With today being a light day for news, we wanted to provide
some color on a well-known retailer than has been making strides with its
turnaround efforts and which quietly traded to new 52-week highs last week.
Today, we will take a look at Crocs (CROX 20.57, -0.09, -0.44%). You're probably familiar with
Crocs' casual footwear for men, women, and children. All Crocs shoes feature
Croslite material, a proprietary technology that gives each pair of shoes soft,
comfortable, lightweight, and non-marking qualities. The brand achieved
extraordinary popularity in the middle years of the last decade; the stock’s
price peaked above $70 in October 2007 after the company went public in early
Crocs is best known for its distinctive clogs (51% of 2017 revenue) and sandals (15% of revenue), but it makes a wide variety of styles, including wedges, loafers, and boots. It also has licensing partnerships with Disney, Marvel, Nickelodeon, and Warner Bros., among others. Just over half of the company’s sales are made via the wholesale channel (footwear retailers, sporting goods stores, etc.), about a third are sold via its retail channel (company stores, kiosks), and the rest are sold online.
CROX saw its stock price steadily decline from the low $30's in mid-2011 to about $6 in May 2017 due to slumping sales as the Crocs brand fell out of favor with consumers. However, the company has been making a comeback.
One of the major steps the company is taking to drive its business revival is closing underperforming stores, generally in order to operate more efficiently and reduce SG&A expenses. The goal is to reduce SG&A by $75-85 mln by 2019. A major component of this program involved slashing its store base by 160 stores between 2017 and 2018 and eliminating the related infrastructure and overhead. When complete, CROX will be operating fewer than 400 stores compared to the 558 stores in operation at the end of 2016. In 2017, the company planned to reduce store count by approximately 70 stores. However, CROX substantially accelerated those efforts, resulting in the closure of 111 stores in 2017, with more to follow in 2018.
Another strategy in its turnaround has been to improve the quality of revenue. CROX has thus been reducing its European discount channel sales, which the company notes generated poor margins while having a detrimental impact on brand perception. Furthermore, CROX has shifted from a sell-in to a sell-through wholesale and distributor culture and has aggressively cleared through obsolete and end-of-life product. As a result, the company is now able to invest with more focus in its newest, fastest-earning, and highest-margin products, including its flagship clogs and sandals, those silhouettes that best reflect Crocs' DNA and present the highest margins in the company’s portfolio. All of these changes have led to a 400 bp improvement in gross margin since 2015, including a 230 basis point improvement in 2017.
On the marketing side, the company aims to highlight clogs and sandals with its “Come As You Are”, which was first launched in 2017. It has featured celebrities like actress Drew Barrymore and singers YOONA and Henry Lau. Empathizing with customers who feel shoe-shamed for their footwear tastes, the ad campaign encourages people to be different, to embrace individuality, and to “feel comfortable in your own shoes”.
In early August, Crocs reported Q2 results. EPS jumped 75% year/year to $0.35 from $0.20 last year while revenue rose 4.7% year/year to $328.0 mln, which was above prior guidance of $315-325 mln. It was good to see growth being achieved despite the loss of approximately $22 mln due to lower store count and business model changes. E-commerce sales grew 23.8%, wholesale grew 7.2%, and retail comps increased 7.1%.
Clogs and sandals performed well in Q2, and LiteRide, its newest franchise, continues to exceed expectations. Looking ahead to 2H18, Crocs feels good about its Fall/Holiday 2018 collection. It has incorporated seasonally appropriate colors and graphics, including a new platform clog, which launched recently. And while it's still very early, Crocs is pleased with initial feedback from its wholesale accounts on its Spring/Summer 2019 collection.
Its “Come As You Are” marketing campaign continues to raise the profile of the brand and drive demand. Interest in Crocs is accelerating, and the company continues to increase its digital footprint and attract more PR coverage. During the first week of June, the number of Google searches for Crocs hit a five-year high and has remained at elevated levels since then. When it launched its first Snapchat filter, over 6 million people used the Snapchat lens to see themselves in a giant Classic Clog hat. Also, its collaboration with Alife, a highly regarded streetwear brand, generated over 400 mln PR impressions in just a few months.
In sum, Crocs’ turn-around efforts are showing promising progress. Increasing focus on its signature and higher-margin clogs and sandals has been a smart move. Also, its “Come As You Are” marketing campaign is resonating well with consumers. The stock has moved up in recent months, but it's still well below its most recent noteable peak, the $32 mark reached in mid-2011. Looking ahead, Crocs will report Q3 results in early November. Last week, they reiterated Q3 and FY18 guidance.
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