Risk

Crocs’ Success Is No Crock

Just after passing the $1 billion revenue mark for the first time, Crocs is plotting its encore. CFO Jeff Lasher tells how the company is driving a...
Vincent Ryan and David McCannMarch 13, 2012

Crocs, the company that makes the shoes on which almost everyone has an opinion, passed a milestone in 2011 by squeaking past the $1 billion revenue mark, according to the firm’s annual report filed last month. To CFO Jeff Lasher, the achievement was most definitely part of a journey, not a destination. Crocs is eyeing organic growth of 15% to 20% over the next few years, which could push revenue to around $2 billion, he says.

It’s a reversal of fortune for Crocs. The company, which started selling its products in 2003, hit $100 million in sales by 2005 and soared to $800 million in 2008. Then came the recession and a $200 million falloff the next year. “That was pretty much a near-death experience,” says Lasher.

It remains true that there is a subculture of Crocs haters, who are put off by the shoes’ colorful appearance and minimalist construction. For example, there’s a Facebook page called, “I don’t care how comfortable Crocs are you look like a dumbass.” It has two million “likes.”

Offers Lasher, “Well, there are all kinds of different hater groups out there. But there is a lot of demand for casual comfortable shoes for boating, at the beach, in the snow, or on rainy days. If there are some detractors, then OK.”

Lasher came to the company as its controller in 2009 and was promoted to CFO a year ago. Even besides the revenue surge, he’s overseeing a healthy operation; Crocs has $257 million in the bank. He recently spoke with CFO editors about the company’s wild ride. An edited transcript of the session follows.

Is there anything psychologically important about hitting the $1 billion mark, like when the stock market reaches a certain threshold?
Since we were at $600 million a couple of years ago, it’s pretty good. It’s good for the employees, at least. I don’t know if Wall Street cared so much.

So how are you doing it?
For one thing, we’re increasing our store count. We have about 400 throughout the world today, up from 340 a year ago, and plan to open about 80 to 100 this year. A big growth opportunity is expanding into countries like Brazil, Argentina, India, and South Africa where we don’t have much of a portfolio or distribution network today. We also have an opportunity to build out our networks in China, Korea, and Japan.

We also have wholesale accounts around the globe and just signed a distribution deal in Europe for the first time. For us a wholesale account would be with companies like Nordstrom, Dillard’s, and Modell’s. In fact, 60% of our business is wholesale, 30% retail, and 10% Internet. Those numbers have been surprisingly consistent for years.

Is there anything else behind the good financial returns?
Yes, the big story has been our ability to leverage our [selling, general, and administrative expense] structure. After the footprint we established a few years ago, we haven’t added many employees or costs. We’ve had 1,500 [full-time, salaried] employees since 2009. In my area, my annual spend for finance and accounting globally was $28 million in 2009, $28 million in 2010, and $28 million in 2011.

With the company growing, how are you managing to do that?
We moved a lot of our back-office processing offshore: payables, cash application, reconciliations. The costs for those have been significantly reduced, which has allowed us to get more into analytics. So while the dollars are the same, the talent behind those dollars has significantly changed. We have many more analytical resources and business-analysis partners.

What are the demographics of your typical customers?
About 25% of our shoes are sold to children. We have some that light up, some that change colors when you walk outside, and cold-activated boots. In the United States, we have a middle-class demographic. Most of our price points are between $30 and $50, and the original Crocs are $30 to this day; we haven’t taken any price increases.

What’s your view of that middle-class demographic’s current mind set on spending?
That’s been a bit of a pressure point in the United States, but we’ve expanded our product line and grown market share to overcome the macroeconomic issues with the middle class. But it’s Asia’s middle class that is growing the fastest. Many people are transcending from one economic class to another, and they want all the different brands that are associated with their new class. Asia is a success story for us.

Are you seeing a slowdown in China?
Everybody talks about that, but we really haven’t seen it. China is still growing pretty well, and our market share is good. We have different prongs of attack in China. We have company-owned stores in Shanghai and Beijing, partner stores in other locations throughout the country, and distributors who sell to wholesalers. And while Internet sales are relatively small, there is a growing consumer population in China for which the Internet is becoming a realistic portal.

What’s your biggest finance issue for 2012?
It’s our currency exposure and how we’re mitigating the risk on that. Only 35% of our sales come from the United States. We have $257 million in the bank, and only 9% of it is from here. So we have a lot of balance-sheet exposure and operating-income exposure from currency movement. That’s why we’re hedging the risk.

In 2012 the currency market overall is hypersensitive. The euro business is definitely one that we’re concerned about. We think we can do the same kind of thing we did back in ’09, when we took advantage of the real estate market, got long-term lease deals at a more attractive operating expense percentage, and were able to turn that economic situation into a long-term benefit for us.

How do you hedge currency risk? Do you use options, or buy it forward?
We do everything. We have a collar strategy and some straight-up hedging. We have some natural hedges for intercompany loans that balance things out a bit. We try to use all the different creative approaches to balancing risk.

You know, everything works in the short term. The challenge is more in the long term. We buy in dollars and sell in local currency, so we definitely benefit from an overall declining dollar. Now that the dollar has strengthened modestly against the Japanese yen, we’re quickly trying to address some of our risk issues there.

What are the currencies that are of concern?
The yen is the biggest one. Fifteen percent of our revenue and 2530% of our operating income comes from Japan. So that’s a significant one to us. Next is the euro.

How did the disaster in Japan last year affect Crocs?
At the time of the tsunami the yen was about 85 [to the U.S. dollar], then it ran to 76 before getting back up to 79 at the end of the year. And recently the Bank of Japan pushed it back up above 80. It’s not a great scenario, but we had it good for a while and now maybe we’re getting paid back for that.

Since you do so much business in Asia, surely you’ve seen some of the press on Apple, about the issue of auditing suppliers.
We are going to hit that in 2012. We have a third party that does social-compliance audits for things like child labor, minimum wage, working conditions, fume and exhaust, and other environmental issues including the recycling and safe disposal of waste. We’re going to comply with the California rules that will be in effect in 2013, and we’re going to get it done in 2012.

Given that you’ve really expanded your product lineup, your inventory numbers suggest that you manage that area pretty well. How are you dealing with that?
That was one of the problems the new management team ran into when we came in. For 2007 and 2008, there were some inventory issues. So we looked at what went wrong in those years. We said, we know that 5% of our sales are going to be from the original classic product. And we know we can estimate demand for some other products. The secret is getting those products to flow like milk, whereas with other products we can take some risk from a fashion perspective but mitigate it by making them available to wholesale accounts only as prebooked products. They have to be ordered in advance, and there’s a last call for telling us how many shoes to ship. That reduces our inventory risk, and it also reduces the buyers’ cost structure because we give them incentives to prebook.

Does the fact that you own 400-plus stores give you better data [to] help you get products to market faster or react more quickly when a product isn’t doing well?
I think it does. For example, last year we made a shoe that changes colors in the sunlight. Our senior vice president of product development came up with the idea around Thanksgiving, and it was in our stores by Memorial Day. It stayed just in the retail stores all summer, and it did very well. This year the product is going to the wholesale accounts.

The challenge with selling that product is activating it on site, so we included a UV light generator in the shoebox that allows the shoe to change colors in stores. We perfected that in our retail stores. We tried a variety of box designs over the last six months until we got it right.

What’s the process of deciding whether to go ahead with that kind of product like?
Some products are finance-driven, like an entire family of products [intended to be sold broadly throughout our network]. But there are also one-offs, which might be handled just in one region. There’s a product-line management group and a financial-planning-and-analysis group in each region. They try to estimate consumer demand and pricing. And if the cost of selling comes in high or the pricing isn’t realized, there’s a discussion about killing the product.

I would say that over the next few years, since we already have 325 products, we have to develop a quicker trigger on our kill switch. That means developing a better institutional quantitative analysis of how to kill products off.

Do you have any guiding tenets when it comes to developing your finance and accounting staff?
Yes. Hire really smart people out of the best business schools and then put them in different positions to learn on the job from others. Coupling senior experienced people with freshly minted, new-hire MBAs is a powerful force, because you have people who are creative and hungry to prove themselves together with senior people who can channel that energy in the proper fashion.