Crocs Accelerates Turnaround Efforts

Analysts lauded struggling Crocs Inc. for outlining a recovery blueprint, which includes streamlining its product mix, prioritizing larger-scale geographies and closing between 75 and 100 retail locations.

The restructuring comes as the Niwot, Colo.-based company rebuilds itself with the support of private equity group Blackstone, which injected $200 million of capital into Crocs last year.

“This plan clearly marks the first step in a 1000-mile journey,” said Steve Marotta, an analyst at C.L. King & Associates. “There isn’t one silver bullet in the package — this is definitely a turnaround that will be multifaceted. All parts [of it] are important and feed off one another.”

Crocs president Andrew Rees, who joined the firm in May from L.E.K. Consulting, told Footwear News that the strategy shift follows an analysis of the company’s individual businesses. “We are focusing our efforts back on a more cohesive global product range, which we think will still meet the demands of our core customer,” Rees said, adding that part of this initiative would involve pulling back from dress and fashion boots.

He noted that the company would narrow its product offering to focus on its core heritage brands. “Over the last two or three years the company has grown attractive businesses in casual men’s and women’s footwear styles, and we have expanded beyond that. Now we are paring back our SKUs,” he said.

Mitch Kummetz, an analyst at Baird Equity Research, said cutting costs is only the first step in improving the business.

“The tougher thing to do will be growing the business to drive profitability, and they will be held to that,” Kummetz said. “They are going to improve margins over the near term through these transformational measures, but to get to their goal of 12 percent operating margins over the longer term and to drive operating profits, they need to improve revenue again.”
As a result of the store closures, Crocs expects to post a revenue decline of between $35 million and $50 million in the near term. It is forecasting selling, general and administrative expenses to shrink by between $17 million and $25 million due to the retail consolidation.

While the turnaround plan was not a huge surprise to the analyst community, market watchers were not expecting it to be announced before the company had hired a new CEO.

Market watchers applauded the result, with Crocs shares soaring 11 percent, or $1.58, to $16.42 in morning trading.

As part of its turnaround strategy, Crocs plans to pare back its product portfolio with a sharpened focus on its core product of molded footwear, in addition to simplifying its supply chain and rejiggering its organizational structure.

The company also plans to reduce its investment in the smaller geographic markets in which it currently operates, with a focus to expanding in its larger operating markets globally, such as Brazil.

As a result of closing between 75 and 100 Crocs branded retail stores by the end of 2015, Crocs expects to report cost savings of $14 million by the end of next year.

The company expects that the revenue decline as a result of the store closures will be approximately $35 million to $50 million.

On the company’s revamp, Crocs president Andrew Rees said, “We have identified the key strategic and structural improvements that we expect will allow the company to achieve its potential … We have a clear, well-defined strategy for addressing these issues and improving performance.”

“Work is underway already to drive significant change throughout our company in four key areas. Our objective is to create a more efficient organization that can sustain profitable growth in a multichannel global business model,” Rees added.

Crocs chairman Thomas J. Smach said the company’s transformation strategy was incited by private equity group Blackstone’s $200 million cash injection in December last year.

“The board has confidence in the plan and the leadership team, and we look forward to realizing the tangible positive impacts on our business in order to increase shareholder value,” Smach said, noting that the company is still on the hunt for a permanent CEO.

Crocs expects to post revenue of between $300 million and $305 million in the third quarter, which is in-line with the Street’s expectations.

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