Crocs loses some spring in its step
Stock price drop, shareholder suits burden company
By James Paton, Rocky Mountain News (Contact)
Published January 5, 2008 at 12:05 a.m.
The Rocky
Crocs launched the YOU line of fashion footwear in September. The company was dealt a blow in 2007 when a European court ruled one of its patents invalid.
Crocs soared after its early 2006 debut as a public company and seemed to know only one direction, but lately it has been brought down to earth.
While the company has continued to record large increases in sales of its colorful shoes and to expand its product line, it has hit a humbling stretch.
Crocs shares have been sliced by more than half since the end of October, since a disappointing earnings report. The European Union has tripped up the company, ruling that one of its patents is invalid. Shareholders have brought lawsuits saying executives misled them while unloading their own shares. Rivals have fought patent infringement claims. Now some employees are likely to be peeved - the company said it temporarily reduced staff before Christmas, forcing workers who had vacation time to use it if they wished to be paid.
Crocs said it will appeal the EU decision and "vigorously" defend itself against the shareholders' allegations. Addressing the short-term staff reduction, the company cited a "slow cycle of business in the last two weeks of December."
Tim Beyers, a contributor to the Web site The Motley Fool who is based in Littleton, has worried about Crocs' top brass selling stock and whether the Niwot company can keep its competitive advantage, but he said the stock has declined to more attractive levels.
"A lot of companies get a burst of initial growth and investors come to expect too much. When expectations turn out to be too high they sell like crazy," he said. "As long as the growth story underlying the company is mostly intact, it can represent an opportunity for investors. I sense that's what we've got with Crocs."
Crocs shares have fallen from $74.75 at the end of October to $32.75 on Friday. Its stock market value has dropped from $6.1 billion to $2.7 billion.
Crocs saw its shares plunge after reporting third-quarter revenue of $256.3 million, lower than what analysts had anticipated but higher than what the company had told Wall Street to expect.
Inventory, meanwhile, has risen faster than sales. That can be a worry or a sign of a company gearing up for growth. The company said problems in distribution centers in foreign markets kept it from filling orders.
The stock's precipitous drop sparked a string of lawsuits accusing Crocs executives of misleading investors about the company's operations. Crocs said the claims have "no merit."
Those are not the only battles Crocs has waged. Crocs in April 2006 filed complaints against 11 companies - in federal court and with the U.S. International Trade Commission - alleging patent infringement.
One of those companies is the maker of shoes under the brand name Nothinz. That company, Australia Unlimited, has refused to surrender. Countering with its own complaint, the company said Crocs failed to disclose that the design in one of the patents was created by an Italian man before 2000 and molds used to manufacture the clogs were bought by a Canadian company. That company, Finproject, sold the shoes in the U.S. before 2002 and was acquired by Crocs in 2004 after its name was changed to Foam Creations, the complaint said.
The EU, acting in response to a complaint filed by a competitor, Holey Soles, dealt Crocs a blow last month. Its Office for Harmonization in the Internal Market found that the patent lacked "individual character" compared with previous designs.
Crocs said its patent will remain intact in the meantime. "We will continue to enforce our intellectual property rights as necessary," it said.
Beyers was prematurely bearish, watching Crocs continue its ascent after declaring the stock was overvalued. But the "haircut" to the stock, as he put it, finally happened in late 2007. The shares had a particularly rough Friday, falling about 13 percent.
He doubts any patent problems will have a profound impact on Crocs, saying he believes customers will snap up its products even with similar ones on the market. At the same time, he said the novelty effect could wear off. "I don't know Crocs has a sustainable competitive advantage, no matter how you look at it," he said.
As for the staffing move, it was not permanent. Crocs said it "is not uncommon" for companies to make such a reduction and that the employees affected "were able" to take paid time off.
patonj@RockyMountainNews.com or 303-954-2544
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January 5, 2008
8:17 a.m.
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Oh_Wise_One writes:
Despite my sympathy for patent infringment by foreign companies, the investors had/have to realize that Crocs are a fad. "the novelty effect could wear off" has to be the understatement of the week. But, I though Google was a fad which is why I don't give stock tips. But 2, I don't wear Crocs but I use google.
January 5, 2008
1:03 p.m.
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DenverDem writes:
I'm sorry employees may lose jobs over this but I am not sad to hear this news. Those shoes are just butt ugly.
January 6, 2008
1:16 p.m.
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prk166 writes:
Crocs = Zubaz
January 8, 2008
5:36 a.m.
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vudumom writes:
My kids love their Crocs, they are comfortable,but expensive. A pair if crocs still cost $40,however the knock-offs are about $10-$15.Quite a huge difference in savings for a rubber shoe.They should have filed and protected their patent better than they did.
January 8, 2008
10:58 a.m.
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aspenextreme writes:
My kids also love Crocs (and my wife and I are loving the pair of Mammoths we bought). We were at the store and considering buying a knockoff but my son threw a fit because he didn't want to get teased for wearing the fakes. The real deal isn't that expensive so we bought them for him.
This article is ok but I am wondering why Mr. Paton makes it sound like there were layoffs or a "staff reduction" at the company when that's not true? My friend works at Crocs and said some employees who still had some vacation time left were told they must use it before the year's end because they wouldn't be permitted to carry the days over to the new year (we were told the same thing at my job). So, some people had to take some extra time off for the holidays. My friend said no one was "peeved" like the article implies. Most of the affected employees were more than happy to take a few (paid) days off. She said everyone is back to work now and the company is quite busy. Maybe the author should consider updating this article with some more accurate information.
January 8, 2008
9:04 p.m.
Suggest removal
rede2go writes:
Dito's to aspenextreme.
My wife is loving her new Mammoths. My daughter is enjoying her new Croc laptop bag (who knew).
I have worked for a company (a newspaper, no less) that had the use-or-lose vacation policy; everyone knew the rules, it was no big deal. The only difference, the company I worked for didn't make it an issue to point out how much vacation time associates had in an effort to protect the employee benefit ("it was the responsibility of the employee . . ."), and without sufficient notice, time would not be granted; thus, it would be lost. I was afraid this article negatively (and perhaps erroneously) reported the story. And, I agree, the author should consider updating the article with accurate information. If you track any of the financial news in relation to Crocs, the only story is that Crocs initiated a mandatory vacation over Christmas due to waning sells (what a croc). Thanks aspenextreme, for the real story.