Six months after receiving a $200 million investment from the Blackstone Group, Crocs announced a major strategic performance improvement plan revolving around four key initiatives:
(1) streamlining the global product and marketing portfolio,
(2) reducing direct investment in smaller geographic markets,
(3) creating a more efficient organizational structure including reducing duplication and excess overhead which would also enhance the decision making process, and (4) closing or converting 75 to 100 Crocs branded retail stores around the world, while working more closely with key wholesale customers.
Under the first initiative, Crocs intends to drop 30 percent of the SKUs in its product range, focusing on its core molded footwear heritage while continuing to develop innovative casual footwear platforms. The company will stop developing non-core products and will explore strategic alternatives for non-core brands. A more centralized product line control system is expected to reverse the proliferation in SKUs that has occurred for the brand over the past few years. The simplified supply chain will lower production costs and inventory levels.
Through the second key initiative, the company intends to prioritize direct investment in larger-scale geographies, 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 and Taiwan and will be applied to some other markets. ON the other hand, the company intends to expand its engagement with leading wholesale accounts in selected markets through special make-ups and in other ways.
With regard to the third initiative, Crocs has reorganized key business functions and is in the process of eliminating 183 positions around the world. The company expects cost savings associated with staff reductions of $4.0 million in 2014 and $10.0 million in 2015. Additionally, Crocs will open a Global Commercial Center in the Boston area in late 2014, where it will house key merchandising, marketing and retail functions.
The Boston facility should attract experienced people from the local shoe industry. It is expected to employ 50 to 75 people over time, some of whom may relocate from its head office in Niwot, Colorado, which will house Crocs' Product Creation and Global Shared Services Center. The company's Regional Commercial Centers in the Netherlands, Singapore and Japan will be strengthened, assuming responsibilities for managing Crocs' global business. They will increasingly focus on retail, wholesale and partnerships.
Finally the planned store closings: Crocs will place greater focus on assets and operations with higher profit potential. At the same time, it will develop special make-ups for key wholesale accounts and back up the sell-through of its products with a 50 percent increase in consumer marketing expenses. It will slow down the opening of new stores.
The company intends to close or convert to franchises around 75 to 100 company-owned retail locations around the world, with 18 stores already closed or converted in the second quarter. About 25-30 stores will be closed in the U.S. alone, and more than half of the other shutdowns will take place in Asia. The company is also pursuing initiatives to improve four-wall retail store performance, such as merchandising or inventory planning, to drive same-store sales growth over time.
The impact of store closures and conversions is expected to reduce annual revenues by around $35.0 to $50.0 million and operating expenses by around $17.0 to $25.0 million, with an insignificant impact on future operating income. Crocs will also consolidate the e-commerce sites operated by the company around the world, cutting them down from 21 to 11.
Overall annual savings of about $85 million should come from the implementation of the new business plan. It was announced at the same time as the company's second-quarter results by Andrew Rees, a consultant appointed as interim president in May. The stock market responded well to the announcement, sending up the value of Crocs' shares by 12 percent.