The fastest-growing footwear brand on the market has been hit over the past few weeks by several class action suits launched by investors who saw the share price suddenly melt down, plummeting from $74.75 to $47.74, after the release of its results for the 3rd quarter. The introduction price of the stock in February 2006 was $14.27.
This reminds us of the yo-yo effect that Heelys’ stock underwent in August, when it fell by 49 percent to $9.39 on a single day, after its management said that sales were slowing down and inventories were piling up. Back in June, its share value was trading at around $31, or 48 percent above its initial public offering price of last December. Several law firms launched class action suits against the 7-year-old company, charging the management of false and misleading statements in its regulatory filings to the U.S. Securities & Exchange Commission.
Crocs’ actual results for the quarter were very good. Revenues jumped by 130 percent to $256.3 million during the three months ended Sept. 30, as compared to the same period of a year ago, as the company shipped a total of 13.8 million pairs, up from 6.8 million pairs. Net income increased by 163 percent to $56.5 million. The gross margin rose to 60.6 percent of revenues – a very high level for the footwear industry – from 58.2 percent, but selling, general and administrative expenses rose from 29.9 to 30.1 percent of revenues because of higher marketing expenses and investments in infrastructures in new markets such as India, Brazil and China.
U.S. sales were up by 78 percent, while sales in the rest of the world jumped by 220 percent and overtook for the first time the domestic business with a turnover of $130.9 million, led by Europe with $58.1 million. Footwear represented 87 percent of the total turnover, with an average selling price of $16.29 per pair, and classic styles like the Beach and the Cayman clogs made up 35 percent of footwear revenues.
A few items in the management’s presentation of the quarterly results worried investors, however, triggering a massive sale of Crocs shares on the stock exchange. For one thing, analysts had projected total sales of $836 million for the full year, and they have been used to Crocs beating their expectations, but this time the management said it expected revenues of only $820-830 million for the year.
Investors are particularly worried about a disproportionate build-up in inventories. They ended up at a level of $195.3 million at the end of the quarter, versus $49.1 million one year ago, and 90 percent of them were stationed outside the USA, primarily in Europe, Japan and the Southern hemisphere. Approximately $20 million of the increase in Crocs’ inventories was attributed to missed sales from the ramp-up of the company’s new European distribution center in the Netherlands. To help service its clients better, Crocs Spain recently moved to a new 2,500-square-meter structure near Alicante, equipped with its own warehouse.
The demand is evidently outstripping the supply in Europe, where Crocs is commanding slightly higher prices and better margins because of the weak dollar. On the other hand, also in the USA, retailers are reportedly complaining that they are getting the merchandise late.
Another $10-15 million worth of excess inventories was related to missed orders in China and Japan for the last Spring/Summer collection. Crocs officials say most of the footwear consisted of relatively standard models that the company will be able to sell at the beginning of 2008, and that their availability will allow it to shift manufacturing capacities to new models such its Mammoth shoe to keep up with the demand.
The fleece-lined Mammoth style was described as the best-selling shoe since September and it is expected to be a highlight of the Christmas selling season. The 5-year-old company hopes to sustain its sales momentum with the launch of its new dress shoes and other new styles with a Croslite EVA-based footbed in the first half of 2008, and with other brands such as Jibbitz, Bite and Ocean Minded. Crocs is also banking on the launch of its first range of clothing early next year, but analysts are doubting the company’s ability to diversify in a way that will sustain the high rates of increase to which they have grown accustomed.
For next year, the management forecast overall increases of between 35 and 40 percent in both sales profits, indicating a major decline in the growth rates but ensuring that the turnover will surpass the $1 billion level in 2008. The management declined to break down the figures among the different categories of products and the different brands. It said that gross margins should remain above the company’s previously stated long-term forecast of a margin in the “mid-50s” percentage points.
Crocs will make its debut in Foot Locker stores in the USA and abroad during the 1st quarter of 2008, with a focus on new models and with some special make-ups. The brand is currently featured in 12,500 stores in the USA and 16,000 elsewhere. Some 1,000 additional doors are expected to adopt it outside the USA in the current quarter. The number of U.S. doors should rise by 15-20 percent in 2008, thanks in part to the company’s new styles.