THE COMPANY THAT SOMEHOW POPULARIZED COLORFUL PLASTIC CLOGS IS CLOSING 100 STORES AND CUTTING JOBS AFTER MAJOR DROPS IN PROFITS.
Crocs, the U.S. firm responsible for those shoes that look like what Ronald McDonald’s children might wear, has announced it'll close 100 of its 600 stores around the world following a 44% drop in profits in the last three months. The company plans to lay off about 180 of its 5,000 employees, and will also slash its product range by 30% to 40%, offering fewer styles. The announcement smells like victory for the anti-Croc movement of sorts that spawned an “I Hate Crocs” blog and a Facebook page titled “I Don’t Care How Comfortable Crocs Are, You Look Like A Dumbass,” which has 1.5 million likes.
Crocs were born in 2002 as boating footwear. Unfortunately, they didn’t stay at sea for long. Lauded for being supremely comfortable, the shoes soon became a favorite of “crocophile” celebrities like Jack Nicholson, Al Pacino, and chef Mario Batali, who has a Crocs line named after him. George W. Bush, too, wore the shoes in public (another reason he’ll forever be on the wrong side of history). By 2005, the company was producing a million shoes a month, and by 2007, had hit $850 million in annual sales.
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But by 2008, Croc-love was waning as consumers slowly came to their senses, and the company suffered a major drop in sales. They tried hard to regain their former glory by expanding their design selections: they made high-heeled leather Crocs, wedges, sneakers, winter boots, and leather boating shoes. The strategy worked, for a while--in 2011, they made $150 million in profits--but ultimately proved to be overexpansion. They’re now cutting the leather boots and dress shoes, and downsizing the company to survive--layoffs include 70 jobs at their Colorado headquarters. Crocs President Andrew Rees said in a statement.
"We have a clear, well-defined strategy for addressing these issues and improving performance. Work is under way already to drive significant change throughout our company."
Will fashion historians of the future see the Crocs phenomenon as a sign of a deeply sick society, the way we look back in horror at 18th-century corsets and bustles, or lead makeup, or mullets? Discuss.
COMMENTARY: Crocs, Inc. (Nasdaq: CROX) reported Q2 2014 EPS of $0.36, versus $0.48 reported last year. Revenue for the quarter came in at $376.93 million, versus $363.83 million reported last year.
Crocs, Inc. sees Q3 2014 revenue of $300-305 million, versus the consensus of $236.5 million.
Crocs Financial Performance by Year - Actual and Estimated - 2008 Through 2016 - Reuters (Click Image To Enlarge)
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Strategic Performance Improvement Initiatives Underway
The company undertook a comprehensive strategic review of the business and its operations globally and identified four key areas of opportunity in the business.
1. Focus On Core Business - Crocs intends to focus on its core molded footwear heritage, as well as develop innovative casual footwear platforms. The company will streamline the product portfolio, eliminate non-core product development and will explore strategic alternatives for non-core brands. This more centralized product line control will also result in (i) a reduction of the SKU proliferation that has occurred over the past few years, (ii) a simplified and efficient supply chain and (iii) a reduction in overall product line costs and inventory levels.
Further, the company intends to drive cohesive global brand positioning from region to region and year to year to create a clearer and consistent product portfolio and message, resulting in a more powerful consumer connection to the brand. This strategy will be accomplished through developing powerful product stories supported with effective, consistent and clear marketing. Finally, the company will increase working marketing spend, defined as funds that put marketing messages in front of consumers, by about 50 percent, funded primarily from a reduction of marketing overhead.
2. Refine Its Business Model - Crocs will refine its business model around the world, prioritizing direct investment in larger-scale geographies to focus the company's resources on the biggest opportunities, moving away from direct investment in the retail and wholesale businesses in smaller markets and transferring significant commercial responsibilities to distributors and third-party agents. These re-alignments are already underway in Brazil, Taiwan and other markets around the globe. Further the company intends to expand engagement with leading wholesale accounts in select markets to drive sales growth, optimize product placement and enhance brand reputation.
3. Reorganize and Streamline Key Business Functions - Crocs has reorganized key business functions to improve efficiency, having eliminated 183 global positions of which the majority took place today, reducing structural complexity, size and cost. The company expects cost savings associated with the reduction in force of $4.0 million in 2014 and $10.0 million in 2015. In addition, Crocs will open a Global Commercial Center in the Boston area in late 2014, housing key merchandising, marketing and retail functions. The Boston location was chosen in order to attract experienced senior footwear and retail management talent. The Global Commercial Center in Boston will join the Product Creation and Global Shared Services Center in Niwot, Colo., the cornerstone of support for Crocs' global business. The company will strengthen Regional Commercial Centers in the Netherlands, Singapore and Japan with responsibility for managing Crocs' global business.
4. Focus On Efficient Asset Utilization Improve Store Peformance - Crocs will rationalize under-performing business units, in order to re-align its cost-structure and place greater focus on assets and operations with higher profit potential. This action will enable the company to gain greater strategic and economic leverage from its direct-to-consumer assets, including owned retail and e-commerce stores. The company intends to close or convert approximately 75 to 100 company-owned retail locations around the world, with 18 stores already closed or converted to partner stores in the second quarter of 2014. The company is also focused on various initiatives to improve four-wall retail store performance, such as merchandising, inventory planning, as well as the benefits from the above-mentioned product and marketing actions, to drive same-store sales growth over time. The impact of these closures and conversions is expected to reduce annual revenue by approximately $35.0 to $50.0 million and reduce SG&A expense by approximately $17.0 to $25.0 million, with an insignificant impact on future operating income. Crocs also will consolidate global company-operated e-commerce sites from 21 to 11.
For earnings history and earnings-related data on Crocs, Inc. (CROX) click here.
The Weakness of Marketing A Single Product
Crocs once again proves the dangers of launching a single-product business concept. Although Crocs had a great five year run, before consumers tired of their wimpy Crocs shoes and stopped buying, it obviously needs to innovate and design no product offerings. When a business fails to change, pivote or innovate, you end up like Mrs. Fields Cookies (closed hundreds of stores and avoided its third bankrutcy and ceded control to creditors in December 2011) and Crumbs the cupcake chain that closed all its stores abruptly in July 2014.
Closing Remarks
In my opinion, Crocs management should've innovated a lot sooner and streamlined its product offerings a lot sooner. In spite of this failure, the company is still profitable, but it now has to pay the piper as it increases spending on R&D, closes under-performing business units and reduces its inventory SKU's to improve return on assets. Nearly 90% of investors are institutions with large blocks of shares. Hopefully, they will not dump their Crocs share holdings in mass and force additonal downward presson on the share price which has fluctuated between $15 and $15.5 bucks a share since the beginning of 2014. This is a far cry from Crocs high of $68.98 back in October 2007.
Courtesy of an article dated July 23, 2014 appearing in Fast Company Design and an article dated July 22, 2014 appearing in StreetInsider.com
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