Crocs: The rise and fall

Just when the obituaries had been written, and the doomsayers were queuing up to stamp on the grave of yet another victim of the recession, there came the tiniest view of light at the end of a very long tunnel.

For the best part of the noughties Crocs have been considered the Marmite of footwear - you either love them or hate them. Their clumpy, clog-like and colourful design has split pretty much the entire world into followers and those campaigning to have wearers hung from the nearest available tree. But those that love them really adore what others consider plastic monstrosities and have bought more than 100 million pairs in more than 125 countries over the past seven years.

Those kinds of numbers would lead most to conclude this company had been, and would continue to be, an incredible success story. But the Colorado-based supplier to the more fey shoe-lover was, this summer, facing an abyss. A US$185 million abyss to be precise.

Crocs finished 2008 with a $185 million net loss on revenue of $721.6 million, down 14.8 percent the previous year. In its annual report released in March, Crocs disclosed that Deloitte & Touche had big doubts about the company's viability, or its `ability to continue as a going concern'. By March, Crocs was searching for a new boss following the resignation of Chief Executive of Ron Snyder.

Then news emerged that Crocs had until September to save itself or face bankruptcy. Then, along came John Duerden to replace Snyder. Duerden, who was at the helm of Reebok International in the 1990s when the shoe company tripled its sales to $3 billion, stepped back into the footwear industry and not only claimed he would save Crocs but also return it to profitability.

Despite his return to the world of shoes and his undoubted pedigree in the industry, the knives were still very much out for Duerden and Crocs. The Washington Post wrote an article in mid-July entitled `Once-trendy Crocs could be on last legs'. The article gave little hope of Duerden turning the situation around and offered these caustic words from Damon Vickers of investment fund at Nine Points Capital Partners in Seattle: "The company's toast. They're zombie-ish. They're dead and they don't know it."

The problem with the Crocs' business model, claim its critics, is incredibly simple. The likes of Vickers said the product was too reliable, not usually a criticism of a product, but a crucial one in this case. Made of an almost indestructible material, patented by the company, called Croslite, Crocs' durability is, for many, their downfall.

There's rarely a reason to buy a new pair because the first pair never wore out. In happier economic times disciples of Crocs would buy several pairs in different colours or styles. But, in the current recession-laden climate, potential buyers are more concerned with putting food on the table than buying another colour from the range. Other than the likes of celebrity followers such as Jack Nicholson, Demi Moore and Morgan Freeman, the majority of Crocs' buyers are not from the wealthy elite. There are far more pressing matters for them right now than buying another pair of indestructible, machine washable shoes.

Another reason for the trouble may have been the sight of former president George W. Bush wearing his own beloved pair with, of all things, socks. Rather than providing a Presidential seal of approval, the fact that the most hated President in history had a pair may have put many buyers off.

So, clearly, it was all doom and gloom for Crocs. Or was it? The tunnel may be a long one but there are an increasing number of commentators beginning to give the company more than a chance of survival. Shortly after the Washington Post slating, investors began flocking to Crocs. From mid-July to the beginning of August the shares, listed on NASDAQ, more than doubled following rumours that Duerden had indeed begun to turn things around. However, doubling to around $5.50 should be put into perspective. Less than a year ago the stock was worth almost $70.

Come August 6, the day the company present its second quarter earnings, talk of bankruptcy had begun to fade. The second quarter numbers were not great, but that chink of light had certainly become somewhat wider.

The results were better than the huge downturn in sales many had expected, but revenue still fell by 11 percent to $197.7 million and losses stood at $30.3 million compared to a $2.1 million profit at the same point last year. It was the group's fourth quarterly loss, but investors appeared to believe Duerden when he proclaimed the company would return to profit in 2010. On the very day of the results the stock leapt 28 percent.

"The rumours of our demise have been greatly exaggerated," says Duerden, quoting Mark Twain and dismissing the notion that the company's footwear for men, women and kids was a mere fad. "The Crocs brand, maybe more so than any other brand I've been associated with, continues to resonate with a passionate consumer base, and while we're certainly not celebrating here, we might be excused for giving a few mid-fives given the recent media reports.

"There are those out there who have written us off. This quarter's results financially, operationally and qualitatively show that this company and the brand are still very much glancncealive. We expect to reduce our operating losses through the balance of this year and return to profitability next year."

Duerden also says the company has repaid in full $17.3 million borrowed under a credit facility and signed a term sheet with a well-known lender for a new, asset-backed revolving credit facility by the end of the third quarter. He has also cut the group's inventory by nearly a quarter since the end of December, and said levels would continue to decline.

Duerden says: "The inventory has a fundamental bearing on the perception of the brand, on our future price levels, our relationships with major wholesale customers, and our ability to move new products into the market."

He adds that stockists are also coming around the theory Crocs are here to stay: "We are restoring relationships with key domestic and European retailers who carry the Crocs brand and growth in those accounts is expected for next year," he says.

Moreover, the company has begun to create fewer, but more compelling styles of shoes that are "very appealing" when presented well, he claims.

Wedbush Morgan analyst Jeff Mintz says investors were likely buoyed by the balance sheet improvements, as well as the lower inventory and more streamline operations.

"The reduction in inventory is good and the balance sheet is good," says Mintz.

Within just a couple of weeks Duerden appears to have put the colourful Crocs adventure back on track and it appears Crocs may again attain their financial bite.