DENVER—Among Camille Kintzele’s friends, the once-familiar sight of clunky, rainbow-hued Crocs is becoming rarer and rarer. In their place is the $5 foam flip-flop, even on chilly days.
“Crocs aren’t big in my class anymore,” said Camille, a seventh-grader in Evergreen who owns two pairs of Crocs she’s outgrown and doesn’t plan to replace. “There are a few people that still wear them, but only one or two people.”
She isn’t the only former Crocs fan whose enthusiasm has cooled.
Crocs recently reported second-quarter sales fell for the first time in its history as a publicly traded company, dragged down by a 20 percent drop in U.S. sales.
“The first six months of this year have been difficult as we dealt with the challenging retail environment, unfavorable weather and increasing competition and a slowdown in (sales) of core styles here in the U.S.,” CEO Ron Snyder told analysts on the second-quarter earnings call. On the positive side, he said, were strong international sales and the performance of Crocs’ company-owned stores.
In the aftermath of that report, its third straight disappointing earnings announcement, the stock fell to a low of $4.03—less than half its split-adjusted IPO price and down from $74.75 last October.
Crocs had long anticipated that it had to diversify beyond its mainstay clog, attempting to branch into protective sports gear, clothing and high-fashion lines. But none of those extensions has gained mass-market traction.
At the same time, everyone from Wal-Mart to Skechers now offers a similar funky rubber shoe, often at a far lower price, that holds increasing appeal to cash-strapped shoppers.
“They have some significant challenges,” said Marshal Cohen, chief industry analyst for research firm NPD Group. In addition to competition from knockoffs, Crocs must find “the right extension that can get their core customers to grow and their noncustomers to enter the market.”
Adds Amit Choksi, a money manager who has profited by betting that Crocs’ shares would fall: “The legacy product is so important to the company; if it fails, they might not have a chance with the new products.”
“They’re still selling a lot of shoes and you still see a lot of people wearing Crocs,” Choksi said. “But the fad’s starting to wear thin because you see a lot of markdowns. They’re not commanding the $30 (price) anymore.”
Crocs’ problems caused 75 employees to lose their jobs last month, largely at the company’s Niwot headquarters. Those cuts were on top of the closure of a 600-employee manufacturing plant in Canada, and another 44 workers laid off or reassigned this year at its headquarters and Boulder-based Jibbitz subsidiary. In July, Jibbitz founders Rich and Sheri Schmelzer and team member Zan O’Leary resigned to spend more time with their families.
The series of stumbles has shocked and saddened investors in a company that for much of its short life could seemingly do no wrong. The company went public in January 2006 and by year’s end began a run that saw its shares gain 600 percent in two years. That made multimillionaires of its executives and early investors, who sold millions of shares in the IPO, in a second large offering of shares and in the open markets.
CEO Ron Snyder sold nearly $140 million worth of Crocs shares during the period.
Doubters pointed to the heavy insider selling as a red flag and called the shoes a fad, the footwear equivalent of the 1970s pet rock craze. They were shouted down by a chorus of believers, buttressed by the rapidly rising share price.
“Crocs is the next Nike,” author and former stockbroker Georges Yared wrote in May 2007 on the Web site BloggingStocks. “It’s a bold statement, I realize, but if any footwear/apparel maker has the chance to become relevant, sustainable and as near-dominating as Nike has been these past 25 years, it’s Crocs.” (Contacted last month via e-mail, Yared says he hasn’t followed the company recently.)
Wall Street analysts, some working for firms that had investment-banking relationships with Crocs, encouraged the believers with “buy” recommendations that were reiterated near the stock’s peak of $75.21 in October 2007.
That all-time high came the day before a third-quarter earnings report that disclosed sales growth slightly below expectations and, more troubling, a sharp inventory buildup. The increase in inventory suggested that Crocs was making more shoes than it could sell, and negative results would follow in the coming quarters. Shares fell 36 percent in a single day.
The stock’s slide continued into 2008 and accelerated dramatically in July after the company sharply lowered second-quarter guidance.
When the company reported second-quarter results, it said net income plummeted to $2.1 million, or 3 cents a share, from $48.5 million, or 58 cents, in the year-earlier quarter. Crocs’ profit decline violated its agreement with its bank, and the company had to renegotiate for a smaller line of credit.
The company has been trying to expand beyond the simple clog, launched in six colors in 2002, that quickly became a phenomenon. The company’s lineup has expanded to 250 models, including golf sandals and canvas slip-ons.
In recent years, the company has tried to weave its patented Croslite material into everything from lacrosse kneepads to patent-leather high heels. Crocs in June quietly folded its sports gear division, called Fury, disclosing the move in a regulatory filing.
Crocs also scaled back the clothing venture it introduced last fall. Spokeswoman Tia Mattson said the company is now focusing on its footwear, though it continues to offer a “limited line” of apparel.
“These offerings will not add materially to sales or profits, rather will further strengthen our brand,” she said.
Crocs’ high-fashion You by Crocs shoe line seems to have fared better, although Crocs launched the line, priced in the $139 to $299 range, with the intention of keeping it as a niche offering. You by Crocs is available only online and at a handful of boutiques nationwide and in the Denver area, although the company plans to begin selling the shoes in Europe this fall.
Samantha Castilla, owner of her namesake shoe boutique in North Cherry Creek, has sold the You by Crocs line since its debut last fall and says its shoes are among the most popular in her store. She already has a waiting list for the motorcycle boots slated for fall release.
“When I tell people they’re made by Crocs, they say ‘no way,'” Castilla said. “These are people who wouldn’t be caught dead in the other Crocs.”
CEO Snyder said Crocs plans to modify its retail sales strategy, focusing on “key retailers” that can display more of Crocs’ products and opening more company-owned stores. He promises a “greater percentage of pre-booked orders” to avoid making shoes that don’t sell. In the meantime, the company will cut head count, with executives taking a 25 percent pay cut and no 2008 bonus.
The company has also had better luck increasing sales overseas, with international sales soaring 20 percent to $130 million in the latest quarter. Crocs now sells in more than 100 countries, accounting for 58 percent of its sales, and says it plans to further bolster its presence in Asia and Russia.
Spokeswoman Mattson said the company is “pleased with the launch performance of our newer products” but retailers have been cautious with their order levels, in order to maintain lower inventories.
“We remain confident about the long-term prospects of our business,” she said. “We believe many of our markets are under-penetrated and should provide meaningful growth opportunities for our products well into the future.”
Cohen blames part of Crocs’ U.S. sales dip on the resilience of the shoes themselves, which, unlike tennis shoes or flip-flops, don’t quickly show signs of wear and tear.
“Crocs built a product that has a lot lower level of obsolescence. They weren’t ever really in style, so they don’t go out of style. And they last a lot longer than other shoes,” he said. “Everyone who would’ve reached over the fence and purchased Crocs pretty much already has.”
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Information from: Rocky Mountain News,
