Crocs: Successful Brand or Victim of Cheap Imitations?

There's a debate raging as to whether Crocs (CROX), maker of the famous Croslite clog, is a dead fad or a value at its current stock price just over $7. The stock is down from $75 last Halloween, but the business sports an operating margin of 23%, revenue growth of 40%, insider ownership of 11%, and an impressive line of footwear beyond the original clog -- it even includes women's shoes with heels. Look at all the styles at the Crocs website.

Here at The Kelly Letter, I began building a position in Crocs last month to howls of protest from some and cheers of encouragement from others. Those protesting said the original Crocs clog was a fad killed by cheap imitations. Those cheering said the original clog itself was no fad because it's very comfortable and, furthermore, the expanded line of styles speaks to the company's long-term plans and prospects.

I decided to start buying shares because it looks like Crocs is making strides towards establishing its name as a desirable brand. There will always be knock-offs, but are they as good as the original?

Where I live and work in Japan, the knock-offs have shown up from China but they feel different. People who've gone on comparison shopping trips for me reported that true Crocs are softer both in terms of pushing down on them with one's feet and in terms of rubbing their surface with one's fingertips. The Croslite material is better.

Also, teachers and mothers at schools near my office report that mothers do not want their children seen in knock-offs. They buy for them either real Crocs or an entirely different kind of shoe, not an imitation. That's branding at work.

These are anecdotal observations, but they're useful. I'd like to know the word on the street from other parts of the world as well. If you have access to a shopping area and can compare Crocs with imitations that are available, please send in your impression. I'd also like to hear what people say in your neighborhood. Is there value in the Crocs brand, or is it just a maker of a fad shoe that's now been flanked by knock-offs?
 

Disclosure: long.
 

Comments

[To the point]

In Israel it seems that every other person is wearing Crocs and for the most part they're genuine

[syndicat]

Very good point about the value of the name brand. Kids are very
brand savvy.

[Tokyo Haze]

I too live in Japan and agree that at least in Japan, most would not want to be caught dead wearing imitation brands. However, this phenomenon is not true elsewhere. I just returned from vacation in Hawaii and actually picked up an imitation pair for about $9 at Walmart. And I have to say they are great. Later in the trip, I found a Crocs store and tried theirs. Problem was that they only had S, M, and L sizes. M was slightly too small and L was slightly too big, so I could not find a comfortable pair. However, the imitation I was wearing was a "9" and fit perfectly. So even though I wanted to buy a pair of Crocs (as I actually own the stock), I ended up putting them back on the shelf and sticking with my imitation pair. I bought a second imitation pair before returning to Japan.

It seems that if Crocs is to beat the impostors, it must not only advertise its got a better brand, but that it is also better quality. Because I couldn't get my size, I can't judge the actual material quality, but since sizing is also a factor of quality, the impostor had Crocs beat in my case....

[Tokyo Haze]

Let me add one more comment, in the interest of fairness to Crocs, my wife bought a pair of Crocs' sandals with heels (not one of their original designs) and she loves 'em. So there is definitely the potential for increased revenue generation through their expanded product line.

[mcadoo3312]

I called Crocs a couple of days ago to try and get a feel of what was going on at the company, but from the perspective of a daily worker (who would likely be more candid from what they are experiencing). I waited on hold for about 10 minutes, so I saw an opportunity to jokingly ask if they were understaffed because the company was going through a rough patch. She said the exact opposite was the case; they have been busier than last year. FYI.

[beavis909]

I'm with ya. The Crocs brand, imo, is still a global powerhouse. The product is excellent and the customers rabid and loyal, despite criminal shorts' repeated attempts to trash it through planted "stories". I'm in, and ready to go "all-in" if they continue to beat it down.

[JohnPseudonym]

Cmon guys, this is a fad.

The hippest fashion expert I know (My Tween girls) are no longer wearing the Crocs the just "had to have".

Price went from 7 to 70 and now we're back to 7; that's the end "my friends"; hopefully you sold around 70...

It's over people. Get out with any profit you have.

[mcadoo3312]

You are basing your opinion on what a 12 year old girl thinks - smart investment strategy. Teen aged girls change their mind every twenty minutes based on what is popular, not to mention, we have known American growth has been slowing since the brand's introduction a couple of years ago. It's the international growth that is continuing to drive the brand. They have perfect financials and a ton of short interest, so even if the fad is over, there is still profit to be had based on fundamentals.

[JohnPseudonym]

"They have perfect financials and a ton of short interest, so even if the fad is over, there is still profit to be had based on fundamentals."

The stock has gone from 70 to 7; that says a lot to me.

My girls (and all of their friends) stopped wearing Crocs last August and I promptly sold my shares at $60 in September the price then went to $75; ouch! But I walked away happy with my take:)


Bought 285 shares ($10,000) at $35, sold at $65 = $8550 profit

Ride the trend people! Get in after it starts, sell before it ends and you will consistently make money!

[JohnPseudonym]

Correction: $7125 Profit

[User 76963]

I live in Honolulu and Crocs are still very popular here. Obviously, the climate and beaches here lend themselves perfectly to Crocs line-up of shoes. My 7 yo daughter has been wearing crocs as her main daily footwear (year round in Hawaii) since she was 5 yo and this is true for many of her friends too. We tried some knock-off copies in the stores (more than once) but she complained they weren't as comfortable as Crocs. For her, it had nothing to do with brand. She is still a little too young to be concerned with brands but I know that will change soon. it's more the parent's that will be brand conscious for their little tikes. Unfortunately, Crocs are so comfortable and because she wears them all the time, my daugther balks at wearing anything else. Even when we go to an event that requires footwear more formal than Crocs, she complains about the "other" sandals (even though they are high quality sandals from Nordstrom).

There's some truth to the fad aspect, but my long thesis for CROX is based on international sales and the fact that Crocs has a real decent shot at becoming a lasting brand that stands for simple, well-designed comfort.

[DaveinHackensack]

A few thoughts on this, as my Crocs Islanders are drying in the back of my car after I washed them earlier today.

First, the bearish points:

1) I felt a pair of knockoffs selling for under $10 at my local CVS ("Doggers"). The material feels just like Croslite.

2) Checking the company's SEC filings, I found that Crocs has not attempted to patent the Croslite material. Why not? Are they unable to do so?

Now the bullish point:

1) The new marketing campaign aimed toward women looks savvy. My girlfriend subscribes to Vegetarian Magazine, and there was a clever full page Crocs add in the recent issue, showing off one of the new high-heeled shoes. The tagline: "Hard to believe the parents were ugly".

[notsosmart]

they were ok when made in usa or canada.once china came in forget it. i could feel & smell the difference.

[shoe Man]

I am in the shoe business.
These guys are done and anyone that held after the initial slide is misleading themselves as this stock will STAY in this zone.
There new shoes are not at retail.
The kids are still buying, but the adult business has changed significantly. Even on kids side sales are off substantially so the market is and has spoken on the Brand.
New designs have yet to be delivered but the shoes retail from $220 to $300 USD......and in case anyone thought that we are in a depressed or maybe recession, these retails are not $40 that made the Company millions.
Brand is not dead as they do hold a great comfort value for your money......but will never reclaim previous years volumes.
I was out in the the $50's last fall.
I am not buying in till I see the August show in Vegas.
Going long.....buy some gas stocks!
Ed.

[shoe Man]

Oh and one other thing!
The knockoff for now $4 are better fitting and don't make your feet sweat.....and yes when Canada and USA made them they fit and where made with Croslite.....but a different compound bthen the China version.
Once you see them leave Nordstrom's.....game is dead.

[Value Dope]

imagine if you shorted at $70? crox = crap, insiders dumped so many shares out, amazing people would invest in a FAD!!!

[WanderSF]

I went to the website and first thing that crossed my mind was "fad."

[Jason Kelly]

Thank you, everybody. I appreciate your time. Your observations were helpful in conjunction with Crocs CFO Russ Hammer's comments at the Piper Jaffray Europe Conference. I wrote an in-depth report based on this and other material.

With the Crocs core models selling well even as new models grow, international sales taking off, a better handle on inventory management, licensing deals that have exceeded even internal forecasts, and a steady expansion of company stores, I think there's a good chance of a return to a snappy earnings pace and stock lift.

A couple of follow-ups:

"Shoe Man" -- I'm not sure what new models you're seeing priced at $220 to $300, but Russ Hammer made a point of highlighting the low price of the Crocs line and how it's made a lot of retailers happy in the tough consumer environment. I didn't see any models as pricey as the ones you cited.

"To the point" in Israel said that it seems Crocs are on every other pair of feet. Almost, but not quite. One in six Israelis owns a pair.

"Dave in Hackensack" -- The reason you weren't able to find the patent on Croslite for Crocs is that there isn't one. It's just a trade secret. Crocs bought the company that created it, Foam Creations, in June 2004. That gave Crocs the exclusive right to use Croslite. It is NOT patented, but the formula for making Croslite from resin is safeguarded.

From Crocs' May 2006 S-1 SEC filing: "We consider the formulation of croslite used to produce our products to be a valuable trade secret. Prior to our acquisition of Foam Creations in June 2004, Foam Creations developed the formula for croslite, and we believe that they did not publish or otherwise make the formula available to third parties without the protection of confidentiality or similar agreements. Since the acquisition, we continue to protect the formula by using confidentiality agreements with our third party processors and by requiring our employees who have access to the formula to execute confidentiality agreements or to be bound by similar agreements concerning the protection of our confidential information. Neither we nor Foam Creations have attempted to seek patent protection for the formula but we are not aware of any third party that has independently developed the formula or that otherwise has the right to use the formula in their products other than Finproject. Under the terms of our supply agreement with Finproject, Finproject has certain limited rights to use croslite, which were originally negotiated in connection with our purchase of Foam Creations from Finproject's parent company."

[dsg]

Just because the price of the stock dropped doesn't mean it was a fad. Was Apple a fad in the 90s when it lost over 80% of its value. I guess maybe, but that fad ended up having its price increase around 70x from there.

I still see Crocs all over the place - of course I live on an island and am on the beach a lot. I wear them all the time - they are incredibly comfortable and great for getting sand out of.

[DaveinHackensack]

Jason Kelly,

I had read that passage in the S-1 filing as well, but after reading it I still didn't understand *why* Crocs hadn't sought a patent on Croslite. Do you understand why they haven't? They haven't been shy about patenting their footwear designs. I could be wrong, but I suspect that they are unable to patent Croslite because it's not materially different enough from other resin-based materials to warrant a patent. This might explain why the knockoffs I saw in my local CVS feel just like the real Crocs I have.

[Brett.S]

My family owns and operates a large hardware store that sells over a thousand Crocs a year. One thing Crocs customers have told us is that when they purchase the cheap imitation brands sold at Wal-Mart, etc. they wear out extremely fast. The fast wear of imitation brands is probably a result of a less dense foam being used. After testing out the imitation brands, customers have come back to purchase Crocs.

I invest a substantial amount of my own money and continue to believe that Crocs has some holding power, because of it's branding, ever growing selection of shoe styles to accommodate consumers different tastes in style , and a superior density to their foam (crosolite). Almost all semi faddish/retial stocks have taken a huge hit in the last year. Everyone dumps them during this part of the market cycle.

Unlike faddish stocks like Heely's, Crocs is not seeing much of a slow down in it's sales and earnings growth. Maybe they have had to downgrade their estimates a little, but almost everyone is doing that. Until I see a change in Crocs' fundamentals, I will continue to believe that the stock is undervalued. I'm not sure if Crocs will be a huge company 10 years from now, but I'm confident they will still be rapidly growing sales for at least a couple of years.

[DaveinHackensack]

Heelys may or may not be a fad, but that company has at least patented its key differentiator -- and successfully defended its patents against an imitator.

[True Genius]

In the medical industry, CROCS are very popular among hospital staff and office staff. Now that they have released an updated model to comply with safer shoe wear in medical environments, I believe that they will have a very loyal customer base in healthcare for decades.

[mikenews]

My wife and I bought knock-offs for our 5 year old daughter. They lasted 3 weeks. The next pair were the real deal and hardly any sign of wear after 2 months. She'll outgrow them soon and we'll be buying again. She loves em. Parents aren't moved by fashion trends when it comes to pre-teen shoes. They want shoes that are comfortable, last, and make the kids happy. On July 4th, we attended a pool party... almost every kid was wearing authentic Crocs. The others had on sandals. Not an imitation in sight. Why? The imitations have a well deserved bad rep. Perhaps there are some good copies (Skechers?), but parents don't want to shop around until they find the decent clone. The clones may be doing Crocs a service by pushing the repeat business their way, as was our case.

[yep950]

the facts are that international sales of these shoes are dwarfing what happened in the US and at that time, they did not have an additonal line of goods. august will be an interesting report. if it is a fad, it has not even begun to reach it's revenue milestones. sales and profits will eclipse previous performance. but as always, that doesn't translate to stock value.

[doghouselabs]

@DaveinHackensack who wrote "2) Checking the company's SEC filings, I found that Crocs has not attempted to patent the Croslite material. Why not? Are they unable to do so?"

patenting it would require public filings regarding potentially the manufacturing process and materials used to make it. instead, croslite is a trade secret, much the same way as the recipe to coke. competitors can only guess what's in it/how to make it...

[doghouselabs]

i also wanted to add that patents are routinely ignored in some other countries where knockoffs are manufactured. why give them the ingredients to the secret sauce for free?

[PaulaJohnson]

I closed my CROX position last year October to add to my POT stock. Some oil and gas profits were recently reinvested into this cyclical shoe and cash until this market is at a level I feel comfortable to play.
Is CROX a fad? Absolutely, just like the 15 year UGG fad.
Knockoffs? Plenty, but cheap enough to have Brand loyal support.
Solid branding, new product lines, expensive accessories, comfort, and new international support.
Between October 1-31 I will sellout of CROX again just when I need to put away my sandals, get out my winter boots, back up the oil / gas market truck to heat my home, and before I see their international shipping bill costs!!!
There is too many weak handed shareholders to hold this stock annually.-Including me!
CASH is my favorite ticker lately.
Some spec cash invested in what I will believe will be the 2008 WSA footwear line winner www.skinsfootwear.com/ Skins Inc (SKNN.OB) ticker @ .18 cents
The biggest long term difference between CROX and SKNN ?
SKNN is completely patented something I wish CROX had!
FYI Shoe Man's mention of new CROX models priced at $220 to $300 are lines not yet launched to the public and will be on display in August for retailers only at WSA.

[JohnPseudonym]

Anyone want to buy some shares of Crox? I'll sell them for $15 each:)

[JohnPseudonym]

"You are basing your opinion on what a 12 year old girl thinks - smart investment strategy."

Yes, it was very smart!

Hate to say "I told you so", but....