend from 2011 to 2012 while Decker has a negative trend from 2010 to 2012. Crocs
has a better trend in net profit margin.
Operating income margin
Operating income margin gives a measure of operating income dollars generated by each dollars
of sales. Crocs increased from 9.89% in 2010 to 13.10% in 2011 and decreased to 13.01% in
2012 while Decker from 24.88% in 2010 to 20.68% in 2011 and to 13.22% in 2012. By
comparing both companies, we can see Crocs has positive trend from 2010 to 2011 and has a
negative trend from 2011 to 2012 while Decker has a negative trend from 2010 to 2012. In 2012,
the operating income margin almost the same. Crocs has a better chance in operating income
margin.
Degree of financial leverage
Degree of financial leverage is the multiplication factor by which the net income changes as
compared with the change in EBIT. Crocs’s degree of financial leverage stayed the same from
2010 to 2012 which is 1.01 while Decker’s stayed the same from 2010 to 2011 which is 1.00 and
increased from 2011 to 1.02 in 2012. By comparing both companies, we can see Crocs’s degree
of financial leverage stayed the same while Decker has a negative trend from 2011 to 2012.
Decker is a little risker.
Operating cash flow per share
Operating cash flow per share indicates the funds flow per common share outstanding. Crocs’s
operating cash flow per share increased from 1.19 in 2010 to 1.58 in 2011 and decreased to 1.42
in 2012 while Decker increased from 3.56 in 2010 to 7.66 in 2011 and decreased to 4.39 in 2012.
By comparing both companies, we can see Crocs has a negative trend from 2010 to 2011 and has
a positive trend between 2011 and 2012 while Decker has a negative trend from 2010 to 2011
and has a positive trend from 2011 to 2012. Decker is more fluctuant.
Total asset turnover
Total asset turnover measures the activity of the assets and the ability of the firm to generate
sales through use of the assets. Crocs’s total asset turnover decreased by 0.14 from 1.54 in 2011
to 1.40 in 2012 while Decker decreased by 1.25 from 1.51 in 2011 to 0.26 in 2012. By
comparing both companies, we can see both companies have negative trend, but Decker has a
larger decease and lower number in 2012.
Operating asset turnover
Operating asset turnover measures the ability of operating assets to generate sales dollars.
8. 7
Crocs’s operating asset turnover decreased by 0.19 from 1.83 in 2011 to 1.64 in 2012 while
Decker decreased 0.99 from 1.75 in 2011 to 1.66 in 2012. By comparing both companies, we can
see both of them have negative trend while Crocs has average larger operating asset turnover but
has a larger decrease.
Return on assets
Return on assets measures the firm’s ability to utilize its assets to create profits by comparing
profits with the assets that generate the profits. Crocs’s return on assets decreased by 0.98% from
17.37% in 2011 to 16.39% in 2012 while Decker decreased by 10.40% from 21.87% in 2011 to
11.77% in 2012. By comparing both companies, we can see both companies have negative trend.
Crocs have a higher percentage of return on assets in 2012 and has less decrease.
Return on operating asset
Return on operating asset measures the firm’s ability to utilize its operating assets to create
operating profits by comparing with the operating assets that generate the operating profits.
Crocs’s return on operating asset decreased by 2.63% from 23.91% in 2011 to 21.28% in 2012
while Decker decreased by 14.95% from 36.23% in 2011 to 21.94% in 2012. By comparing
both companies, we can see both companies have negative trend. Their return on operating asset
are almost the same in 2012 while Decker has a larger decrease.
Return on investment
Return on investment measures the ability of the firm to reward those who provide long-term
funds and to attract providers of future funds. Crocs’s return on investment decreased from 23.27%
in 2011 to 21.16% in 2012 while Decker’s decreased from 26.85% in 2011 to 15.98% in 2012.
By comparing both companies, we can see both companies have negative trend. Crocs has a
better ability of the firm to reward those who provide long-term funds and to attract providers of
future funds and has a less decrease between these two years.
Return on common equity
Return on common equity measures the return to the common stockholder, the residual owner.
Crocs’s return on common equity increased from 42.51% in 2011 to 47.50% in 2012 while
Decker’s decreased from 140.76% in 2011 to 90.04% in 2012. By comparing both companies,
we can see Crocs has a positive trend while Decker has a negative trend. However, the
percentage of Decker is larger than Crocs.
Price earnings ratio
Price earnings ratio expresses the relationship between the market price of a share of common
stock and that stock’s current earnings per share. Crocs’s price earnings ratio is 9.28 in 2012
while Decker is 17.78 in 2012. Stockholders have a better expect to Decker than to Crocs.
9. 8
Recommendation
By analyzing the database below, as the perspective of a banking officer, I will accept Crocs as a
loan candidate.
At first, from the vertical common-size income statement analysis, we can see Crocs has a larger
percentage of net income and has a positive trend of that while Decker has a negative trend.
From year 2010 to year 2012, the gross profit of Crocs increased from 53.55% to 54.12%,
because the increase of sales volume and the sales price. Selling, general and administrative
expenses slightly increased which were due to the new-opened retail store. Crocs chose to open
more shows that it is in a developing period and has a positive. Also, Crocs’s net income
increased dramatically from 8.58% in 2010 to 11.69% in 2012, which shows that Crocs may
have a positive trend in increasing its net income. As for Deckers, comparing with Crocs, it has a
lower gross profit and has a negative trend which decreased from 50.24% in 2010 to 44.69% in
2012. The reason of that is because the decrease sales in UGG and Teva brand. During these
three years, Deckers has lower sales in Europe which generally bring higher margin. We worry
about this negative trend will be continued in the next several years and have a negative impact
on returning the loan. Deckers selling, general and administrative expenses increased because the
company spent more money in the new-opened retail stores and Sanuk and UGG brand. The
company choose to open new store and new brand when its net income has a negative trend may
give heavier burden and has more risk. What’s more, the percentage of net income observably
decreased from 16.09% in 2011 to 9.14% in 2012 shows a serious problem Deckers may own in
its operation. According to the vertical common-size income statement analysis, Crocs is a better
choice.
The common-size analysis also indicates that it is better to choose Crocs as a loan candidate.
Crocs has a larger current ratio in 2012 than Decker’s that Crocs’s is 3.88 and Decker’s is
2.59. Also, Crocs has a positive trend while Decker has a negative trend from 2011 to 2012.
It shows that Crocs own a better ability to cover its current liabilities.
Crocs has larger quick ratio in 2012 than Decker’s that Crocs’s is 2.84 and Decker’s is 1.47.
Also, Crocs has a positive trend while Decker has a negative trend from 2011 to 2012. It
shows that Crocs own a better ability to use its cash, cash equivalent and accounts receivable
to cover its current liabilities.
Crocs has more account receivable turnover in 2012 than Decker’s that Crocs’s is 8.30 and
Decker’s is 7.50. Although they both have a negative trend in accounts receivable turnover,
but Decker has a bigger decrease. It shows that Crocs has a better liquidity of the receivables.
Crocs has more inventory turnover in 2012 than Decker’s that Crocs’s is 3.15 and Decker’s
is 2.45. Although they both have a negative trend in inventory turnover, but Decker has a
bigger decrease. It shows that Crocs has a better liquidity of the inventory.
Crocs has shorter operation cycle in 2012 than Decker’s that Crocs’s is 159.85 days and
Decker’s is 197.65 days. Although they both have a negative trend in operation cycle, but
Decker has a bigger increase. It shows that Crocs spends fewer days in elapsing between the
acquisition of goods and the final cash realization.
10. 9
Crocs has more times interest earned in 2012 than Decker’s that Crocs’s is 174.89 and
Decker’s is 48.95. Although they both have a negative trend in operation cycle, but Decker
has a bigger increase. It shows that Crocs has a positive trend in times interest earned while
Decker’s has a fluctuant one and a negative trend. It shows that Crocs has a better ability to
pay the firm’s long-term debt.
Crocs has a positive trend from 2010 to 2011 and has negative trend from 2011 to 2012
while Decker has a negative trend from 2010 to 2012.
Crocs has less debt to tangible net worth in 2012 than Decker’s that Crocs’s is 0.38 and
Decker’s is 0.64. Also, Crocs has a positive trend during these three years while Decker has
a negative trend. It shows that Decker used larger percentage liabilities to run the company
which will have more risk.
Crocs has larger gross profit margin in 2012 than Decker’s that Crocs’s is 54.12% and
Decker’s is 54.12%. Also, Crocs has a negative trend between 2010 and 2011 and has a
positive trend from 2011 to 2012 while Decker has a negative trend from 2010 to 2012. It
shows that Crocs gain more gross margin generate by each dollars of sales.
Crocs has larger net profit margin in 2012 than Decker’s that Crocs’s is 11.69% and
Decker’s is 9.12%. Also, Crocs has a positive trend between 2010 and 2011 and has a
negative trend from 2011 to 2012 while Decker has a less percentage and has a negative
trend from 2010 to 2012. It shows that Crocs gain more net income margin generate by each
dollars of sales.
Crocs has almost the same opearting income margin in 2012 as Decker’s that Crocs’s is
13.01% and Decker’s is 13.22%. Also, Crocs has a positive trend between 2010 and 2011
and has a negative trend from 2011 to 2012 while Decker has a negative trend from 2010 to
2012. It shows that Crocs gain more operating margin generate by each dollars of sales.
Crocs and Decker have stable and similar degree of financial leverage. However, Decker’s is
1.02 in 2012 while Crocs is 1.01. I shows that Decker is a little risker.
Crocs has less operating cash flow per share in 2012 than Decker’s that Crocs’s is 1.42 and
Decker’s is 4.39. Also, Crocs has a negative trend from 2010 to 2011 and has a positive
trend between 2011 and 2012 while Decker has a negative trend from 2010 to 2011 and has
a positive trend from 2011 to 2012. Decker is more fluctuant.
Crocs has less total asset turnover in 2012 than Decker’s that Crocs’s is 1.40 and Decker’s is
0.26. Also, both companies have negative trend, but Decker has a larger decease. It shows
that Crocs has a better ability to use its assets to generate sales.
Crocs has similar operating asset turnover in 2012 to Decker’s that Crocs’s is 1.64 and
Decker’s is 1.66. Also, both companies have negative trend, but Decker has a larger decease.
It shows that Crocs has a better ability to use its operating assets to generate sales.
Crocs has larger return on assets in 2012 than Decker’s that Crocs’s is 16.39% and Decker’s
is 11.77%. Also, both companies have negative trend, but Decker has a larger higher
11. 10
percentage decease. It shows that Crocs has a better ability to use its assets to generate net
profit.
Crocs has similar return on operating asset in 2012 to Decker’s that Crocs’s is 21.28% and
Decker’s is 21.94%. Also, both companies have negative trend, but Decker has a larger
decease. It shows that Crocs has a better ability to use its operating assets to generate sales.
Crocs has larger return on investment in 2012 than Decker’s that Crocs’s is 21.16% and
Decker’s is 15.98%. Also, both companies have negative trend, but Decker has a larger
higher percentage decease. It shows that Crocs has a better ability of the firm to reward those
who provide long-term funds and to attract providers of future funds and has a less decrease
between these two years.
Crocs has less return on common equity in 2012 than Decker’s that Crocs’s is 47.50% and
Decker’s is 90.04%. However, Crocs has a positive trend while Decker has a negative trend.
Crocs has less price earnings ratio in 2012 than Decker’s that Crocs’s is 9.28 and Decker’s is
17.78. It shows that stockholders have a better expect to Decker than to Crocs.
Although Crocs has less price earnings ratio than Decker, other database shows that Crocs has a
better trend than Decker. We can draw a conclusion that Crocs is a better loan candidate.
