Working Capital & Liquidity

Working Capital, defined as current assets less current liabilities is increasing a lot since 2008. An increase in working capital can be either good or bad because for sure the company has more assets to face short-term obligations, but that increase could be due to lack of liquidity of those assets, like increase in inventories from difficulties in selling the stocks. Fortunately, Crocs working capital increase is mainly due to the increase in cash and cash equivalents which accounts for 49% of current assets in 2011 (38% and 29% in 2010 and 2009 respectively).

Without cash, WC is much more stable since 2008. In this year, lower sales and a lot of fixed costs made inventories and receivables decrease more than payables. Of course this is only true because collecting, paying and inventory holding periods have followed a similar trend.

The fact that the company receives from its clients sooner than when it needs to pay its suppliers, is a good thing. Also, if the AIHP remains unchanged and APP increases more than ACP, this means the cash cycle of the company will be decreasing, and that is also a good thing. It helps to reduce Working Capital needs, which means a release of cash-flow.

Now it's important to understand if this is sustainable or if the industry has other tradition.

The APP is one of the highest in the sample. In another case it would be weird that a company increased its APP at such a fast pace, without increasing ACP an being on the top end compared to its peers. Still Crocs has been able to maitain its gross margin (so it's not paying for this "delay") and it current liquidity position is pretty good as we'll see. So one solution left: bargaining power increase.

Still, i'd say the company might reduce this period in the future, or at least that it won't be able to delay it much longer. On the other hand, Crocs is a very unique company to what concerns its supplies specially regarding Croslite. Anyway, as the company moves to new products and uses new materials, APP should fall a little.

Crocs ACP is pretty much on the average. It could never compete with pure retailers, but it has a good position compared to other wholesalers and "hybrids".

AIHP is also on the average. This is very important as we've seen operational efficiency is a major contributor to return on equity.

In summary, the cash cycle of the company (73 days) is a bit lower than average (88 days), and is following a doward trend.

LIQUIDITY:

Crocs doesn't seem to have liquidity problems. The company has a huge amount of cash ($207M at the end of Q1 2012) to face current liabilities (<$195M). Despite the fast growth experienced, working capital needs are increasing very slowly as the company is reducing its cash cycle.

The best part of this is that all this cash is coming from operating activities. You can see in the annual cash-flow statement that cash-flow from operations is growing at an AAGR = 100% since 2007! It grew 37% and 71% in 2011 and 2010 respectively.

Still, in order to provide aditional liquidity in the future Crocs also has a revolving credit facility with a syndicate of lenders, which currently provides with up to $70.0 million in borrowings. It's important to notice that in Q1 2012 Crocs had $24.1 million of outstanding borrowings under the Credit Facility compared to $0.4M in 2010. This means that the financial position of the company as of March 31st, 2012 actually changed a little, even though the company is still net cash.

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