The Summer of Crocs: Can The Funky Shoe Company Continue to Grow? (CROX)

Jul. 6.06 | About: Crocs, Inc. (CROX)

Investopedia Advisor submits: I am definitely not the person to ask when it comes to anything to do with fashion, so it is not surprising that I was completely off the mark when I saw a pair of Crocs (NASDAQ:CROX) shoes for the first time. The rather bulky, resin-based footwear looked to me like the most recent adaptation of the clog (wooden Dutch shoes). Definitely not a style I would guess to be one that would fly off the shelves.

However, a quick look at the company’s short history suggests the complete opposite of my anecdotal conclusion. The Niwot, Colorado based company, which was founded in 1999, has rapidly grown into a $1 billion business.

The company has seen its sales grow from $1.2 million in 2003 to $108 million in 2005, as it has grown its distribution network and product line. While those numbers are certainly impressive, they prompt questions as to exactly why these resin-based shoes are flying off the shelves.

With a little further investigation, I found that these shoes are considered by many to be the most comfortable shoes on the market. And after a quick test walk, suggesting they are uncomfortable is a nearly insurmountable task.

Other selling points for the shoes include their resistance to scuffs and their strong grip, along with their inability to absorb bacteria and odor. So it appears to me that comfort and practicality is winning over style, which I must say is a rather refreshing change of pace. But will it win in the long-run?

The company started off with a bang when it had its IPO in February, as its shares rose from $21 to $28.55 to close its first day of trading up 36%. Since its IPO the company’s shares have been as high as $37 and as low as $20 and are currently trading at the $25 level, or 20% above its IPO price. Crocs' first quarterly filing as a public company was a strong one, with revenue increasing 309% to $44.8 million, compared to the same quarter last year.

This translated well into bottom-line growth as the company earned $6.4 million compared to the $1.9 million earned in the same quarter last year, an increase of 225%. Crocs is projecting strong numbers throughout 2006, with top line guidance of roughly $200 million, which would represent an 85% increase over the $108 million the company earned last year. This is clearly illustrates that the company has a very hot product right now.

But before one invests in Crocs (the company, not the shoes), they need to assess whether this is fad or a sustainable trend with consumers. We all know that the consumer can both be the savior or destroyer of consumer product companies, so it is vital to make this consideration. The biggest problem surrounding Crocs is its reliance on footwear sales, which is the major reason for the company’s growth. The Crocs line of footwear can only grow into the market for so long, as it is not going to replace the likes of Nike (NYSE:NKE).

Also, just as quickly as something becomes a hot trend, it can just easily move out of favor with consumers. If the company wants to sustain its growth into the long-term, it must transform into much more than simply the seller of resin-based shoes. But the company has made strides towards answering this concern as it has added apparel and gear lines, which include products such as shirts and knee pads. It will be vital though in the coming quarters that we see these lines start contributing more to revenue.

Another concern is the strong competition within the industry from alternative forms of footwear and products similar to those of Crocs. Remember, one of the clearest signs of success for retailing firms are scores of knock-offs based on their products, which of course take away sales. And Crocs has its fair share of knock-offs, which has led to several patent infringement cases initiated by the company. But due to relative ease of replication, over time this threat will only become more destructive.

This will likely be the summer of Crocs, leading to several strong quarters of financial performance and maybe even stronger share gains. For me, Crocs seems more exciting as a short-term play than a long one, as I think these shoes are little more than a fad and the company’s operating environment is one of the most difficult. But you can't deny a hot product and the return it could provide investors. Look out for Crocs, at least in the short-run.

By Chad Langager, Contributor - Investopedia Advisor

Full disclosure: At the time of release Chad Langager owned no shares in the companies mentioned in this article.