Crocs' Shifting Business Model Is Beginning to See Success

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A few years ago, Crocs’ (NASDAQ: CROX) stock crashed from incredible highs as the company’s notoriety as a fad shoe, wore off. Some may wonder why the shoes even sold at all, but they did and in large numbers. With 2008, the company saw its fortunes collapse considerably, taking a loss in 2008. Yet, from this seeming calamity emerged a stronger, more diversified company that has made the transition from being a fad into a brand with a wide product offering.

The company installed a new management team in 2010 with John McCarvel as CEO. As a five year veteran with Crocs, the CEO had experience with the brand and saw what worked and what did not before he took the top leadership role, and since his tenure as CEO, we have seen the company go through a slow but focused transformation. The CEO’s primary background has been in operations, and in international markets and you can see this focus coming through naturally in the company strategy.

The company is shifting its focus from selling through wholesale and mall kiosks to a focus on direct retail. In a bid to drive up its gross margins, Crocs is opening more Crocs branded stores and direct to consumer outlets. Their revenue split has been shifting too.

<table> <tbody> <tr> <td> </td> <td> <p>2011</p> </td> <td> <p>2010</p> </td> <td> <p>2009</p> </td> </tr> <tr> <td> <p>Wholesale</p> </td> <td> <p>59.80%</p> </td> <td> <p>61.00%</p> </td> <td> <p>62.60%</p> </td> </tr> <tr> <td> <p>Retail</p> </td> <td> <p>30.60%</p> </td> <td> <p>29.50%</p> </td> <td> <p>28.00%</p> </td> </tr> <tr> <td> <p>Internet</p> </td> <td> <p>9.60%</p> </td> <td> <p>9.50%</p> </td> <td> <p>9.40%</p> </td> </tr> </tbody> </table>

Source: Crocs Annual Report

As you can see from the chart above, Crocs’ revenue percentage from retail has grown relative to wholesale. This new channel is seeing significant success. Between 2009 and 2011, they added 96 new stores and in a recent conference call, the CEO said that sales through retail grew 12.7% in the Americas and 17.6% in Asia.

Changing the Business Model

In addition, the company is adding entire product lines repositioning the company not as a premier brand but instead as a comfort brand that provides informal comfortable shoes of all types. This brand in my opinion fits the company very well. Crocs were seen as a comfort shoe by many consumers and Crocs is trying to double down on this perception by marketing and creating products that fit this perception.

So how well is it working? The traditional “crocs” shoes now represent less than half of sales while its other products, particularly its new fashion lines have gained traction. This is significant number as it shows that Crocs has become, not just a one-trick pony, but instead an entire product line that is appealing to consumers.

International Management Team

Third, coming from management experience in Asia and internationally in general, the CEO is making a noticeable shift to focus on Asian markets. John McCarvel worked for five years in Asia as an executive for both Flextronics and Crocs and Crocs is seeing the beginnings of success in Asia. Sales grew 34% with 39 new store openings in 2011 and sales grew 19.9% with 40 new store openings in 2010. In time, the company expects Asian sales to grow to a larger percentage of sales.

The US business for Crocs is also doing well growing over 20% per year. The new product lines are seeing consistent growth. The European market, as expected, has proven a tougher for Crocs as growth has stalled in those markets primarily attributable to this.

The Final Word

Yet, there are a few concerns still remaining with Crocs. Can they still maintain some level of growth and do they have the brand to keep on growing? I believe they have the capability. Since 2010, the company has recovered enormously from its difficulties in 2008 to become a solid consistent growth company. At the moment, they seem to be in the transition from a growth stock to a value stock as the company, while growing, does not necessarily maintain the growth figures that would appeal to many growth investors. The stock however, is priced very nicely with a P/E around 10 with growth maintaining in the double digits.

Overall, Crocs seems to be a company with incredible potential. After shaking off its fad status that powered its initial growth and lead to its major challenges, the company is growing stronger and more solidly than ever. Its expansion into new products, its transition into higher-margin retail sales, and its focus on emerging markets, particularly Asia, show me that this company has enormous potential to become a long-term growth story that will see it moving forward for many years to come.

XMFReza has no position in any stocks mentioned. The Motley Fool owns shares of Crocs. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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