Crocs Inc Case - Case Studies in Corporate Finance

Case Studies in Corporate Finance

Crocs

Group C2: Han Xiao

Qian Yang

Wenkai Xie

Case Overview

Crocs, Inc., first launched its famous clog shoes in November 2002, has now become a world popular shoe designer and manufacturer company in less than 10 years. Crocs uses a very special material called Croslite, which can render the shoes light, comfortable and water-resistant, to make shoes. The unique looks, bright colors and wide range of uses soon increased a large group of customers' interests. Just five years after its initial launch, Crocs achieved its revenue from 1.16 million to 847 million, a dramatic increase in sales. But later it suddenly suffered a serious stock price meltdown in late 2007.

Industry Analysis

The global casual footwear and apparel industry is highly competitive and easy to entry. There may be a new competitor join to share the market every day and may lead to a new trend. So as long as to be successful, footwear companies must always focus on design, pricing, quality, and distribution.

Management

In order to maintain competitive, Crocs made some efforts to carter to the need of the whole industry. In June 2004, the company acquired Foam Creations which produces Croslite, to make a vertical integration. This measure can be very helpful to reduce market risk, save transaction cost and more importantly, it is quite easy to set up entry barrier. Since Crocs uses Croslite to make its symbolic shoes which is different from other main competitor in the market, actually it is a big advantage to improve Crocs' brand recognition among consumer group because differentiation is one of the key factors for footwear companies to successfully survive in that highly competitive industry.

Like other footwear companies, Crocs needs to extend its brands' reach and grow its revenue. In order to achieve this goal, Crocs made some acquisitions, some of these are proved to be successful but others may not. When Crocs acquired Fury and Bite, actually it is quite confused because it seems like these two companies had not much connection with Crocs's core operation. For a company still in its growing stage, we think it is more crucial to focus on its core products and key customer segment, not to make its product lines as big as some mature companies. Acquisition of these two companies would not only cost quite a lot of capital but also put forwards challenges to managers' work. In contrast, when Crocs acquired Jibbitz, it can offer customized merchandise and allow customers to personalize their own shoes, which can really do a lot to develop an emotional connection to customers and build their brand loyalty.

Crocs has a wide range of distribution channels due to its broad appeal. These channels play an important role in its high growths rate till now since it is more and more difficult for enterprises who want to maintain competitive in the market only through the leading technology and innovation. But problems are always exist. When Crocs facing a high inventories issue, managements attributed it to distribution problems in Europe and Japan. Maybe some false performances made company overestimate the demand of the market.

Financial Analysis

We can easily conclude from the income statement that the company did a good job from the year they launched to the year 2006. The average growth rate of revenue is 5.33% in those four years which means at the end of 2007, its revenue will reach $847,350,000, raised from $1,163,100 in the year of 2003. The net income shows that the company achieved profitability at the year 2005, just two years before it launched, from loss $1,200,000 to earn $168,228,000, and keeps profitability in the following years while the growth rate of net income goes downside from 2005 to 2007. Since 2005, the crocs had kept its profit margin above 15% and its gross profit margin above 55%.

Looking at the balance sheet along with the income statement（Chart 1）, we can use the LAPS and DuPont method to analysis the financial situation of the Crocs.

From Chart 2, the Crocs has a good liquidity for the two years 2005 and 2006, and also, its inventory was a comparatively large portion of its current assets. Because of the insufficient data, we cannot compare with other company. While, we can still conclude that Crocs has the capability to pay off its obligation. Chart 2 shows the inventories turnovers of the Crocs where the lowest ratio would appear in 2007 because the growth rate of revenue did not match the growth rate of inventory. The slightly decrease of assets turnover, from 1.39 to 1.18, also reflected the same problem. It can be concluded that, from Chart 2, the Return on Asset remains constantly while the Return on Equity declined a lot, from 4.13 in 2005 to 1.44 in 2006, which was mainly caused by the lower equity multiplier. The lower equity multiplier indicates that the company had lower financial leverage, or in another word, less financial risk. As to the solvency issue, the interest coverage grows from 44.13 to 168.15 and the debt equity declined from 2.74 to 0.44, which means the company's ability to meet its debt obligations got stronger and it had low exposure to solvency issues. One reason is that much of the company's long term debts matured in 2006; the company's long-term debt decreased from 3.4 million in 2005 to 0.12 million in 2006. While from another aspect, both those ratios revealed a potential problem that the company did not make good investment of its earning to make more money.

Valuation (Peer Group)

We estimated CROX's valuation using three methods: EBITDA, P/E multiple and EV/SALES. While we feel the EBITDA multiple is the most useful measurement as it incorporates observable market data, we included the other two methods as a comparison. To calculate the terminal EV / EBITDA