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Why Crocs Is Set to Post a Successful Recovery

- By Robert Stephens, CFA

An increasing focus on innovative products and customization could boost the performance of footwear retailer Crocs Inc. (CROX). The company is seeking to differentiate itself from competitors through a greater focus on comfort and personalized decoration within its product lines.

It is also expanding its e-commerce channel through higher and more targeted investments, while a focus on partnerships across Asia could catalyze its financial performance.


While the wider retail sector faces an uncertain future, the stock's valuation and growth prospects suggest it could post a successful recovery after falling 22% over the last six months.

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Innovation

Crocs' investments in innovative products could provide it with a competitive advantage versus peers. It is focused on including greater innovation around comfort technology in its products, which customers have noted is a key consideration when making purchasing decisions. The release of premium shoe offering LiteRide in the first quarter of 2018 was successful and the company expects its sales to double in 2019.

The incorporation of comfort technology into the design process means the upcoming release of its spring and summer sandal collection is likely to resonate with customers. New products, such as the Reviva sandal, include strategically placed bubbles in the footpad that massage with every step. This could further align Crocs' products with evolving customer tastes and improve customer loyalty.

The global megatrend for greater personalization among consumers has led to the release of Crocs' Jibbitz Charms in the most recent quarter. The charms add decoration to clogs, making it possible to change the design easily and as often as the consumer wishes. So far, Charms have boosted sales of clogs, with further personalization opportunities in the company's pipeline expected to do likewise.

Future sales growth

In the most recent quarter, Crocs recorded 17% e-commerce sales growth. This marks the eighth consecutive quarter of double-digit sales growth. The momentum is likely to continue, with the company set to upgrade the technology it uses to analyze and manage its customer data. This will provide it with greater scope to run targeted campaigns that are set to increase customer engagement levels. It will also improve the efficiency of its marketing spend through a greater focus on areas that offer the highest return on investment.

As part of a refreshed marketing campaign, the company is focusing on building collaborations with prominent retailers and brand ambassadors in Asia. For example, in the most recent quarter, Crocs collaborated with specialty retailer Beams in Japan. It is also in the process of delivering a revised marketing campaign called Come As You Are, which is expected to increase brand awareness in key growth markets such as China.

Risks

The outlook for the U.S. retail sector is highly uncertain as the impact of tariffs on consumer spending could be negative at a time when sales are already weak. For example, over the last nine months, retail sales have risen just 1.1%. Although Crocs has a relatively flexible manufacturing footprint following its decision to outsource all of its production to third parties, increasing pressure on disposable incomes from the rising costs of a variety of other products could hurt demand for its goods.

In order to improve its efficiency, Crocs is upgrading its supply chain. This will allow it to maximize the growth potential of its channels and geographic segments. It is also relocating its Americas distribution center to Ohio in order to mitigate higher freight rates. It will also eliminate the use of air freight as it restores inventory to long-term sustainable levels. These changes could improve the gross margin and help to offset a potential slowdown in U.S. sales.

Outlook

In fiscal 2020, Crocs is guiding for an over 20% increase in earnings per share. Since it trades with a price-earnings ratio of 16.7, the stock appears to offer good value.

The company's investments in innovation and personalization could lead to greater differentiation versus peers.

It may also enjoy a competitive advantage through its investments in e-commerce as well as the refreshed marketing campaigns that are currently in progress.

Having fallen 22% over the last six months on uncertainty for the wider retail sector, the stock could have recovery potential.

Disclosure: The author has no positions in any stocks mentioned.

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This article first appeared on GuruFocus.