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Turnaround Management Columbia Business School Advisor: Professor Laura Resnikoff April 26, 2010
Molly Bennard Kevin Sayles Ron Schulhof Julie Thaler John Wolff


EXECUTIVE SUMMARY............................................................................................................ 2 INDUSTRY.....................................................................................................................................3 COMPANY...................................................................................................................................11 HISTORICAL FINANCIAL OVERVIEW...................................................................................22 DISCUSSION OF VALUATION ................................................................................................35 TURNAROUND PLAN ...............................................................................................................47 RECOMMENDATION.................................................................................................................51 EXHIBITS.....................................................................................................................................55 MARKETING MATERIAL..................................................................................................65

EXECUTIVE SUMMARY Crocs, Inc. is a designer, manufacturer and retailer of footwear for men, women and children. Crocs uses its proprietary closed cell-resin, Croslite, to make shoes that are comfortable, lightweight and odorresistant. Since its introduction in 2002, Crocs has sold more than 120 million pairs of shoes in over 125 countries.

During the past two years, Crocs experienced a rapid decline in revenue, from a peak of $847.4 million in 2007 to a trough of $645.8 million in 2009. This decline proliferated throughout all regions in which the Company operates, with the exception of Asia. Management attributes the deterioration in operating and financial performance to a combination of macroeconomic factors (the global economic crisis resulted in a reduction in consumer spending and decreased volume in malls and retail establishments) and difficulty in executing Crocs long-term business strategy (significant challenges in merchandising an expanded product line through existing wholesale channels, and both the declining demand for mature products and the increasing competition from imitation products).

In response to these threats, the Company began a restructuring program and other downsizing activities during FY08 and FY09. The combination of declining revenues, restructuring costs and other one-time expenses resulted in the Company recording a loss of $185.1 million and $42.1 million during FY08 and FY09, respectively.

We have reviewed trends in the footwear and apparel industry, closely examined the Companys strategic, operational and financial situation, and diagnosed the reasons for its distress. Despite recent improvements in sales, margins, and the Company stock price, we believe that Crocs is in danger of returning to the distress of 2008-2009. We recommend that Crocs implement a turnaround strategy with the following key features: Realign the distribution model in U.S. Crocs should forgo its retail expansion and instead focus on a small number of profitable flagship stores and its wholesale and internet channels Focus on the shoes and key customer segments. Crocs should refocus its entire organization (design, manufacturing, marketing) on the unique appeal of its shoes Management Information Systems and Supply Chain Logistics. Systems and supply chain improvements should occupy a significant portion of managements time until the issues are satisfactorily resolved.

INDUSTRY Overview & Recent Developments The general sentiment among industry experts and executives is that the apparel and footwear industry continues to improve but has not fully recovered from the economic downturn. At the National Retail Federations convention in January 2010, the outlook was optimistic when compared to the 2009 convention and attendance was up 27%.

A group of 20 comparable retailers (including department stores, mass merchants, and warehouse clubs) that are tracked by S&P experienced a 3.9% increase in December 2009 on a sales-weighted basis. Although holiday season sales were not strong during 2009, retailers and apparel vendors did record a modest 1.1% holiday sales gain (November December) versus a 3.4% decline in the same period during 2008. Further, retailers were able to protect some profit margin during the holiday by capping markdowns at 30% to 40% instead of the 60% to 85% offered a year earlier.1

Although the worst appears to be over, the near term is expected to be a challenging period. With an additional two million people unemployed at the start of 2010, consumer spending and discretionary spending in particular is likely to continue to be under pressure during 2010.

Driscoll, Marie. Apparel & Footwear: Retailers and Brands. Industry Surveys. S&Ps, March 4,2010

Experts are predicting a sluggish consumer recovery with slow growth in 2010 and 2011. Due to the high unemployment rate, S&P predicts that consumers cautiously manage purchases and continue saving. Despite the negative outlook, there are two positive attributes to highlight: Revenue has stabilized as inventories are no longer declining sharply. Because inventory levels have been reduced to meet consumer demand, retailers now require fewer markdowns to sell excess goods. Markdowns are easing, resulting in recovering margins. As previously mentioned, markdown expenses will be minimal when compared to 2008. Gross margins have therefore recovered, and the current inventory/demand balance suggests footwear companies should be able to maintain recent gains.2 S&P NetAdvantage suggests that because the majority of the possible cost initiatives have already been completed, any additional initiatives will likely affect the direct to consumer parts of the business and could further erode demand. S&P anticipates that companies will experience increased general and administrative expenses.

Retailers have been implementing various aggressive strategies to contact and market to the customer. In particular, despite decreased inventory levels, retailers have tried to maintain a selective set of inventory on hand to cater to customer needs and support product differentiation. Further, retailers are expected to increase efforts to market new products faster and to incorporate current demand and fashion trends into new products.

Market Segments Within the specialty retail industry, the footwear sub-industry segment can be divided into several market segments including athletic wear, urban apparel, outdoor gear and casual shoes. Additionally, the market can be subdivided into footwear and accessories. Based on recent research distributed by S&P NetAdvantage and the Business & Company resource center, the specialty retailing landscape remains fragmented (despite the proliferation of large chains and superstore format), with thousands of small- to medium-sized businesses, often catering to local tastes and preferences.

Driscoll, Marie. Apparel & Footwear: Retailers and Brands. Industry Surveys. S&Ps, March 4, 2010.

Competitive Landscape The global casual footwear and apparel industry is highly competitive. Major competitors in the footwear segment include Nike Inc., Heelys Inc., Deckers Outdoor Corp., Skechers USA Inc., and Wolverine World Wide, Inc. In the retail segment, significant competitors include Macys Inc., Nordstrom Inc., Dicks Sporting Goods Inc., and Collective Brands Inc.

The principal qualitative traits that provide retailers a competitive advantage in the footwear industry include a well-known brand name, product differentiation, favorable customer demographics/target market, an expanded distribution network, active new product development, a superior management team, established manufacturing processes/low manufacturing costs, efficient inventory management, good real estate (sales locations) and well designed technology systems. There are many established players in this space that have strong financial resources, comprehensive product lines, broad market presence, long-standing relationships with wholesalers, long operating histories, great distribution capabilities, strong brand recognition, and considerable marketing resources. Additionally, there are very low barriers to entry which invites new market entrants to imitate popular styles and fashions.3

US Apparel & Footwear Industry. Trends: An annual statistical analysis of the US apparel and footwear industries. Shoe Stats. http://www.apparelandfootwear.org.

Full time employees


1,000 813,177 645,993 54% 167,184






Revenues by Geography Total Revenues 645,767 Americas 298,004 International/Other 347,763 Revenues by Distribution Channel Retail Revenues 152,300 Wholesale Revenues 404,500 Online Revenues 89,000 Retail store count Manufacturing % International % in house 317



43,777 100% 19,176,100 100% 1,436,440 100% 1,101,056 100% 15,157 35% 7,827,600 41% 1,117,833 78% 779,678 71% 318,607 22% 321,378 29% 21% 28,620 65% 11,348,500 59%

78,951 658,560 75,666 14%

24% 63%

10% 81%

0% 43,777 100% 9% 0% 0

n/a n/a n/a 674

321,829 1,091,980 22,631 246

22% 76% 2%

n/a n/a n/a 88


100% 27%

100% 0%

100% 0%

100% 0%

100% 0%

93% 7%

Source: Capital IQ, 2009 10-K for CROX, DECk , HLYS, NIKE, SKX and WWW 1 Heelys only sells via retail and online. Online revenue data was not made available. 2 Nike has a May 31 year-end. Approximately $10.3b (53%) of revenue is footwear

The Wolverine Footwear Group represents $233.2m of total revenues. Wolverine manufacturers 7% of its product in-house. Company manufacturing facilities are located within Michigan and the Dominican Republic.

Deckers Outdoor Corp. Deckers offers footwear products and accessories, including casual and performance outdoor footwear, sheepskin footwear, sustainable footwear and sandals. It markets shoes to men, women and children under the brands of UGG, Teva, Simple, Ahnu, and TSUBO. However, UGG accounts for over 80% of revenue. Deckers operates 18 retail stores, of which 12 are in the United States and the remaining 6 are located in England, Japan and China. The company primarily sells its brands through third party retailers, such as department stores, outdoor retailers, sporting goods retailers, shoe stores, and online retailers. In July 2008, Deckers entered into a joint venture with Stella International Holdings for the opening of retail stores and wholesale distribution for the UGG brand in China. The company was founded in 1973.4

Nike Inc. Nike offers shoes, apparel, equipment and accessories for virtually all athletic and recreational activities. The company markets its products under nine additional brand names: Converse, Chuck Taylor, All Star, One Star, Umbro, Jack Purcell, Cole Haan, Bragano, and Hurley. The company sells its products through retail stores, independent distributors, licensees and its

Capital IQ

website. Nike has a significant presence abroad and a majority of their 2009 sales were international. In addition, footwear revenues of $10.3 billion accounted for approximately 55% of total revenues. Nike operates 338 retail stores in the United States and 336 retail stores internationally. The company was founded in 1964.5

Heelys, Inc. Heelys primarily offers their own branded wheeled shoes that allow wearers to easily transition from walking or running to rolling (by shifting weight to the heel). The company also markets non-wheeled footwear and accessories. Heelys sells its products to sporting goods retailers, specialty apparel and footwear retailers, department stores, family footwear stores and online retailers. The company was founded in 2000.6

Skechers USA, Inc. Skechers offers a large variety of footwear products for men, women and kids. The company markets its own brands, including Skechers Sport, Skechers Cali, Skechers Work and Skechers Kids. The company sells its products at its own retail stores and website as well as through department stores, specialty stores, athletic retailers, boutiques and catalog and internet retailers. Skechers operates 219 retail stores in the United States, as well as 27 internationally. The company was founded in 1992.7

Wolverine World Wide, Inc. Wolverine World Wide offers footwear, apparel, and accessories in approximately 180 countries. The company markets its products under the brands of Bates, Harley-Davidson Footwear, Hush Puppies, Merrell, Patagonia Footwear and Wolverine. The company sells its products at department stores, national chains, catalogs, specialty retailers, mass merchants, internet retailers and governments and municipalities in the United States. Wolverine also operates 83 retail stores in North America and 5 in the United Kingdom. The company was founded in 1883.8

5 6

Capital IQ, Company annual reports Capital IQ 7 Ibid 8 Ibid

Summary of Crocs and Competitors9

CompanyName MarketCap NetDebt EV TotalRevenueLTM EBITDALTM DilutedEPSExcl.ExtraItemsLTM GrossMargin%LTM EBITDAMargin%LTM EBITMargin%LTM NetIncomeMargin%LTM TotalRevenues,1YrGrowth%LTM TotalDebt/Capital% TotalDebt/EBITDALTM TEV/EBITDALTM P/ELTM P/TangBVLTM CROX DECK 939 2,027 (77) (357) 862 1,671 646 835 33 202 (1) 9 47.7 5.1 (0.5) (6.5) (10.5) 0.5 0.0x 26.0 NM 3.7 HLYS 76 (60) 16 44 (2) (0) NIKE 37,836 (3,471) 34,366 18,650 2,810 4 45.2 15.1 13.2 9.3 (4.6) 5.7 0.2x 12.2 22.2 4.3 SKX 1,934 (278) 1,660 1,436 94 1 43.2 6.5 5.1 3.8 (0.3) 2.4 0.2x 17.7 35.7 2.6 WWW 1,610 (84) 1,526 1,131 149 2 39.9 13.1 11.6 7.0 (4.8) 0.2 0.0x 10.3 20.4 3.4 Avg* 8,697 (850) 7,848 4,419 651 3 42.2 10.9 9.3 4.6 (6.6) 2.8 0.1x 12.2 24.0 3.1


46.7 35.8 24.2 (4.5) 23.0 (6.4) 14.7 (11.7) 15.0 (38.1) 8.7 17.7 4.3 NM NM 1.0


Current Environment As a result of recent economic conditions, consumers have become more value-focused purchasers. The middle-class group is the most challenged and this has lead to an even greater bifurcation in retail thereby benefiting luxury positioned retailers on one end and off-price warehouse clubs on the other.10 According to the Bureau of Labor Statistics, unemployment reached 15.3 million in 2009, a yearly increase of 3.9 million. According to the NPD Group, total footwear dollar sales decreased 3.6% to $42.4 billion in 2009, while total unit sales dropped 7.3%. In 2008, footwear sales totaled $44 billion, a decrease of 2.6% from the previous year.11

Ibid Driscoll, Marie. Apparel & Footwear: Retailers and Brands. Industry Surveys. S&P, March 4th, 2010 11 IBid

Trading Multiples


The shoe industry is broken down into fashion, performance and leisure segment. As a percent of sales, the segments represent (through first nine months of 2009)12:

Other 1%


Leisure Footwear 15%


Leisure Footwear 16% FashionShoes 54%

Performance Footwear 29%

Performanc eFootwear 32%

Fashion Shoes 53%

On the manufacturing slide, US imports slid in 2008 year over year to 2.2 billion pairs from 2.4 billion pairs, respectively. However, the value of imported footwear rose during this period from $18.9 billion to $19.1 billion. The vast majority of these imports come from China.13

Industry Operations As with many consumer discretionary products, industry demand fluctuates with macro economic cycles. Specific economic metrics that affect such demand include disposable personal income, consumer confidence, and consumer spending.14 As seen the in the following

12 13

IBid American Apparel and Footwear Association 14 Driscoll, Marie. Apparel & Footwear: Retailers and Brands. Industry Surveys. S&P, March 4th 2010

chart, imports have declined since 2007, giving rise to companies looking abroad for revenue. Crocs in particular has enjoyed strong revenues and profits abroad, especially in Asia.15

While S&P describes the industry as mature and slow growing16, it could be argued that Crocs products do not fit the mold of a traditional footwear company since the Company is in its infancy and had experienced explosive growth. However, if Crocs quickly moves into a more mature stage in its life cycle, then it will have to adopt measures that other firms in the industry are pursuing: new technologies and restructuring to create leaner organizations.17

15 16

Company annual reports Driscoll, Marie. Apparel & Footwear: Retailers and Brands. Industry Surveys. S&P, March 4th 2010 17 Ibid


COMPANY18 Overview Crocs, Inc. is a designer, manufacturer and retailer of footwear for men, women and children. Crocs uses its proprietary closed cell-resin, Croslite, to make shoes that are comfortable, lightweight and odor-resistant. The Company was founded in 1999, began marketing and distributing footwear products in 2002 and completed its initial public offering in 2006. Revenues have grown from $1.2 million in 2003 to its peak of $847 million in 2007 and were most recently $646 million in 2009. As of December 31, 2009, Crocs sells more than 230 different models in over 100 countries, owns 317 stores and employs 3,560 people. Crocs has sold more than 120 million pairs of shoes since their 2002 introduction19.
Geographic Distribution of Revenues
Europe 16.6% 16 stores Americas 46.1% 182 stores Asia 36.8% 119 stores

Product and Customer Mix

Children 23%
Apparel & Other 5%

Adults 77%

Footwear 95%

Source: 2009 10K

History In 1999, Lyndon "Duke" Hanson, Scott Seamans and George Boedecker founded Western Brands, LLC in Niwot, Colorado. The three founders were entrepreneurs from the Boulder area and Boedecker and Hanson had known each other since high school. While on a sailing trip in 2002, Seamans showed his friends his new boating clog. They were very impressed by the waterproof, lightweight and comfortable material the clogs were made of (now called Croslite) and decided to purchase the rights to manufacture the shoes from Canadian company Foam Creations, Inc. After making a few changes to the clogs design and adding a strap to improve the shoes utility, they started preparing to market Crocs (named after a crocodile for its


Material in this section is based on Company annual reports and website. Fredrix, Emily. Crocs revival? Experts say its a stretch. The Associated Press. April 16, 2010.


durability and comfort both on land and in water).20 The founders opened a warehouse in Miami, Florida and received their first shipment of shoes in August 2002. Boedecker became CEO of the eight person start-up and they released the Crocs clog at an international boat show in Ft. Lauderdale in October. The clogs were very well received and 1,000 pairs were sold at their next trade show (at the retail cost of $30 per pair). In fact, sales were quickly forecast to outnumber supply, due to manufacturing capacity of 8,000 pairs per month.21

Due to their initial success, the founders purchased additional molds from Italy and began introducing new models to the market. By the middle of 2003, they were selling the original Beach model (now called Crocs Classic), the Highland model which was marketed for colder climates because it did not have ventilation holes and the Nile model which was a summer sandal marketed to females. They opened another assembly warehouse in Colorado and also introduced the website (www.crocs.com). By the end of 2003, Crocs had more than doubled its production and put a software system into operation to help them manage inventory, accounting and sales. The founders raised additional capital, increased the number of models sold and achieved over $1.2 million in revenues in the fiscal year.22

Ron Snyder (who had been consulting for the Company since October 2003) became an important member of the management team in 2004. Snyder believed that Crocs could continue its impressive growth if they could provide retailers with a faster turnaround time. By taking control of their manufacturing and distribution process, Crocs allowed retailers to order as few as 24 pairs at a time and only weeks in advance. This replenishment system also prevented markdowns of Crocs because stores could base their orders on more accurate demand estimates. As Synder said, we decided to base our business model on this - to deliver styles and colors customers want, and deliver them right away.23 Crocs was able to achieve this operational improvement because in June 2004 they purchased Foam Creations Inc. (formerly known as Finproject NA and now called Crocs Canada). By acquiring their upstream counterpart, Crocs

20 21

http://www.referenceforbusiness.com/history2/25/Crocs-Inc.html http://www.refreshagency.com/cases/crocs/crocs_media.pdf 22 http://www.refreshagency.com/cases/crocs/crocs_media.pdf 23 Anderson, Diane. When Crocs attack, an ugly shoe tale. Business 2.0 Magazine. November 3 2006.


gained the manufacturing facilities as well as rights to the proprietary resin-based Croslite material used
to make Crocs.

Crocs growth took off and the Company began preparing to go public in 2005. The Company officially changed its name from Western Brands to Crocs, Inc. in January 2005 and incorporated in Delaware later that year. Crocs launched its first national advertising campaign and was recognized as "Brand of the Year" by Footwear News24. Nine models were available in up to 17 different colors and Crocs were carried at more than 5,000 retailers by the end of the year. Due to the advertising campaign and increased distribution network, Crocs sold over 6 million pairs of shoes (accounting for approximately $109 million in revenues) and turned its first annual profit of $16.7 million25. The Company filed its registration statement on August 15, 2005 and went public on February 8, 2006. While early pricing guidance was at $13 to $15 per share, Crocs completed its IPO of 9.9 million shares on February 8, 2006 at $21 per share. Crocs raised $207.9 million in the largest IPO of a footwear manufacturer up to that time.26

In 2006 and 2007, Crocs expanded exponentially - fueled by organic growth as well as numerous acquisitions. They acquired new brands, such as Jibbitz and Ocean Minded, added a clothing line made with Croslite and began selling childrens shoes. Due to growing demand, they increased production capacity through their own manufacturing facilities in Canada, Mexico and Brazil and also employed contract manufacturers in China, Italy and Romania. Crocs product offering expanded from 25 models in 2006 to over 250 in 2007. The retail expansion continued, with the first US store openings in Santa Monica, Boston and New York in November 2007. By the end of 2007, Crocs had 5,300 employees, operated more than 25 company owned retail stores and sold their products in over 15,000 locations worldwide. They also more than doubled revenues from $354.7 million in 2006 to $847.4 million in 2007.

However, things took a turn for the worse in 2008. Revenue growth slowed in the first quarter and Crocs experienced a loss of $4.5 million. The decline in growth continued for the rest of the year and losses mounted. Crocs had grown their manufacturing facilities and inventory in
24 25

Brand of the Year. Company Press Release. Nov. 21, 2005. Alsever, Jennifer. What a Croc! Fast Company. June 1, 2006. 26 Crocs IPO Takes Off. Denver Business Journal. February 8, 2006.


preparation for continued expansion; however the market turned and Crocs was swollen. Crocs therefore closed their manufacturing facilities in Canada and Brazil and decreased production in Mexico and China. This resulted in a reduction in force of approximately 1,600 employees. On the positive side, Crocs attained greater sales from abroad as international sales grew from 32% of revenues in 2006 to 56% in 2008. Crocs ended the year with a loss of $185.1 million, mostly due to inventory write-downs and impairments of goodwill and other assets.

In 2009, Crocs continued restructuring and right-sizing the business. They also hired John Duerden, who previously worked at Reebok to serve as their new CEO in March. Crocs paid down its outstanding credit facility with UBOC and negotiated a $30 million asset-backed revolver with PNC in September. Earnings in the second and third quarter beat analyst expectations. However, Crocs demand estimates were too optimistic as growth continued to lag and the Company reported an annual loss of $42.1 million. In February 2010, Duerden announced he would be leaving Crocs and John McCarvel was promoted from COO to CEO. Crocs also recently launched a new advertising campaign called Feel the Love to debut new models for their spring/summer collection and highlight the benefits of Croslite. Lastly, the Company has provided guidance that they expect revenues to be approximately $160 million in the first quarter of 2010.
Stock Performance (since IPO)
80 Record earnings for 4Q2007 and FY revenues increased 139% to $847m Dec-31-2007


Acquisition of Bite Footwear Jul-30-2007


Closing stock price

50 Revenues increased 227% compared to 2005 Dec-31-2006


Annual revenues down 14.8% and net loss 4Q loss reported; of $183.6m FY revenues down Crocs lowered sales (2.22 per share) 10.5% and net Feb-19-2009 guidance and loss of $42.1m announced expected Feb-25-2010 loss for 1Q2008 John McCarvel Apr-14-2008 promoted to CEO Mar-01-2010 1Q loss was $4.5m (0.05 per share) May-07-2008 2Q and 3Q results beat guidance; profit of $22.1m announed in 3Q Aug-06-2009 Nov-05-2009

30 Crocs IPO Feb-08-2006 20 Stock split announced after strong 1Q results May-03-2007

Loss of $148m announced Nov-12-2008


Acquisition of Jibbitz Dec-05-2006 Jun-06 Oct-06 Feb-06 Apr-06 Feb-07 Apr-07 Dec-06 Aug-06

0 Jun-07 Jun-08 Oct-07 Oct-08 Jun-09 Feb-08 Feb-09 Oct-09 Apr-08 Apr-09 Feb-10 Dec-07 Dec-08 Dec-09 Aug-07 Aug-08 Aug-09 Apr-10


Source: Capital IQ and Company website

Historical Revenues and Earnings

950 847.4 721.6 645.8

750 550 $ Milliions 354.7 350 168.2 150 1.2 -50 -250
Revenues Net Income/(Loss)

108.6 13.5 (1.2) 2003 (1.6) 2004 16.7 2005

64.4 (42.1) 2006 2007 2008 (185.1) 2009

Source: Company Annual Reports

Quarterly Revenue (Bar) and EBITDA margin (line)

Source: Capital IQ

Significant Recent Acquisitions During its years of extraordinary growth, Crocs was able to fund several acquisitions, most of which were unsuccessful. As mentioned previously, Crocs originally (in 2002) purchased the rights to manufacture the footwear produced by Foam Creations, Inc. and Finproject N.A. Inc. (now called Crocs Canada). In order to expand their product line and distribution, Crocs acquired Foam Creations in June 2004 for $5.2 million in cash and assumed $1.7 million of debt. As a result, Crocs had control over its manufacturing operations and product lines and rights to


the proprietary Croslite material. In October 2008, Crocs divested some of the manufacturing, inventory and finished products to the original founder of Foam Creations.

Next, Crocs hit a home run with its December 2006 purchase of Jibbitz, a producer of decorative charms designed to fit into Crocs footwear, for $10 million in cash and an additional $10 million earn-out based on Jibbitzs EBIT over the next three years. Jibbitz was the perfect complement to Crocs, and sales were $67.5 million in 2007 alone, representing nearly 8% of the Companys total sales. As of December 31, 2009 Crocs sells 1,200 different Jibbitz charms SKUs, many of which are based on licensed entertainment characters. Earlier that year, Crocs also acquired Fury Hockey for $1.5 million and EXO Italia for 6.0 million in October They purchased Fury to expand into sporting equipment and EXO to have an in-house designer of ethylene vinyl acetate
products. Fury was discontinued in June 2008, resulting in an impairment of $1.3 million for the

brands goodwill and trade name.

Crocs made two additional acquisitions of footwear manufacturers in 2007. They purchased Ocean Minded for their leather and EVA-based sandals in January and they purchased Bite for their performance shoes and sandals in July. Ocean Minded was acquired for $1.75 million in cash and milestone payments worth an additional $3.75 million over three years. Bite was purchased for $1.75 million in cash (plus the assumption of their debt of $1.3 million) and milestone payments worth an additional $1.75 million over three years. Crocs discontinued Bite in 2009 and incurred a restructuring charge of $1.1 million to terminate their obligations related to the Bite agreement. In April 2008, Crocs acquired Tidal Trade for $4.6 million and Tagger International for $2.0 million. While the purchase of Tidal Trade, the distributor of Crocs in South Africa, included $1.4 million in customer relationships, it also resulted in reduced revenues of $2.1 million from previously sold inventory. Crocs discontinued Tagger International, a manufacturer of messenger bags, in 2009 and recognized an impairment charge for its trademark (valued at $1.9 million at acquisition). Given Crocs financial situation in 2008, it is surprising that these acquisitions were executed. That being said, Crocs has not acquired any additional brands since April 2008 and has focused on liquidating non-performing assets during the last two years.


Acquisition History
Brand Crocs Canada (fka Foam Creations Inc.) Jibbitz, LLC Fury Hockey, Inc EXO Italia Ocean Minded, Inc. Bite, LLC Tidal Trade, Inc. Tagger International Year 2004 2006 2006 2006 2007 2007 2008 2008 Price $6.9m $20.2m $1.5m Discontinued? No No Yes No No Yes No Yes Description Developer/manufacturer of products using resin-based Croslite material Decorative charms that fit into Croc shoes Hockey, soccer and lacrosse equipment Developer/designer of ethylene vinyl acetate products for footwear industry Designer/manufacturer of sandals for beach/action sports Manufacturer of performance shoes and sports sandals Distributor in South Africa Manufacturer of messenger bags

$5.5m $4.8m $4.6m $2.0m

Management and Governance As mentioned above, Crocs was founded by three entrepreneurs who ran the business themselves from 1999 to 2003. In late 2003, the founders hired a college friend, Ron Snyder, who previously co-founded the electronics manufacturing company Dii Group and oversaw its growth, IPO and eventual sale to Flextronics, Inc. Ron Snyder was President of Crocs from June 2004 to March 2009, CEO from January 2005 to March 2009 and also a member of the board of directors until June 2009. Snyder was very instrumental in the success of Crocs, as he led the Company from a young start-up to a global brand. Under his leadership, they bought Foam Creations, completed an IPO and developed internationally into more than 125 countries. However, they also made many unsuccessful acquisitions and grew too quickly, which resulted in high restructuring charges and a loss of $185 million in 2008. It is worth noting that during Snyders tenure, Crocs had three CFOs: Caryn Ellison (from January 2005 through March 2006), Peter Case (from April 2006 to January 2008) and Russ Hammer, who has held the position since January 2008. After Snyders retirement in March 2009, the board of directors appointed John Duerden as CEO. John Duerden, an industry veteran who was responsible for Reeboks sensational growth and performance in the 1990s, only lasted one year at Crocs and was replaced by John McCarvel on March 1, 2010.

John McCarvel had been employed by Crocs since January 2005 (after providing consulting services in 2004) and most recently served as COO for the firm. Prior to becoming COO in 2007,


McCarvel was senior vice president for global operations (from October 2005 to February 2007) and vice president for Asia. McCarvel successfully moved up the ranks at Crocs, proving himself on projects such as the expansion of Crocs direct channel business, consolidation of their global warehouse capacity and investments in customer systems. McCarvel is taking charge of Crocs after a very difficult period of substantial losses and overall economic distress; however, he already knows the Company inside and out and is hopeful that they will be able to turn the business around. As he said, Weve spent the last 18 months stabilizing the Company while reinvigorating our product line and brand, and realigning our cost structure. I look forward to guiding the Company back to profitable growth, with the help of our talented management team and employees around the world and the support of our board.27

Of the three founders, Hanson and Seamans are still involved in the firms operations. Lyndon Hanson is currently VP of Customer Relations and Scott Seamans serves as Vice President of Product Development. George Boedecker was CEO of Crocs from July 2002 through December 2004 and subsequently resigned from Board in May 2006 amid personal issues.
Timeline of Major Personnel Changes
July 2002 December 2004 Co-founder George Boedecker is CEO May 2006: Boedecker resigns amid personal issues March 2009 February 2010 John Duerden (industry pro from Reebok) serves as CEO

1999 2002 2003 2004 2005 2006 2007 2008 2009 2010

January 2005 March 2009 Ron Snyder is CEO

March 2010: John McCarvel is promoted from COO to CEO

Board of Directors When Ron Snyder officially came out of retirement to serve as CEO in 2005, he hired former colleagues to join him to run Crocs day-to-day operations as well as the board of directors. Richard Sharp (chairman of the board since April 2005) was formerly a director of Flextronics, Thomas Smach (director since April 2005) was formerly CFO of Flextronics and Dii Group, and
Veteran Crocs Executive John McCarvel Named President and Chief Executive Officer of Crocs, Inc. Company Press Release. February 25, 2010.


John McCarvel (Crocs current CEO) was formerly Vice President of the design, test and semiconductor division at Flextronics. Over the past five years, the board has experienced some turnover. In addition to the CEO, two new directors Peter Jacobi and Stephen Cannon (Richard Sharps former General Counsel at Circuit City) have been appointed to the board in the past two years.
Key Officers and Directors28 Name Position Tenure Age Current/Previous Employment John McCarvel Director/CEO March 2010* 52 Flextronics Russell Hammer CFO January 2008 52 Motorola Daniel Hart Chief Legal and January 2010** NA NA Admin Officer Richard Sharp Chairman April 2005 62 Carmax; Circuit City; Flextronics Stephen Cannon Director February 2009 57 Constantine Cannon; Circuit City Raymond Croghan Director August 2004 59 Croghan & Associates Ronald Frasch Director October 2006 60 Saks Fifth Avenue; Escada Peter Jacobi Director October 2008 65 Levi Strauss Thomas Smach Director April 2005 48 Riverwood Capital; Flextronics * McCarvel joined Crocs in January 2005 and his current position commenced in March 2010. ** Hart joined Crocs in January 2009 and his current position commenced in January 2010.

SWOT Analysis Strengths Crocs is a brand that is well known and recognized around the world. They have proprietary rights to the Croslite material, which gives them a competitive advantage in the marketplace and increases the popularity of their shoes. Crocs also has a diversified customer base and no single customer has represented 10% of their revenues over the past three years. Crocs has a clean right side of the balance sheet with very minimal debt. Therefore, they are able to implement changes without worrying about maintaining a certain level of cash to make interest payments. In addition, they have a $30 million credit facility which can be drawn for additional funding. Lastly, Crocs has a large international presence, with 60.2% of 2009 revenues generated from outside the U.S. and these sales are more profitable (with operating margins of 24% in Asia and 10% in Europe compared to 7% in the Americas).29 Weaknesses

28 29

Capital IQ. Company annual reports


Crocs does not have a diversified product offering beyond footwear, which causes revenues to be seasonal (since most of their footwear is worn in summer) and also very cyclical (dependent on consumer spending and performance of the retail sector). Demand for Crocs Classic shoes has been declining over time (from 30% of total sales in 2007 to 16% in 2009) as they transition to a mature product and therefore, revenues are contingent upon the success of new models and fads. Crocs also relies too heavily on key suppliers and manufacturers. In 2009, Crocs only produced 27% of footwear products at company-owned facilities in Mexico and Italy. Another 36% of 2009s footwear products were produced by their largest third-party supplier in China and Crocs does not have written supply agreements with their primary third-party manufacturers in China. Crocs has poor IT systems and depends on manual processes which are not efficient or scalable as the Company grows. Another weakness is Crocs capital markets valuation, as their stock is currently trading at $10.96, down from a high of $74.75 in October 2007. Lastly, Crocs has also experienced management turnover in the past year; their CEO John Duerden retired in February 2010, they promoted John McCarvel from COO to CEO (leaving the COO position unfilled) and their general counsel resigned in December 2009.30 Opportunities Crocs has the ability to expand through growth in direct to consumer sales and internet sales. Given Crocs success internationally, they can continue expanding abroad by reaching untapped markets. In addition, its possible that the Crocs fad is in a different part of the fashion trend cycle abroad and Crocs can even take advantage of further growth in countries where it already has a presence. Lastly, there is an industry movement towards more comfortable and casual shoes, so Crocs has the opportunity to attract new consumers by highlighting the benefits of Croslite. Threats Given that Crocs does not have patent protection on its proprietary Croslite material, other companies have been replicating the material or creating close substitutes, which eliminates Crocs competitive advantage. In addition, there are limited barriers to entry and many knockoffs have been created. While Crocs has filed suits against numerous copycats, this process is costly and takes time (and important executives) away from their core business. Due to the lack



of advanced IT systems, Crocs is more susceptible to human error or fraud. Also, Crocs does not hedge its exposure to foreign exchange and could therefore face significant losses if the US dollar strengthens. Crocs likely has over-capacity from its rapid growth pre-2008 which may add additional difficulty as they come out of the recent economic crisis. Another threat is their unknown ability to tap the capital markets, given that Crocs may need additional capital if there are losses in 2010. The revolver with PNC pledges their assets as collateral, therefore the Company would need to find an unsecured lender. Lastly, there is anti-Crocs sentiment in the market, as evidenced by the website I Hate Crocs.com31 which could reduce demand for its products.32

31 32

http://ihatecrocs.com/ IBid


HISTORICAL FINANCIAL OVERVIEW Crocs experienced rapid revenue growth and had difficulty meeting the demand for its footwear products from the Companys inception to the year ended December 31, 2007. In fact, many people felt the love for the brand when the shoes were introduced in 2002. Revenue reached $354.7 million in 2006, the year the Company went public. A year later, that figure had more than doubled to $847.4 million. During this period, the Company significantly increased production capacity, warehouse space and inventory in an effort to meet demand. This trend rapidly ended in 2008. But by 2009, sales had fallen nearly a quarter to $645.8 million.

FiscalYearEnded 2005A Salesgrowthrate COGS/Sales Grossmargin SG&A/Sales FXtransactionlosses(gains),net/Sales Netprofitmargin Capex/PP&E,net(PrevYr) 703.1% 44.0% 56.0% 31.2% 0.0% 15.6% 309.5% 2006A 226.7% 43.5% 56.5% 29.7% 0.0% 18.2% 161.4% 2007A 138.9% 41.3% 58.7% 31.7% 1.2% 19.9% 164.7% 2008A (14.8%) 67.5% 32.4% 47.3% 3.5% 25.6% 63.0% 2009A (10.5%) 52.3% 46.6% 48.3% 0.1% 6.5% 20.9%

Management believes that both the large decline in revenues in the Americas and Europe, and the moderation of revenue growth in Asia, are largely attributable to the following factors: a. The global economic crisis, which impacted the United States, Europe and Asia, causing a reduction in consumer spending and decreased foot traffic at shopping malls. This resulted in the Companys inability to execute its long-term growth strategy or maintain current revenue levels. b. A less successful than anticipated attempt to face the following challenges: a. Merchandising expanded product lines in existing wholesale channels while responding to lessening demand for mature products. b. Effectively responding to competitors entering the market with imitation products that are sold at substantially lower prices.

Revenue Trends and Drivers


Over the last five years, Crocs revenues, influenced by distribution channel, product mix and geography have varied significantly and resulted in changes to profitability. As shown in Exhibits 1 and 2, the following trends are evident: Increasing revenues in the Asia-Pacific region, from 4% to 37% of total revenues in FY08 and FY09, respectively, offset by declining revenues in the Americas and Europe during the same period. The Company expects that growth in Asian markets will continue to fuel Company revenue growth going forward. Note that revenues earned in Asia (and Europe) generate significantly larger operating profit margins than those earned in the Americas. As revenue growth in Asia continues to outpace that of the Americas/Europe, one would expect the Companys operating profit margin to improve. OperatingProfitMarginbeforeTaxbyGeography
Fiscalyearended 2007 2008
Americas Europe Asia-Pacific Corporate and Other 33.3% 42.9% 44.9% -4852.9% -12.0% 0.7% 8.1% -3808.6%

7.1% 10.3% 24.4% -4204.1%





Americas Europe Asia-Pacific Corporate and Other 259% 623% 965% nm

-15% 2% 13% nm

8% 16% 38% nm





Source: Capital IQ, Crocs 10-K, financial analysis nm= not meaningful

Growing retail and online revenues, offset by recent declines in wholesale revenue. It is part of the Companys long-term strategy to continue increasing retail and online sales growth, as these distribution channels earn higher sales prices which is accretive to gross profit margins and also allow the Company to maintain control over brand recognition/awareness. Decreasing wholesale revenues are driven by lower unit sales/Jibbitz sales due to the economic downtown and during FY08, increased sales return allowances (discussed below). The continued global economic downturn in FY09, lessened consumer demand and leaner inventory levels further contributed to declining wholesale revenues. Also, the Company took measures to reduce the number of


wholesalers selling its product in order to be in a better position to brand the product in the marketplace. Change in sales mix, from primarily the classic/core Crocs products to newly introduced shoe models. Per management, a wider range of products requires additional materials (such as canvas, cloth, lining and suede) and additional processes (such as stitching) to manufacture. This results in a higher cost of sales and decreased gross margins. Expenses33 As shown within the Companys income statement contained within Exhibit 3, the Company experienced significant changes to both cost of sales and operating expenses during FY08 and FY09. Given the sharp decline in sales, the Company commenced restructuring efforts and other downsizing activities during FY08, which resulted in various material non-recurring items being recorded in the Crocs financial statements.

Cost of Sales Inventory write-down/charge on future purchase commitment: During FY08, Crocs inventory included certain styles and colors with substantially diminished demand. Based on decreased demand for these products, the Company discontinued them and implemented a plan for the disposal of the discontinued product inventories. This plan included structured sales to established discount retailers, sales through Company-operated outlet stores, warehouse sales and other disposition activities as well as charitable product donations. In connection with these efforts, the Company recorded approximately $76.3 m of inventory write-down charges and an additional $4.2 m in charges related to losses on future purchase commitments for inventory with a market value lower than cost. Sales returns and allowances: In light of then-prevailing economic conditions, the Company granted certain return requests and allowances to a number of customers it believed were strategically important to the Companys ongoing business; this resulted in an increase in sales returns and allowances. The expense recorded for the reserve for sales returns and allowances increased from $7,168,000 in FY07 to $52,597,000 in FY08 and went back to $8,368,000 in FY09. Per the MD&A within the Companys 10-K filing, amounts recorded in

Company annual reports


2008 were significantly higher than historical estimates and management does not expect to grant such allowances to customers in the future.
CostofSales Inventorywritedown Chargeonfuturepurchasecommitment Salesreturnandallowances Restructuringcharges Tenderoffer GrossProfit,netimpact Saleofimpairedinventory,netimpact Impactofforeignexchange Restructuringcharges Operatingleaseexitcosts Otherrestructuringcosts Terminationbenefits Amountstransferredtocostofsales Sales,GeneralandAdministrative(SG&A) Tenderoffer Legalexpense Advertising/Marketingexpense Foreigncurrencytransaction(losses)gains,net Foreigncurrencytransaction(losses)gains,net Impairmentcharges Goodwill Intangibleassets Jibbitzbrandname Equipment/molds Leaseholdimprovements Capitalizedsoftware Otherintangibleassets Gainoncharitablecontribution Gainoncharitablecontribution 3,163 (23,867) (882) (150) (20,885) (18,150) (327) (4,514) (3,094) (25,438) 665 (13,300) (3,900) Errorincalculationofstockbasedcompensation 4,500 (1,853) (5,587) (2,187) (5,307) (4,525) (3,815) 901 7,086 (7,664) (7,623) 16,400 16,400 49,800 (4,400) 45,400 (76,258) (2,568) (4,200) (52,597) (8,368) (901) (7,086) (3,000) (133,956) (21,022)

FiscalYearEnded 2008A 2009A

(16,800) 24,100 (22,300) 27,900 (34,600) 34,800

(45,784) (26,085)


(231,042) 29,298


Gross Profit, net impact Sale of impaired inventory: Related to the inventory write-down described above, the Company was able to sell $58.3m of impaired product at substantially higher prices than what management had previously estimated. The gross profit related to these units was accretive to gross margin in the amount of $49.8m. Impact of foreign exchange: According to the Companys MD&A, changes in foreign currency exchange rates year-on-year impact gross margin. Management expects that sales at subsidiary companies with functional currencies other than the US dollar will continue to generate a substantial portion of overall gross profit. Changes in foreign currency exchange rates can impact gross margins and/or comparability of gross margins from period to period.

Restructuring Charges Given declines in revenue, the Company evaluated its production capacity and operations structure and recorded the restructuring costs outlined below. Of total amounts recorded, the Company recorded $7.6 million recorded in restructuring charges and $7.1 million in cost of sales during FY09 and $7.6 million in restructuring charges and $0.9 million in cost of sales during FY08. Operating lease exit costs: Includes costs related to the restructuring/discontinuation of operations in Canada and Brazil during FY08 and the consolidation of warehouse and distribution facilities in FY09. Other restructuring costs: Other restructuring costs for FY08 includes the cancellation of purchase obligations and freight and duty charges related to transferring inventory and equipment to its United States and Mexico facilities. FY09 amounts include costs related to the termination of a manufacturing agreement with third party in Bosnia and the termination of the Companys sponsorship agreement with the Association of Volleyball Professionals, a $1.1 million charge to release the Company from obligations under an earn-out agreement with Bite, LLC, and $0.5 million in charges related to the termination of consulting agreements with former key employees. Termination benefits: Represents employee termination costs related to headcount reductions.


SG&A costs Tender offer: During FY09, the Company offered to purchase stock options with exercise prices equal to or greater than $10.50 per share in order to restore the incentive value of its long-term performance award programs and in response to the fact that the exercise prices of a substantial number of outstanding options were under water. Of the $16.3 million charge, $13.3 million was recorded to SG&A and $3 million was recorded to cost of sales. Error in calculation of stock-based compensation: During FY09, management identified an error in the calculation of stock-based compensation for prior periods. The error resulted in a $4.5 million understatement of stock-based compensation in FY08. Amounts were corrected during FY09 through both the tender offer expense described above and a direct adjustment to the financial statements. Legal expense: During FY08, the Company experienced an increase in legal expense of $16.8 million due to ongoing litigation and intellectual property enforcement. During FY09, legal expense decreased $24.1 million when compared to FY08. Advertising/Marketing expense: The Companys advertising/marketing expenses fluctuated significantly during FY08/FY09. Expense increases in FY08 include $5.4m related to corporate sponsorships and $12m related to advertising expense. During FY09, expenses decreased $27.9m, due to an $11.1m expense decrease related to corporate sponsorship and a $16.8m decrease in advertising as the Company exited corporate sponsorships.

Foreign currency transaction gains and losses Expenses related to recording transactions denominated and settled in a currency other than the functional currency (USD) have resulted in significant swings in the Companys income statement, including a gain of $10.1 million, a loss of $25.4 million and a gain of $665, 000 in F07, FY08 and FY09, respectively. Per the Companys 10-K, management intends to engage in foreign exchange hedging contracts to reduce economic exposure in the future.

Impairment Charges In conjunction with the restructuring activities described above, the Company recorded various charges during FY08 and FY09 related to equipment and molds that represented excess capacity,


goodwill, intangibles assets including trade names and patents, and other assets/equipment used in manufacturing, distribution and sales that were considered impaired.

Gain on charitable contribution As part of the Companys plan to dispose of discontinued and impaired product inventories, impaired product donations were made to the Companys Crocs Cares! charitable organization. The inventory items consisted of end of life units, some of which were fully valued, partially impaired or fully impaired. The contributions made were expensed at their fair value of $7.5 million during FY09. Because the fair value of the inventory contributed exceeded its carrying amount, the Company recognized a gain of $3.2 million.

Normalized earnings Based on our analysis of the items outlined above, we have prepared a normalized income statement in which we have adjusted income before taxes for any one-time/non-recurring items.
Revenues Costofsales Restructuringcharges Grossprofit SG&A Foreigncurrencytransactionlosses(gains),net Restructuringcharges Goodwillimpairmentcharges Assetimpairmentcharges Charitablecontributions Income(loss)fromoperations Interestexpense Gainoncharitablecontribution Otherexpense(income),net Income(loss)beforeincometaxes

Audited Adjustments Normalized Audited Adjustments Normalized 2008A 2008A 2008A 2009A 2009A 2009A
$721,589.0 486,722.0 901.0 233,966.0 341,518.0 25,438.0 7,664.0 23,867.0 21,917.0 1,844.0 (188,282.0) 1,793.0 0.0 (565.0) (189,510.0) $0.0 (118,164.3) 0.0 118,164.3 (12,300.0) 0.0 (7,664.0) (23,867.0) (21,917.0) 0.0 183,912.3 0.0 0.0 0.0 183,912.3 $721,589.0 $645,767.0 368,557.7 0.0 353,031.3 329,218.0 25,438.0 0.0 0.0 0.0 1,844.0 (3,468.7) 1,793.0 0.0 (565.0) (4,696.7) 337,720.0 7,086.0 300,961.0 311,592.0 (665.0) 7,623.0 0.0 26,085.0 7,510.0 (51,184.0) 1,495.0 (3,163.0) (895.0) (48,621.0) $0.0 10,564.0 0.0 (10,564.0) (17,200.0) 0.0 (7,623.0) 0.0 (26,085.0) 0.0 0.0 0.0 3,163.0 0.0 (3,163.0) $645,767.0 348,284.0 0.0 297,483.0 294,392.0 (665.0) 0.0 0.0 0.0 7,510.0 (3,754.0) 1,495.0 0.0 (895.0) (4,354.0)

Refer to Exhibit 5 for a summary of the non-recurring/one-time adjustments that were incorporated into the normalized income statement above.

Off-Balance Sheet Exposures and Contractual Obligations A summary of Crocs contractual obligations is as follows:


Lessthan 1year 13years $in000s 48,862 OperatingLeaseObligations $ 44,749 $ 14 CorporateSponsorships 212 1 MinimumLicensingRoyalties 1,301 35 52,116 PurchaseObligations 2 FIN48estimatedliability 19,664 9,499 CapitalLeaseObligations 640 904 Total 118,682 59,314
1. 2.

35years $ 33,647 14 1 7 33,669

Morethan 5years $ 43,514 43,514

Total $ 170,772 240 1,337 52,116 29,163 1,551 255,179

IncludesroyaltiesrelatingtolicensingagreementswithcompaniessuchasDisney,MLB,and RepresentsestimatedliabilitiesasaresultoftheouradoptionFASBInterpretationNo.48,Accountingfor UncertaintyinIncomeTaxes("FIN48"),ascodifiedinAccountingStandardsCodificationTopic740"Income Taxes".

Operating lease obligations, which include various building and equipment transactions, are not reflected on Crocs Balance Sheet. These obligations may increase in the future if Crocs continues to enter into operating leases related to retail stores. We have capitalized these operating leases in the valuation section to capture these commitments. Purchase commitments are related to inventory purchases with the Companys third-party manufacturers.

Excluded from the Companys Balance Sheet and the table above are guaranteed payments the Company must make to its third-party manufacturer in China for purchases of material for the manufacture of finished shoe products. The maximum potential future payment that the Company could make under the guarantee is 2.1 million (approximately $3.0 million).

Crocs also entered into an amended and restated four-year supply agreement with Finproject S.P.A., the former majority owner of Crocs Canada, on July 26, 2005. Based on the agreement, Crocs has the exclusive right to purchase the material for the manufacture of finished shoe products, except for certain current customer dealings (including boot manufacturers). The supply agreement was extended through June 30, 2010. Crocs must meet minimum purchase requirements to maintain exclusivity throughout the term of the agreement. No information about the purchase requirement amounts was provided within the financial statements, except the fact that the pricing is to be agreed upon each quarter and fluctuates based on order volume, currency fluctuations, and raw material prices.


Liquidity and Capital Resources At December 31, 2009, Crocs had $77.3 million in cash and cash equivalents. Refer to Exhibit 6 for the Companys historical Statement of Cash Flows.

During FY09, the Company fully repaid its Revolving Credit Facility with Union Bank of California, N.A. (approximately $23 million). In order to secure additional liquidity for the future, on September 25, 2009, the Company entered into a Revolving Credit and Security Agreement with PNC Bank, N.A, which matures on September 25, 2012. As outlined within the Companys 10-K, this agreement provides for an asset-backed revolving credit facility of up to $30 million in total, and contains the following sublimits: $17.5 million sublimit for borrowings against eligible inventory $2 million sublimit for borrowings against the Companys eligible inventory in-transit $4 million sublimit for letters of credit asset-backed revolving lines of credit.

The total borrowings available under the Credit Agreement are also subject to customary reserves and reductions to the extent the Companys asset borrowing base changes. Borrowings are secured by all Company assets, including all receivables, equipment, general intangibles, inventory, investment property, subsidiary stock and leasehold interests. The Company must prepay borrowings under the agreement in the event of certain dispositions of property.

Per the Companys financial statements, interest due on domestic principal amounts outstanding is charged as a 2% premium over the rate that is the greater than either: (i) (ii) (iii) PNC's published reference rate, The Federal Funds Open Rate in effect on such day plus 0.5% , or The sum of the daily LIBOR rate and 1.0%, with respect to domestic rate loans.

Eurodollar denominated principal amounts (Eurodollar loans) outstanding bear interest of 3.50% premium over a rate that is the greater of: i. ii. The Eurodollar rate, or 1.50%.


The credit agreement requires monthly interest payments with respect to domestic rate loans and at the end of each period with respect to Eurodollar rate loans.

Restrictive and financial covenants applicable to the credit agreement include the maintenance of a certain level of tangible net worth and a minimum fixed-charge coverage ratio, calculated on a quarterly basis. The agreement also contains certain restrictive covenants that limit and may prohibit the Companys ability to incur additional debt, sell, lease or transfer its assets, pay dividends, make capital expenditures and investments, guarantee debts or obligations, create liens, enter into transactions with Company affiliates, and enter into certain merger, consolidation or other reorganizations transactions. According to its financial statements, Crocs was in compliance with these financial covenants as December 31, 2009. An immaterial amount was outstanding under the credit agreement at December 31, 2009.

Crocs ability to fund working capital needs and planned capital expenditures is directly dependent on its future operating performance and cash flow, which is ultimately impacted by economic conditions and financial, business and other factors. Although management asserts within its 10-K that the Companys recent downsizing / cost reduction actions will be sufficient to maintain a level of liquidity necessary to meet the Companys ongoing operational needs, further economic deterioration, and/or the Companys inability to implement strategic goals may require additional financing beyond the Companys credit agreement; this factor must be considered when projected the Companys future cash position.

FiscalYearEnded 2005A
Accountsreceivable,net/Sales ARturnover(usingavgofAR) Daysreceivable Inventories/COGS Inventoryturnover(usingavgofInv) Inventorydaysonhand Source:Crocs10K,financialanalysis 59.6% 3.1x 217.7 55.9% 2.7x 204.1 71.0% 2.1x 259.3 16.2% 10.4x

18.5% 8.5x

18.0% 7.8x

4.9% 7.7x 25.8 29.4% 2.5x 107.4

7.8% 15.1x 34.1 27.6% 2.9x 100.9

Accounts Receivable


One item important to consider when analyzing Crocs cash flows is that seasonal variations in product demand and the associated changes in operating assets and liabilities may impact cash flows from operations. Further, changes in macroeconomic conditions can affect customers liquidity and ability to pay amounts due. If the Company were to have difficultly collecting its accounts receivable, its cash flows and capital resources could be negatively impacted.

Per Crocs 10-K, the Company monitors its accounts receivable aging and records reserves as applicable. The accounts receivable balance as of December 31, 2009 was $50.5 million, an increase of $15.2 million compared to the balance as of December 31, 2008. The increase in accounts receivable was largely the result of higher sales during Q409 compared to Q408. Days sales outstanding increased from 25.8 days at December 31, 2008 to 34.1 days at December 31, 2009. This increase was driven by the previously described granting of return request and allowances to customers in the fourth quarter of 2008. This action caused a lower net accounts receivable balance for 2008. The combination of these factors artificially lowered the days sales outstanding for 2008 by approximately 10 days, and therefore 34.1 days is a realistic estimate of the Companys days sales outstanding.

Inventory Crocs inventory balance decreased to $93.3 million at December 31, 2009, from $143.2 million as of December 31, 2008. As previously described, the Company began an active inventory management program in 2008, including decreased production and actively selling existing inventory. This has allowed the Company to increase its inventory turnover ratio and decrease days on hand. Note that new product introductions, limitations on production capacities and seasonal variations require that the Company adjust to meet changing market conditions and may result in material fluctuations in the inventory balance.

Cash Management and Risks Crocs operates in many different countries, which requires that cash be held in various different currencies. The global market has recently experienced many fluctuations in foreign currency exchange rates, and as discussed above, the Companys results of operations and cash positions have been significantly impacted. In conjunction with the previously mentioned impact to


earnings, foreign exchange fluctuations impacted Crocs cash balance in the amounts of $3,758,000, ($2,697,000), and $12,491,000 during FY07, FY08 and FY09, respectively. Any future fluctuation in foreign currencies may have a material impact on Crocs cash flows and capital resources.

Although Crocs has substantial cash requirements in the U.S., the majority of its cash is generated and maintained abroad. Management considers unremitted earnings of subsidiaries operating outside of the U.S. to be indefinitely reinvested, and to be used for the ongoing operations of the international location of business. Although management does not intend to change this position, most of the cash held outside of the U.S. could be repatriated to the U.S. but would be subject to U.S. federal and state income taxes, less applicable foreign tax credits. To further complicate matters, repatriation of certain foreign balances is restricted by local laws and could have adverse tax consequences if the Company were to move cash from one country to another.

At December 31, 2009, $64.8 million of the total $77.3 million in cash was held in international locations. Of the $64.8 million, $16.0 million could potentially be restricted, as described above. If the remaining $48.8 million were repatriated to the U.S., the Company would be required to pay approximately $1.7 million in international withholding taxes with no offsetting foreign tax credit.

Capital Expenditures

FiscalYearEnded $in000s Capex 2005A 11,531.0 2006A 23,828.0 2007A 57,379.0 2008A 55,559.0 2009A 20,054.0

The Company ramped up its capital expenditures during 2005-2007. During 2008, most of Crocs capital expenditures were dedicated to infrastructure expansion to meet expected sales volume. Given the revenue decline during FY08 and into FY09, management altered its capital expenditure strategy and its FY09 capital expenditure budget was spent primarily on infrastructure considered to be critical to executing Crocs business strategy instead of expansion.


Management plans to continue to make ongoing capital investments in molds and other tooling equipment related to manufacturing new products and footwear styles as well as those related to opening additional retail stores. Management also plans to continue to invest in its global information systems infrastructure to further strengthen its management information and financial reporting capabilities. Note, however, that the Company: Has slowed the pace at which it is opening new retail stores Plans to reduce expenditures in its distribution and manufacturing activities due to a reduction in revenues, and Is currently in the process of implementing new software systems which management hopes to bring greater efficiencies to the Companys distribution strategy in the long term. These capital expenditures also do not capture implied Capex the company would need if they owned the stores instead of using operating leases. In the following valuation section, we have capitalized these operating leases and therefore included an estimated amount of Capex needed for these stores.



Liquidation Value In the table below, we have estimated the liquidation value of the Company to range between $173.5 million and $267.8 million.

LiquidationAnalysis Assets Cashandcashequivalents Restrictedcash(STandLT) Shortterminvestments Accountsreceivable,net Inventories Otherreceivables Propertyandequipment,net Otherassets TotalAssets/LiquidationProceeds (a)Inventories Finishedgoods Workinprogress Rawmaterials (b)PP&ELiqduiationAnalysis Machineryandequipment Leaseholdimprovements
1 2 2 1

77,343.0 $2,650.0 0.0 50,458.0 93,329.0 16,140.0 71,084.0 15,431.0 326,435.0

EstimatedRecoveryRate Low High 100.0% 100.0% 100.0% 100.0% 90.0% 100.0% 50.0% 90.0% Seedetails(a) 50.0% 90.0% Seedetails(b) 10.0% 50.0%

EstimatedLiquidityProceeds Low High 77,343.0 77,343.0 2,650.0 2,650.0 0.0 0.0 25,229.0 45,412.2 46,554.5 83,798.1 8,070.0 14,526.0 12,133.9 36,401.6 1,543.1 7,715.5 173,523.5 267,846.4

88,775.0 220.0 4,334.0

50.0% 0.0% 50.0%

90.0% 0.0% 90.0%

44,387.5 0.0 2,167.0

79,897.5 0.0 3,900.6

48,535.5 22,548.5

25.0% 0.0%

75.0% 0.0%

12,133.9 0.0

36,401.6 0.0

(Assumeddepreciation/amortizationallocatedas%oftotalgrossvalue) (Assumedleaseholdimprovementswouldgotolandlordinliquidation/leasecanceling)

A summary of our assumptions is as follows: Accounts receivable: We have assumed a recovery rate between 50% and 90%. In general, the Company has not had difficulty in collecting customer balances; its increase in sales returns/allowances for customers during FY08 was believed to be a unique, non-recurring event given the severity of the economic crisis. Nonetheless, upon the liquidation of the company, collection of amounts due could be difficult. Other receivables: We do not have any information related to the components of this balance and therefore have been conservative in assuming a recovery rate ranging from 50% to 90%. Inventory: We have assumed that any work-in-progress would have no value. We believe that finished goods and raw materials that could be resold could be liquidated anywhere between 50% and 90% of book value, which is expected to be recorded at the lower of cost or market under US GAAP.


Property, Plant and Equipment: We have assumed that all leasehold improvements would have no recovery value, as the improvements are likely connected to the leased property and would therefore be returned to the landlord upon liquidation/lease termination. We allocated the total depreciation/amortization on PP&E to each leasehold improvements and machinery & equipment based on relative gross values. As it pertains to machinery & equipment, we assumed a low recovery value, somewhere between 25% and 75%.

Other assets: Similar to the other receivables balance, we do not know the components of this balance. Given the nature of other assets accounts, we have assumed that the recovery rate would be extremely low, somewhere between 10% and 50%.

Valuation Turnaround Strategy, No Liquidation We have utilized a discounted cash flow model to determine the value of Crocs. Refer to Exhibit 3 for financial statement projections.

Note that prior to projecting the FY10-FY15 financial statements, we normalized FY08 and FY09 earnings as described in the Financial Overview section so that we had a more realistic base year upon which we could perform our projections. Refer to Exhibit 5 and the Financial Overview section of this report for additional information on the items we considered as nonrecurring that have been incorporated into our model. We have also capitalized the operating leases and restated rent expense as interest expense and depreciation.

Key assumptions included in our free cash flow calculation are as follows: Revenues: We have analyzed and projected revenue growth both by geography and distribution channel. Refer Exhibit 8 for projected revenue drivers. We have assumed revenue growth based on various factors: o GDP growth by geography: We have utilized 2010/2011 GDP growth estimates recently published by the World Bank34 as our base for growth projections by geography as we believe GDP growth will fuel the trend in shoe purchases (volume). Based on expert estimates, GDP growth will continue to be slow within the US and



Europe over the next two to five years. We have therefore assumed a growth rate of 4% in both regions over the next 5 years. We have assumed a significantly higher growth rate of 13% for China over the same period; this is slightly more optimistic than GDP growth expectation for the country but we believe the Crocs product is still within its growth phase in this region and therefore expect continued significant revenue growth in this region. We expect the Americas and Europe revenue contribution to decline while Asia-Pacific revenue contribution increases. Ultimately, we envision revenues to be comprised of 37.3%, 13.4% and 48.9% associated with the Americas, Europe and Asia-Pacific, respectively. Also note that our growth projections are above GDP growth estimates due to our expectation that revenues will continue to grow in the retail and online space (as described below), where the Company is able to charge higher sales prices; total retail and online revenues are expected to represent 49% of total revenues in 2015, compared to 37% in 2009. o Distribution channel mix: Given our turnaround strategy, detailed in a later section, of renewing focus on wholesale relationships, continuing growth in retail kiosks, closing various retail locations in the Americas and maintaining retail stores internationally, we have assumed retail growth of 6% and wholesale growth of 4% throughout the projected period. We anticipate continued online revenue growth given the constant increase in ecommerce and the use of the internet. We do, however, expect growth to slightly taper over the 5 year period. Ultimately, we project revenues to be comprised of 21.4%, 50.7% and 28.0% associated with Retail, Wholesale and Online revenues, respectively Cost of Sales: Over the last three years, Crocs cost of sales has increased significantly, from 41.3% to 50.9% to 55.1% of FY07, FY08 normalized and FY09 normalized revenue, respectively. This increase reflects increased salaries related to retail business growth and increased component costs related to a greater variety of product lines. Although we expect further decreases in product variety, we do not anticipate reaching historical cost of sale % levels. We also expect cost of sales to slightly decline with an increase in online sales as online distribution is a low cost form of distribution. We have therefore selected a COS/Sales ratio of 52% for FY10 and 50% for FY11-FY15. Also note that we anticipate the closure of 50 retail stores in conjunction with our turnaround plan and have calculated the net impact to 37

the cost of sales; this impact has been incorporated into projected cost of sales. Refer to Exhibit 9 for a summary of the financial impact of our turnaround plan actions. Restructuring Charges: Although the Company has recorded significant restructuring charges over the FY08/FY09 period, we believe there will be additional charges recorded in the near future. We anticipate further product consolidation will result in the write-down of additional product molds/equipment molds related to redundant/discontinued product lines. Refer to Exhibit 9. SG&A: Recent increases in SG&A expense, from 31.7% to 45.6% to 45.6% of FY07, FY08 normalized and FY09 normalized revenues, respectively, reflect the Companys efforts to expand its retail business, which has a significantly higher cost structure than wholesale and online distribution. Despite our anticipated turnaround efforts to close 50 retail stores in the US, Crocs has non-cancellable operating leases for the majority of its retail space; given recent difficulty the Company has had in subleasing rental property, we have conservatively assumed this property will not be subleased and therefore the related rent expense will not decline until the least terminates. Given the Companys contractual obligation table as previously summarized, it appears the majority of these leases do not renew/terminate for approximately 5 years. Although we believe our turnaround strategy will slightly decrease SG&A costs to approximately 40% of revenues, we do not believe further decreases will be possible given the existing lease situation. Note that projected SG&A also incorporates the financial impact of turnaround activities, including additional marketing expense to strengthen brand awareness, as outlined within the turnaround plan section of this document and within Exhibit 9. Foreign currency transaction gains and losses: The Companys public filings do not provide clarity regarding the full financial impact of foreign currency transactions and translation. Various numbers reported in the MD&A and financial statement notes outline the impact to Other Comprehensive Income (financial statement translation), Cash, Gross Profit and SG&A; it is extremely difficult to piece the information together to get a full picture of the financial impact of foreign currency fluctuations. Further, the foreign exchange impact reported in FY07-FY09 is not intuitive given the movements in the US dollar exchange rate against the Euro and Yuan. Nonetheless, it is clear the foreign exchange impact is significant.


As mentioned within the turnaround plan section of this report, we recommend that the Company begin to hedge some of its foreign currency transactions to mitigate some of its exposure to exchange rate risk. Due to our inability to obtain complete information on foreign exchange and the complexity in projecting the foreign exchange impact, we have not incorporated the impact of foreign exchange within our projections. Capital Expenditures/Depreciation: We expect capital expenditures to be similar to those levels recorded during FY09, which was primarily comprised of maintenance capital expenditures. Given our strategic plan to close various retail stores and focus more on kiosks from a retailing perspectives, large capital expenditures will no longer be required. Further, as previously mentioned, we intend to eventually move all production off-shore to third-party manufacturers in China. We therefore do not intend on making significant capital expenditures related to the growth of facilities and instead will make maintenance capital expenditure related to manufacturing facilities. Note that capital expenditures recorded in FY10/FY11 included additional amounts related to the systems improvement implementation described within the turnaround plan and contained within Exhibit 9. Resulting from lower capital expenditures, our annual depreciation expense will decline over time. Included in both capitalize expenditures and depreciation are amounts relating to the capitalization of operating leases. We made assumptions regarding future amounts, taking into consideration our recommendation to close stores going forward. Taxes: We have assumed a marginal tax rate of 40%. Changes in Working Capital: Given the lack of clarity around the components of various current asset and liability balances, including other receivables, prepaid expenses, other assets and accrued expenses, we have projected the balances as either constant (e.g. other receivables/other assets) or as a percentage of sales based on historical averages (e.g. accrued expenses). For the most significant working capital accounts, we assumed as follows: o Accounts Receivable: Due to lack of information regarding historical credit sales, we were only able to utilize the FY08/FY09 days receivable information as reported within the 10-K for our projections. Based on management commentary within the filing, it appears the 2009 days receivable of 34.1 is generally representative of the Companys operations. We have used 34.1 for FY10 but believe the Company will be


able to slightly improve this number to 32 days outstanding (14.3x) for the FY11FY15 period given Company efforts to improve cash management and be more selective about wholesale vendors. o Inventory: Based on historical information, the Company has improved inventory days on hand period-over-period. As previously described, the Company has commenced an active inventory management program to decrease production and actively sell existing inventory. This has allowed the Company to increase its inventory turnover ratio and decrease days outstanding from 259 days in FY07 to 101 days in FY09. We believe this trend will continue but days on hand will slightly increase to 110 going forward. o Accounts Payable: Accounts payable as a percentage of cost of sales has gradually decreased over time, primarily due to the fact that accounts payable are comprised of some fixed components that dont vary directly with revenue/cost of sales and therefore the ratio was exorbitantly high during the Companys first few years of operations. Since revenues have grown and we believe somewhat stabilized, we expect days payable will be more or less consistent going forward. We have assumed days payable to be 50 days during the projected period, which results in accounts payable representing 10% of cost of sales. Capitalized Operating Leases: o To capture the effect of mandatory future lease payments, we capitalized the operating leases as an asset and liability on the balance sheet. We feel this most accurately represents the companys debt and debt-like obligations. Accordingly, we restated rent expense as interest expense and depreciation. Although we do not have exact data regarding the companys cost of debt for real estate and stores, we assumed this discount rate to be the companys cost of debt at 10%. We also assumed obligations after year 5, which are aggregated, to have yearly amounts equal to the year 5 minimum payment.


DiscountedCashFlow(DCF)Analysis EBIT* TaxesonEBIT NOPAT Depreciation&Amortization* Capex* ChangeinWorkingCapital (Increase)/DecreaseinAccountsreceivable (Increase)/DecreaseinInventories (Increase)/DecreaseDeferredtaxassets,net (Increase)/DecreaseIncometaxreceivable (Increase)/DecreaseOtherreceivables (Increase)/DecreasePrepaidexpensesandothercurrentassets Increase/(Decrease)inAccountspayable Increase/(Decrease)Accruedexpensesandothercurrentliabilities Increase/(Decrease)Deferredtaxliabilities,net Increase/(Decrease)Accruedrestructuringcharges Increase/(Decrease)Incometaxespayable ChangeinWorkingCapital UnleveredFCF FCFgrowth

2009A (34,715.8) 0.0 (34,715.8) 76,889.8 67,243.8

2010E 52,878.5 21,151.4 31,727.1 67,678.0 73,121.7

2011E 2012E 65,017.8 80,472.9 26,007.1 32,189.2 39,010.7 48,283.8 69,119.8 68,748.8 70,958.0 71,987.6

2013E 87,446.6 34,978.6 52,468.0 73,277.7 75,967.2

2014E 95,202.2 38,080.9 57,121.3 79,234.8 83,594.1

2015E 102,669.8 41,067.9 61,601.9 85,750.8 90,328.1

(15,153.0) 49,876.0 4,006.0 15,806.0 (11,498.0) (4,098.0) (11,703.0) 0.0 3,504.0 (21.0) 1,177.0 31,896.0 6,826.2

(14,270.2) (13,159.3) 0.0 0.0 0.0 (2,710.1) 24,969.8 0.0 (516.6) (9.0) (2,616.0) (8,311.4) 17,972.0 163.3%

(549.3) (7,951.3) 0.0 0.0 0.0 (1,163.4) 3,614.2 0.0 3,962.2 0.0 0.0 (2,087.6) 37,294.0 107.5%

(4,992.2) (6,336.4) 0.0 0.0 0.0 (1,280.6) 2,880.2 0.0 4,361.1 0.0 0.0 (5,367.9) 41,886.3 12.3%

(5,503.0) (9,458.2) 0.0 0.0 0.0 (1,411.6) 4,299.2 0.0 4,807.3 0.0 0.0 (7,266.3) 42,512.2 1.5%

(6,074.6) (10,440.7) 0.0 0.0 0.0 (1,558.2) 4,745.8 0.0 5,306.7 0.0 0.0 (8,021.1) 44,740.9 5.2%

(6,714.8) (11,541.1) 0.0 0.0 0.0 (1,722.4) 5,245.9 0.0 5,866.0 0.0 0.0 (8,866.4) 48,158.2 7.6%

Capital Structure: Calculation of WACC and Terminal EBITDA Multiple We calculated the WACC based on the companys current capital structure, including capitalized operating leases (refer to Exhibit 7), using the CAPM method for the cost of equity and observable debt interest metrics. CROXs beta of 2.43 has risen recently as the Companys stock price has significantly outperformed the market. We chose not to adjust the beta downward to reflect the expected excess volatility in the stock as the Company continues its restructuring efforts. The 10% cost of debt is based on the Companys current revolving credit facility priced at LIBOR plus 300 bps and the average retail senior BB rate at 5.75%. We felt it necessary to significantly increase the cost of debt to reflect the Companys unlikelihood of being able to access the capital markets without a significant premium. The current revolvers rate is optically low because the Company pledged significantly all their assets as collateral. Based on these metrics, the Companys current cost of capital is 16.9%.


WACCCalculation MarketValueofdebt Costofdebt(rD) Assumedtaxrate Aftertaxcostofdebt(kD) Sharesoutstanding(MM) Pricepershare Marketvalueofequity Beta Riskfreerate(10yr) Marketriskpremium Costofequity(rE) Source Debt Equity Wgt 11.8% 88.2%

125,654.1 10.0% 40.0% 6.0% 85.7 10.96 938,829.0 2.43 3.82% 6.0% 18.4% Cost 6.0% 18.4% WACC wt*cost 0.7% 16.2% 16.9%

We estimated CROXs valuation using three methods: competitive markets, perpetuity with growth and EBITDA multiple. While we feel the EBITDA multiple is the most useful measurement as it incorporates observable market data, we included the other two methods as a comparison. To calculate the terminal EV / EBITDA multiple, we looked at competitor trading multiples and used the average of 12.1x as a conservative estimate (actual multiple used is 12.5x).35


Capital IQ


PricepershareCalculation Assumptions Perpetuitygrowthrate EV/EBITDA ResidualValue PVofResidualValue PVofFCF Cash EnterpriseValue MarketValueofdebt EquityValue Sharesoutstanding(MM) Pricepershare %ofvaluefromresidualvalue Impliedgrowthrate

7% 12.5x CompMkt 364,508.3 166,968.6 71,111.8 77,343.0 315,423.4 125,654.1 189,769.3 85.7 $2.22 52.9%

Perpw/g 486,446.3 222,824.2 71,111.8 77,343.0 371,279.0 125,654.1 245,624.8 85.7 $2.87 60.0%

EBITDAx 2,180,463.0 998,794.5 71,111.8 77,343.0 1,147,249.3 125,654.1 1,021,595.2 85.7 $11.93 87.1% 14.7%

Sensitivity Analysis Price per Share

TerminalMultipleof2014EEBITDA $11.93 DiscountRate 15.0% 16.0% 17.0% 18.0% 19.0% 7.5x 7.9 7.6 7.2 6.9 6.6 10.0x 10.5 10.0 9.6 9.1 8.7 12.5x 13.0 12.4 11.87 11.4 10.9 15.0x 15.5 14.8 14.2 13.6 13.0 17.5x 18.06 17.27 16.5 15.8 15.1

Based on the EBITDA multiple of 12.25x, Crocs is valued at $11.93 per share, with an enterprise value of $1.15 billion. 87.1% percent of the value is derived from the terminal value. This analysis implies a perpetuity growth rate of 14.7% which appears extremely high when compared with our expected growth rate over the next five years.

Valuation Sale to Strategic Buyer An option for Crocs to consider is selling itself to a strategic buyer. A large player, or even a similar sized company that would create scale in a combined company, could help Crocs improve its competitive situation. Issues that could potentially be addressed in a sale include: product expansion, gaining scale in manufacturing (or leverage in buyer from a 3rd party manufacturer) and distribution, access to an established marketing platform, experienced management team and improved access to the capital markets and a lower cost of capital. We evaluated three types of strategic buyers: Small strategic footwear company Skechers


o Company has an experienced management team, similar focus and could benefit from a brand and scale expansion internationally. Large strategic footwear company Nike o A sale would primarily be for the brand and a small acquisition for a company of Nikes size. Strategic retailer Collective Brands o Stores include Payless and Stride Rite. Company also owns product lines including Sperry Top-Sider and Saucony. However, they lack a strong presence in Asia. While each company addresses some of the issues stated above and could make for a stronger combined company, any deal at Crocs current valuation would be extremely dilutive. We believe a merger, regardless of potential synergies, will face a difficult time gaining capital market acceptance at the current levels of dilution36:
Purchase Price / Share Premium to Market Price Strategic Alternative Acquiror Payment Stock Accretion/(Dilution)/Share % Accrection/(Dilution)/Share (0.60) (0.64) (0.67) (0.70) (0.73) (0.76) -23% -24% -25% -26% -27% -28% 10.96 11.50 12.00 12.50 13.00 13.50 0.0% 4.9% 9.5% 14.1% 18.6% 23.2%

Sell to Strategic: Skechers Small Player

Sell to Strategic: Large Player



Accretion/(Dilution)/Share % Accrection/(Dilution)/Share

(0.02) (0.02) (0.02) (0.03) (0.03) (0.03) 0% -1% -1% -1% -1% -1%

Sell to Strategic: Collective Retailer


Accretion/(Dilution)/Share % Accrection/(Dilution)/Share

(0.42) (0.44) (0.46) (0.48) (0.50) (0.52) -25% -26% -27% -29% -30% -31%

Note: Although dilution is minimal for Nike, an acquisition at the current valuation only for the brand will likely be viewed unfavorable by shareholders.

Valuation - LBO Taking the company private, ideally in a management led buyout, would provide a platform to enact our proposed operational turnaround plan that current shareholders may not find palatable. We analyzed an LBO with a 5 year exit horizon; enough time to enact turnaround initiatives and

Analysis based on consensus estimates from Capital IQ


ensure they are entrenched before re-entering the public market. Operationally, an LBO is a favorable alternative. However, the financing structure is unlikely to attract a sponsor investor. Even under an aggressive leverage assumption of 5x 2009 EBITDA (normalized), a sponsor would need to contribute over 75% equity into the deal. Any exit into the capital markets is likely to see a lower multiple than the current trading range if the company is valued based on their peers. Assuming a 15% premium to the current stock price, a deal values the Company as an incredibly high 31x EBITDA. Exiting in 5 years at a 20x multiple, which is a very aggressive assumption, only yields an IRR of 21.2%. Such a return, coupled with the equity investment required and risk of a turnaround, is unlikely to attract an LBO investor37.
Sources(thousands) CashonBalanceSheet NewEquity NewSeniorDebt NewSubDebt TotalSources 77,343.0 929,040.3 101,436.0 67,624.0 1,175,443.3 %oftotal 6.6% 79.0% 8.6% 5.8% 100.0% CurrentStockPrice TransactionPremium AcquisitionStockPrice FDSO AcquisitionEquityValue TEV/EBITDA SeniorDebt Leverage Rate SuborindatedDebt Leverage Rate 4/23/2010 10.96 15.0% 12.60 88,695.5 1,117,917.8 30.8 3.0x 7.75% 2.0x 15.0%

Uses %oftotal PurchaseofEquity 1,117,917.8 95.1% RefinanceExistingDebt 1,552.0 0.1% TransactionExpenses 55,973.5 4.8% TotalUses 1,175,443.3 100.0% Assumptions: 2009EBITDA(normalized) 33,812.0 TransactionFee 5.0%


Financing costs are based on Retail BB 5yr senior debt average of 5.75%. Assumed a 200bps premium for company-specific risk. Source: Bloomberg.



Exit EBITDAx Year1 Year2 Year3 Year4 Year5 31x $1,853,418.1 $2,344,805.1 $2,847,015.3 $3,103,020.2 $3,380,446.8 20.0x 1,202,690 1,521,553 1,847,439 2,013,562 2,193,585 15.0x 902,018 1,141,165 1,385,579 1,510,171 1,645,189 10.0x 601,345.0 760,776.4 923,719.5 1,006,780.8 1,096,792.3 (114,802.1) 0 (43,049.3) 0 0.0 42,364 0.0 135,063 0.0 234,938

Less:Debt Plus:Cash ImpliedEquityValue 30.8x 20.0x 15.0x 10.0x Exit EBITDAx 30.8x 20.0x 15.0x 10.0x

1,738,616.1 1,087,888 787,215 486,542.9

2,301,755.8 1,478,504 1,098,115 717,727.2

2,889,379.4 1,889,803 1,427,943 966,083.5

3,238,083.6 2,148,625 1,645,235 1,141,844.2

3,615,384.6 2,428,522 1,880,126 1,331,730.1


87.1% 17.1% (15.3%) (47.6%) 2.5%

57.4% 26.2% 8.7% (12.1%) 4.6%

46.0% 26.7% 15.4% 1.3% 7.1%

36.6% 23.3% 15.4% 5.3% 8.3%

31.2% 21.2% 15.1% 7.5% 9.2%



TURNAROUND PLAN As we have discussed throughout our analysis, in an effort to stimulate sales growth and become the global leader in active casual footwear products38, Crocs management has embarked upon an ill-fated strategy to dramatically expand the Companys retail store presence in order to more effectively sell its non-core products (classic Cayman and Beach models and their closely-related spinoffs). This strategy led to a series of acquisitions (ice hockey equipment, messenger bags, specialty textile design firms, etc), a decreased focus on its wholesale business, and an explosion of new Crocs-branded footwear and clothing styles.

We believe that this new strategy, combined with the Companys highly questionable management information systems and its recent senior management turnover, is in danger of returning Crocs to the distress of 2008-2009. Despite recent improvements in sales, margins, and the Company stock price, we believe that Crocs remains in a precarious position, for the following reasons: Primary Concerns: Retail store expansion. Presumably in an attempt to find the next hit product, Crocs expanded from 25 product models in 2006 to 230 in 2009. The Companys stated rationale for the rapid store expansion is the ability to merchandise the full breadth and depth of [its] product line.39 In order to accommodate this strategy, Crocs expanded its U.S. company-owned and managed retail stores from 25 in 2007 to over 100 North American stores today. As a result Crocs spent approximately $60 million in rent in 2009, representing 10% of sales, and its SG&A/Sales is significantly above its competitors (48.3% TTM, versus 23.8% for Deckers, 28.3% for Wolverine Worldwide, 32.1% for Nike, 38.2% for Skechers and 42.4% for Heelys).40 One example of Crocs difficulty in executing its retail expansion program is the retail space at 143 Spring Street in New York, NY, for which the Company entered a 20 year lease agreement in July 2006. Per the Companys 2006 10-Q, a portion of
38 39

10K, page 15 10K, page 44 40 Capital IQ, 4.25.10


this property is expected to be utilized as a retail outlet for crocs footwear, gear and apparel. The Company also intended to utilize this space for design offices. Although management anticipated this lease to be one of the Companys first brick and mortar locations, this 192-year old landmarked building has been in the process of renovation since 2006 finally opened on May 8th, 2010 (see pictures below showing property development at 2006 and 2010).41 Based on total lease payments of approximately $13.7 million required over the 20 year lease term, we calculate that the Company has paid at least $2.6 million in rent on this unused property, not to mention any significant renovation costs to prepare the property as a retail space.42 Crocs leases are primarily non-cancellable and are likely long-term in nature, entered into at historically high rates.

Distribution strategy. The effect of the retail store expansion has been a reduction in focus on wholesale distribution, traditionally Crocs dominant channel (62.6%, 76.5% and 90.8% of net revenues in 2009, 2008 and 2007, respectively). The expanded retail presence ostensibly has a negative impact on Crocs relationships with these wholesalers, who are now effectively competing with Crocs retail stores for sales. Systems. Management information systems are a significant cause of concern. The risk factors listed in Crocs 10K state that current management information systems may not be sufficient for our business, and planned system improvements may not

http://ny.racked.com/tags/crocs-store http://therealdeal.com/newyork/articles/crocs-crawl-from-colorado-to-the-city; http://goliath.ecnext.com/coms2/gi_0199-5610524/Crocs-store-snaps-up-SoHo.html; Crocs 10-Q,2005




be successfully implemented on a timely basis or be sufficient for our business and for certain business planning, finance and accounting functions, we still rely on manual processes that are difficult to control and are subject to human error.43 As a consequence, we may have to disclose in periodic reports we file with the SEC any material weaknesses in our system of internal controls.44 Counterfeiting. Despite recent successes in legal battles with counterfeiters, the relative simplicity of the Crocs shoe design makes it an ongoing target. This is a particular concern for Crocs international expansion efforts; any counterfeiting that occurs in international markets will directly impact authentic Crocs sales. Crocs may be forced to engage in continuous, costly and distracting legal action to protect its interests. Unfortunately, even U.S. retailers may be susceptible to Crocs knockoffs; the Company accused Costco of selling unauthorized Crocs to customers in 2008.45 Skechers also settled a patent infringement suit with Crocs in 2008.46 Secondary Concerns: Senior management. The recent senior management turnover is a significant concern. Duerdens reputation as a short term turnaround specialist makes his departure after only one year more understandable.47 A more cynical view of the abrupt announcement (Duerden resigned just days after the Company released its 2009 10K) suggests that he believed additional restructuring was necessary but that other senior managers forced him out. Also, shareholder lawsuits, while possibly spurious, may indicate a culture of self-interested management.48 In addition, the concerns mentioned elsewhere (failed acquisitions, inadequate systems, slow

43 44

10K page 19 10K page 25 45 "We have discovered instances where we believe our products were being sold indirectly to Costco and we promptly terminated those relationships upon learning of that behavior," Snyder conceded. https://www.capitaliq.com/CIQDotNet/News/ExternalArticle.aspx?newsItemId=34201205 46 Crocs and Skechers settle patent suit. http://www.reuters.com/article/idUSN0331678820081203 47 Duerden steps down as Crocs CEO; McCarvel fills his shoes. Ed Sealover Denver Business Journal. 48 10K, pages 30-31 defendants made false and misleading public statements about the Company and its business and prospects and that, as a result, the market price of the Company's stock was artificially inflated. Also claims that certain current and former officers and directors traded in the Company's stock on the basis of material nonpublic information.


product development timelines) combine to suggest a lack of effective managerial oversight. Manufacturing. Compared to its peers, Crocs manufactures a high percentage of its footwear in company owned facilities (27% vs. 7% for Wolverine Worldwide and 0% each for Deckers, Nike, Skechers and Heelys).49 While having company-owned manufacturing has advantages (oversight of processes, insight into best practices, ability to meet immediate demand needs), it also implies a higher COS which may not be sustainable. Product development timeline.50 Crocs product development timeline is a staggering 6-9 months from concept to full production; add shipping and merchandising to that timeline and it likely takes Crocs well nearly 12 months to bring a new style to market. Supplier power. There are only two manufacturers of the elastomer resins used in the Croslite resin. These two manufacturers have a degree of pricing power, and Crocs has not sufficiently addressed its response to this risk in its public documents. Other Concerns: Other concerns include foreign currency exchange rate risk, the seeming lack of patents or other enforceable design protection, cash locked up in foreign subsidiaries, integration (and selection of) acquisitions, and the effect of returns / markdowns / outlet stores on the brand.

49 50

Respective Company 10Ks 10K page 21, For example, once we begin to design a new footwear model, it can take six to nine months to progress to full production because of the need to fabricate new molds and to implement modified production tooling and revised manufacturing techniques.


RECOMMENDATIONS Based on our analysis of the strategic, operational and financial situation at Crocs, we have developed a detailed set of near-term recommendations for Crocs management: Realign the distribution model in U.S. We believe that Crocs should reduce its focus on retail expansion and instead recommend migration to the model that has proven successful for Uggs, another one-hit-wonder seasonal fashion shoe that has managed to successfully emerge from its early high-growth stage. The features of the Uggs distribution model include: o Focus on a limited number of U.S. flagship stores in key geographic areas. Uggs has successfully built its brand with only eleven flagship stores in major cities worldwide. The flagships provide marketing buzz and increased exposure to the brand driven by [Uggs] retail concept stores which showcase all of [its] product offerings.51 o Reduce retail store presence. Crocs should carefully evaluate the returns on existing stores, and suspend plans to open new stores. For those stores that are not in key geographic areas and that are not strong performers, Crocs should naturally discontinue operations as leases expire. o Refocus on building authorized wholesaler relationships. Focus sales efforts on key wholesalers, realigning resources from retail stores to push for branded merchandise displays (example at right) and separate physical footprints for Crocs products (akin to slotting strategies in U.S. grocery stores).

In addition to the Ugg model, we would recommend the following distribution strategies: o Asian markets. In Asian markets, Crocs should continue to operate its own stores in the near term in order to maintain control over its brand image and merchandising mix.

Deckers Outdoor Corp 10K, page 27


o Kiosks. Crocs kiosk locations seem to be cost effective and flexible. We recommend keeping these stores largely intact, but subjecting them to the same rigorous financial returns analysis as the traditional retail stores. o Internet. Crocs should continue to focus on its Internet sales channel, which accounted for 13.7% of sales in 2009.52 Because Crocs buyers typically require relatively little sizing knowledge (a single mens size is 9-11, versus traditional half sizes for other footwear retailers), Crocs are uniquely suited to online selling. Focus on the shoes. Crocs should refocus its entire organization (design, manufacturing, marketing) on the unique appeal of its shoes. There is reason to be optimistic that this is already happening: Crocs new Feel the Love advertising campaign focuses on the quirky appeal of the shoes, as well as comfort and therapeutic aspects of the Croslite technology (see ad below). The discontinuation of efforts to expand into apparel and more radical shoe designs (see the high-heeled Crocs on our cover page) is another indication of the Companys intention to return to its roots. Focus on key customer segments. Crocs should focus on its core customers and its core mission: We aspire to bring comfort, fun and innovation to the world's feet.53 We feel the key customer markets for Crocs are the following: o Kids. The kids segment, which comprised 23% of revenues in 2009, is a natural and sustainable market for Crocs. Crocs comfort, easy-on, easy-off style, bright colors and customizable Jibbitz accessories make them ideal for kids. And their low price point and broad size range make them ideal for parents on a budget with fast-growing children.

52 53

10K, page 41 10K, page 5


o Women. 77% of Crocs sales in 2009 were from products geared towards adults, and we suspect that the majority of those sales are to women. Continued focus on understanding the needs of this segment as well as effectively marketing to it (the Feel the Love campaign seems to focus on female protagonists) is well advised. o Active footwear. This segment would be geared towards people that prefer products intended for healthy living. Customers would utilize the footwear for active purposes such as boating, walking, and hiking as well as for recovery after workouts. o Commercial footwear. Another natural segment for Crocs are the hospital, restaurant, hotel and hospitality markets, (currently the focus of the Crocs Work line) and medical needs footwear (CrocsRx) for podiatric and diabetic needs. Management Information Systems. Because management information systems are essential to the management and governance of any organization, particularly one as large, geographically diverse, and complicated as Crocs, systems should occupy a significant portion of managements time until the issues are satisfactorily resolved. If necessary, we recommend hiring external consultants to assess and implement updates to all systems. Supply chain. We recommend that Crocs spend the money necessary to reduce lead time both in design and production. Management should also dedicate efforts to identify additional suppliers, and/or lock up these suppliers in long term exclusive contracts, or possibly even to find alternative raw materials for its Croslite product. Marketing. Although we are encouraged by the recent Feel the Love campaign, we recommend several strategic marketing priorities: o Target audience. Crocs should target its key audiences (discussed above) via mass marketing channels (e.g. target kids via Nickelodeon). Billboards or other untargeted mass marketing should be de-prioritized.


o Education. Crocs marketing should focus on educating consumers about the comfort and health benefits of Croslite. o Alliances. Crocs should explore alliances or licensing arrangements with other brands, similar to the Nike alliance with Cole Haan (high end dress shoes with Nikes air cushioning technology). Consider a strategic transaction. Finally, we recognize that a public company may not have the wherewithal to make the kinds of distribution, systems, and marketing changes that we suggest are necessary. With that in mind, we recommend that Crocs management engage an investment advisor to consider the options of going private or of selling to a strategic buyer. Although Crocs may find it easiest to implement the necessary changes as a private company or subsidiary, the company does have the needed funds through cash on hand and free cash flow to implement our recommendations as a stand-alone company. Please see Exhibit 9 for a breakdown of the turnaround plan costs.


Revenues by Channel
Retail Revenues Wholesale Revenues Online Revenues Total Revenues

n/a n/a n/a n/a

FiscalYearEnded 2006A 2007A 2008A

22.2 318.5 14.0 354.7 74.2 738.9 33.9 847.0 125.8 552.1 43.7 721.6

152.3 404.5 89.0 645.8

Retail Revenues Wholesale Revenues Online Revenues

n/a n/a n/a

6% 90% 4%

9% 87% 4%

17% 77% 6%

24% 63% 14%

Revenues by Geography
Americas Europe Asia-Pacific Corporate and Other Total Revenues Americas Europe Asia-Pacific Corporate and Other Source: Capital IQ

102.8 1.0 4.7 0.1 108.6 95% 1% 4% 0%

FiscalYearEnded 2006A 2007A 2008A

265.5 30.3 54.4 4.6 354.7 75% 9% 15% 1% 498.5 179.7 167.5 1.7 847.4 59% 21% 20% 0% 361.7 150.7 204.9 4.3 721.6 50% 21% 28% 1%

298.0 106.9 237.5 3.4 645.8 46% 17% 37% 1%


Unitsalesfootwear Avgsellingprice SalesJibbitz(in$000s) Productmixpercentages Classicmodels(Beach/Cayman,orCrocsClassic) Coreproducts* Newfootwear 30% n/a 18% 25% 57% 15% 16% 33% 17% 46,900 n/a $67,500

35,300 $18.35 $47,200

36,800 $16.60 $25,200

*IncludesBeach.CrocsClassic,KidsCrocsClassic,Athens,KidsAthens,MaryJane,GirlsMaryJane, MammothandKidsMammoth Source:Crocs10K,FY08/FY09


Revenues Costofsales Restructuringcharges Grossprofit SG&A Foreigncurrencytransactionlosses(gains),net Restructuringcharges Goodwillimpairmentcharges Assetimpairmentcharges Charitablecontributions Income(loss)fromoperations Interestexpense Gainoncharitablecontribution Otherexpense(income),net Income(loss)beforeincometaxes Incometaxexpense(benefit) Netincome(loss) Dividendonredeemablepreferredshares Netincome(loss)attributabletocommonstockholders EPSBasic EPSDiluted WtdAvgCommonSharesBasic WtdAvgCommonSharesDiluted 0.0 0.0 0.0 0.0 26,892.0 611.0 0.0 (8.0) 26,289.0 9,317.0 16,972.0 275.0 $16,697.0 $0.33 $0.25 0.0 33,916.0 60,808.0 0.0 0.0 200,570.0 105,224.0 0.0 0.0 0.0 0.0 0.0 95,346.0 567.0 0.0 (1,847.0) 96,626.0 32,209.0 64,417.0 33.0 47,773.0 154,158.0



349,701.0 0.0 497,649.0 268,978.0 (10,055.0) 0.0 0.0 0.0 959.0 237,767.0 438.0 0.0 (2,997.0) 240,326.0 72,098.0 168,228.0 0.0

486,722.0 901.0 233,966.0 341,518.0 25,438.0 7,664.0 23,867.0 21,917.0 1,844.0 (188,282.0) 1,793.0 0.0 (565.0) (189,510.0) (4,434.0) (185,076.0) 0.0

337,720.0 7,086.0 300,961.0 311,592.0 (665.0) 7,623.0 0.0 26,085.0 7,510.0 (51,184.0) 1,495.0 (3,163.0) (895.0) (48,621.0) (6,543.0) (42,078.0) 0.0

353,347.6 5,500.0 333,990.8 293,449.4 0.0 0.0 0.0 0.0 0.0 40,541.4 (56.0) 0.0 0.0 40,597.4 16,238.9 24,358.4 0.0

379,731.4 4,500.0 360,340.0 305,578.6 0.0 0.0 0.0 0.0 1,861.4 52,900.0 (115.5) 0.0 0.0 53,015.5 21,206.2 31,809.3 0.0

400,756.9 2,000.0 398,756.9 328,105.5 0.0 0.0 0.0 0.0 2,003.8 68,647.6 (194.7) 0.0 0.0 68,842.3 27,536.9 41,305.4 0.0




$108,581.0 $354,728.0 $847,350.0

$721,589.0 $645,767.0 $692,838.4 $744,571.5 $801,513.9 $864,282.2 $933,570.7 $1,010,161.4














































45,629.9 $64,384.0 $168,228.0 ($185,076.0) ($42,078.0) $0.86 $0.80 $2.08 $2.00 50,987,154 74,598,400 80,759,077 67,140,000 80,170,512 84,194,883 ($2.24) ($2.24) ($0.49) ($0.49) $24,358.4 $0.28 $0.28 $31,809.3 $0.37 $0.37 $41,305.4 $0.48 $0.48















82,767,540 85,112,461 85,659,581 85,659,581 85,659,581 85,659,581 85,659,581


82,767,540 85,112,461 85,659,581 85,659,581 85,659,581 85,659,581 85,659,581




Exhibit5SummaryofNonrecurringFinancialItems20082009 $inthousands CostofSales Inventorywritedown Saleofimpairedinventory,netimpact Chargeonfuturepurchasecommitment Salesreturnandallowances Restructuringcharges Tenderoffer Restructuringcharges Operatingleaseexitcosts Otherrestructuringcosts Terminationbenefits Amountstransferredtocostofsales FiscalYearEnded Nonrecurringamounts 2008A 2009A 2008A 2009A (76,258) (2,568) (71,290) a 49,800 20,650 b (4,200) (4,200) (52,597) (8,368) (41,773) (901) (7,086) (901) (7,086) (3,000) (3,000) (133,956) 28,778 (118,164) 10,564 (1,853) (2,187) (4,525) 901 (7,664) (5,587) (5,307) (3,815) 7,086 (7,623) (13,300) (3,900) 24,100 6,900 (18,150) (327) (4,514) (3,094) (26,085) (1,853) (2,187) (4,525) 901 (7,664) 4,500 (16,800) (12,300) (23,867) (882) (150) (20,885) (45,784) (5,587) (5,307) (3,815) 7,086 (7,623) (13,300) (3,900) d (17,200) (18,150) (327) (4,514) (3,094) (26,085) c

Sales,GeneralandAdministrative(SG&A) Tenderoffer Errorincalculationofstockbasedcompen 4,500 Changeinlegalexpense (16,800) (12,300) Impairmentcharges Goodwill (23,867) Intangibleassets (882) Jibbitzbrandname (150) Equipment/molds (20,885) Leaseholdimprovements Capitalizedsoftware Otherintangibleassets (45,784) Gainoncharitablecontribution Gainoncharitablecontribution Summaryofsignificantfinancialitems (199,704) Source:Crocs10Kandfinancialanalysis

3,163 3,163 5,133 (183,912) (37,181)

a b

Assumeonetimeamountistheexcessofwritedownover2%ofinventory (approximatedinventorywritedownratiobasedonhistoricalinformation/trends). FY09expenseisrepresentativeofanormalyear. Perfinancialstatements$58,300insales.Assume50%COS=$29,150minus$8,500 COSrecorded=$20,650understatementinCOS Assumeonetimeamountistheexcessreturnallowanceover1.5%ofsales (approximatedsales/returnallowanceratiobasedonhistoricalinformation).FY09 expenseisrepresentativeofanormalyear.


Cashflowsfromoperatingactivities: Netincome(loss) Adjustmentstoreconcilenetincome(loss)tonetcash providedby(usedin)operatingactivities: Depreciationandamortization Lossondisposaloffixedassets Unrealizedloss(gain)onforeignexchange Deferredincometaxes Goodwillimpairment Assetimpairment Inventorywritedowncharges Lossonpurchasecommitments Charitablecontributions(NonCashin'07'09) Gainoncharitablecontributions Noncashrestructuringcharges Baddebtexpense Sharebasedcompensation Sharebasedcompensationfromtenderoffer Excesstaxbenefitonsharebasedcompensation Changesinoperatingassetsandliabilitiesnetof effectofacquiredbusinesses: Accountsreceivable Inventories Prepaidexpensesandotherassets Accountspayable Accruedexpensesandotherliabilities Accruedrestructuring Incometaxesreceivable Cashprovidedbyoperatingactivities Cashflowsfrominvestingactivities: Purchasesofmarketablesecurities Salesofmarketablesecurities Cashpaidforpurchasesofpropertyandequipment Proceedsfromdisposalofpropertyandequipment Cashpaidforintangibleassets Restrictedcash Acquisitionofnoncompetitionagreement Acquisitionofbusinesses,netofcashacquired Cashusedininvestingactivities Cashflowsfromfinancingactivities: Proceedsfromnotepayable,net Proceedsfromlongtermdebt Repaymentofnotepayableandcapitalleaseobligations Proceedsfrominitialpublicoffering,netofofferingcosts Distributionofpaymenttomembers Paymentofpreferreddividends Debtissuancecosts Excesstaxbenefitonsharebasedcompensation Exerciseofstockoptions Purchaseoftreasurystock Repurchaseofmember'sinvestments Proceedsfromequityissuances Paymentsonmemberloans Cash(usedin)providedbyfinancingactivities Effectofexchangeratechangesoncash Net(decrease)increaseincashandcashequivalents Cashandcashequivalentsbeginningofyear Cashandcashequivalentsendofyear 6,949.0 2,009.0 (158.0) 0.0 (3,000.0) (275.0) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 5,525.0 (127.0) 3,733.0 1,054.0 $4,787.0 1,808.0 0.0 (14,072.0) 94,454.0 0.0 (171.0) 0.0 10,248.0 2,284.0 0.0 0.0 0.0 0.0 94,551.0 478.0 37,869.0 4,787.0 $42,656.0 7,000.0 0.0 (541.0) 0.0 0.0 0.0 0.0 43,216.0 18,547.0 (25,022.0) 0.0 0.0 0.0 43,200.0 3,758.0 (6,321.0) 42,656.0 $36,335.0 76,024.0 0.0 (60,707.0) 0.0 0.0 0.0 0.0 0.0 3,283.0 0.0 0.0 0.0 0.0 18,600.0 (2,697.0) 15,330.0 36,335.0 $51,665.0 293.0 0.0 (23,078.0) 0.0 0.0 0.0 (458.0) 0.0 1,290.0 (238.0) 0.0 0.0 0.0 (22,191.0) 12,491.0 25,678.0 51,665.0 $77,343.0 0.0 0.0 (640.0) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 (640.0) 0.0 9,241.2 77,343.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 27,899.3 86,584.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 31,983.4 114,483.5 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 34,211.9 146,466.9 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 37,960.2 180,678.8 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 41,440.7 218,639.1 0.0 0.0 (11,531.0) 0.0 0.0 0.0 (636.0) 0.0 (12,167.0) (52,600.0) 30,275.0 (23,828.0) 155.0 (5,216.0) (2,890.0) 0.0 (15,399.0) (69,503.0) (64,880.0) 87,205.0 (57,379.0) 0.0 (16,525.0) 1,753.0 0.0 (12,391.0) (62,217.0) 0.0 0.0 (55,559.0) 2,383.0 (10,659.0) (1,624.0) 0.0 (7,977.0) (73,436.0) (1,502.0) 0.0 (20,054.0) 2,476.0 (6,973.0) 322.0 0.0 0.0 (25,731.0) 0.0 0.0 (27,500.0) 0.0 0.0 0.0 0.0 0.0 (27,500.0) 0.0 0.0 (25,000.0) 0.0 0.0 0.0 0.0 0.0 (25,000.0) 0.0 0.0 (27,678.4) 0.0 0.0 0.0 0.0 0.0 (27,678.4) 0.0 0.0 (29,062.3) 0.0 0.0 0.0 0.0 0.0 (29,062.3) 0.0 0.0 (30,515.4) 0.0 0.0 0.0 0.0 0.0 (30,515.4) 0.0 0.0 (32,041.2) 0.0 0.0 0.0 0.0 0.0 (32,041.2) $16,972.0 0 3,334.0 (7.0) 0.0 (3,090.0) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 4,757.0 0.0 983.0 0.0 (14,700.0) (26,035.0) (3,472.0) 17,711.0 14,049.0 0.0 0.0 10,502.0 $64,417.0 $168,228.0 ($185,076.0) ($42,078.0) 0 8,053.0 137.0 0.0 (2,037.0) 0.0 0.0 588.0 0.0 0.0 0.0 0.0 1,719.0 10,255.0 0.0 (10,248.0) 0.0 (45,702.0) (13,049.0) 19,959.0 33,799.0 0.0 0.0 12,343.0 0 20,949.0 199.0 (8,583.0) (14,866.0) 0.0 0.0 1,829.0 0.0 959.0 0.0 0.0 4,671.0 21,683.0 0.0 (43,216.0) 0.0 (83,948.0) (10,912.0) 27,149.0 79,174.0 0.0 0.0 8,938.0 0 37,450.0 633.0 21,570.0 (5,429.0) 23,837.0 21,927.0 76,258.0 4,200.0 1,844.0 0.0 0.0 3,153.0 18,976.0 0.0 0.0 0 111,318.0 16,395.0 (4,342.0) (60,168.0) 11,553.0 2,398.0 (23,634.0) 72,863.0 0 36,671.0 (776.0) (11,267.0) 5,399.0 0.0 26,027.0 2,568.0 0.0 7,424.0 (3,148.0) 2,196.0 1,316.0 15,237.0 16,197.0 0.0 0 (13,251.0) 44,828.0 (13,914.0) (17,387.0) (19,304.0) 1,208.0 23,163.0 61,109.0 $24,358.4 0 21,325.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0 (14,270.2) (13,159.3) (2,710.1) 24,969.8 (516.6) (2,616.0) 0.0 37,381.2 $31,809.3 0 23,177.6 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0 (549.3) (7,951.3) (1,163.4) 3,614.2 3,962.2 0.0 0.0 52,899.3 $41,305.4 0 23,724.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0 (4,992.2) (6,336.4) (1,280.6) 2,880.2 4,361.1 0.0 0.0 59,661.8 $45,629.9 0 24,910.6 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0 (5,503.0) (9,458.2) (1,411.6) 4,299.2 4,807.3 0.0 0.0 63,274.2 $50,340.7 0 26,156.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0 (6,074.6) (10,440.7) (1,558.2) 4,745.8 5,306.7 0.0 0.0 68,475.7 $54,884.4 0 27,463.9 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0 (6,714.8) (11,541.1) (1,722.4) 5,245.9 5,866.0 0.0 0.0 73,481.9












(55,548.0) (154,378.0)

$86,584.2 $114,483.5 $146,466.9 $180,678.8 $218,639.1 $260,079.7


DiscountRate CurrentYear Year5+Payments EstimatedNumberof5+Years MinimumOperatingLeasePayment FiscalYearEndingDecember31 2010 2011 2012 2013 2014 2015 2016 2017 Total 10.0% 2009 43,514.0 3.0

Payment 44,749.0 29,760.0 19,102.0 19,088.0 14,559.0 14,504.7 14,504.7 14,504.7 170,772.0

DF 0.9091 0.8264 0.7513 0.6830 0.6209 0.5645 0.5132 0.4665

PV 40,680.9 24,595.0 14,351.6 13,037.4 9,040.0 8,187.5 7,443.2 6,766.5 124,102.1

2009A SG&Aadjustment SG&A Rentexpense Depreciationexpense SG&A(ex:rentexpense/inc:depreciation) Leaseassetadjustments Depreciationexpense Capex Interestexpense 12,410.2 CapexAdjustmentforStoreClosures #ofstoresclosures Capexsavingsperstore TotalCapexsavings 311,592.0 59,600.0 47,189.8 299,181.8

2010E 293,449.4 58,689.9 46,352.8 281,112.3

2011E 305,578.6 58,059.9 45,942.2 293,460.8

2012E 328,105.5 59,059.0 47,233.7 316,280.2

2013E 353,212.9 60,046.2 48,367.1 341,533.8

2014E 380,928.3 64,757.8 53,078.7 369,249.2

2015E 411,564.6 69,966.0 58,286.9 399,885.5

47,189.8 (47,189.8)

46,352.8 (45,621.7)

45,942.2 (43,748.8)

47,233.7 (44,309.2)

48,367.1 (46,904.9)

53,078.7 (53,078.7)

58,286.9 (58,286.9)







5 146.2 731.1

15 146.2 2,193.3

20 146.2 2,924.5

10 146.2 1,462.2

146.2 0.0

146.2 0.0


Revenues by Channel
FiscalYearEnded 2008A 2009A
125.8 552.1 43.7 721.6 645.8 692.8 744.6 801.5 864.3 933.6 89.0 111.2 141.8 176.4 212.6 250.9 404.5 424.7 446.0 468.3 491.7 516.3 152.3 2010E 156.9 542.1 291.7 1,010.2 2011E 156.9 2012E 156.9 2013E 160.0 2014E 166.4 2015E 176.4 2008A 70% 25% 29% -14.8% 2009A 21% 27% 104% -10.5% 2010E 3% 5% 25% 7.3%

Growth 2011E 0% 5% 27% 7.5% 2012E 0% 5% 24% 7.6% 2013E 2% 5% 21% 7.8%

Retail Revenues Wholesale Revenues Online Revenues Total Revenues







18% 8.0%

16% 8.2%

Retail Revenues Wholesale Revenues Online Revenues Revenues by Geography 6% 14% 16% 19% 77% 63% 61% 60% 58% 22% 17% 24% 23% 21% 20%

FiscalYearEnded 2008A 2009A 2010E 2011E 2012E 2013E 2014E

19% 57% 25% 18% 55% 27%

2015E 17% 54% 29%

$inmillions Americas Europe Asia-Pacific Corporate and Other Total Revenues 0.0 Revenue by Region in% Americas Europe Asia-Pacific Corporate and Other Source: Capital IQ 2008A 50.1% 20.9% 28.4% 0.6% 2009A 46.1% 16.6% 36.8% 0.5% 2010A 44.7% 16.0% 38.7% 0.5% 2011A 43.3% 15.5% 40.7% 0.5% 2012A 41.8% 15.0% 42.8% 0.4% 2013A 40.3% 14.5% 44.8% 0.4% 2014A 38.8% 13.9% 46.9% 0.4% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 2015A 37.3% 13.4% 48.9% 0.3% 100.0% 721.6 4.3 204.9 237.5 3.4 645.8 0.0 150.7 106.9 111.2 268.4 3.4 692.8 (0.0) 2008A 361.7 2009A 298.0 2010E 309.9 2011E 322.3 115.6 303.3 3.4 744.6 0.0 2012E 335.2 120.2 342.7 3.4 801.5 (0.0) 2013E 348.6 125.1 387.2 3.4 864.3 0.0 2014E 362.6 130.1 437.6 3.4 933.6 0.0 2015E 377.1 135.3 494.5 3.4 1,010.2 0.0 2008A -27% -16% 22% 156% -14.8% 2009A -18% -29% 16% -21% -10.5% 2010E 4% 4% 13% 0% 7.3%

Growth 2011E 4% 4% 13% 0% 7.5% 2012E 4% 4% 13% 0% 7.6% 2013E 4% 4% 13% 0% 7.8%









0% 8.0%

0% 8.2%


$in000s CloseretailstoresAmericas Numberofstores Employeesperstore Salaryperemployee($000s) Costsavingsemployees Costsavingsrent Restructuringexpenseperstore Restructuringexpensetotal Totalcloseretailstores Narrowdownproductofferings Writedownofequipment/molds Increasemarketingexpense Estimatedadditionalspend ITsystemsimplementation ITsystemsimprovement Goingprivate Consulting/miscfees FinancialStatementImpact IncreasedRestructuringexpense Increased(decreasedSG&A) DecreasedCOS ITCapex Total CashandEquivalentsStartofYr EstimatedFCF Fundsavailablecheck

2010 5 20 35 3,500 100 500 3,500

2011 15 20 35 10,500 100 1,500 10,500

2012 20 20 35 14,000 100 2,000 14,000

2013 10 20 35 7,000 100 1,000 7,000

2014 20 35 100

2015 Comment 20 35 100 a b c d

5,000 3,000

7,500 7,500 7,500 7,500 7,500 7,500

7,500 5,000

500 250

5,500 8,000 (3,500) 7,500 17,500 77,343 17,972 OK

4,500 7,750 (10,500) 5,000 6,750 86,591 37,294 OK

2,000 7,500 (14,000) (4,500) 114,510 41,886 OK

1,000 7,500 (7,000) 1,500 146,530 42,512 OK

7,500 7,500 180,792 44,741 OK

7,500 7,500 218,816 48,158 OK

Close50USretailstores.Keepinternationalretailstorestomaintainbrandcontrol.KeepKiosks(low rent/abilitytokeepbrandintact).Continuewholesale.strategy

b Assume20employeesperstore c Assumeapproximately$35k/yearsalaryperemployee(majorityareparttime) AssumesthatCompanyisnotabletosublease.Conservativeestimate,assumesCrocscannotrecover d operatingleasecashexpenseandthereforemustincurnoncanellableleaseexpensethroughend/termination oflease Productconsolidationdonein2008/2009.However,consolidationofproductswillresultinadditionalcharges. e Productsgrewfrom25in2006,to250in2007to270in2008to230in2009.Assumefurthercontractiontoabout 200/175goingforward Afterananlyzingcomprablecompetitor(e.g.Deckers),Crocissignificantlyunderspending.Amountrepresents f newspendperyear. g Amountstoimprovefinancialreportandwarehouse/distributionsystem h Estimateofamountsincurredinexploringgoingprivatealternative


CapitalStructure 2009A SeuredDebt PNCRevolvingCreditFacility Beginningbalance Issuance/(Prepayment)ofrevolver Endingbalance Averagebalance InterestRate Interestexpense Commitmentfee Cash Interestexpense(income) TotalInterestExpense/(income) CovenantCheck NetWorth Check FixedChargeCoverageRatio Check CapexCeiling Check Spread: 3% Rate: 0.5% 2009A 2009A 2010E 2011E 2012E

640.0 640.0

640.0 (640.0) 0.0 320.0 3.3% 10.4 150

0.0 0.0 0.0 0.0 3.3% 0.0 150

0.0 0.0 0.0 0.0 3.3% 0.0 150

0.0 0.0 0.0 0.0 3.3% 0.0 150

0.0 0.0 0.0 0.0 3.3% 0.0 150

0.0 0.0 0.0 0.0 3.3% 0.0 150

(216.4) (56.0)

(265.5) (115.5)

(344.7) (194.7)

(432.3) (282.3)

(528.0) (378.0)

(633.2) (483.2)

266,000.0 1.1

266,515.4 OK 57.0 OK 50,000.0 OK

298,324.7 OK 365.8 OK 50,000.0 OK

339,630.1 OK 432.2 OK


Marketing Material


Amazon review of Crocs Classic Most Helpful Favorable Review54

At first I didn't know what to make of this shoe/sandal... it's lightweight, comfortable and "convertible", which is a nice feature that I've never seen in a sandal before. First, I'll break down the benefits, then give the low-points.

"LIGHTWEIGHT & COMFORTABLE" This is probably the most attractive feature of the CROC, because it adds to the comfort and makes you feel like you're walking on air. By far the most comfortable things I've ever worn and I'm a picky shoe person. I have only owned 1 pair of sandals for the past 6 years and have hated every other sandal I've tried on, so these CROCS are definitely special.

"CONVERTIBLE" You can turn the "sandal" into a "shoe" simply by pushing forward the strap. In "shoe" mode, it's a tighter more snug fit, so you don't have to worry about it coming off your feet. In "sandal" mode, it's easy to slip on and off (although it has a tendency to cling to the bottom of your feet), for that quick trip outside to take out the trash, or pick up your cell phone that you left in the car.

PROBLEM: "SWEATY FEET" One problem I have with the CROC is that it doesn't ventilate very well. Sure, it's got holes. But the material is such that it traps heat so you're feet end up sweating in warm weather.

PROBLEM: "HOLES ALLOW DEBRIS IN" Another problem is that the holes allow all sorts of debris into the sandal while you're walking, such as loose rocks, wood chips at the playground, sand and dirt (when you're not at the beach), and rain water (puddles in the parking lot). This means that you're feet get dirty rather quickly and can be uncomfortable at places where there is a lot of debris - eg, playgrounds.

"SIZE & PRICE" Sizing is a bit weird. I'd recommend going to a store first to try it on and see what size you are. It's hard to find a good selection at a store, so it's best just to dip in for sizing and then purchase the one you want on Amazon. Turned out to be the best thing for me, as I was able to score Army Green Caymans from Amazon, while searching at numerous stores I've only been able to find blue and black Caymans in sizes way too big. For $29.99 I think it's a bit pricey actually, but if you're picky about sandals like me, there's nothing you can do about it.

"STYLE" One other thing you'll have to get used to is how aesthetically disgusting it is. Let's be frank: it's a damn ugly shoe and there's no way getting around it. It's not the prettiest thing to wear, but it's hands-down the most comfortable. Just be careful where you tread. Definitely not an allterrain/purpose sandal. Good for beach and casual sidewalk/short trip walking.

"DIFFERENCE BETWEEN THE BEACH AND CAYMAN STYLES" None. Except that the sizes for Beach version are "ranges" and are more roomy for your feet. Cayman sizes are exact and are more narrow. Try on before you buy as the versions are not the same.

Amazon review of Crocs Classic Most Helpful Critical Review55

I ordered two pairs of Crocs - one pair of thongs and one pair of cayman crocs. I used the sizing chart provided and ordered both pairs in M5/W7. However, when they arrived, while the Thongs fit perfectly, with room to wiggle, the Caymans were way too small (I'd almost say a full size too small). The Thongs were "made in China" and the Caymans "made in Mexico". I went to my local store and discovered that they receive Croc orders which are often made in multiple countries. It would appear to me that there is no "standard" mold used. So beware - just because you have
54 55

http://www.amazon.com/review/R3OL74Z5NX0Z0B/ref=cm_cr_pr_viewpnt#R3OL74Z5NX0Z0B http://www.amazon.com/review/R2UE3K74BI3F49/ref=cm_cr_pr_viewpnt#R2UE3K74BI3F49


tried them on in a store and think you have the correct size - you may end up getting a larger or smaller size, depending on where they are manufactured.