Don’t Laugh but Crocs
Steve’s breakdown: Yeah we said it, Crocs. Do they have an agency? Probably not judging by their ads but they do have the cash so pick up a pair and get crazy.
NIWOT, CO: Just a decade ago, Time magazine listed Crocs as one of the world’s “50 Worst Inventions” and quoted fashion consultant Tim Gunn, sniping that the Niwot-based company’s iconic square-toed sandal “looks like a plastic hoof. How can you take that seriously?” Satirists such as Bill Maher and “The Daily Show” poked fun at the neon-splashed foam footwear as well.
Now Crocs — emphatically — is having the last laugh.
Anticipating the strongest fourth quarter in company history, Crocs (Nasdaq: CROX) is riding a wave of sustained growth. Its shares are up 38% from this time a year ago, beating the S&P 500’s 26% return. The most recent report showed that its e-commerce posted double-digit growth for the 10th straight quarter, and retail had its ninth successive quarter of positive movement.
Continuing to look up
Buoyed by those numbers as well as strong holiday sales, Crocs’ management in mid-January revised upward its net revenue guidance for 2020 from between $245 million to $255 million to between $260 million to $262 million. It now expects 2019 overall revenues exceeding $1.4 billion, a 13% increase over 2018 sales, according to filings with the U.S. Securities and Exchange Commission.
The company also reaffirmed expectations for revenues to climb between 12% and 14% from 2019 levels through the rest of the year, and predicted an adjusted gross margin of approximately 51%.
“Our projected fourth quarter results represent a strong finish to a record year,” Andrew Rees, Crocs’ president and chief executive officer, said in a prepared statement, “and we anticipate building on our 2019 growth trajectory in 2020.”
Stock analysts seem to agree. In early January, Pivotal Research called Crocs a top pick for 2020, with a price target of $49 per share, after a similar rosy outlook from Piper Jaffray in late December.
Looking long term
“We don’t want it to be a flash in the pan,” said Michelle Poole, Crocs’ senior vice president and chief product and merchandising officer. “We’re bringing new products to the market, fresh colors, graphics and embellishments. We’re doing collaborations with partners in the fashion, music and art space” — such as adding actress Zooey Deschanel as a spokesperson and introducing new clogs with design assistance from celebrities such as country singer Luke Combs and rapper Post Malone. Combs’ green-and-brown camo clog hinted at a hunting theme, and Malone’s design sold out in less than two hours on Dec. 10.
It also introduced a “Brooklyn Wedge” sandal, which comes in multiple heel heights. Chief marketing officer Terence Reilly called the platform style “the shoe of 2020.”
That marketing push is aimed at solidifying Crocs’ cross-generational appeal and making sure its iconic square-toed foam sandal isn’t pigeonholed as mainly a comfort shoe for health care professionals and a gardening shoe for retirees.
“Teens are a big driver for our brand,” Reilly told CNBC last summer. “They spend a lot, and youth culture drives culture.”
‘Some time in the making’
The turnaround for Crocs wasn’t just born in the past year, however, Poole said.
“It’s been some time in the making. We really started laying down the foundation five years ago by restructuring the business,” she said.
Crocs had endured a stretch of uneven sales and several quarters of losses, dogged by unproductive stores, scattered marketing and a veer away from its core product. The possibility of bankruptcy had loomed in 2009, when demand for the clogs, which had soared two years earlier, took a dive when the Great Recession hit and Crocs discovered that it was overstocked. The company lost $185 million in 2008.
Rees took the reins as president of Crocs in June 2014. A month later, the company cut its workforce by 180 jobs and decided to stop producing product lines that were deemed underperforming,
Poole, who was hired at Crocs a few months after Rees arrived, recalled that “we leveraged existing talent and, where we needed additional horsepower, we brought it in from the outside.”
She said Rees “created a very clear framework for growth,” but that his focus also was on “the way you talk to the consumers … is the way that the product comes to life. What he really did was understand the need to invest. He helped support our product and marketing team” by bringing in people such as Reilly.
“We were good at delivering on our commitments, and didn’t rush in and tell our investment community it would be solved in a few months or so,” Poole said. “We locked in on what we really believed to be big growth drivers and focused on bringing those to life. That instilled a lot of confidence in our investors.”
Platforms for profitability
Also in 2014, Crocs closed nearly one-sixth of its 624 retail stores. “We focused on where do we believe our target is shopping,” Poole said. “We remain committed to have our brand show up in fun, meaningful ways at retailers. But we right-sized our number of stores to be in the right locations and right sizes to give us more profitability.
“We still believe in consumers experiencing Crocs in brick-and-mortar stores.”
Online sales also are vital, Rees said in an interview with CNBC.
“Direct-to-consumer through digital mechanisms, whether it be our own website or Amazon, is critically important, and we believe we want to do both,” he said. “Our own e-commerce business, our DTC business, is growing very significantly, but we think Amazon is an incredibly important vehicle to reach a very broad set of customers. They’ve invested massive amounts of money and created an incredible, incredible infrastructure, to be able to serve customers. We’re better off, leveraging that versus just going in our own direction and doing our own thing. So, we kind of have the opposite track where we think both are important platforms for our consumers.”
The title of CEO was added to Rees’ title in 2017. The next year, Crocs closed its last company-operated manufacturing plants in Mexico and Italy. Its shoes now are built largely by third-party manufacturers in Vietnam, but also in other countries including China and Bosnia. Reuters reported last June that Crocs intended to cut by more than two-thirds the volume of its shoes and accessories produced in China for the U.S. market, a strategic move designed to mitigate the impact of President Donald Trump’s trade war with Beijing.
Last month, Trump and Chinese vice premier Liu He signed an initial trade deal, but Trump said tariffs already imposed on Chinese products would stay in place until the second phase of the agreement is reached.
“Any time you’re moving in a direction where you’re eliminating duties — even if the duties were exorbitant to start with — (is) a good direction,” said Matt Priest, president and CEO of the Footwear Distributors and Retailers of America, in a report on Crocs. “This agreement creates a little breathing room for the industry and a little more certainty, but we still think applying duties … was not the right policy. They drive up costs for consumers, they make us less competitive (and) they take away money from footwear companies and retailers that could be invested in other capital investments, whether it’s job creation or developing more innovative products.”
In 2018, Crocs bought back shares of stock from private equity firm The Blackstone Group Inc. that were valued at $183.7 million. Blackstone had invested $200 million in Crocs in 2013, which gave it a 13% stake in the company and two board seats. Last July, New York-based hedge fund Woodson Capital General Partner LLC bought nearly 3.8 million shares of Crocs stock, taking a 5.2% stake in the company, according to SEC documents.
Image is everything
Not surprisingly from a marketing professional, Poole credits brand image for much of Crocs’ resurgence.
“One of the first things we did from a product point of view was emphasize our iconic clog,” she said. “Strong footwear brands have iconic shoes or silhouettes the consumer recognizes, that resonates worldwide. So we spent time making sure our classic clog was at the heartbeat of our brand. We made sure our marketing story was ignited around the classic clog.”
It’s not that Crocs had problems with brand awareness, Poole said. Press photographers had caught then-President George W. Bush wearing black Crocs with socks in 2007, then-first lady Michelle Obama sporting them in 2009, and then-23-month-old Prince George, son of Prince William and Kate Middleton, wearing navy blue Crocs at a 2015 charity event.
“The challenge has been driving relevance for the clog,” Poole said, adding that the marketing team has invited consumers to “treat it like a blank canvas for self-expression.”
Part of that consumer engagement is through Crocs’ sales of Jibbitz charms that snap into Crocs’ topside holes.
“We continue to see consumers wanting to personalize their products,” Poole said, “and Crocs is the only brand that can personalize it right there in their stores. We see consumers collecting and trading those charms. They had been treated more as a children’s accessory, but millennials put them on their jean jackets and purses. We targeted young adults with emojis and numbers and sayings and all the things that are part of their vernacular.”
“The personalization is very, very important,” Rees told CNBC. “Across the globe, a younger consumer wants to be able to turn a generic purchase into a personal purchase and tell a story. They can do that through the Jibbitz on the shoes, and it’s an incredible vehicle.”
The shoes’ primary colors also have been supplemented with trendy new hues including mint, cantaloupe, hot pink and electric yellow.
In the Taking Stock with Teens survey issued by Piper Jaffray last fall, Crocs were rated the seventh-most-popular footwear brand among teenagers, up from 13th in the previous year’s survey.
Global outreach also has been re-emphasized, Poole said.
“We’re very committed to five key countries: the U.S., China, South Korea, Japan and Germany,” she said. “We have a huge opportunity to drive more relevance with clogs around the world.”
Continuing revenue growth is especially important to Crocs now as it prepares to move its global headquarters this year from its current 98,000-square-foot facility at 7477 E. Dry Creek Parkway in Niwot to 88,000 square feet at 13699 Via Varra Road in Broomfield, part of the two-building Atria project built by Etkin Johnson Real Estate Partners. Crocs picked Denver-based Venture Architecture to design its new offices, and leased the space for an initial 10-year term with two five-year renewal options.
Crocs’ move this year will end an 18-year run in Niwot, where it was founded in 2002 by Scott Seamans, Lyndon Hanson and George Boedecker.
“Just like our iconic product, this best-in-class new headquarters will help our employees be comfortable in their own shoes,” Rees said when the move was announced.