Crocs' profits soaring on heels of new designs

Crocs — love 'em or hate 'em.

But not just the distinctive rubbery shoes with holes. The stock of Crocs generates the same polarized sentiment.

Investors have alternately loved it and hated it, sending the shares on precipitous surges and crashes over Crocs' six years as a publicly traded company.

While the stock still shows volatile swings, Crocs has reversed a succession of financial losses with a successful turnaround strategy.

The Colorado-based shoemaker gradually is transforming its product mix from the iconic clunky clogs to snazzier styles, and beefing up its international markets. That has helped bring Crocs back from near extinction to a steady money-maker.

After a rocky 2008-09 when auditors issued a warning about Crocs' ability to survive, the company has turned a profit for seven consecutive quarters.

Revenue hit a record high of $295.6 million in the second quarter of 2011 as consumers embraced a growing selection of shoe styles at higher prices — and better profit margins — than the classic $29.99 clog.

"They've added shoes that look like shoes, not shoes that make your feet look like a duck's," said Sam Poser, a New York-based senior research analyst with Sterne Agee.

Yet amid the fashion transition and financial makeover, the share-price volatility remains.

Investors were reminded of the stock's capricious nature in October when Crocs was hammered with a one-day price plunge of 39 percent after it said third-quarter revenue and earnings would be slightly lower than projected.

The October drop reflected both pragmatic and emotional concerns by investors, Poser said.

"Half of it was missing their numbers," he said. "The other half was people thinking back to 2007 and saying, 'God, here they go again.' "

That's a reference to Crocs' big surge after its 2006 initial public stock offering, followed by an epic crash.

After buyers flocked to the February 2006 IPO at a split-adjusted price of $10.50, shares took a meteoric run up to $74.75 by October 2007.

But just a year later, the stock plummeted to less than $1 as investors fled what they believed to be a fad-induced spike.

* * * * *

A founding investor in Crocs was Richard L. Sharp, the Goochland County resident who was the longtime executive of now-defunct consumer electronics retailer Circuit City Stores Inc. He also was part of the team that created CarMax, which was spun off from Circuit City, and served as its chairman until 2007.

Sharp became chairman of Crocs in April 2005, but he took a leave of absence from the company board in December 2010. He left the board in June.

Former Henrico County resident W. Stephen Cannon, chairman of the Constantine Cannon LLP law firm in Washington, has served on Crocs' board since February 2009. Cannon was the senior vice president and general counsel at Circuit City from 1994 to 2005.

Fadishness, however, is not a current concern for John McCarvel, the president and chief executive of Crocs.

In fact, "We never say the f-word around here," McCarvel said, with a grin.

McCarvel held other management positions with Crocs and headed the company's Asian operations.

Earlier this year, McCarvel was named winner of the annual Stevie Award for turnaround executive of the year at the American Business Awards.

In a recent interview at Crocs' headquarters, McCarvel relaxed in a meeting room, wearing an a open-collar oxford shirt, well-worn blue slacks and a pair of Crocs "Santa Cruz Loungers" — a canvas model that bears a resemblance to household slippers.

He described the recent stock-price fall as an overreaction to lower earnings projections. Shareholders may be skittish, but customers, he said, are enthusiastic.

"We've got a loyal customer base," he said. "From a name-brand recognition point of view, it's a pretty good connection with customers."

McCarvel said his belief that Crocs has a sustainable, non-faddish future is based on:

• Consumer enthusiasm for the company's non-clog product line.

Crocs now has 125 different styles. Particularly for women, models now include diverse styles of boots, heels, wedges, flats and sneakers made with leather or fabric, and priced as high as $119.99.

In the third quarter of 2011, the majority of Crocs' revenue came from non-clog models.

• Prospects for growth in international markets.

Third-quarter sales in Asia increased by 41 percent. And even as questions remain about Europe's financial problems, European sales were up by 26 percent.

• Better control over inventories.

Bloated inventories were a key factor in Crocs' net losses in 2008 and 2009. The company now has a manageable inventory ranging from 10 million to 14 million pairs, compared with 29 million when sales began to drop in 2007.

• More emphasis on Internet and company-owned-store sales instead of from wholesale customers such as department stores and shoe stores.

McCarvel said Crocs will add about 100 more company-owned retail outlets next year. It now has about 400.

• Strong financial fundamentals.

The company has no debt and $250 million in cash.

Wall Street analysts generally like Crocs' direction, with the majority maintaining "buy" ratings.

"Although we believe it may take a quarter or two for the stock to start working again and management needs time to rebuild credibility with investors, we are sticking with our 'buy' rating," WJB Capital Group analyst Robert Samuels said in a recent report.

"We continue to believe that Crocs represents a compelling global growth story," Monness Crespi Hardt retail analyst Jim Chartier said in a report. "Given this growth profile, the stock looks undervalued."

Customers continue to exhibit a love-hate relationship with Crocs, sometimes simultaneously.