Business

SALES & MARKETING

Crocs has three sales channels and its Marketing efforts center on specific product launches utilizing a variety of media outlets, including print and the internet.

• The wholesale channel includes distributors and third party retailers like Dick's Sporting Goods, Famous Footwear, Academy, DSW, Nordstrom, Murasaki Sports, Centauro. It also includes online retailers like Zappos and Amazon.

• The retail channel includes kiosks/store-in-store, company-operated retail and outlet stores.

• The internet channel is based on company-operated webstores.

In the first graph we see that the wholesale channel accounts for about 60% of the total revenues, retail 30% and internet 10%. We also see that the retail part of the business is slightly increasing its share as the company realizes it can present a broader range of products in their company-operated retail stores and even in outlet stores. 

In the second graph we see the evolution of the retail and Internet channel in terms of number of stores. The company stated that is now part of their strategy to increase the number of retail stores. These, account in 2011 for more than 40% of the total number of stores (430). In 2011 Crocs opened 42 new company-operated retail stores! That's a 30% increase from 2010.

The annual average growth rate of these stores is 37% since 2008. If we count all stores from the retail channel the annual average growth rate is 15.5%.

The last graph on the right shows the number of global stores distributed by main regions. We can easily understand that Asia is fueling the growth with an annual average growth of 39% since 2007, accounting for more than 45% of the total stores. America accounts for just about the same 45%, but it seems like the company already considers that the american market doesn't need anymore stores, since the number of stores remained the same in 2011 and 2010 and the annual average growth rate is just 6,5%. Although Europe shows a big increase in relative terms (AAGR = 85%), it still accounts for just 8% of total stores.

PRODUCTION

When talking about production there are some main things to pay attention in this company:

• Croslite: Could there be any problem in terms of suppliers? How do they guarantee no copy cats?

• Internal Manufacturing VS Outsourcing?

• Design: This is a fashion business. How can they keep up with new trends? 

Crocs answers the first question in its annual report stating it has more than one contact of suppliers for Croslite inputs. To what concerns other raw materials the company started to use in order to broaden the line of products, it states there's no difficulty in finding them. So for the inputs we can conclude there is no risk of a shortage neither of relevant price increase.

To answer the second question, the company claims to protect its intellectual property and trademarks with patents all over the world. Also, in regards to Croslite formula, it claims to protect it through confidentiality agreements with employees and outsourced producers. It important to notice that there has been some reports of counterfeit Crocs, specially in Japan.

The second point raises the question about how the company produces. Crocs has both internal and external production. It produces about 20% and outsources the remaining part. Is says that this allows for a more flexible production as it can be faster to produce a new design internally and at the same time takes advantage of the scale economies and experience of the outsourced partners. 

This graph shows the company is reducing its dependence of the largest third party manufacturer, reducing the risk of stoppage in production and the bargaining power of the third party.

The third point is probably the most difficult to assess and definitely the most arguable. First of all, I think everyone has different tastes so some people will agree that Crocs have a great design and others will simply hate it. Second, fashion is very ephemeral. What is fashionable today can be old-fashion tomorrow. I'm not going to discuss this aspects, i'll just discuss the company's actions to keep up with fashion trends and even anticipate them.

Although it's not a guarantee of success, investment in research and development is usually a good gauge of commitment. In this case, the company invested more than $10 million in 2011, which represent a 38% increase compared to 2010. Another positive point about this is that the company shows a positive trend of investment in research and development. Even throughout the difficult years of 2008 and 2009 the company increased the amount invested. (AAGR = 19%). Crocs claims to have inside and outside designers working to create new collections. The fact is that every year they seem to be reducing the part of revenues coming from traditional Crocs. 

SEASONALITY

Most of the footwear produced by Crocs is associated (because of traditional Crocs) to hot weather, so financial reports show some seasonality. The 1st and 4th quarters (lower temperatures on the northern hemisphere) report lower sales and profits. The company claims to be commited in the development of footwear more suitable for lower temperatures. Some results have been achieved as one can see on the 2012 1st quarter report.

LEGAL PROCEEDINGS

Crocs is involved in three main legal proceedings, which can adversely and materially affect the company's financial statements:

1. The company and some officers were acused in 2007/2008 of artificially inflating the share price of the company by disclosing misleading information to the market.  Also, the same case acuses some officers of inside trading based on private information. The court dismissed all charges in 2011, but the prosecution appealed the decision and there's no final decision yet.
2. The company was acused by Spectrum Agencies ("Spectrum"), a former agent of Crocs Europe in UK, of ending unilaterally its contract, without paying the appropriate fees. Crocs claimed to have ended the contract on the base of bad faith actions toward Crocs. The first decision of the court was favourable to Spectrum, but Crocs decided to appeal in Dec-2011. This is a £16 million case.
3. Are currently being targeted for an audit of the U.S. Customs Service. Report comes in the second half of 2012 - may have a significant impact if something goes wrong.

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