Markets

Crocs Footwear Loses Novelty

By David Phillips

Updated on: November 18, 2008 / 3:17 PM EST / MoneyWatch

Sales at Crocs fell 32 percent in the third-quarter ended September 30 to $174.2 million, as the company experienced substantial declines in demand for its brightly colored clogs, largely attributable to reduced consumer spending, market share erosion to cheap knock-offs and counterfeits, and decreased foot traffic at shopping malls.Challenging global economic and retail environments aside, management is ignoring the reality that the novelty of its footwear, introduced in 2002, has worn thin. Further evidence that the lightweight, resin clogs are long past the maturity phase of their product life cycle can be found in the third-quarter 2008 FORM 10-Q regulatory filing:

At September 30, 2008, the Company had committed to purchase 3.1 million pairs of shoes, with certain of its third-party manufacturers during the three months ended December 31, 2008, at prices in excess of net realizable value, given the Company's current plans for sales of the product. The Company recorded an expected loss on the purchase commitments of $4.2 million in the three months ended September 30, 2008.

The comfort footwear retailer has reduced its global manufacturing capacity [shut-down of Brazilian and Canadian facilities] to better align its cost structure with anticipated lower unit sales. Unfortunately, efforts to expand Croc's product offerings to include apparel and sports equipment (such as hockey and lacrosse equipment) have yielded few merchandising successes. At September 30, footwear sales still account for more than 90 percent of sales.

Chief Operating Officer John McCarvel told analysts on the third-quarter 2008 earnings call that pre-bookings for fall 2008 and spring 2009 suggest strong interest by consumers for some models, most notably the new version of the fleece-lined Mammoth and the Nadia boot. Nonetheless, in view of a weak retail environment, the company expects overall footwear sales for the fourth quarter of fiscal 2008 of between $100 million and $120 million, down from Wall Street consensus estimates of $187.5 million.