Crocs: When a Growth Firm Starts Shrinking

Posted by: Ben Steverman on November 13, 2008

If you’re an investor in Crocs (CROX), the faddish shoemaker, you’re used to disappointment. But even by Crocs’ low standards, today was a doozy. Crocs shares fell almost 45% to 1.05.

A brief history of Crocs: The firm’s shoes may be ugly but they’re also apparently very comfortable and they caught on quickly with children and adults, particularly those with jobs that keep them on their feet all day. A wave of hype followed, investors piled into Crocs shares, Jim Cramer touted the stock, and executives expanded a distribution network worldwide with dreams of being the next Nike (NKE). Even after it became clear that Crocs was an overhyped stock market fad, analysts continued to recommend the stock.

At one point, Crocs shares were approaching $70, and now, after yet another bad quarter of financial results, they’re just above $1, a decline of about 98%.

On Nov. 12, Crocs reported a loss of $1.79 per share in the third quarter. Revenues fell from $256.3 million a year ago to $174.2 million last quarter. But even more disturbing to investors was its fourth-quarter outlook:

The maker of colorful plastic clogs said it expects a loss of 50 cents per share to 65 cents per share on revenue of $100 million to $120 million. Analysts surveyed by Thomson Reuters forecast a narrower loss of 6 cents per share on revenue of $185.7 million, on average.

Executives tried to reassure investors. Crocs still has cash of $56.6 million, and it paid down debt last quarter. It’s slashing capital expenditures and closing plants to, as chief executive Ron Snyder put it, “further right-size our operations to better align with our lower volumes and revenues.”

But I bet investors were disturbed that executives frequently mentioned broader economic troubles. This “has obviously been a very tough year as we deal with one of the most challenging economic and global and retail environments in some time,” Snyder told analysts.

A tough economy is one thing, but surely it’s not the main factor in a 33% drop in sales in the third quarter and (based on projections) a fourth quarter sales drop of as much as 55%. Crocs sales are in near free-fall, and you can’t just blame the macroeconomic environment for that.

Snyder argues the firm still has “compelling growth opportunities both domestically and overseas.” But this is not longer a growth stock. It’s shrinking before our very eyes.

Here’s Jon C. Ogg at 24/7 Wall St.:

If the company wants to really give anything back to shareholders, there are several things it can do. First, halt all production and pink slip all employees. Put the brand up for sale. Sell off whatever property plant and equipment it can at reasonable prices. Donate the inventory to the homeless and recently unemployed for the tax credits, and then try to monetize those credits.

Yes, this is cruel. That is the state of the market right now, and the company sounds like it is in an untenable position.

Maybe, just maybe, it isn’t that bad. Crocs’ hope is that there is a built-in permanent demand for Crocs shoes even after fashions change and competitors try to copy Crocs with similar shoes. Crocs have become staples for many nurses and chefs, for example, and parents still find them convenient, cheap and comfortable footwear for their children.

One scenario is that Crocs could be acquired by another firm looking to capitalize on its brand name and shoe technology. This would be similar to the fate of a fad stock of the 1990s, Snapple, which after a few ownership changes is now part of Dr. Pepper Snapple Group (DPS). (That firm also just reported earnings.)

Reader Comments

david wayne osedach

November 13, 2008 9:37 PM

The current depressed market is looking for value - not trash. The business cycle for Crocs is plunging like the price at the pump.

Gumby

November 15, 2008 3:51 AM

Billy Gates Foundation recently doubled its investment in Crocs stock..Hmm?

e

July 9, 2010 4:57 PM

As an gen x industrial designer working on the east coast near the center of design for the whole country, I can tell you that design gets very little respect and its value is not understood at all, nor is the process by which it needs to be practised to get good results supported. I beleive it is a deeply engrained cultural thing. Design is still seen as elitest, arts and craftsy or practised by ego starved outcasts.

Maybe the next generations designers can fare better.

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About

Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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