crocs - with 2010 update
DESCRIPTION
How the hole went from the shoe to the bubble... and maybe back.TRANSCRIPT
The Product
Shoes
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Financial data
2008 (9 mnths 9/30)
2007 (9 mnths 9/30) 2007 2006 2005 2004 2003
Revenue 595,497 622,554 847 354.7 108.6 13.5 1.2
COGS 417,575 250,729 350 154.2 47.8 7.2 0.9
Gross profit 177,922 371,825 497 200.5 60.8 6.3 0.3
Gross Profit Margin 29.9% 59.7% 58.7% 56.5% 56.0% 46.7% 25.0%
SG&A Expenses 271,224 187,958 260 97.2 30.6 7.2 1.4
Restructuring (6,769)
-- -- -- -- -- --
Impairment (45,301) -- -- -- -- -- --
D&A -- -- 8.1 3.3 0.7 1.4
Operating Income 237 95.2 26.9 -1.6 -2.5
Operating Margin 28.0% 26.8% 24.8% -11.9% -208.3%
NI after Taxes (150,374) 129,945 168 64.4 17 (1.5) (1.2)
Net Profit Margin
(8.4%) 20.9% 19.8% 18.2% 15.7%
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• Simple and functional product, yet very new and funky.
• Global world strategy
• Supply chain that provided a competitive advantage: 2-3 weeks, in season, product replenishment.
Core strategy
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Crocs Supply chain: 1st phase
• Immediate purchase of the Canadian Manufacturer and acquisition of proprietary resin croslite (comfort and odor resistance)
• Canada for 100% of production
Buychemicals
Compounding
In Italy
Molding of Croc shoeBy Foam Design in Canada
BoxingIn various
assortments
Denver Distribr
USA Europe
New pellets with color
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Crocs Supply chain: 2nd phase (2005)
• Starting from 2005, large contract manufacturer in China
Buychemicals
Compounding
In Italy
New pellets with color
Molding of shoeChina
Manufacture
Boxing
In various assortm.
Denver Distrib.
USA EuropeMolding of shoe
By Foam Design in Canada
Boxing
In various assortm.
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What a difference 5 years make…• 2002: 1 model, 6 colors
• 2007: 250 models, including: Ocean Minded, YOU by Crocs (fashion) Bite footwear models; licensing agreements with Disney, Nickelodeon, Marvel, DC Comics and Warner Bros., and introduced a limited edition line of footwear and Jibbitz charms featuring such popular characters as Cinderella, Ariel, Mickey Mouse, Sponge Bob Square Pants, Dora the Explorer, Spiderman and Batman;
Introduced Crocs at Work line that offers Crocs shoes targeted towards healthcare and food industry professionals;
Developed Crocs Rx line: the Relief, the Cloud and the Silver Cloud. Targeted towards consumers who require specialized footwear that provides relief from certain medical conditions, such as diabetes, plantar pain, heel pain, metatarsalgia, achy feet and post-op conditions; and
Entered into and extended existing collegiate licensing agreements with various colleges and universities, and our sports licensing agreements with, among others, NFL, NHL, MLB, AVP, NASCAR and more recently the Olympics, Gaelic Athletic Association and Australian football league
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• Must have enough injection molding machines Purchase molds from 2 suppliers: by 2007 lead time crashed from 3 months to
6 weeks as supplier realized Crocs potential.
• Must have enough molds for desired products. For this purpose, molding machines would be transferred between production
locations: e.g.: if demand increased in the US, might move production to Mexico, closer to customers. Productions for products with relatively dependable forecast would be switched to China.
In general: products for Europe made in Europe, products for Asia made in Asia.
Flexibility and lead time
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Geographical Sales
In 2007:
• U.S. sales: 52% of total revenues, (compared to 68% in 2006 and 93% in 2005), 13,000 stores.
• International sales: 48% of total revenue, 19,000 international customer store locations, including 25 Company-operated retail stores in a variety of locations including Canada, Finland, United Kingdom, Singapore, Hong Kong, Japan, China and the Netherlands
• An interesting forecasting aspect: products generally equally sold in each market: test product in the ss season in the southern emisphere and the result would be indicative of how Europe and the US would respond.
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Company Owned Stores
• U.S Retail Stores Crocs Kiosks 138 Crocs Retail Stores 4 Crocs Outlet Stores 6 Total 148
• International Retail StoresCrocs Kiosks 36Crocs Retail Stores 25
Total 61
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• Initially: small retailers
Advantages:
1. Willing to take more risk2. Willing to work with Crocs on problems such as stock out and shipment delays,
while large retailers charged hefty penalties for an order past cancellation date.3. Important for brand building and presence even after majority of sales went to
large retailers.• By 2007: 75% of sales large retailers
(shoe stores, department stores and sporting goods sales)
Retailing channels
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2007
• 18% shipped from Company owned manufacturing facilities (940,000 sf) and third-party manufacturers directly to the customer.
• 82% fulfilled by 20 distribution locations strategically located throughout the world. Crocs owns warehouses in Australia, Brazil, California, Colorado, Canada, Finland, Hawaii, the Netherlands, India, Japan, Mexico, Puerto Rico and Singapore.
and by third-party operated distribution centers located in Canada, Colorado, Dubai, the Netherlands, Hong Kong, Japan, Kansas, Korea, New Zealand, and Taiwan (750,000sf).
• 1.7 million square feet of space : flexibility to meet rapidly changing business requirements and positions Crocs to support the growth of all of their brands (e.g.flip flop sandal explosion in 2006: projected 250K, sold 2.5M).
• Production capacity at 1M above actual monthly plan. This additional 1M can be turned on at a minute notice. Quite impressive.
• In December 2007,agreement with Manhattan Associates to provide warehouse management systems within all Company-operated distribution centers. The implementation of their software is scheduled to be strategically rolled-out in all locations over the next 24 months.
Logistics
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The supply net after 2005
NordstromDCs
Florida Mnfctr, 1 high volume prodct + wrhs
Brazil Company owned mnfc+ wrhs
China 3rd p. Mnfctr 55% of Pr.+ compndg+ wrhs
Canada Compounding + Mnfct
Mexico Cmpndg
Colorado wrhs
Dillard’sDCs
Dick’s Sporting Goods
DCs
Vietnam third Party mnfct
19,000 International Retailers
13,000 US retailers
Bosnia and Rumania third party mnfctr
Italy compound + mnfc
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Things get complicated
2007
• Expansion into products lines beyond croslite molded shoes. • Crocs acquires Ocean Minded a designer and manufacturer of high quality
leather and EVA based sandals primarily for the beach, adventure and action sports market
» Additional complications in the supply chain and production process
» Higher costs of materials
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New planning system
• Adoption of ERP• Launch of inventory module global view of inventory information for the planning system, which was
brought online.
Each country’s generating their requirement plan + global planning activity for each model type: global planning personnel worked with the local staff on the
requirements for each market.
No excess inventory – but this has dramatically changed in 2008 Yes to acquiring excess capacity
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' The stock – (or what a difference a year makes…)
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New planning system
• Adoption of ERP• Launch of inventory module global view of inventory information for the planning system, which was
brought online.
Each country’s generating their requirement plan + global planning activity for each model type: global planning personnel worked with the local staff on the
requirements for each market.
No excess inventory – but this has dramatically changed in 2008 Yes to acquiring excess capacity
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• The importance of a committed strategy
• The Crocs phenomenon has by now crashed as a Wall Street favorite, but we think they have found a very fit logistic model and the product has real value, especially the original one.
• We wonder if part of its recent debacle may not be due to “too much of a
good thing”: how did the company expect to be able to handle an exponential increase in SKUs while maintaining almost real time response for over 33,000 global customers at a low price?
• Maybe a slowdown would have been advisable, consolidating the brand and the Company’s already remarkable organizational skills before taking on additional different products which contributed to distract the Company from its core expertise.
Brief comments
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• Crocs web site • Crocs 10-K• “Crocs: Revolutionizing an Industry’s Supply Chain Model for Competitive
Advantage”,Stanford Graduate School of Business case, 2007• Rick Munarriz, “Ugly Shoes, Pretty Profits”, The Motley Fool, May 4, 2007• “Crocs Losing Foothold Among Young Consumers”,
http://www.npr.org/templates/story/story.php?storyId=93150100
References:
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Year 2008 almost collapsed the company.However, 2009 has seen a strong improvement on the bottom line (a steep
decrease in the final loss) in spite of a terrible global economic environment and decreasing sales. Main reason for improvement were improved gross Margins and reduction of impairments.
The first quarter of 2010 shows a profit of almost 6M against a loss of over 22M for the same period in 2009. The company is opening 300 stores in the USA and seems poised for a stable come back. What we fear is that such a strong decline in SG&A could have an impact on the image: see for example bad store appearance in key retail areas such as Manhattan Upper West Side, where frequently piles of boxes are left in the windows instead of being properly stored.
After reaching rock bottom at barely $1 in Fall 2008, the stock currently trades at about $ 10 and we believe has room for growth.
Summer 2010 Update !
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