Longevity of Crocs Brand in Question?

24/7 Wall Street analyzed 100 brands and makes a prediction that 12 brands will not survive after 2010. The third on in the list? Crocs, the footwear company in Niwot, Colorado.

Two weeks before the credit extension, the company’s auditors gave the firm a “going concern” letter, an indication that there would be reasonable chance that Crocs would make it another year. In the fourth quarter of 2008, Crocs lost $43 million after making $55 million in the same period the year before. Revenue fell from $225 million in the last quarter of 2007 to $126 million. Crocs won’t make it through the year.

The stock did fall from its highs last year of $72 and I wrote about it in the Boulder Net blog. The Wall Street Journal reported that the trend does not favor Crocs. In that article an analyst with Wedbush Morgan Securities was quoted saying,

"Crocs's problems have less to do with the recession than with fading public interest in its signature footwear. Their problems started earlier."

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Crocs Signaling Its Focus On Brand Value With New CEO Pick

Crocs saw its shareholder value fall by close to 96% from its highs in 2007. Crocs stock has fallen to $1.45, a downfall that is twice as steep as the rest of the market. Crocs announced that Mr.John Duerden will become the new CEO of the Niwot, Colorado based company. Crocs footwear may have few takers these days, as evidenced by the fall in revenues (to $126.1 million, half of previous year number), but its brand still has some equity that quite possibly some "brand elasticity" that can be transferred to other related items.

The economy and its current product line does not bode well for Crox. Mr. Duerden's appointment signals a possible Crocs' plan to leverage this brand equity, possibly with line extensions. The new CEO used to run another big brand in footwear, Reebok. Most recently, Mr.Duerden was with the Chrysallis Group, a brand development and renewal consulting group that he founded in 2006. We should expect him to be more brand focused and rebuild shareholder value through products with higher premium rather than increasing sales with lower priced items. Crox cannot win by  going  after market share by competing purely on price, profit should be the number focus.

Of course for all those coming to this post from Yahoo Finance Crox message board, this is just my opinion. Mr. Duerden's resume is verifable and it is true. I am not making any recommendation here. You should not make your stock decisions based on this or any other opinions. Look at my previous post on Crox  from last year here.

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How Crocs made its first Million in sales

The May issue of Inc magazine talks to CEO Ron Snyder of Crocs, Niwot Colorado, about how they made their first $1 million in sales.

With only one factory, in Canada, Crocs lacked the capacity to ramp up its production from 30,000 to 300,000 pairs of shoes a month. "There was no chance we could fulfill the order," Snyder says. Fortunately, he had a few contacts in Asia and was able to find a contractor in about a month. Soon, Crocs was shipping thousands of pairs of shoes. "Saying no never occurred to us,"

Since this first million they have come a long way and their stocks was hovering around $75 before falling to $10-$12. Crocs made revenues of $194 million just in the first quarter of 2008. Interestingly, the very first factory in Canada they had used to supply their sales is what they are shutting down now. Is there more room for Crocs' earning growth?

Crocs Earnings Report Deserves a Closer Look

Just a day before Niwot, Colorado based Crocs reported its 2008Q1 earnings (SEC filing) I wrote about its practice of capitalizing software development costs. Yesterday after Crocs (CROX 11.81, +1.85, +18.6%) reported a loss including one time charges for closing down operations in Canada, its shares jumped almost 20%. WSJ blog also predicted a high stock volatility.

For the quarterly earnings we do not have much insight into the components but some of the components do deserve a closer look before predicting a stock turnaround.

1. The Cost of Sales grew faster than revenues, leading to a significant erosion in gross margin. This leads to questions, whether they increased sales by slashing prices and extending higher commissions. How far can they go to increase sales further?
   
2. They use FIFO (First in First out) for inventories. The higher cost of sales is accounted for by the increasing raw material costs. The current cost of sales in the income statement represent the cost of materials when they acquired them, may be an year or two ago. Since then costs have been on the increase due to run up in oil prices. Their gross margin is bound to go down more.
3. Cash position is weak as they generated no operating cash flow and ate into the cash reserves.
4. Their SG&A is also on the rise indicating a higher fixed cost that is independent of sales.
5. They indicate to us that the $12.1 million ($20 million total for the year) after tax charge on closing down Canadian operations is one time charge. In GAAP terms, this is still above the line but most companies tend to signal this to investors who also agree with this one time classification. But we need to find out whether the company is taking a big bath, adding many costs to the restructuring that are usually not one time charges. We do not have data to say either way.
6. Capitalizing Software development costs. We need to see if some of these costs get written off as part of the one time charges.

Before rushing to buy the stocks at current levels, investors do need to ask these questions.

Crocs Capitalizing Software Development Costs

The Niwot based company's stock is trading at $10, more than 85% below its highs set in November 2007. There is one aspect in their 10-K is nagging. Crocs has invoked the GAAP that allows companies to capitalize software development costs after the feasibility period. In other words instead of expensing all of the development costs and taking a hit in income statement, Crocs capitalized the cost into assets that are amortized over 7 year period.

Capitalized Software—The Company capitalizes certain internal and external software acquisition and development costs that benefit future years in accordance with SOP 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.

The carrying amount increased from $5.5 million to $24 million from 2006 to 2007. That is close to 10% of the net income reported for 2007.

The SOP 98-1 makes perfect sense for software companies with high fixed cost of software development and low marginal costs and can track the revenues directly to the particular software.

Why is a footwear manufacturer capitalizing software that is used for its operations and has no market value?