Headquartered in Niwot, Colorado, Crocs, Inc. produces Crocs shoes, one of the most comfortable shoes ever designed. The awkward, even clumsy look of the Crocs shoe is offset by unbelievable comfort. One of the world leaders in casual footwear and apparel for men, women, and children, Crocs’ shoes offer unmatched comfort derived from Croslite, a proprietary material that gives Crocs its soft, lightweight, waterproof, and odor-resistant qualities. Crocs are produced in many different styles, including boots, sandals, sneakers, flats, golf shoes, mules, and the popular original clog style, which is offered in more than 20 colors. Most of the other styles are limited to six colors or two-color combinations.
Crocs makes shoes specifically for companies in the healthcare and airline industries as well as for diabetic needs markets. Crocs has an alliance with the American Nurses Association, providing nurses with a 25 percent discount on shoes. Croc “Fuzz Collection” is designed with removable woolly liners that enable the shoe to be worn in winter or summer and the Jibbitz line, marketed primarily at children, manufactures declarative clip on items, often of Disney characters, for use in the ventilation holes of the shoes.
For the first time in its history, Crocs reported revenues of more than $1 billion at year-end 2011 and in 2012 celebrated its 10th birthday. To date, Crocs has sold more than 200 million pairs of shoes to customers in more than 90 countries through its retail stores, outlets, kiosks, and Web stores. Crocs Web stores operate under the brand names Crocs Work, Crocs Rx, Ocean Minded, and Jibbitz. As of year-end 2012, Crocs operated 121 kiosks, mostly in malls, 287 retail stores, 129 outlet stores, and 43 Web stores around the world. With more than 4,100 employees, Crocs manufactures its shoes mainly in Mexico, but it has other manufacturers in Italy, Romania, Bosnia and Herzegovina, and China.
Crocs’ major rival, Columbia Sportswear Company (COLM), in late 2013 strengthened its presence in India by forming a distribution agreement with the New Delhi-based Chogori India Retail Ltd. As per the agreement, Chogori will serve as the sole distributor of Columbia’s brands in India. Chogori owns 32 stores in 14 cities in India and is the exclusive retailer of Hi-Tec, the British footwear brand and American footwear brand, Crocs.
Copyright by Fred David Books LLC. (Written by Forest R. David)
Crocs was founded by friends Scott Seamans, Lyndon “Duke” Hanson, and George Boedecker Jr. in 2002 who desired to manufacture and distribute a foam clog style shoe they purchased from a company in Quebec, Canada, called Foam Creations. Foam Creations was marketing the shoe solely for use as a spa shoe, however, Boedecker, former Chief Operations Officer of International Sales at Quiznos Corp. in Canada, envisioned a brighter future for the product than limiting the marketing only to spas. Soon after securing rights to the shoe, Crocs unveiled its first official shoe under the Crocs brand named, called the Beach, at the 2002 Fort Lauderdale, Florida Boat Show. All 200 pairs available at the show were sold almost instantaneously. In 2004, Crocs officially purchased Foam Creations and with it rights to Croslite, the principle material that provides Crocs their comfort and medically beneficial properties. In 2006, Crocs expanded their brand by acquiring Jibbitz, from a stay-at-home mom, for $10 million, and acquired Bite Footware and Ocean Minded in 2007. In 2008, Crocs acquired two European based companies, Tidal Trade and Tagger.
In 2006, Crocs had an initial public offering (IPO), selling stock and raising funds through equity financing for the first time. Fortunately for Crocs, the 2006 IPO corresponded with the rapid advancement of sales in what Salon described as “somehow just caught fire” in reference to demand for the product. Crocs’ stock price subsequently jumped from around $15 in 2006 to more than $75 by 2007, amounting to a 400-percent return for IPO investors in a little more than a year. However, along with increasing sales, critics of Crocs were coming equally as fast. In 2007, fashion consultant Tim Gunn was quoted in Time Magazine as saying “the Croc looks like a plastic hoof. How can you take that seriously?” In addition to Time, the Washington Post and New York Times printed critical reviews of the shoes. The ongoing negative press coincided with a weakening global economy and resulted in Crocs’ stock price falling from $75 per share in late 2007 to under $0.80 per share by year-end 2008. Fortunately for Crocs, the stock and company rebounded an amazing 4,000 percent to $32 per share in 2011. Revenues also hit an all-time high of $1 billion at year-end 2011.
Along with Crocs robust rise as a powerful player in the shoe industry in 2006, the year witnessed other firms manufacturing or distributing products deemed “croc-offs” a unique play on words indicating Crocs patents were being infringed. In 2007, many of these “croc-offs” were seized in the Philippines and Denmark. However today, there are still competitors offering similar looking shoes under various brand names such as Airwalk, Poliwalks, and NothingZ. Unfortunately for Crocs, Inc., croc-offs can be purchased today at discount stores, beach stores, superstores, and similar shopping outlets.
According to the company website, Crocs provides two separate mission statements, one for Crocs, Inc. and one for Ocean Minded. Crocs’ mission is: “To bring profound comfort, fun and innovation to the world’s feet.” Ocean Minded’s mission is: “To become the global leader in sustainable lifestyle footwear, apparel and accessories whilst ensuring that the four pillars of the Ocean Minded brand—Quality, Authenticity, Responsibility and Community—resonate throughout our company, products, associates and actions.”
Crocs’ organizational structure consists of all white males, as indicated in Exhibit 1 . Notice the firm operates using a division-by-region organizational design. Shares of Crocs’ stock dropped 5.1 percent on 8-8-13 after Sterne Agee analysts downgraded the company to underperform, due to a perceived lack of talented top executives. The analysts also have concerns about Crocs’ relationship with backjoy.com —which includes several former Crocs executives—calling it “too close for comfort.”
EXHIBIT 1 Organizational Structure
Source: Based on company documents.
In 2012, Crocs operated 43 company-owned Internet web stores, up from 42 and 37 the prior two years respectively. But the company’s Internet sales dropped to 9.1 percent of total revenue in 2012 from 9.6 percent the prior year. For 2012, 57.5 percent of Crocs’ revenues were derived from sales to wholesale distributors, down from 59.8 and 60.8 percent the prior two years, respectively. Distributors include Dick’s Sporting Goods, Famous Footwear, Kohl’s, and Nordstrom, but no single customer accounts for 10 percent or more of revenues.
Crocs footwear accounts for about 96 percent of total revenues, with accessories, primarily from Jibbitz, producing the remaining revenues. Footwear products are divided into four main categories: (1) Core-Comfort, (2) Active, (3) Casual, and (4) Style. Core-Comfort category includes the classic Crocs and all close derivatives from the original design. The Active product offerings are designed for activities such as boating, walking, and hiking. The remaining two categories of shoes are designed with style in mind, taking more of an equal role with comfort, and Crocs hopes this line of shoes will expand the pool of “wearing occasions” for customers.
Crocs also operates under three different brands: (1) Crocs, (2) Ocean Minded, and (3) Jibbitz. Although Crocs does not report revenues or operating incomes by brand, the three brands are quite distinct and even have their own mission statements. The Crocs brand is the traditional clog-looking shoe and in line with the Core-Comfort category. Crocs describes the Crocs brand shoe as being: innovative, fun, comfortable, and simple. Even going as far to state “in a world full of bells and whistles, less is more.” Crocs’ Ocean Minded brand, which was acquired in 2007 keeping the name Ocean Minded, includes the Active, Casual, and Style categories of shoes. The Ocean Minded brand specializes in ocean or water sports themed items. Flip flops, boat shoes, and shoes for surfing are all possible options. In addition, shoes with wooly liners, high-quality leather, hiking shoes, and more everyday shoes are also produced by Ocean Minded. Ocean Minded brand shoes have their own website at www.oceanminded.com . Finally, the Jibbitz brand produces accessories designed for use with Crocs brand shoes as well as a means to personalize purses, cell phone cases, beach bags, backpacks, and more. Jibbitz has contracts with Disney, Marvel, and Lego, among others to produce trademarked items.
Crocs’ organizational structure is set up by geographic region, and so are the reporting business segments. As indicated in Exhibit 2 , Crocs’ revenues and operating incomes are reported under three segments: Americas, Europe, and Asia. Exhibit 2 provides a breakdown of the most recent financial information for Crocs. Note the company is doing well in all three geographic regions.
The Crocs’ Americas segment includes all revenues in North and South America. Products are sold wholesale to sporting goods, department, and specialty retail stores as well as direct to the consumer through about 200 company-operated stores and Web stores. About 45 percent of all revenues are derived from the Americas segment, making it the largest of the three reporting segments. The bulk of business for Crocs is located outside the USA. Despite 45 percent of revenues being derived from the Americas, only 32 percent of operating income came from this segment.
Crocs’ Asia segment has experienced stable total revenues each of the last three years, culminating with 38 percent of total revenues being derived from this segment in 2011. The Asian segment accounted for an impressive 51 percent of operating income in 2011. Locations included are Asia, Australia, New Zeeland, the Middle East, and South Africa. Products are sold in a similar manner as in the Americas. Crocs operated 198 company stores in Asia based on year-end 2010 data.
The European segment, which includes Russia, is the smallest Crocs segment based on revenues, operating income, and number of stores. In 2011, total revenues and operating income each accounted for around 17 percent of their respective measures. Like the Americas and Asia, products are sold to wholesale distributers in Europe. Crocs operated 35 direct-to-consumer stores as of year-end 2010 in European markets.
EXHIBIT 2 Crocs’ Revenues by Channel
|Year Ended December 31,||Change|
|Americas||$ 235,988||$ 214,062||10.2%|
|Total revenues:||$ 1,123,301||$ 1,000,903||12.2%|
Source: 2012 Form 10K, p. 28.
As indicated in Exhibit 3 , Crocs’ revenue increased nicely in 2012 in all channels. Note in Exhibit 4 that Crocs reduced its number of kiosks in 2012 to 121 from 158 the prior year, but increased its number of retail stores and outlet stores to 287 and 129 respectively.
Crocs’ stock price recently jumped 9 percent in one day after Goldman Sachs analyst Taposh Bari gave the creator of those colorful plastic shoes a “Buy” rating, saying that investors have misinterpreted the shoe brand as a fad. “We see Crocs as a lifestyle brand with global appeal that appears both proven and sustainable,” he wrote in a note to investors. Crocs’ stock hit a 52-week low price of $12 on November 15, 2012, but since then has increased to $18 in mid-2013. Crocs, Inc. has little debt and has more than $315 million in total cash, and a price-to-earnings to growth (PEG) ratio of only 0.90. All these factors indicate a stock that is undervalued. The company has never paid a cash dividend on shares of its stock.
As revealed in Exhibit 5 , 2012 was the best year ever for Crocs with the company reporting revenues up 12.2 percent percent from 2011 to an all-time record of $1.12 billion and net income rose 17 percent to $131 million. The record growth was fueled by all three geographic operating segments and Crocs attention to focusing on selling prices, new product styles, forming new contracts with existing and new wholesale customers and a strong expansion of new Crocs stores. In addition, Crocs increased marketing efforts of Ocean Minded products to provide Crocs footwear options for all four seasons.
The balance sheets in Exhibit 6 reveal that Crocs’ stockholders’ equity increased 30 percent from 2011 to 2010 and an impressive 71 percent more than the two-year period ending in 2011. Crocs has acquired other firms over the years, but to their credit, the company has $0 goodwill on their balance sheet.
EXHIBIT 3 Crocs Income by Segment
|Year Ended December 31,||Change|
|Americas||$ 495,852||$ 448,077||10.7%|
|Total segment revenues||1,122,727||1,000,712||12.2|
|Total consolidated revenues||$ 1,123,301||$ 1,000,903||12.2%|
|Americas||$ 85,538||$ 70,532||21.3%|
|Total segment operating income||248,044||231,556||7.1|
|Unallocated corporate and other||(91,125)||(86,415)||5.5|
|Total consolidated operating income||$ 146,174||$ 131,079||11.5%|
Source: 2012 Form 10K, p. 33.
EXHIBIT 4 Crocs’ Company-Owned Stores
|December 31, 2012||Opened||Closed||December 31, 2011|
|Kiosk/Store in Store||121||39||(76)||158|
Source: 2012 Form 10K, p. 28.
A competitive advantage for Crocs is the absence of any type of box packaging, saving millions on costs. Although revolutionary, Croslite remains cheaper to purchase and manufacture than other shoe materials like leather. Rival firms such as Deckers Outdoor and Timberland report cost of sales around 55 percent, whereas Crocs’ cost of sales are about 42 percent.
One of the biggest changes Crocs undertook in the aftermath of the 99-percent stock depreciation was that the firm began producing their own footwear in their own facilities in Mexico, Italy, and China. Ultimately this reduced costs, provided Crocs with better quality control and enabled the company to significantly speed up production and delivery of products to customers. Crocs also expanded away from their traditional clog-style shoe into beachwear, hiking shoes, boats shoes, and other more casual and fashionable options.
EXHIBIT 5 Crocs’ Income Statement
|For the Year Ended December 31,|
|($ thousands, except share data)||2012||2011||2010|
|Consolidated Statements of Operations Data|
|Revenues||$ 1,123,301||$ 1,000,903||$ 789,695|
|Cost of sales||515,324||464,493||364,631|
|Selling, general and administrative expenses||460,393||404,803||342,961|
|Income (loss) from operations||146,174||131,079||78,123|
|Foreign currency transaction (gains) losses, net||2,500||(4,886)||(2,325)|
|Other income, net||(2,711)||(1,578)||(1,001)|
|Income (loss) before income taxes||145,548||136,690||80,792|
|Income tax (benefit) expense||14,205||23,902||13,066|
|Net income (loss) attributable to common stockholders||$ 131,343||$ 112,788||$ 67,726|
|Income (loss) per common share:|
|Basic||$ 1.46||$ 1.27||$ 0.78|
|Weighted average common shares:|
|Footwear unit sales||49,947||47,736||—|
|Average footwear selling price||21.55||20.04||—|
Source: 2012 Form 10K, p. 24.
Crocs continues to expand globally. The company’s unique products match well with consumer demand around the world, so there are numerous countries yet that Crocs can enter.
The footwear industry is quite fragmented in the USA and Western Europe. Total footwear sales rose just under 5 percent in 2011 to $50.5 billion in the USA. Out of the main categories of footwear, fashion represented 48 percent, performance 27 percent, sports and leisure 13 percent, outdoor 8 percent, and work and occupational 4 percent. It is expected the leading area for growth the footwear industry in the USA and Western Europe resides in the fashion category. Markets in Asia and Eastern Europe are less developed and offer a wider range of product development and penetration strategies for firms to explore. Firms competing in the industry are increasingly expanding their product offerings. Nike, for example, is now well entrenched in the apparel business and more recently has expanded into producing golf clubs, watches, yoga mats, and other products in an attempt to grow revenues.