The Problem With Crocs
Shoemaker Crocs , which is known mainly for its brightly colored clogs, has had a roller coaster year. Shares rose from $12 per share at the beginning of the year to nearly $18 by June, only to suffer two huge collapses due to disappointing earnings. The most recent earnings miss sent the stock back near $12 per share which erased all of this year's gains. While competitors Deckers Outdoor Corporation and Steven Madden are doing well, Crocs is struggling. What's going on with Crocs and its roller coaster of a ride? Can it be fixed?
Europe strong, America weak?
One strange thing about Crocs' recent earnings report was that the European market was the strongest for Crocs in terms of growth. Europe's economies aren't exactly booming, so this may mean that consumers across the pond are showing a preference for the Crocs brand. The exact opposite seems to be happening in the Americas and Japanese markets. Wholesale revenue fell by 20% in the Americas and 29.3% in Japan year-over-year, with Asia-Pacific growing by 2.3% and Europe growing by 20.9%. The fact that Europe was strong while the Americas was weak leads me to believe that execution is the real problem, not the economy.
Retail sales, through Crocs' own stores, rose by 11.2% overall but the store count also grew by about 20%. Comparable store sales in the Americas fell by 8.3%, with Japan falling by 16.3%. Overall, comparable store sales fell by 4.2% in the quarter.
Internet sales were also lackluster, falling 4.8% year-over-year. The Americas and Japan fell by double-digits, while Asia Pacific grew sales by 42%, albeit from a far smaller base.
Overall, revenue fell by 2.4% year-over-year while net income was slashed by 70%. Higher SG&A costs associated with expanding the retail network was a big culprit here, as expenses rose considerably.
A failing strategy
Crocs now operates nearly 600 retail stores worldwide, with 315 normal stores, 157 outlet stores, and 122 kiosks. This number is up by about 100 since the same time last year, and the company is aggressively pursuing this retail strategy. However, with comparable store sales falling and a product lineup which isn't fully fleshed out the big concern is that these stores will simply eat away at profits. That seems to be the case today.
It would be different if the stores were doing well, but they're clearly not. One problem is the products themselves. While Crocs has diversified greatly over the past few years, now with over 300 styles, the company still relies on the classic clog for a big fraction of its sales. While the company does sell some cold-weather shoes, the upcoming winter quarter is the weakest time of the year. The company expects a bigger loss than last year during the quarter and until the retail operation improves, profits will remain depressed.
You have to question the judgement of opening all of these stores when the busiest shopping season of the year is the company's weakest period. Crocs needs to make its current retail stores work before building any more, as the costs are becoming a real problem.
A Crocs-specific problem
It seems that companies similar to Crocs, like Deckers and Steve Madden, aren't suffering the same problems. Deckers sells the UGG brand of sheepskin boots, along with some other brands. The company has been disappointing investors for quite some time. However, last month the company blew past analyst estimates which caused the stock to surge.
Deckers shares one common problem with Crocs -- its main product may end up being a fad. It seems that, for now, UGG boots are selling well, but there's no guarantee that this will continue. The use of a lower-priced sheepskin substitute boosted margins last quarter, but by switching materials the company runs the risk of upsetting its customers with a product which feels cheaper.
Steven Madden, like Crocs, runs its own stores, but Madden's store count is significantly lower. Madden owns 117 stores compared to Crocs with nearly 600, and the companies have similar revenues. Madden skews more heavily toward wholesale than Crocs, meaning that the company isn't saddled with the higher costs of running more retail outlets.
Madden reported solid earnings last month, with revenue growing by 10.6% and net income growing by 16.1% year-over-year. While traffic was a bit weak in its retail stores, wholesale performance was strong. This is in contrast to Crocs, which saw weakness across the board.
It seems that Crocs' problems are caused not by the economy, but by the company itself. Deckers and Steven Madden, both similar businesses, are seeing much better results. This points to a failure of Crocs' retail strategy.
The bottom line
Crocs has potential, but the high costs associated with its rapid retail growth is dragging down the company. With comparable store sales in decline, the company needs to fix its current stores before building any new ones. The stock looks cheap based on past earnings, but the future is murky. It would be wise for Foolish investors to keep an eye on this one, without making any firm commitments at this time. As always Foolish investors should do their own research before making any investment decisions.
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The article The Problem With Crocs originally appeared on Fool.com.Timothy Green has no position in any stocks mentioned. The Motley Fool owns shares of Crocs. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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