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Crocs Has Indeed Lost Its Mettle

August 09, 2014 | About:
Suravi Thacker

Suravi Thacker

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People’s tastes and preferences keep changing with the changing times. So was the case with the footwear industry, when Crocs’ (CROX) fancy and new style shoes took over the market. Customers became highly fascinated with the new style of resin-molded shoes which came in a variety of bright colors. It became a fashion statement. However, a few years later, this fascination started to fade away as customers got bored of the same old style. Crocs’ footwear became tacky for the same lot of customers. This resulted in sharp decline in the retailers’ revenue.

Therefore, the company is still struggling to overcome the after effects of the situation. But this time Crocs wanted to differ. Its recently reported second quarter results were ahead of the Street’s estimates, enabling its share price to move north.

Numbers accompanied with restructuring plans

The footwear retailer’s revenue inched up slightly to $363.8 million from $376.9 million in last year’s quarter. The top line was higher than the analysts’ estimate of $372.8 million. Even the bottom line was higher than the estimates, clocking in at $0.36 per share. However, this was lower than the prior year’s EPS of $0.48 per share.

The primary driver of sales increase was revenue from Europe, which surged 20% during the quarter. This contributed to the top line since both North America and Europe are the key markets and make 85% of the overall revenue. On the contrary, sales in the regions such as Asia were weak. For instance, revenue from Japan dropped 9.4% to $41 million. Therefore, the company plans to reduce its investments in such smaller markets, including China, Japan and Korea.

What the turnaround plan entails?

Crocs announced its plans to restructure its business in order to make it more profitable. It has become quite evident from its second quarter numbers, that the retailer has mainly hit on the bottom line. In order to boost its earnings, it has firstly decided to cut jobs. This job cut is expected to save $4 million in this year and $10 million in the year 2015.

It will be closing or converting 75 to 100 stores and will lay off 183 workers, in order to grow its net income. The converted stores will remain Crocs stores, but will be run by third party operators. Although the store closures would reduce the revenue base, but will also result in a cost saving of $17 million to $25 million.

Further, it plans to change its product portfolio by cutting down on its shoe styles by 30% to 40%. It will now focus on the signature designs only such as flip flops, sandals, classic clogs and flats. It will also focus on styles like high heels and leather boots.

What is also important for Crocs is to bring in new products, which will attract customers to its stores. Innovation has been key to footwear retailers’ success. For instance, Nike (NKE) has been able to register growth and create demand by bringing new technological advancements, which force customers to own Nike products. Continuous strive to introduce products such as FuelBand, Nike Free and many more, have been instrumental to its growth.

Summary

Although Crocs is on the right track to control costs, it is difficult to say how far it will be beneficial in the longer term. Not only costs, but also revenue should be taken care of. In order to do that, it is important for the retailer to have new products in its stores. Therefore, investors should stay away from this company.


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