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Crocs was written up here six months ago by abcd1234, who made a great stock call (up 110% in 6 months) and did a good job explaining the risk-reward skew in this stock. While the stock has done great and massively outperformed the market, I do think the skew still exists. While it isn’t as extreme as it was six months ago, it is still a really attractive set up. If management does what they say they are going to do by 2026, this stock will double or even triple in the next three to four years. But if the business cools down and growth normalizes on the Crocs brand to low single digits digits globally (this is expected for North America but not international) and margins contract somewhat, you are probably looking at 25% downside. I like that ratio of risk 1 to have a chance at making 4 to 8 in the intermediate term.  

I wouldn’t repost an idea that had been written up so recently if I didn’t think I had something to add, and in this case, what I have to add is historical perspective and industry specialization. I’ve covered Crocs since it went public in 2006 and as dangerous as these words are in investing, I feel quite confident that “it’s different this time” in terms of its boom/bust potential. This is a company that has, in my opinion, graduated from operating in the terrain of fads and has moved onto being a fashion staple that at times heats up in terms of trendiness and at times cools down, but enjoys an underlying steady base of replenishment demand, regardless of the fashion cycle. I would cite Uggs from Deckers (DECK) as a brand that enjoys similar characteristics (but at a higher price point).

History of a 20-year “Fad”

Crocs went through two sales busts, the first of which was an existential crisis where it almost went belly up. Sales contracted by 24% from 2007 to 2009, which led to earnings falling from $2.00 in 2007 to a loss of $1.30 in 2008. The stock lost 99% of its value from peak to trough. The cause of this first crisis was overdistribution to the wholesale channel. When the brand initially got hot, management sought to capitalize on that by selling to literally every retailer that was interested in carrying it. With the product overdistributed, discounting followed, hurting brand integrity at a time when generic, unbranded copycat plastic clogs were flooding the market. Gross margins fell from the discounting, and inventory write downs exacerbated the margin freefall. Gross margins contracted a whopping 2620 basis points in 2008, before rebounding materially in 2009.

The second business decline kicked off several years later and was driven more by lack of cost and ROI discipline than a drop in sales. From 2012 to 2015, gross margins came under pressure at the same time that SG&A exploded due to an ill-fated over-expansion of the owned retail network. When the company started to close stores and unwind the overexpansion, revenues fell – but much less this time – only about 15% over three years. The cause of the profit downturn was again overdistribution, but this time it was in the company’s own retail stores as opposed to in third party ones. Too many points of distribution again led to an oversupplied market and discounting and in turn gross margin pressure and loss of brand cache and integrity.

Both business declines were two different versions of the same problem: lack of brand management characterized by undisciplined inventory controls in the retail channel. Well-run footwear and apparel companies control where their product goes. Think Nike, Adidas, Uggs, every European luxury brand, etc. Controlling your wholesale distribution goes hand in hand with maintaining good vendor relationships where the cadence of promotions and discounts is mutually managed, in support of long-term brand health. This idea of brand management and cultivation was non-existent at Crocs in the years before current CEO Andrew Rees joined the company. (Rees joined in 2014 in conjunction with an investment made by Blackstone – they’ve since successfully exited. Rees was promoted to CEO in 2017).

The Rees Era: From Product Company to Brand

The first thing Rees did when he became CEO was clean house. He cut $80 million in costs, rationalized the owned store base, and made investments in systems and sourcing. Once the house was in order, he went on a growth mission. Beginning in 2019, Crocs began a growth campaign that was rooted in something the company never had in its first 15+ years of existence: active brand management. I’ll get into the details of what that entailed, but I’ll start with the punchline… the results have been fantastic. The Crocs brand has doubled in three years and seen significant margin expansion.

While some will dismiss this growth as the result of being a “Covid beneficiary”, there’s a lot more going on here that just a Covid benefit. A reason to believe that Crocs brand growth will prove sustainable is that the brand has already “comped the comp” so far this year, unlike countless Covid beneficiaries (from Pelton to Zoom) which have seen their windfall reverse already. Even confined to the world of retail (which got a Covid boost from stimulus checks and a margin boost from inventory shortages prompted by supply chain disruptions), you see companies ranging from Abercrombie to Gap to Target, which were overearning, see their top and bottom lines come back to earth.

In the most recently reported third quarter, the Crocs brand grew 20% in constant currency, despite it having grown 72% in the third quarter of 2021. In North America, where the comps were toughest (95% growth in 3Q21), the Crocs brand eked out 2% growth. Its DTC business in North America was even stronger, with comps of +13%, reflecting that sales continue to shift to the company’s captive distribution channel. The “Covid winner” short thesis has gotten long in the tooth at this point, given how many companies in the same sector have already seen temporary tailwinds reverse.

That isn’t to say there wasn’t a Covid benefit to Crocs, but there was one that was more enduring. The pandemic era was great for selling comfy apparel and footwear that was perfect for working at home. But the trend to casualization hasn’t totally reversed – and it won’t. While people have returned to the office, many more than before are working from home, at least part of the time. And in order to lure people back to the office, many offices are more casual than they were pre-pandemic. This isn’t that radical of a shift, as casualization and athleisure were already decade-or-more long trends before the pandemic even started. Going back to that first bust for Crocs, around the time of the Global Financial Crisis… wearing a plastic clog to most offices would have been laughable. Now, 14 years later, I would say it would be acceptable in more spaces than not. So, all that helps the TAM here.

But beyond just being at the right place selling the right kind of product at the right time, there were meticulous efforts towards brand elevation through prudent merchandising, retail strategy, and marketing over the last 3 years. Not only did Rees rationalize the number of stores that Crocs operates from 624 to 353 currently, but he also rationalized the number of SKUs. He ended the product over-assortment that led to too many low-selling styles that ended up on discount. Instead, Crocs homed in on just a few key silhouettes, primary among them the core clog. Love it or hate it for its clunky ugliness, the Crocs clog is iconic, and immediately recognizable. Real brands - especially in footwear - have signature, instantly recognizable evergreen key styles. For Crocs, that’s the clog.

Beyond the clog and variations on that signature silhouette, most merchandising investment has been confined to sandals and personalization. I would say the jury is out still on sandals (slides and double straps), but personalization has been a home run. The company’s Jibbitz charms are very on-trend and in-line with the Gen Z/Millennial preference for customization and projecting personal interests. Just like a graphic T allows the wearer to broadcast their favorite movie/band/sports team/TV show/travel destination, so does a Jibbitz. And they are 90% margin. So, whether your jam is Disney characters, the Wu-Tang Clan, or a spin bike… there’s a Jibbitz out there for you to advertise that affinity to the world (at high margin).

The core tenets of brand elevation include controlled distribution and strong marketing execution. In terms of distribution, allocations to wholesale have been tighter (in terms of number of stores as well as breadth of product). Owned points of distribution have been cut by more than 40%, and emphasis has been put into getting customers to shop online at Crocs’ own website. Sales are now nearly 40% digital (which includes its own website as well as third party sites like Zappos, Amazon, and Tmall).

In terms of marketing execution, the company – not unlike successful streetwear and athletic footwear brands – has leaned hard into collaborations and limited drops, many of which sell out fast. Below are examples of collaborations with an American streetwear designer (Salehe Bembury designs footwear for luxury brand Versace), a Japanese streetwear brand, and an iconic and kitsch-y fast food brand….

These limited offerings add brand heat, and once they sell out, often sell for multiples of the original price on secondary market sites.

Crocs has also turned up the brand heat through collaborations with luxury brands (Balenciaga) and recording artists (such as Luke Combs, Post Malone, and SZA). Crocs has also benefited from celebrities posting themselves in the product (pics below are an Instagram shot from noted Crocs-lover Justin Bieber, a press photo of Questlove on the Oscar red carpet, and more Instagram shots from Ariana Grande, and one of Kardashian-Jenners – Kendall? Kylie? – I forget which is which).