Analysts who believed in Crocs’ continued success through product and brand extensions, foreign development and acquisitions were disappointed by its latest sales and profit report. The company had a net loss of $148 million in its third quarter, and it included $104.1 million in restructuring, impairment and inventory write-down charges. For the same period last year, Crocs posted net income of $56.5 million.
Sales fell by 32 percent to $174.2 million in the latest quarter. The revenue figure includes $29.1 million in returns and allowances, way up from the $9.6 million in those negatives in the same period last year, and the immediate future doesn’t look rosy at all. Blaming the “extremely challenging” retail environment in the USA and Europe, the company expects sales in the fourth quarter to be between $100 million and $120 million, compared with $224.8 million in the same quarter last year.
Geographically, sales fell by similar amounts in Europe and the USA, dropping by 50 percent to $29.0 million and by 43 percent to $69.5 million, respectively. Asia was still growing, however, up by 14 percent to $61.4 million. The drop in Europe was attributed to bad weather, negative publicity and increasing competition from similar products, in addition to the generally deteriorating retail environment.
The activity in the various regions was also reflected in Crocs’ door count: In Europe and the USA the number of stores to which its products were delivered fell by about 10 percent, while Asia saw 1,000 new doors. The company’s own retail operations made up 28 percent of sales for this quarter compared with 19 percent in 2007, not including 180 partner stores. It had 120 stores, 121 kiosks and 21 outlet stores at the end of the period.
The company sold a total of 8.1 million pairs of shoes, which still represented about 91 percent of the total turnover. Out of all the units sold, 54 percent were core products and 21 percent classic styles.
Most of the returns that pushed the final figures down were of its core product; Crocs says its new products are selling relatively well. Its licensed sports business is performing well, but the company’s entertainment licenses are faltering because of a large number of similar licenses in mass merchants. Crocs plans to penetrate this channel with a line of products under its Jibbitz brand.
The gross profit margin plunged by 59.2 percentage points to just 1.4 percent in the third quarter. Selling, general and administrative expenses were significantly higher at $104.4 million, or 59.9 percent of sales, compared with $77.2 million, or 30.1 percent of revenues. Other losses include $14.6 million related to foreign currency rates.
The extraordinary charges that worsened Crocs’ loss included $31.6 million related to goodwill, intangible assets and the write-off of excess equipment and tooling; $70 million for a write-down of some inventory and expected losses on inventory purchase commitments; and $2.5 million after closing its Canadian manufacturing and distribution operations.
As of Sept. 30, inventories were down by 36.0 percent to $141.0 million. The company still ended the third quarter with $56.6 million in cash after paying down its line of credit by $17.1 million.
Ron Snyder, president and chief executive of Crocs, says 2008 has been a year of transition. He says the company is going into 2009 with a “leaner” cost structure after consolidation of facilities, writing down inventory, reductions in headcount and shutting down its Canadian plant. Since its peak in 2007, it has cut 2,100 jobs and expects about $11 million in cost savings in personnel costs.
The company announced this time that in the fourth quarter it will close its factory in Brazil and outsource 85 percent of its manufacturing, as it will then have only one plant in Mexico and a small one in Italy. Crocs is carefully managing expenses and inventories, and plans to halve its capital spending in 2009.
Snyder’s words failed to persuade investors. At $1.14 a share, Crocs’ stock market valuation was 97 percent lower than at the beginning of this year. From $6,163.8 million on Oct 31, 2007, the company’s market capitalization has fallen to $94.4 million. One of the big losers may be Bill Gates, the founder of Microsoft, whose recent statement to U.S. financial authorities revealed that he had bought 4.7 million Crocs shares, representing a stake of 5.6 percent. It could not be determined whether he has since sold them.
Meanwile Crocs’ European division has established a subsidiary in Moscow, Crocs CIS, to cover Russia and other parts of the former Soviet Union. Also, Crocs recently launched a line of licensed shoes with the Premier League football club Liverpool FC, based on its classical Cayman style of plastic clogs. The company is also believed to be linking up with Arsenal FC for a similar deal.