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Crocs marks 10 years: Boulder County shoe company $1B in size after decade of highs, lows
Jul 31, 2012 (Daily Camera - McClatchy-Tribune Information Services via COMTEX) -- Copyright (C) 2012, Daily Camera, Boulder, Colo.

On Tuesday morning, executives for Crocs Inc. are scheduled to ring NASDAQ's opening bell in a ceremony to mark the 10th anniversary of the launch of the Niwot-based shoe company's iconic holed clog.

Crocs comes to Times Square as a billion-dollar company and a firm that, analysts say, has solid footing within the shoe industry.

Just a few years earlier, Crocs' story had a different ring to it.

Since the 2002 unveiling of its first shoe -- a brightly colored, resin-based shoe speckled with port holes -- it has been a roller coaster ride for the company founded in 1999 as Western Brands LLC and known today as Crocs.

Crocs rose "like a rocket ship" as its clogs became increasingly popular across the globe. Crocs' initial public offering in 2006 was the largest ever for a footwear company.

Some twists and turns -- from knock-offs to patent disputes to escalator mishaps -- rattled Crocs' Cinderella story. The fairy-tale beginning soon gave way to a meteoric fall when operational and inventory issues compounded with a dampening in sales.

In 2009, Crocs was handed a "going concern" qualification by its independent auditor and given a death sentence by others in the industry.

After finishing 2011 with $1 billion in revenue, surpassing Wall Street expectations for its most recent quarterly earnings and posting double-digit annual sales growth, Crocs still has some bite, say company officials and industry analysts.

"Yes, we have gone through a lot in 10 years, haven't we?" John McCarvel, Crocs' chief executive, said Friday. "This is an amazing story for a business school case study for someone."

'Big problem'

In 2005 and 2006, Crocs was a "shooting star" that took the industry by surprise, said Neil Weilheimer, executive editor of Footwear News, a Conde Nast publication.

"It caught everyone off guard," he said.

Other companies took notice.

"Within the next season or two, you saw dozens of companies doing a similar clog," he said.

Some of Crocs' competitors, however, created clogs that the Boulder County company claimed were a little too similar. Crocs waged expensive intellectual-property legal battles against some of the "knock-off" makers and also found itself on the other side of the aisle when it was counter-sued for patent infringement.

Crocs' sales continued to climb.

"It was like a rocket ship," said Tia Mattson, a Crocs spokeswoman who left the company in 2010 for family reasons and no longer has financial connections to the firm. "There was nothing else like that at that time. It was rapid. It was fast. I can't equate it to any other experience in my life."

The dizzying pace soon led to some complications.

"What happened in '06 and '07, that business got so hot, so fast ... and they thought it was a no-fashion-risk, widget type of a business," said Sam Poser, a senior research analyst who covers Crocs for Sterne, Agee & Leach Inc.

Crocs built up its inventory -- about 70 percent -- in its "classic" Beach and Cayman models, he said. However, the retailers and the consumers were more engaged by the new product than the old product, he said.

"They had their inventory the opposite way. Oops," he said. "They had a big problem."

The issues that arose in Crocs' inventory management and distribution operations combined with a drop in sales led to a build-up in inventory that -- when revealed in the third-quarter 2007 earnings call -- spurred a 36 percent decline in Crocs' stock. That stock drop led to the filing of class-action lawsuits that alleged then-CEO Ron Snyder and other executives had knowledge of the inventory problems and made false statements to inflate the stock.

Although a federal judge later would rule in Crocs' favor in the class-action suits, the inventory problems worsened in 2008, when 27 million shoes were left on the table.

In that year's annual report, Crocs posted a $185 million loss and garnered a "going concern" notice from Deloitte & Touche, which questioned the viability of the business going forward.

Crocs later downsized, closing factories and laying of scores of employees locally.

Mattson, the company's former spokeswoman, equated the fallout to "growing pains."

"The pains were painful for a lot of people," she said. "But I don't think that anything that Crocs experienced was abnormal or due to anything other than rapid growth or the economic situation."

Turnaround

Much has changed from the early days of the company, said McCarvel, who became Crocs' CEO in February 2010, following the short tenure of "turnaround specialist" John Duerden.

Crocs' sharp growth primarily came from the "original silhouettes," the injection-molded models such as the Beach and Cayman, and the majority of those sales occurred in the United States, he said.

"Today, we look back, we have over 300 styles of shoes made up of so many different kinds of materials," he said. "We have a strong marketing organization around the brand, and 65-plus percent of our revenue comes from the foreign market."

Roughly 46 percent of the company's annual sales are from shoes based off the "silhouette" model and the remainder come from the other styles that pair the company's Croslite resin with materials such as leather and canvas.

Additionally, the "negative connotations" around Crocs are about half of what they were last year, he said, noting internal research conducted by Crocs.

Crocs' balance sheet, cash flow and income statements appear relatively healthy, said Reed Anderson, an analyst who covers Crocs for Northland Capital Markets.

"They're solidly on track with the growth plans they've laid out," said Anderson, who does not own shares of Crocs. "They've absolutely broadened their customer base, and that's been very much driven by a continued focus on expanding their products."

McCarvel expects to close out 2012 with about $1.15 billion to $1.2 billion in revenue, or an increase of about 15 to 20 percent. The trajectory, he said, very well could continue for at least another three years.

He puts much of that optimism on the company correcting operational and inventory issues that undermined its stark gains.

When Crocs was growing rapidly in 2007, the company chose to build up its products on the expectations that the trend would continue into 2008 instead of providing the shoes in a "pre-book" fashion to retailers. The company since has followed the latter, more traditional pre-booking model, he said.

Crocs also became more nimble, shedding businesses such as its hockey gear business and high-end shoe line, YOU by Crocs. The company also closed factories and "right-sized" by way of layoffs.

McCarvel said he lamented the workforce reductions, adding "there was probably nothing harder" than to lay off employees.

He said he's taking a conservative approach while he's at the helm of Crocs and is slowly adding to the local workforce and not investing in risk inventory.

"I think our founders were absolutely the right people -- entrepreneurial, opportunistic, and without them we wouldn't have had the benefit of (being in) so many retailers," he said. "But for us, on a going-forward basis ... I'm sure that there'll be times when we'll see more rapid growth. There will be times when things slow a little bit.

"When you're in the product business like we are, it really depends on how good your product is, and right now, we have a great product."

Crocs appears to be maintaining its appeal with consumers and also falling back into favor with retailers, but the company may still have a ways to go with the investment community that remains reticent given the stock's turbulent past, said Sterne Agee's Poser.

"(Crocs) better under-promise and over-deliver to some degree," he said.

Shares of Crocs (Nasdaq: CROX) closed down 21 cents, or 1.33 percent, on Monday to $15.58.

Contact Camera Business Writer Alicia Wallace at 303-473-1332 or wallacea@dailycamera.com.


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