Fads come and go quickly, and they often take hot stocks with them. But here’s how Krispy Kreme, Crocs, Pier 1 and others survived the rush -- and why they may thrive again.
Surviving success
We’d all like to think that the market is more rational than kids panting for the latest shoes (with wheels!), or adults willing to line up around the block for a really special doughnut.
But in fact, Mr. Market seems ever eager to hitch a ride on the latest consumer bandwagon -- which could be a quirky rubber shoe, a crafty new soda, a luscious treat or a Next Big Idea someone’s thinking up just now. The reason is simple: Trendy stocks can mint millions for those who get in at the right time -- if they also know when to get out.
That’s because the public, particularly the teens and young adults who drive so many consumer trends, are fickle. And when fads end, companies without a solid foundation often go the way of the Pet Rock -- or so many late-1990s dot-coms.
But those companies with a core brand, a cadre of loyal customers or more good ideas are often able to hunker down, rethink things and come out the other side. And for investors, there’s often big money to be made when such companies rebound because the stocks tied to broken fads can fall so low.
The following is a look at eight once-hot trends and the companies behind them -- companies that have refused to die. Some are rebounding, others seem poised to make the turn and some still have plenty of work to do. But they should all outperform nicely if they truly turn things around, and their stories suggest they will.
The Crocs craze
Fashionistas slammed Crocs (CROX) from the start, but consumers fell in love with the quirky look and comfy feel of their clunky rubber shoes. By the summer of 2007, the ranks of "Crocophiles" included Al Pacino, Jack Nicholson and even President George W. Bush.
Inevitably, the Crocs craze led to the classic mistakes of many a retail fad, says Eric Marshall, the director of research and portfolio co-manager of the Hodges Small Cap Fund (HDPSX). Crocs overexpanded distribution and production to meet hefty demand, some of which was fake because stores were ordering too many shoes just to have them on hand.
As the amount of inventory flooding supply chains became apparent, Crocs got slammed. After peaking above $75 in October 2007, the stock dropped like a rock. Then the recession worsened, and the stock dropped below $1 in November 2008.
But a large cadre of Crocophiles remained loyal. That following was one reason Hodges funds concluded this was a company that wouldn’t die, and took a contrarian position in the stock. "They definitely had a core business there that went beyond the fad," says Marshall.
It took years for Crocs to right-size distribution and manufacturing and introduce new lines like flip-flops, high heels, loafers and running shoes. But it did, so when the economy recovered, Crocs did, too. Last year, the company posted growth and profit all four quarters; the stock is now trading at around $21.
Here's one sign there may be more to come: Investors who notoriously bet heavily against the company by taking short positions in 2006-07 are now nowhere to be seen, says John Tabacco Jr. of Locatestock.com, which tracks short sellers.
Pier 1's treasure hunt
One of the first home-furnishing retailers to import custom-made goods from exotic lands, Pier 1 Imports (PIR) pioneered a niche that drove years of growth from its start as a single store in 1962 through the mid-1990s.
But in the middle of the last decade, with competitors imitating Pier 1's successful approach, the retailer tried to be more like them. It let prices rise and cut the number of products on sale. Sales growth slowed as Pier 1 stores lost their treasure-hunt feel. Then the real estate crash hit.
By March 2009, in the depths of the economic panic, the retailer's stock traded for 10 cents a share, down from more than $25 in late 2003, on fears that it would go bankrupt. But under a new management team led by Alexander Smith, Pier 1 Imports has refused to die. It shuttered unprofitable stores, sold its home office and closed its catalog and e-commerce divisions in efforts to raise cash and reduce costs.
Pier 1 also took two other bold steps. It bought back its own debt on the cheap in March 2009 to kill bankruptcy fears. And it went against the grain by sharply increasing the number of products on offer -- at a time when everyone was expecting consumers to close their wallets. Doing so restored the old feel, and the chain was positioned exactly right when consumers began to spend again. By the end of last year, sales were growing by a robust 8.9%. The stock has rebounded to about $12.25.
The company expects to keep boosting sales and profitability by revamping stores, expanding e-commerce, and buying back its stock. "We are extremely well positioned to build on our profitability," Smith said in the company's most recent conference call with investors.
Krispy Kreme’s sugary story
Starting from modest North Carolina beginnings in 1937, Krispy Kreme and its signature glazed doughnuts -- served warm, of course -- were handling sweet-tooth cravings throughout the Southeast by the late 1960s.
In the 1990s, the company took its doughnuts national, and Krispy Kreme Doughnuts (KKD) went public in a sought-after 2000 initial public offering. Maybe the nation and the market needed a sugar high amid the tech meltdown. People lined up at new stores, and the stock went crazy. Shares rose from $11 to nearly $50 by the summer of 2003. "The stock held up extremely well during the tech market crash and the recession. It was a very hot concept stock," says Timothy Ghriskey, of Solaris Asset Management.
But then Krispy Kreme fell, for typical reasons. "They grew much too quickly," says Ghriskey. "They tried to sell in too many locations and it undermined the brand." Accounting issues surfaced. Competitors like Dunkin' Donuts upped their game. And efforts to tap calorie-conscious consumers also hurt Krispy Kreme; its rollout of whole wheat glazed doughnuts in 2007 was a bust.
Now trading below $5.50, Krispy Kreme’s stock seems unlikely to return to its prior glory. Growth has been modest, and rising commodity prices will hurt the company. Krispy Kreme's answer has been to look to smaller stores to contain costs, move into products beyond doughnuts and focus on expanding in its traditional base in the Southeast.
But Krispy Kreme has a powerful name, which could make it a takeover target. And while fads come and go, this is a mature company with a solid -- and tasty -- foundation.
American Eagle falls out of fashion
The tastes of teens and young adults are never more fickle than when it comes to fashion. And since the recession hit, they seem to have turned away from American Eagle Outfitters (AEO).
American Eagle's stock advanced sevenfold from 2004 to 2006 as it consistently hit the fashion trends just right, reaching $35 a share at the end of 2006 from $5 a few years earlier. But in 2007, store traffic and sales began to slip, a condition that worsened as the downturn pitched lower in 2008-09.
The economy has since begun to recover, but American Eagle hasn't been able to join in, at least not like competitor Abercrombie & Fitch (ANF). At $16, American Eagle stock currently trades around where it did in April 2009. Abercrombie & Fitch has nearly tripled, from $25 to $70.
But the Eagle has rebounded from misses before, and some believe it will do so it again. "They have gone through a tough period," says Timothy Ghriskey, of Solaris Asset Management. "But to me, it's a concept that can turn around again."
After all, American Eagle still has a powerful brand and a reputation for quality at affordable prices. Another big plus: a huge cash position of $740 million, or $3.77 per share, which gives the company the financial strength to ride out the bad patch. The company is also expanding internationally, and cutting costs -- an expected $20 million to $30 million in savings over the next two years.
So if it catches the next trend, and healthy sales growth returns, the Eagle's stock could soar again.
American Apparel rides on reputation
Known for its sexually charged advertising as much as its comfy cotton knitwear, American Apparel (APP) sells T-shirts, leggings and underwear that were popular enough to make the company one of the fastest-growing businesses in the U.S. just before it went public in 2007.
But soon American Apparel's stock was grinding lower along with the economy. Then just as business was turning around in 2009, American Apparel was hit hard as investigations into the immigration status of workers disrupted production in its Los Angeles factories. The company lost $86 million in 2010, and its stock spiraled below $1 a share as questions swirled around bankruptcy and sexual harassment lawsuits against founder and CEO Dov Charney.
All along, though, there were signs that American Apparel would be a survivor. In late 2010 and again this year, Charney plowed millions of dollars into the company, even though he already had a huge position in its stock. Who would do that if he expected failure?
The company brought in fresh top management with key retail experience at places like Hugo Boss, Calvin Klein and the Old Navy division of Gap (GPS), Wet Seal (WTSLA) and Cost Plus (CPWM). And despite all the controversy surrounding this name, many customers remain loyal not only because they like the clothes, but also because of American Apparel's "sweatshop-free" policy of manufacturing in the U.S. instead of places abroad where wages are much lower. American Apparel is one of the few clothing companies that exports goods boasting "Made in the USA."
In the past week, the stock has been strong on rumors that the company will secure financing and avoid bankruptcy. If the company really does turn around and grow revenue this year, as Charney predicts, the stock can probably go much higher.
Can Heelys roll again?
Back before the economy blew up, shoes with stealthy wheels in the heels, called Heelys, were all the rage among kids and teenagers. And the company behind these shoes made a smart move.
With sales peaking, Heelys (HLYS) went public in late 2006, raising lots of cash.
Those who bought shares in the $30 to $40 range back then got crushed as bullish expectations turned negative and the stock sank. Lately, shares have been going for around $2.20.
"Success begat success which began to be the problem," says Heelys CEO Thomas Hansen, who joined the company in 2009. Like many companies with hot products, Heelys expanded too fast. "When you flood the market, it cheapens the product. So somebody is going to start discounting."
Now, besides introducing new products like the Nano, a kind of streamlined skateboard, Hansen is positioning Heelys as a lifestyle brand that resonates on an emotional level with customers. "We are in the freedom, fun and fearless business," he says.
Thanks to that IPO, the company's huge cash position gives it breathing room. It currently has a market capitalization of $61 million -- less than the $67 million in cash on hand from the IPO -- which means that investors currently value the business at zero. If Hansen’s turnaround works, it will be worth much more than that.
Jones Soda goes pop
In a classic David vs. Soda Goliath confrontation, Jones Soda (JSDA) took on the beverage giants a few years ago -- and the market applauded. Shares rose from around 20 cents in late 2002 to top $32 in April 2007.
But about four years ago, Jones committed one of the classic errors made by small growth companies with hot products. It reached too far, branching out from "craft" versions of classics like root beer and cream soda into vitamin waters and juice drinks.
By January 2009, the stock had fallen back down to 26 cents a share, a level that often suggests a company is headed for the recycling bin.
But consumers remained loyal to Jones Soda's core products, which are sold in glass bottles endearingly decorated with photos from customers. "We are focused back on the core products and what Jones does really well," says CEO Bill Meissner, an industry veteran who joined the company in April 2009 to try to turn things around.
Here's the potential that might make Jones Soda a huge comeback play: Right now, its core sodas are in just 14% of grocery stores in the U.S., one reason the company is still losing money, albeit less than it did a year ago. Meissner thinks that can grow to 60% by the end of 2014.
Plus, Jones Soda has a knack for developing quirky but popular flavors like Fufu Berry and Blue Bubble Gum. Meissner also hopes a recently relaunched energy drink will boost sales. Such a beverage could bring back bad memories for long-term investors – but if it succeeds, it could pep up their brokerage accounts.
Taser still goes zap
Thankfully, the Taser craze was fueled by local police officers, not teenagers. But in 2003-04, it seemed like every cop in the U.S. wanted one.
Investors started doing the math on what similar sales growth in foreign countries would do for the stock, and they liked what they saw. Taser (TASR) stock soared past $30 a share at the start of 2005, from under $1 at the start of 2003. "It was supposed to be a huge international expansion story," recalls Scott Stevens, the head of research at Strata Capital Management in Beverly Hills. "The U.S. was the poster child for what would happen."
But international sales were much tougher to win than investors expected, says Stevens. Other trouble came in early 2005 with news that the Securities and Exchange Commission was investigating accounting practices and company statements about medical research on the health effects of Tasers.
The stock had crumbled to $5 by the second half of 2005. The SEC investigation was resolved by the end of that year. Taser stock has managed to rally a few times since, but for the past three years, it has been mired in the $5 range.
Taser certainly looks like a survivor, though, since so many police agencies still use its stun guns. Replacement cartridges alone make up a significant percentage of sales. And Taser has a strong balance sheet.
The company could also return to growth mode soon, because it's rolling out new products, says Taser chairman and co-founder Thomas Smith. These include a video system called Axon and a digital evidence management system, called Evidence.com. Plus there's a new Taser that fires two shots instead of one, called the Taser X2. As the economy improves and local police budgets loosen up, spending on these products could increase nicely.
At the time of publication, Michael Brush owned shares of American Apparel. He has suggested to readers of his investment newsletter, Brush Up on Stocks, that they consider buying shares of American Apparel, American Eagle and Heelys.
