![CROCS ACQUISISTION REPORT] an Analysis of a Potential Sale of CROCS Inc., (Nasdaqnm: CROX)](http://data.docslib.org/img/2a0dd35bfce89dae1fbde0ed79f3b23b-1.webp)
2007
Analyst Recruiting Assignment
Robert Ried
[CROCS ACQUISISTION REPORT] An analysis of a potential sale of CROCS Inc., (NasdaqNM: CROX). This analysis begins with a general overview of CROCS Inc., details company growth, discusses both external market and internal effects on the company, and concludes with the suggestions for the sale of the company. [CROCS ACQUISISTION REPORT] October 29, 2007
General Overview Crocs Inc. is a designer, manufacturer and marketer of footwear, apparel and accessories for men, women, and children. Crocs, Inc. corporate headquarters is located in Niwot, CO. The company owns many retail locations in domestic and foreign territories. The conglomerate, originally founded in 2002, has grown in a dramatic fashion through acquisition and internal development. Crocs Inc. was created to market a lightweight plastic shoe first developed and manufactured by Foam Creations Inc. That shoe, created from a closed-cell resin material, which the company refers to as croslite, is the primary material used in all of its footwear and non- branded products.
Originally intended as a boating/outdoor shoe because of its slip-resistant, non-marking sole, Crocs introduced its first model, the Crocs Beach, in November 2002. Despite only a small marketing campaign, Crocs became popular in the United States and elsewhere because of the praise for their unique designs, comfort, bright colors, and light weight.
In the United States, the Company sells its products in over 11,000 domestic retail store locations representing over 4,500 customer accounts. No individual customer accounted for more than 10% of its revenues for the year ended December 31, 2006. Outside the United States, Crocs sells its products through over 1,800 international retail store locations. The Company also offers its products domestically and internationally through its Website, www.crocs.com.
Once considered a passing fad, the product line has remained popular. The company is currently in the growth stage of the product life cycle. Costs have been reduced because of economies of scale, sales volume is increasing significantly, and the shoes are beginning to receive ardent support from the public.
Management Team Name Officer Since Current Position Sharp, Richard L. 2005 Chairman of the Board Snyder, Ronald R. 2004 President, CEO, Director Case, Peter S. 2006 CFO, SVP – Finance, Treasurer McCarvel, John P. 2005 COO, EVP *See Appendix A for Management Profiles
Ownership Structure
The large institutional investors in Crocs include Shares Outstanding 82.00 Mil OppenheimerFunds, Inc. (4.5%), Barclay’s Global Investors Institutional Ownership (%) 81.09% (2.9%), and Clamos Advisors (2.8%) Top 10 Institutions (%) 25.50% Mutual Fund Ownership (%) 4.04% Mutual fund ownership includes Oppenheimer Global 5%/Insider Ownership 17.19% Opportunities Fund (3.7%), Fidelity Blue Chip Growth Fund Float (%) 91.71% (1.3%), and Calamos Growth Fund (.9%) Number of Institutions holding shares 227
+5% ownership Holder Name Shares Held $ Mkt Value % Out Fully Diluted Shrs Mazama Capital Mgmt, Inc. 4,614,575 $ 273,736,576 5.6 4,614,575 Boedecker (George B Jr) 4,468,458 $ 124,848,720 5.4 2,234,229
Company Growth
Products & Future Prospects
Crocs Future Prospects Within the past 18 months Crocs has made the move from a company with a patent and a single line of shoes, to a multinational corporation with numerous revenue streams. Crocs has initiated a number of transactions which should help to solidify their current products lines and introduce new revenue streams to their business.
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[CROCS ACQUISISTION REPORT] October 29, 2007
Strengthening the Brand (Current Products, New Product Uses, and Patents) Crocs original croslite footwear designed to be used as boating/outdoor shoe because of its slip-resistant, non- marking sole. Now available in a wide range of colors and styles.
In June 2004, Crocs purchased Foam Creations Inc. and their manufacturing operations to secure exclusive rights to the proprietary foam resin "croslite", which is made using ethylene vinyl acetate.
Crocs holds four patents covering various utility aspects of its footwear, U.S. Patent No. 6993858 B2 issued February 7, 2006, and U.S. Patent Nos. D517788, D517789 and D517790 issued on March 28, 2006. The Company also announced that it has filed complaints with the U.S. International Trade Commission (ITC) and the U.S. Federal District Court against 11 companies that manufacture, import or distribute products that Crocs believes infringe its patents.
Footwear designed specifically for the medical industry. The croslite foam forms itself to a wearer’s feet, helping them to work for hours with ease.
Footwear designed for anyone on needed a comfortable, no slip shoe. The croslite foam gives superior comfort, a no slip sole, and allow for easy clean up.
To tackle the collegiate (Males and Females, ages 18 – 24) demographic and the sports fan demographics (Males Ages 18 – 35), Crocs recently released a line of logoed sportswear.
Crocs has contracted with the NCAA, NFL, NBA, MLB, NHL and the PGA to create a comprehensive line of Sports Wear shoes. *See Appendix B for product pictures.
Crocs Acquisitions and Subsidiaries (New Products and New Revenue Streams)
Jibbitz was the first acquisition which helped Crocs to diversify their offerings. Jibbitz sells wristbands, charms, and Crocs embellishments.
Croc’s recent purchase with roots in the sandal and alternative golf footwear. Bite has begun to expand into new product lines, footwear for running and fishing. This acquisition represented the emergence of Crocs into the sports market.
This Crocs acquisition helped to propel the brand into the lightweight ocean sandal market.
After great success with Crocs footwear, the designers at Crocs decided to combine the comfort of Crocs with fashion forward designs. In June 2007 Crocs created YOU by Crocs, dedicated to looking fashionable while providing top notch comfort.
Fury, Inc. is a wholly-owned subsidiary of Crocs, Inc. Founded in 2002, Fury delivers top-of-the-line sporting equipment, apparel, and accessories featuring croslite.
*See Appendix B for product pictures.
Market Analysis
Industry Description Crocs is currently a darling of Wall Street. While the consumer goods sector has had a tough year, the sector itself is still reporting strong return on equity and one of the strongest price to book values.
The apparel, footwear and accessories industry is a jewel of the consumer goods sector. Throughout the past three years, specialty lines of clothing, footwear and accessories have had impressive IPOs and continued growth.
Financial Market Conditions The purchasing entity should take into account a number of financial market conditions and their impacts on the proposed transition.
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Conditions Impacts Falling Interest The Fed has recently lowered interest rates. This move helped introduce new liquidity into the market. The Rates market stabilization and new liquidity should make conditions more favorable to find qualified buyers to purchase a growth company like Crocs.
Leveraged During the past year and a half, private equity firms have made some well publicized purchases. The groups that Buyouts by have seen most of the greatest M&A spending include business services, industrials and consumer products. Private Equity Firms / Many large private equity groups (KKR, The Carlyle Group, Bain Capital, Texas Pacific Group, The Blackstone Strong Merger Group and Madison Dearborn Partners) have shown that with current liquidity levels and low interest rates, the & Acquisition merger and acquisition boom is going to continue. Activity A growing company like Crocs could be a worthwhile purchase for these Private Equity firms. The ability to purchase a public company and take them private eliminates both the personnel strain, and monetary burden of Sarbanes Oxley and it would allow the firm to make decisions without any say from public ownership. Strong The market contracted this summer. However with the Fed cutting interest rates, the purchase price multiples Purchase Price continue to strengthen as the cost of capital falls. Multiples Across the market, price multiples from P/E to EBITDA (Earnings before interest, taxes, depreciation and amortization) have been higher than in years past. The high multiples have allowed many owners to get top dollar on their sales side transactions. This should help Crocs to find many potential buyers willing to pay top dollar for the firm. Lower The low consumer spending and consumer confidence is currently a worry for any company within the apparel, Consumer footwear and accessories industry. This industry really has until the fourth quarter to determine how big of a Spending year 2007 will have been.
While the 2007 estimates have consumer spending higher than 2006, they expect the rate at which the spending is increasing to be lower than in the past. This could be a bad trend for Crocs as some potential buyers may be hesitant about getting into the market.
Contracting 2007 has been a year market by the crash of the sub-prime lending sector. This crash has affected the market Sub-Prime as a whole and slowed down virtual all forward looking activity. While the Fed has stepped in to calm the Lending Market market, many investors are weary of potential liquidity issues. This may mean that Crocs should look for a potential buyer who could finance the transaction without taking on too much debt.
Successfully Pursuing an Acquisition
How to Position the Company Most Effectively in a Sale Crocs is making a strong impression within their industry. To date, Crocs has the strongest long term growth rate, quarterly earnings growth, quarterly revenue growth, return on equity, and market capitalization within their industry.
The buyer should be in a position to capitalize on Crocs strong growth and brand recognition. Depending on the buyer, both a horizontal and vertical integration could produce synergy.
With low interest rates, Crocs could be purchased by a company willing to take on large amounts of debt to finance the purchase. A company willing to finance a purchase with debt will be interested in increasing current market share or using Crocs patents.
Crocs could also take advantage of the leveraged buy outs by courting private equity firms. These firms would find that Crocs would allow a strong rate of return for cash borrowed.
Potential Buyers
Horizontal Acquisitions Skechers USA, Skechers U.S.A., Inc. designs and markets Skechers-branded contemporary footwear for men, women and Inc. children under several unique lines. Its brands are sold through department stores, specialty stores, athletic retailers and boutiques, as well as its e-commerce Website and its own retail stores.
Skechers has recently lost market share corresponding to Crocs growth in market share. A purchase of Crocs, Inc might help to propel Skechers to the top of the specialty footwear industry.
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Birkenstock Birkenstock is the exclusive German-made footwear that was transformed from cult status to mainstream hip as the look of the 1970s re-emerged. The company's high-comfort products include more than 400 styles of shoes, sandals, clogs, and arch supports for men, women, and children, all designed around the concept that the shape of the shoe should follow the shape of the foot.
Birkenstock has worked to unsuccessfully imitate a number of Crocs shoe styles. Birkenstock was at one time considered the comfort shoe. Birkenstock, with an average cost of $105/pair have had a hard time entering the low cost comfort market.
Vertical Acquisitions Cabela’s Inc. Cabela's Incorporated is a direct marketer and a specialty retailer of hunting, fishing, camping and related outdoor merchandise. The Company operates through four business segments: Direct, Retail, Financial Services and Other.
Cabela’s is the industry leader in the retail footwear sales. They are in a prime position to move vertically in the supply chain. With the purchase of Crocs Inc., Cabela’s will have the ability to profit from the ownership in the entire supply chain (creation of sandals to sales) of Crocs shoes.
Big Dog Big Dog Holdings, Inc. is the parent company of two retail chains, Big Dog USA, Inc. (Big Dogs) and The Holdings Walking Company (TWC) that develops, markets and retails a branded, lifestyle collection of consumer products, including active wear, casual sportswear, accessories and gifts.
Big Dog Holdings will be able to sell Crocs through Big Dog USA stores as well as The Walking Company. Their stores currently operate under the model of affordable comfort. Crocs (which are currently sold at The Walking Company stores) are the epitome of affordable comfort. Currently Big Dog makes/sells store brand shoes and would be able to use existing efficiencies to integrate the Crocs brand.
Consideration That May Affect the Outcome of the Transaction Conditions Impacts Economic A majority Crocs shoes and products are being created outside of the United States (Canada, Mexico, Romania, and Italy). With the weakening dollar, Crocs could lose some of their operating margin. Cultural / PR A potential buyer will have to deal with the following Cultural/PR conditions:
Lawsuits Escalators – Several children have been injured due to Crocs shoes becoming caught in escalators. Patent Infringements – Crocs has eleven outstanding lawsuits defending patent infringements.
Environmental Crocs does not have any environmental conditions which would affect the outcome of the transaction.
Demographic Crocs have strong demographic support in men and women under the age of 25. A potential buyer should keep in mind that future Crocs is currently trying to build support in other demographics.
Crocs Valuation
Factors to Address and Measure Growth – It is important to know that the business will be sustained, but It is more important to understand how the Crocs plans to grow. It is important to understand how current assets, debt and, equity will fuel future growth.
Price Multiples – It is important to understand the average price multiples that currently exist within the sector, industry and comparable companies. These multiples will help to put the entire sale into perspective and allow both Crocs and the buyer to believe they are getting a fair deal.
Current Earnings and Earnings Estimates – Crocs began their business as just another fad, but as of their IPO date have build a solid foundation as a top player in the apparel, footwear and accessories industry. Quarter after quarter, Crocs has continued to beat analyst estimates for both earnings and growth.
Customer Concentration – To help the valuation process it is imperative to understand the sales landscape. If Crocs has too much concentration in any one customer, the future sales of Crocs could suffer. Crocs footwear is sold through traditional retail channels, including specialty footwear stores. No customer accounted for more than 10% of its revenues for the year ended December 31, 2006.
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Type of Financial Statements – It is important to understand the company’s financial statements, the relationship between net income, EBITDA and the cash flow statement can tell the buyer substantial information. Add backs, depreciation and excessive expenses should be reviewed.
Synergy Assessment – The combined strengths and weaknesses between the purchasing company and Crocs will be insightful as to the worth of the company and the premium paid during the transaction.
Type of Valuation Performed – Comparison Company Valuation – Valuing a company based on comparison company’s financial statements Comparison Transactions – Valuing a company based on similar transactions Discounted Cash Flow – Valuing a company based on future cash flows Leveraged Buyout – Valuing a company based on the target company’s assets and cash flow Current Stockholders Valuation (Stock Value) – Valuing a company based on the equity (stock) price
Assumptions that drive the valuation:
Forecast Time Period – 2007 – 2013 (7 Years)
Future Growth Rate – Analyst Sales forecast through end of year 2008, sales growth through 2009 of 25%, and sales growth declining to 5% in 2013. A final terminal rate of 5%.
Net Income Margin – 18%. This number is consistent with most analyst opinions and is consistent with Crocs financial statements for the past three years.
Weighted Average Cost of Capital – 12% based on last year (2006) and current year (2007) annualized financial statements. *See Appendix C for Valuations
Review & Analysis of Crocs Operating Results
Sales Growth Rates – Crocs has seen increasing sales and assets over the past three years. While the actual growth has been increasing, the rate at which the company is growing is actually decreasing. Crocs as a company is still in the growth stage, but some of its product lines may be moving to maturation soon.
Profitability – The company has become increasingly profitable as it takes advantage of economies of scale. Both return on Equity and return on net operating assets have been increasing with time.
Net Profit Margin and Total Asset turnover have been increasing over the past three years. However, based on the DuPont model, return on equity has suffered as a result of a decreasing total leverage.
Margin Analysis – Margin has steadily been increasing over the past three years. Gross margin, EBITDA margin, EBIT margin and Net Operating margin have increased steadily.
Turnover Analysis – Over the past three years, Crocs has a mixed result of turnover metrics. While Net Operating Asset turnover and Net Working Capital turnover have gone down, average days to collect receivable and average inventory holding period have increased. *See Appendix D for Detailed Statistics
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Appendices
Appendix A – Management Profiles
Officer Name Current Position Biography Since Sharp, 2005 Chairman of the Richard L. Sharp has served as the Chairman of Crocs, Inc. board of directors since April 2005. From Richard L. Board 1982 to 2002, Mr. Sharp served in various positions with Circuit City Stores, Inc., a consumer electronics and personal computer retailer, most recently as President from 1984 to 1997, Chief Executive Officer from 1986 to 2000 and Chairman of the Board from 1994 to 2002. He is also a director of Flextronics International Ltd. and Chairman of the Board of Carmax, Inc., the nation's largest specialty retailer of used cars and light trucks.
Snyder, 2004 President, CEO, Ronald R. Snyder has served as Crocs, Inc. Chief Executive Officer since January 2005, was Ronald R. Director appointed as President and a director in June 2004, and served as a consultant from October 2003 to June 2004. From March 2004 to December 2004, he was Chief Executive Officer of Vinci Corporation, a home theater equipment company. From April 2000 to December 2003, Mr. Snyder served as a senior executive with Flextronics International Ltd., a NASDAQ-listed electronics equipment manufacturer, where he was most recently President of the Flextronics Design division. Mr. Snyder joined Flextronics on its acquisition of The Dii Group, Inc., of which he was a founder and officer and where he had previously led various groups, including manufacturing operations, mergers and acquisitions, and sales and marketing.
Case, 2006 CFO, SVP – Peter S. Case has served as Crocs, Inc.'s Chief Financial Officer and Treasurer since April 2006 and Peter S. Finance, has served as Senior Vice PresidentùFinance since February 2006. Mr. Case served as the Executive Treasurer Vice President, Chief Financial Officer and Treasurer of Ashworth, Inc., a NASDAQ-listed sports apparel and accessories company, from September 2005 to February 2006. From June 2000 to September 2005, Mr. Case served in several executive and managerial positions with Ashworth, including Director of Finance, Vice President of Finance, and Senior Vice President of Finance and Information Technology.
McCarvel, 2005 COO, EVP John P. McCarvel has served as Crocs, Inc.'s Chief Operating Officer and Executive Vice President John P. since February 2007 and as Senior Vice PresidentùGlobal Operations from October 2005 to February 2007 and served as Vice PresidentùAsian & Australian Operations from January 2005 to September 2005, after providing consulting services during 2004. From October 2001 to January 2005, Mr. McCarvel served as Vice President for the Design, Test and Semiconductor division of Flextronics International Ltd., where he was responsible for building Flextronics's engineering infrastructure in Asia and growing Flextronics's business in the region. From 1999 to October 2001, he served as President of U.S. Operations and Senior Vice President of Worldwide Sales and Marketing for Singapore Technology Assembly Test Services Ltd., a semiconductor services company. He previously worked in executive level positions with Micron Custom Manufacturing Services, Inc. and The Dii Group, Inc.
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Appendix B – Products Pictures
Sports Wear
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Appendix C – Valuations
DCF:
Relative P/E Valuation:
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Appendix D – Crocs Company Statistics
Actual Actual Actual
Fiscal Year End Date 12/31/2004 12/31/2005 12/31/2006 Annual Growth Rates
Sales 1060.6% 703.1% 226.7% Assets 1148.0% 381.0% 283.8% Sustainable Growth Rate 85.4% 217.9% 56.7% Profitability
Return on Equity 0.854 2.179 0.567 Return on Net Operating Assets (0.441) 0.799 0.525 Basic Dupont Model
Net Profit Margin (0.121) 0.154 0.182 x Total Asset Turnover 1.543 2.304 1.879 x Total Leverage (4.574) 6.151 1.662 = Return on Equity 0.854 2.179 0.567 Margin Analysis
Gross Margin 0.470 0.560 0.565 EBITDA Margin (0.116) 0.248 0.269 EBIT Margin (0.118) 0.248 0.274 Net Operating Margin (b4 non-rec.) (0.107) 0.162 0.183 Net Operating Margin (0.107) 0.162 0.183 Turnover Analysis
Net Operating Asset Turnover 4.118 4.933 2.874 Net Working Capital Turnover (97.617) 12.239 4.201 Avge Days to Collect Receivables 46.327 39.029 45.916 Avge Inventory Holding Period 72.980 118.073 135.792 Avge Days to Pay Payables 146.984 110.514 93.867 PP&E Turnover 6.650 11.744 14.300 Analysis of Leverage
- Short-Term Liquidity
Current Ratio 0.798 1.217 2.704 Quick Ratio 0.486 0.535 1.560 EBIT Interest Coverage (33.830) 44.026 171.416 EBITDA Interest Coverage (33.426) 44.013 168.159
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