By Cornelius Zeeman & Seipati Rakgoale,
Fairtree Portfolio Manager & Equity Analyst

Another Fad?

2021 and 2022 were record years for Crocs. Its revenue grew by +67% and 54% during these two years, as it benefited from pull forward demand during the pandemic.

Graph 1: Crocs Total Revenue (2011 to 2023 Guided)

Source: Company Financials

Strategy Shift.

Crocs’ impressive growth came despite its strategy to cut excess inventories and stores. They recognised they had over-diversified and perhaps entered some markets too early. Their focus would now be the classic clogs, the “Boating” shoe that has become a statement of comfort and fashion rebellion.

Figure 1: The Crocs Product Suite

Source: Crocs Investor Relations

Crocs announced the acquisition of HEYDUDE in December 2021, and the deal was subsequently closed in February 2022. This was a $2,5bn cash and stock deal, with $2bn of cash to be funded by a term loan. The deal made investors nervous from the beginning with leverage and profitability worries, but most importantly, after working hard to focus on the core shoe and clean up inventories, why acquire an unfamiliar brand that deviated from the core product?

Graph 2: Last Price (Rebased)

Source: Bloomberg

The rationale was an expanded total addressable market for casual footwear of $160Bn. Crocs wanted to build on its digital penetration and leverage Crocs’ global playbook, and at the time, 95% of HEYDUDE sales were from the U.S.

Almost two years post-acquisition, HEYDUDE now makes up 25% of total Crocs sales, but it has seen declining sales and margin trends. Crocs’ share price has been volatile due to the HEYDUDE performance and subsequent full-year guidance cuts. The retail sales channel delivered satisfactory results, but the wholesale is struggling because Crocs is trying to clean up the channel like they did with the Crocs brand a couple of years ago.

Industry wholesale order book indications.

The U.S. retail and wholesale merchandise inventories are still high. The wholesale industry has had disruption from supply chain issues, growth in e-commerce and brands wanting to bypass the channel to make (their own) direct-to-consumer sales.

Here are some of the challenges with entering the wholesale channel in current cycle:

• High promotional environment, so lower margins.
• Grey market risks, as wholesalers try to lower excess inventory.
• Wholesalers are unwilling to take on new, unfamiliar brands.

So, the challenges faced by the HEYDUDE brand are not unique but an unfortunate case of trying to diversify and improve wholesale partnerships in a high inventory cycle environment.

It is more than just a Clog.

The main reason people buy Crocs is for comfort, but another driver has been personalisation via the Jibbitz sold. It has become a way to showcase personality. With social media’s influence in today’s world, visibility is vital. Crocs ran with the concept and has had interesting collaborations with limited edition shoes, almost making them collectables. Other interesting collaborations have been with McDonald’s, 7-Eleven and KFC. Collaborations allow Crocs to introduce new styles. Brands or celebrities partner with the design team with the intention of keeping the silhouette of the shoe the same but adding exclusive Jibbitz and branding that will be associated with them.

Figure 2: Crocs personalisation through collaborations and use of Jibbitz

Source: Crocs Website (November 2023)

Conclusion.

Crocs is a well-run business with a unique product design which appeals to a wide age demographic. Their high margin versus other brands is a testament to a simplistic manufacturing process (just plastic mould). Their collaborations are a testament to newness as people have seen their high durability as a concern. HEYDUDE has overshadowed the underlying margin improvements in the business.

The Footwear market is highly fragmented, with the top 10 brands enjoying 41% market share. Crocs moved from a 1,4% market share in FY21 to 2,2% in FY22, so perhaps the acquisition can still bring the envisioned synergies.

Graph 3: The U.S. Footwear Market Share by Brand (FY22)

Source: Morgan Stanley (May 2023)

Disclaimer:

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