Clogs at 8 times earnings

The other day I was with my wife in a mall and went into a shoe store. To my surprise Crocs was on sale. With the Phil Fisher mindset, I proceeded to ask the sales person a few questions - Do people still buy them? Who buys these shoes? Are they still in demand? Of course all these responses were from one person in one outlet in corner of Dublin.

Crocs is a difficult company to analyse. The company was a stock-market darling in 2021-2022. But soon after their Hey Dude acquisition, the stock turned into a somewhat persona non-grata.

The share price hit an all time high of $200 per share in 2021 and since then the stock has not been very kind to the investors. My guess is that it stems mainly from the hubris of management. They believed (and probably still) that they could re-create the Croc magic with another local brand like HeyDude and take it global. After all, isn’t platform model the name of the game? But taking a brand global is not that easy and it does not always depend on the competency of the management. A lot of stars have to align for that to happen. Such confidence is common among most management teams. Kaspi management believes they could create another superapp in Turkey.

There are certain unique attributes that makes Crocs win. It is not just a marketing story. Interestingly, a lot of stock write ups on Crocs seem to be missing the point - What makes Crocs such a wonderful shoe company?

By and large shoes are a terrible business. Even a long-lasting invincible brand like Nike can barely go above 45% gross margins. One would imagine that a brand like Nike have pricing power. And to a large extent that is because it is expensive to make shoes. Typical sneakers have many parts to be manufactured independently, put together. Even with all this automation around us, shoes are a semi-automated commodity.

Take a look at this Korean mass manufacturing plant. And you can appreciate just how much man power is needed to make shoes

They first make the soles, then the leather, laces etc. Each of which has to be carefully assembled. All of this is complicated by the odd shape of a shoe.

Crocs are a simple, single moulded footwear which is why they have 60% gross margins

Crocs are simple. The number of parts is just 1. The resin is moulded into a clog and then packed, shipped. It is really that simple.

If you watched both these videos, one can appreciate how little manpower is needed to make a Crocs vs any other footwear. The underlying resin is cheap. They do not use fancy leather or laces. Everything is just from their patented resin - Croslite. This is a patented light-weight resin that Crocs supplies to all their manufacturers. The manufacturing is outsourced but Crocs control the raw material supply so that no other competitor can get access to these. In fact Crocs are so paranoid about it, that they are highly litigious when any one tries to copy their style. They will just about sue anyone for it. Hell, they even sued Walmart in 2022 and subsequently settled it. So that is the next important thing - Protect the patent at all costs.

Crocs are affordable, durable and come in fancy colours

Most of the crocs in market right now are under $50. The sales person told me the same thing. It costs just 50 bucks. Nike shoes start at $100+. The mental hula-hoops that a middle class consumer like me does to convince myself for a Nike is tremendous. Like Munger says, I invert the problem and ask myself - Can I instead walk barefoot. But Crocs are different story. They are just on the upper edge of the barrier where my resistance to pay is not high enough.

Second, Kids love Crocs! I don’t know why. I don’t know if this will be different ten years from now. But Kids love them. Maybe because Crocs come in fancy colours. You won’t catch me wearing a neon-green or radioactive purple colour shoes. But for a kid? That looks cool. Imagine this - a kid asks their parents for a Crocs. Why would a parent want to say no? It costs 50 bucks. It is much better than getting them Crocs than a Nike. And Crocs are incredibly durable! Those clogs last a long while no matter what damage gets inflicted on them. They are machine washable. So the product design is really thoughtfully made just for what the customer (parents) wants and what the consumer (kids) wants. Thanks to their durable washable design, another segment that really loves Crocs are the medical community. Doctors and nurses have to stand or walk for most part of the day. They need to disinfect their scrubs all the time. Crocs solves all their problems.

Crocs + Jibbitz = Unique personalized footwear

In 2006, Crocs acquired Jibbitz. These are teeny tiny badges that one can put on their Crocs. They call them shoe-charms.

This is an easy smart way to make your crocs personalized. Something unique to yourself. These Jibbitz are really cheap. A pack of 5 costs somewhere between $15-17 bucks! In 2024, Jibbitz did $260M in sales, around 6% of their total sales! The theme of personalization has worked tremendously well for those who can execute. A few interesting names on the same vein are Build-a-bear Workshop and Pandora. Both in completely different fields compared to Crocs. Yet all of them have the same principle - If you let customers personalize their shoe or bracelet or stuffed toy, they love it!

It is a rather a very fundamental human principle - The need to be unique. The need to be asked “hey what’s that you’re wearing”. It is the same reason we had Orkut bios (for those as old as me). It gives a sense of uniqueness and ownership. The core product serves as a platform and the add-ons customize the overall product. Have you seen kids with a lot of badges stuck to their bags? Same logic.

Simple product design+ Pricing + Marketing + Personalization is what makes Crocs work

All the factors we discussed above is what makes Crocs work. You take away one of these and the model won’t perform. Everything has to come together for the business model to keep ticking. And this is likely the reason why HeyDude is not working out for Crocs. The question was never about clever marketing. It was about all these varied factors that come together. As far as the management does not sink in more capital to Hey Dude, it can stay as a botched acquisition. Perhaps they might spin it off or put it up for sale later. However, all said and done, the stock trades at 8 times adjusted earnings. That sounds incredibly cheap for a company with all the above working for them. We might not see the gang buster 20%+ yoy growth. But there is untapped demand and untapped pricing power. With a bit of rational capital allocation, this can easily be a multi-bagger in my opinion.

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