Crocs Inc, a fad? I think not....When the three Boulder, Colorado based founders decided to develop and market an innovative type of footwear for boating/outdoor use, little did they know they would be developing one of the most versatile and innovative technologies in recent memory. I’m not writing this article to make everyone who reads this run out and buy the stock, however, I would like to dissect several aspects of the company, their products, and future potential.
To start, we will examine some general information about the company’s target markets and their sales growth. This will be followed by a section detailing their current products and the future potential of the main material, Crocslite. Finally, this report will touch upon a comparison to Under Armor (UA) and Heelys (HLYS); two stocks which I feel people tend to pair Crocs with.
Now available in shoe sizes that would fit an infant’s feet to XXXXL, in less than ten years, Crocs have gone from a ‘neat idea’ to a company with a market-cap of over two billion dollars. Their annual revenues have increased from $13.5 million to $354.7 million in just three years (2004-6), with no signs of slowing down. Their non-North American sales already represent 32% of the total revenues, leaving plenty of growth opportunity in all parts of the world, including North America. With nearly no debt, their gross profit margins have continued to improve and now sit at 56.50%; pretty good, especially when compared to its nearest industry peer, in terms of market-cap, Nike’s (NKE) 45.40% and the industry average of about 48%.
Their product line continues to grow steadily, and can easily be adapted to meet the constantly evolving customer demands. Since the process of making the Crocs is much like that of injection molding, the costs of producing the shoes or accessories are significantly lower than any shoe or apparel company; and should remain relatively steady for years to come. As of April 2007, there are 31 different styles and over 25 different shoe colours; plus an additional three pairs in the CrocsRx series for those with medical conditions that affect their feet, and knee pads for carpenters, or for the everyday Joe or Jane working in their garden. Not to be forgotten, Crocs holds several licences to be the official shoe of the NHL, NFL, NASCAR, Nickelodeon, the AVP Tour, Disney, Warner Bros., and 17 different American colleges and universities, just to name a few.
However, the key to Crocs’ future success, in my opinion, once shoe sales eventually slow, is the utilization of the material with which the shoes are made, Crocslite. What is Crocslite? Well, Crocslite is a Proprietary Closed Cell Resin (PCCR), that is anti-microbial, odour resistant, slip resistant and weighs only ounces. Think of the capabilities for such a product! Crocslite could replace foam, couch cushions, life-saving devises such as life jackets, and its superior impact resistance will allow it to replace modern hockey and football equipment with a much lighter and thinner material. In addition, with the purchases of the Italian EVA (Ethylene Vinyl Acetate) maker EXO Italia and Fury (the hockey equipment maker), Crocs is paving the way in the future for additional products, which could include the combination of multiple materials in an effort to make their product stronger, more durable and perhaps better looking!
Many people continue to compare Crocs to such companies as Under Armour (UA) and Heelys (HLYS). Under Amour appears to have passed the ‘fad’ stage and has succeeded in creating direct competition with Nike’s football apparel, and looks to be doing a decent job of it. Their R&D staff has continued to create different, more athlete oriented products for an intensely competitive market and will be rewarded by increased market share over the next several years. Crocs seems well on their way to following such a strategy, but without such competition. On the other hand, I anticipate Heelys to be a short-lived fad. Didn’t Sketchers try the wheel in the heal already? I found a recent study released by Heiden Associates in early April proclaiming the safety of Heelys in comparison with other wheeled sports like biking, ..... when used as directed. Shouldn't all sporting equipment, when used as directed, be safe? As a side note, the study found table tennis, billiards and bowling to be safer than ‘Heelying’. I find Heelys to be slightly oxymoronic; on the package there are the usual warnings, do not use without knee pads, elbow pads, and a helmet. However, the shoes are intended for everyday use as a child’s main pair of shoes, which will make them less likely to wear the necessary safety equipment for each use. These are not a pair of roller-blades, but they follow similar consequences with dealing with injuries from falling onto one’s hands, knees and head. With only one wheel per shoe, a false sense of security can easily be created, thus limiting significance of wearing protective gear. In the attempt to make ‘Heelying’ a sport, the shoes will most likely follow, but to a significantly less extent, the skateboard and roller-blades themselves. With only one main product, Heelys could be in trouble in the future.
As investors, we try to play the game of buy low and sell high, in the case of Crocs, buy now and hold for years should be the strategy. The limitless potential should leave the average long-term holder salivating all over their keyboard. With the unrivalled technology they currently possess, the ability to adapt to ever-changing market demand, recent exposure through media juggernauts Oprah and Martha Stewart and numerous celebrities, and countless licencing agreements, their target markets continue to increase exponentially. Soon, every camper, boater, swimmer, hockey and football player, senior citizen, nurse, doctor, mother, father and child will own multiple pairs of Crocs, which they will put on while sitting on their Crocslite couch cushion, in preparation before they head out with their Crocslite life-jacket, that they will be wearing while they ride on their Crocslite padded jet ski.
Good Luck,
nwatson.,