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Lauren Ooi

Crocs Inc. (NASDAQ:CROX) is an American footwear company, best known for its light-weight, non-slip shoe made with its patented material.^[1] As of 2008, Crocs operates a total of 442 Crocs retail locations.^[2] In 2008 the company sold a total of 22.9 million pairs of shoes worldwide. ^[3]

However, Crocs has seen a significant downturn in earnings starting from the first quarter of 2008, and reported a [net loss] of $147.98 mil in September 2008.^[4] Consequently, the company's share price has also seen a 40% drop in value..^[5] These are all effects of a global recession dampening demand for Crocs' products, not only in its core North American market, but around the world as well. Crocs has tried to curtail this downward trend by aggressively expanding into less-affected global markets; this strategy has been met with many challenges, including an influx of cheap imitation goods.^[6] Additionally, Crocs is also facing legal woes which has harmed its reputation and adversely affect earnings and valuation.

Company Overview

Crocs was ranked the number one casual brand in the athletic specialty sporting goods channel for men, women, and children in 2008 by the NPD Market Research Group,. ^[7]Crocs' shoes are differentiated due to their soft, lightweight, non-marking, slip- and odor-resistant nature. The product began as a simple and innovative product targeted at water sports enthusiasts, but it's popularity has since grown tremendously. However, the company posted its first loss, of $147.98 million, in the quarter ending September 2008; this is compared to net income of $168.23 mil in 2007 and $64.42 mil in 2006.^[8] As of 2008, Crocs operates 120 full-priced stores, 121 kiosks, 21 outlet stores, and 180 partner stores worldwide, for a total of 442 Crocs retail locations worldwide. ^[9]

Business and Financial Metrics

Revenue By Geography ^[10]

Crocs Revenue and Net Income^[11]

Under pressure from rapidly declining sales, Crocs reduced their operations in North America by laying off its workforce and further reducing other operating expenses. It also decided to close manufacturing plants in Brazil and Canada, which might account for the decrease in assets. ^[13]

Net Income

In the early years after the company's IPO, Crocs, saw average Net Income growth of 150% year on year.^[14]. However, since late 2007, Crocs has been suffering losses. The company reported a Net Loss of $147.98 in the Quarter ending in September 2008. This is compared to Net Income of $168.23 in 2007 and $64.42 in 2006.^[15]

Sales and Revenue Growth Rate

From Crocs' inception in 2002 through the year ended December 31, 2007, the company experienced rapid revenue growth, initially starting with annual sales of $1 million in 2003 to $13.5 million in 2004, $108.6 million in 2005, $354.73 million in 2006 and $850 million in 2007. ^[16] This represents a growth of 1250%, 704.4%, 226.6% and 139.6% respectively. However, Croc's financial outlook took a turn for the worse when third quarter 2008 revenue tumbled 32% to $174.2 million, including a 45% decline in the U.S. and a 50% decline in Europe, partially offset by a 14% increase in the Asian market.^[17] Under-performance has led to significantly higher inventory levels, and in September 2008, management has decided to discontinue certain styles in a bid to cut costs.^[18]

Profit Margin

The company has historically recorded high profit margins on sales of Crocs footwear. For the year ended December 31, 2007, gross profit was $497.6 million, or 58.7% of revenues, compared to $200.6 million, or 56.6% of revenues, for the year ended December 31, 2006. ^[19] However, weak sales and the general economic downturn in 2008 have squeezed profit margins to 1.4% in the three months ended September 30, 2008 compared to 60.6% in the three months ended September 30, 2007. The decrease in gross profit was primarily attributed to excess capacity in Company-owned manufacturing and distribution facilities. Additionally, Crocs also recorded a $65.8 million inventory write-down charge during the three months ended September 30, 2008, and an additional $4.2 million charge related to losses on future purchase commitments. Write-down in inventories relates to certain products that have been discontinued, including main product lines in colors that have experienced substantial declines in consumer demand. ^[20]

Business Segments

Footwear (91% of Revenue in 2008, ending Q3): Crocs' main revenue generator is its line of footwear, generating $158.52 million in Q3 2008 and representing 8.1 million units for an average selling price of US$19.57.^[21]

Other (9% of Revenue in 2008, ending Q3): This includes complementary accessories and apparel for men, women and children. Revenue contribution from products outside of footwear has decreased from 11.8% in 2007 to 9.37% in 2008.^[22] This signals the increasing reliance on the footwear segment for revenue generation.

Key Trends and Forces

Global Downturn Worsens Stagnating Consumer Demand for Crocs' Products

The financial crisis that was sparked off by the collapse of the subprime lending market in the last quarter of 2007 has severely impacted consumer spending throughout 2008. ^[23] According to the U.S. Commerce Department, consumer spending in the retail section has fallen 7.4% below 2007 figures.^[24] This trend is reflected in Crocs' North American markets, which experienced a decrease of 23.3% in revenue, from $365.6 million to $280.5 million.^[25] This dampening of demand is reflected in the drop in revenue as discussed above in the Business and Financial Metrics section from $850 million in 2007 to $721.6 million in 2008. .^[26]

International Expansion Bolsters Crocs' Bottom Line

In 2008, international sales accounted for approximately 56% of total revenues, compared to 48% in 2007 and 32% in 2006. ^[27] While the absolute number for international sales decreased from $407.8 million in 2007 to $400.3 million in 2008, the proportion that international sales contributed to Crocs' overall revenue increased. ^[28] Revenues from the core North American market decreased 27.9%, or $135.9 million, to $351.8 million in 2008 compared to $487.7 million 2007. This decline can be attributed to the bleak economic conditions in the United States coupled with the challenges Crocs faces in merchandising of their expanded product lines, the maturity of their core products in the consumer market and lessening demand for their products.^[29] Crocs also faced dismal performance in the European markets. Revenues in Europe decreased 50.1%, or $29.1 million, to $29.0 million in the three months ended September 30, 2008 from $58.1 million in the three months ended September 30, 2007. This decrease in revenue can be traced to certain European countries, particularly in those which represent a more mature market for Crocs' products. The existence of imitation products that also contribute to a fall in sales. ^[30]

However, this was partially offset by growth in the Asian markets. Revenues from the Asian market increased 14.0% or $7.5 million, to $61.4 million in the three months ended September 30, 2008 from $53.9 million in the three months ended September 30, 2007.^[31] The increase is attributable to higher unit sales period over period as Crocs increased direct sales channels in China and expanded available product offerings. Some of the strongest performing markets were Japan, China, the Middle East, and Korea. ^[32] Additionally, the number of Company-owned retail venues in Asia increased from 52 at September 30, 2007 to 96 locations at September 30, 2008. Revenues from Company-owned retail locations increased 54.8%, or $5.8 million, to $16.4 million in the three months ended September 30, 2008, from $10.6 million in the three months ended September 30, 2007. ^[33] Crocs hopes that strengthening demand from Asian markets will be able to bolster the severe demand contractions in the more mature North American and European markets. However, the continued global economic downturn and the emergence of high quality imitation goods is a increasingly threatening sales in this region.

High Profile Legal Proceedings Hurt Crocs' Reputation and Decreases Bottom Line

Crocs has been embroiled in several high-profile lawsuits over the last few years. In 2006, Crocs filed a complaint against several companies alleging patent and product design infringement and seeking an exclusion order banning the importation and sale of infringing products.^[34] The loss of this lawsuit has had a severe impact on Crocs' ability to continue manufacturing shoes with their patented Croslite material, as other companies are now producing similar-quality shoes for up to 70% cheaper.^[35]

Shareholder Class Action Suits were filed in 2007, when shareholders alleged that the company gave false and misleading statements that misrepresented the company's financial situation. Management was accused of with-holding important information about distribution problems in Europe and Japan.^[36] In addition to mounting legal fees, this has adversely affected the company's reputation and is responsible for further driving down Crocs' stock price.

In 2007 and 2008, Crocs' reputation was further dealt a blow when a series of lawsuits were filed against Crocs for injuries to the wearer (mostly young children) due to the shoe getting caught in moving escalators.^[37] One of the main plaintiffs is seeking $7 million in damages arising from the accident..^[38] There were also other reports that Crocs shoes potentially generated an excessive amount of static electricity and were banned from areas with sensitive equipment.^[39]

Competition

Crocs' main competitors include most mainstream athletic wear companies. The largest five include:

• Nike is the largest seller of athletic footwear and apparel worldwide by sales. ^[40] The company specializes in the development and sale of athletic footwear, apparel and equipment, which together totaled approximately $18.6 billion in sales during Nike's fiscal 2008.^[41]
• Timberland designs, develops, markets and distributes, premium quality footwear, apparel and accessories products for the outdoors, with added focus on hiking and trekking activities. The company made $1.44 billion in 2007 and $423.61 billion in the first three quarters of 2008.^[42]
• Deckers Outdoor seeks to offer footwear that is distinctive and appeals broadly to men, women and children. Its products are sold through domestic retailers, international distributors, and directly to end-user consumers through its websites and catalogs. The company's products are sold under Teva, Simple, and UGG brand names. Teva is primarily an outdoor sandal, Simple is primarily casual footwear (clogs, sneakers, and sandals) and UGG is the trendy sheepskin boot.In 2007 revenue increased 48% to $449 million. This includes domestic sales growth of 45.3% to $386.6 million and international sales growth of 62.6% to $62.3 million in 2007.^[43]
• Columbia Sportswear Company designs and manufactures outdoor apparel, including sportswear, footwear, and related accessories. In addition to its namesake brand, the company owns the Mountain Hardwear, Pacific Trail, Sorel, and Montrail labels. Columbia distributes these products to approximately 14,000 retailers in about 100 countries.^[44] More than 40% of total sales come from outside the United States. In 2007, the company made $1.36 billion in revenue, and in 2007, revenue for the first three quarters dropped to $452.5 million.^[45]

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References

1. ↑ CROX 10k 2007, Item 1, pg.4
2. ↑ Seeking Alpha, Crocs Q3 Earnings Call Transcript
3. ↑ CROX 10K 2008, Item 6, pg.47
4. ↑ CROX 10Q 2008, Item 1, pg.3
5. ↑ Google Finance, CROX, Jan 31, 2009
6. ↑ CROX, 10Q September 30, 2008, Item 2 pg 27
7. ↑ NPD Market Research, Sportswear Industry
8. ↑ Google Finance, CROX
9. ↑ Seeking Alpha, Crocs Q3 Earnings Call Transcript
10. ↑ CROX, 10Q September 30, 2008, Item 2 pg 23
11. ↑ CROX, 10Q September 30, 2008, Item 2 pg 23
12. ↑ CROX, 10K December 31, 2008, F2
13. ↑ CROX, 10K December 31, 2008, Pg 42
14. ↑ CROX, 10Q September 30, 2008, Item 2 pg 23
15. ↑ Google Finance, CROX
16. ↑ CROX, 10K December 31, 2007, Item 2 pg 20
17. ↑ CROX, 10Q September 30, 2008, Item 2 pg 23
18. ↑ CROX, 10Q September 30, 2008, Item 2 pg 24
19. ↑ Google Finance, CROX
20. ↑ CROX, 10Q September 31, 2008, Item 2 pg 28
21. ↑ Seeking Alpha, Crocs Q3 Earnings Call Transcript
22. ↑ CROX, 10Q September 30, 2008, Item 2 pg 18
23. ↑ Morgan Stanley 2009 Global Economic Outlook
24. ↑ U.S. Department of Commerce, Consumer Spending Index, November 2008
25. ↑ CROX, 10Q September 30, 2008, Item 1 pg 18
26. ↑ 10K March 17, 2009, Item 1 pg 3
27. ↑ CROX, 10K December 31, 2008, Item 3 pg 6
28. ↑ CROX, 10K December 31, 2008, Item 3 pg 6
29. ↑ CROX, 10Q September 30, 2008, Item 2 pg 27
30. ↑ CROX, 10Q September 30, 2008, Item 2 pg 27
31. ↑ CROX, 10Q September 30, 2008, Item 2 pg 27
32. ↑ Seeking Alpha, Q3 2008 Earnings Call Transcript
33. ↑ CROX, 10Q September 30, 2008, Item 2 pg 27
34. ↑ CROX, December 31, 2007, Item 3 pg 26
35. ↑ "Cocs Post Deep Losses" Reuters November 12, 2008
36. ↑ Lawyers and Settlements, November 22, 2007
37. ↑ All Business, February 1, 2008
38. ↑ The Comsumerist, "Combining Crocs and Escalators May Result in Manlged Feet," February 8, 2008
39. ↑ The Telegraph, "Hospital Bans Crocs Shoes Over Static Risk," September 6, 2007
40. ↑ NIKE 10K, May 31, 2008, Item 1, pg 2
41. ↑ NIKE 10K, May 31, 2008, Item 6, pg 20
42. ↑ Google Finance, TBL
43. ↑ Deckers Outdoor, 10K, December 31, 2007, Item 7, pg 41
44. ↑ Google Finance, COLM
45. ↑ COLM 10K, September 31, 2008, Item 1, pg 4
46. ↑ CROX, 10Q, December 31, 2008
47. ↑ NKE, 10Q, September 30, 2008
48. ↑ CIK 10Q, September 30, 2008 TBL 10Q, September 30, 2008
49. ↑ DECK 10Q, September 30, 2008
50. ↑ COLM 10Q, September 30, 2008 TBL 10Q, September 30, 2008