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Restructuring Crocs, Inc RESTRUCTURING CROCS, INC. Turnaround Management Columbia Business School Advisor: Professor Laura Resnikoff April 26, 2010 Molly Bennard Kevin Sayles Ron Schulhof Julie Thaler John Wolff TABLE OF CONTENTS EXECUTIVE SUMMARY............................................................................................................ 2 INDUSTRY.....................................................................................................................................3 COMPANY...................................................................................................................................11 HISTORICAL FINANCIAL OVERVIEW...................................................................................22 DISCUSSION OF VALUATION ................................................................................................35 TURNAROUND PLAN ...............................................................................................................47 RECOMMENDATION.................................................................................................................51 EXHIBITS.....................................................................................................................................55 MARKETING MATERIAL……..................................................................................................65 1 EXECUTIVE SUMMARY Crocs, Inc. is a designer, manufacturer and retailer of footwear for men, women and children. Crocs uses its proprietary closed cell-resin, Croslite, to make shoes that are comfortable, lightweight and odor- resistant. Since its introduction in 2002, Crocs has sold more than 120 million pairs of shoes in over 125 countries. During the past two years, Crocs experienced a rapid decline in revenue, from a peak of $847.4 million in 2007 to a trough of $645.8 million in 2009. This decline proliferated throughout all regions in which the Company operates, with the exception of Asia. Management attributes the deterioration in operating and financial performance to a combination of macroeconomic factors (the global economic crisis resulted in a reduction in consumer spending and decreased volume in malls and retail establishments) and difficulty in executing Crocs’ long-term business strategy (significant challenges in merchandising an expanded product line through existing wholesale channels, and both the declining demand for mature products and the increasing competition from imitation products). In response to these threats, the Company began a restructuring program and other downsizing activities during FY08 and FY09. The combination of declining revenues, restructuring costs and other one-time expenses resulted in the Company recording a loss of $185.1 million and $42.1 million during FY08 and FY09, respectively. We have reviewed trends in the footwear and apparel industry, closely examined the Company’s strategic, operational and financial situation, and diagnosed the reasons for its distress. Despite recent improvements in sales, margins, and the Company stock price, we believe that Crocs is in danger of returning to the distress of 2008-2009. We recommend that Crocs implement a turnaround strategy with the following key features: Realign the distribution model in U.S. Crocs should forgo its retail expansion and instead focus on a small number of profitable flagship stores and its wholesale and internet channels Focus on the shoes and key customer segments. Crocs should refocus its entire organization (design, manufacturing, marketing) on the unique appeal of its shoes Management Information Systems and Supply Chain Logistics. Systems and supply chain improvements should occupy a significant portion of management’s time until the issues are satisfactorily resolved. 2 INDUSTRY Overview & Recent Developments The general sentiment among industry experts and executives is that the apparel and footwear industry continues to improve but has not fully recovered from the economic downturn. At the National Retail Federation’s convention in January 2010, the outlook was optimistic when compared to the 2009 convention and attendance was up 27%. A group of 20 comparable retailers (including department stores, mass merchants, and warehouse clubs) that are tracked by S&P experienced a 3.9% increase in December 2009 on a sales-weighted basis. Although holiday season sales were not strong during 2009, retailers and apparel vendors did record a modest 1.1% holiday sales gain (November – December) versus a 3.4% decline in the same period during 2008. Further, retailers were able to protect some profit margin during the holiday by capping markdowns at 30% to 40% instead of the 60% to 85% offered a year earlier.1 Although the worst appears to be over, the near term is expected to be a challenging period. With an additional two million people unemployed at the start of 2010, consumer spending and discretionary spending in particular is likely to continue to be under pressure during 2010. 1 Driscoll, Marie. “Apparel & Footwear: Retailers and Brands.” Industry Surveys. S&P’s, March 4,2010 3 Experts are predicting a sluggish consumer recovery with slow growth in 2010 and 2011. Due to the high unemployment rate, S&P predicts that consumers cautiously manage purchases and continue saving. Despite the negative outlook, there are two positive attributes to highlight: Revenue has stabilized as inventories are no longer declining sharply. Because inventory levels have been reduced to meet consumer demand, retailers now require fewer markdowns to sell excess goods. Markdowns are easing, resulting in recovering margins. As previously mentioned, markdown expenses will be minimal when compared to 2008. Gross margins have therefore recovered, and the current inventory/demand balance suggests footwear companies should be able to maintain recent gains.2 S&P NetAdvantage suggests that because the majority of the possible cost initiatives have already been completed, any additional initiatives will likely affect the direct to consumer parts of the business and could further erode demand. S&P anticipates that companies will experience increased general and administrative expenses. Retailers have been implementing various aggressive strategies to contact and market to the customer. In particular, despite decreased inventory levels, retailers have tried to maintain a selective set of inventory on hand to cater to customer needs and support product differentiation. Further, retailers are expected to increase efforts to market new products faster and to incorporate current demand and fashion trends into new products. Market Segments Within the specialty retail industry, the footwear sub-industry segment can be divided into several market segments including athletic wear, urban apparel, outdoor gear and casual shoes. Additionally, the market can be subdivided into footwear and accessories. Based on recent research distributed by S&P NetAdvantage and the Business & Company resource center, the specialty retailing landscape remains fragmented (despite the proliferation of large chains and superstore format), with thousands of small- to medium-sized businesses, often catering to local tastes and preferences. 2 Driscoll, Marie. “Apparel & Footwear: Retailers and Brands.” Industry Surveys. S&P’s, March 4, 2010. 4 Competitive Landscape The global casual footwear and apparel industry is highly competitive. Major competitors in the footwear segment include Nike Inc., Heelys Inc., Deckers Outdoor Corp., Skechers USA Inc., and Wolverine World Wide, Inc. In the retail segment, significant competitors include Macy’s Inc., Nordstrom Inc., Dick’s Sporting Goods Inc., and Collective Brands Inc. The principal qualitative traits that provide retailers a competitive advantage in the footwear industry include a well-known brand name, product differentiation, favorable customer demographics/target market, an expanded distribution network, active new product development, a superior management team, established manufacturing processes/low manufacturing costs, efficient inventory management, good real estate (sales locations) and well designed technology systems. There are many established players in this space that have strong financial resources, comprehensive product lines, broad market presence, long-standing relationships with wholesalers, long operating histories, great distribution capabilities, strong brand recognition, and considerable marketing resources. Additionally, there are very low barriers to entry which invites new market entrants to imitate popular styles and fashions.3 3 US Apparel & Footwear Industry. “Trends: An annual statistical analysis of the US apparel and footwear industries.” Shoe Stats. http://www.apparelandfootwear.org. 5 Comparison of Crocs and Key Competitors $ in 000s CROX DECK HLYS1 NIKE2 SKX WWW3 Full time employees 3,560 1,000 51 34,300 2,160 4,018 Revenues by Geography Total Revenues 645,767 100% 813,177 100% 43,777 100% 19,176,100 100% 1,436,440 100% 1,101,056 100% Americas 298,004 46% 645,993 79% 15,157 35% 7,827,600 41% 1,117,833 78% 779,678 71% International/Other 347,763 54% 167,184 21% 28,620 65% 11,348,500 59% 318,607 22% 321,378 29% Revenues by Distribution Channel Retail Revenues 152,300 24% 78,951 10% - 0% n/a 321,829 22% n/a Wholesale Revenues 404,500 63% 658,560 81% 43,777 100% n/a 1,091,980 76% n/a Online Revenues 89,000 14% 75,666 9% - 0% n/a 22,631 2% n/a Retail store count 317 18 0 674 246 88 Manufacturing % International 100% 100% 100% 100% 100% 93% % in
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