The Secret Behind Crocs' Success

Apr. 4.07 | About: Crocs, Inc. (CROX)

Crocs, Inc. (NASDAQ:CROX) makes a popular line of footwear. Despite a short operating history, the company’s February 2005 IPO was the most successful ever in the footwear industry in terms of raising money.

The company’s tremendous success is due to the popularity of its clog-like sandals with their distinctive air holes and toe-box ventilation system. Made from Croslite, a proprietary closed-cell resin that molds to the contours of the feet, these shoes offer an exceptionally comfortable fit. Croslite is lightweight, waterproof, and slip and odor resistant.

The shoes became a hit with beachgoers and boaters despite their unusual look. Sales growth exploded as they gained popularity with the fashion conscious and then the mass market. Their unique appearance, which some call ugly, made them easily identifiable and probably added to their appeal.

Crocs are now available at more than 10,000 locations in the U.S. including specialty footwear stores, sporting goods retailers, department stores, and online retail sites. They can also be purchased in more than 8,000 locations in 80 other countries. The company has been expanding its product line. It ended 2006 with 27 styles that utilize the Croslite technology including traditional sandals, boots, slippers, flipflops, and all-terrain shoes.

The company acquired Jibbitz last year, which makes accessories that can be snapped onto existing air holes in Crocs. It also entered into licensing agreements to sell Crocs that feature Disney characters and university logos.

crox 2 Revenues for 2006 more than tripled from a year earlier to $354.7 million thanks to strong demand for classic footwear as well as new styles, better-thanexpected sales of collegiate and Disney collections, and robust international sales, which increased to $122 million from just $14 million the year prior. The gross and operating profit margins improved by 54 and 217 basis points, respectively, to 56.54% and 26.94%. Net income jumped 278.8% to $64.4 million or $1.61 per share. Q4 sales were up 236% to $112.9 million and net income jumped almost four-fold to $20.8 million or 51 cents per share.

Nonetheless, the stock came under pressure. This may be due to questions about the company’s ability to sustain rapid growth for long. Skeptics wonder if the shoes will prove to be just a passing fad. Given the fickle nature of consumers, this is a possibility. In addition, success has invited imitation. Competitors have launched copycat products, which could take a bite out of CROX’s future growth.

However, we believe the real key to the company’s success is the technology behind its Croslite resin. Although it isn’t patented, the exact formulation is a closely-guarded secret. And management’s efforts to diversify product offerings should help it keep up with changing fashion trends and attract new customers.

CROX also continues to augment its licensing strategy. Since the start of the year, it signed an agreement with Nascar and expanded existing deals with the National Football League and the National Hockey League. It also signed deals with Nickelodeon (NASDAQ:VIA) and Warner Bros. (NYSE:TWX) allowing it to sell shoes featuring Dora the Explorer, SpongeBob SquarePants, Superman, Batman, and other famous DC Comics superheroes. International markets still offer ample opportunities for growth and could drive overall demand even if domestic sales soften.

CROX 1-yr chart
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