Crocs (NASDAQ:CROX) is perhaps the most controversial footwear brand of all time, creating both blind loyalists and uncompromising cynics. Regardless of what side of the fence you may fall on, Crocs has skyrocketed in popularity over the past few years as brand deals, endorsements, and Gen-Z flocked to the Croc. In this episode of Industry Focus: Consumer Goods, join Motley Fool Analysts Asit Sharma and Emily Flippen as they take a look at where Crocs has been and if the best is still yet to come.

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This video was recorded on July 13, 2021.

Emily Flippen: Welcome to Industry Focus. Today is Tuesday, July 13th, and I’m your host, Emily Flippen. Today, I am joined by Motley Fool Senior Analyst Asit Sharma, as we talk about the somewhat unexpected reemergence of Crocs. Asit, thanks for joining.

Asit Sharma: Thanks for having me, Emily. I must say, as we tape this in real-time, we’re on live on Motley Fool Live, I’m not wearing Crocs. I am curious, and I don’t own any Crocs, before we begin, do you own a pair of Crocs?

Flippen: I do not own a pair of Crocs, but the reason why I wanted to talk about this today was because my boyfriend, of all people, took me out to the mall, dragged me out Saturday evening to go to the Crocs store because he wanted a pair of Crocs. I mean, I’m just thinking to myself, this is the strangest thing that he’s asked me to do, but I’m trying to be a good girlfriend, so I go with him. I stand in line for almost half an hour outside of this Crocs store because they’re limiting the number of people that can go in. But the place was just packed, and it got me thinking, oh, my gosh, what is going on with Crocs? For the people out there, the listeners who are the uncool fashion laggards like myself, where if there is a curve, you are always behind it, you may be completely unaware, like myself, that there’s been this huge comeback for Crocs. I was truly astounded. That was a long answer to say, no, I do not own a pair of Crocs. But I’m very close to maybe making a Crocs purchase after having looked at a lot of their inventory this weekend.

Sharma: As I said on Slack, when you gave me that statistic about yourself, 75% of the way there, ay, ay, ay.

Flippen: Well, let me put it this way, if there was ever a personality with Crocs that fit, it was probably mine, I always value comfort over fashion. But what’s really interesting is that Crocs are actually now becoming fashionable and I think that’s probably where we will spend a lot of today’s show talking about. It’s that Crocs, the gains that they’ve made over the past few years is not because suddenly everybody cares about being comfortable again, although I’m sure there’s an aspect of it to be attributed to that, but it’s because Crocs are cool. Crocs stock, if you just look at the performance of Crocs, I believe their ticker is CROX, it’s up nearly 900% over the past five years, with 250% of that occurring in just the past 12 months alone. So certainly, Crocs are cool again.

Sharma: Yeah. Crocs are cool and I should say they are, I’ve seen this described on the web as a binary brand choice, either you love them or you hate them. I, myself, aspire to comfort. I wear Converse, Chuck Taylors just a very comfortable shoe and I don’t have much fashion sense either Emily, but there’s just something about them which I can’t fit my own foot in a Croc. But I have bought them for my kids when they were younger. I totally get the argument of comfort and functionality, we will get into that but they do evoke some strong emotions.

Flippen: I feel like there’s no correct way to talk about Crocs without talking about, I guess, a brief history of Crocs. It’s mostly what I associate with that. I imagine that there’s a lot of people listening who also associate Crocs with their history. They were really introduced I think it was in 2002 by just three co-founders of Crocs who had put together this comfy and ugly synthetic work shoe. But I think it was around 2007, 2008 Crocs had just taken off and as you mentioned also, it was just a really divisive brand yet all of these people coming out and speaking out against it while others were adamantly defending it and the argument was never really, oh, Crocs are a reasonable shoe to wear it’s that you are either giving up on life and all things fashion by buying a pair of Crocs or you don’t care about comfort or usability at all and you don’t buy a pair of Crocs, there was really no gray area in between.

Sharma: Well, it’s interesting, Emily, that the three co-founders hopped on the idea on a boating trip. There was a small manufacturer that was making a shoe close to what we know today as the baseline croc shoe and they were just taken by how comfortable the shoe was. They found out that the material itself, croslite, was patented, so they basically acquired the rights to manufacture shoes made out of this material. They were very focused on that idea of comfort and usability and function, that I think by the time they took it to market, it dawned on them that there was another part of this shoe that was going to be really great was the brand aspect of something that provoked a lot of different opinions on it stylistic value.

Flippen: That was actually part of the arguments that leadership had for Crocs when it started to get popular as they were proud of how ugly this shoe was. I don’t think they ever tried to say that it wasn’t ugly. They even had a campaign running ads saying something along the lines of ugly can be beautiful so it was really something that leadership leaned into.

Sharma: Yeah. In doing that, they expanded not just in the U.S, but globally. The company was really gaining a lot of momentum after its IPO, and they used capital that they raised from follow-on offerings to buy businesses like Jibbitz. Now, Jibbitz makes those little terms that you can insert anywhere into a Crocs shoe. For the two listeners who haven’t seen a Crocs shoe, it’s designed with a lot of holes on the exterior so that you can fit little charms inside those holes. Now, that’s not why it was designed this way, it was designed for breathability but it enabled Crocs to do something that adidas and Nike and the largest athletic shoe manufacturers have literally spent billions of dollars doing in more sophisticated ways, which is how do you customize a shoe for a customer? You can go to the Adidas store and build your own shoe. You can do the same with Nike. Crocs, got onto this trend and really capitalized on it by having just a manual type of customization with the Jibbitz which remains a very popular adornment to the Crocs shoe today.

Flippen: Not to make this too anecdotal and not to put my boyfriend on blast on this podcast, but he went with the Crocs shoe with the intent of getting something he could wear in the shower at the gym. We left the store with yes, a pair of Crocs shoes, but also probably more money spent in Jibbitz than the shoes cost themselves. I was amazed by how successful the Jibbitz were. Something that when I look at it, I think I associate it with maybe an eight year old girl would put on her shoes, little charms that you accessorize with. But in reality, management thinks that the Jibbitz are just an opportunity to play off this huge trend toward personalization that people are experiencing. In my boyfriend’s case, he got a bunch of bananas to put on them because his coworkers always make fun of him for eating bananas a lot, I don’t know. But the point is that everybody has little things that they associate with themselves or their personalities and Jibbitz are a way for Crocs to monetize off of that.

Sharma: Yeah. Emily, I know you’re going to talk a little bit about variability of design and the tremendous amount of SKUs that Crocs has traditionally put out to the number of unique styles that you can buy in stores and online. Jibbitz is one manifestation of that uniqueness and personalization, but it’s a double edge sword, which I know you’ll get to. But maybe that’s a good segue to talk about, the business model which can offer teeter on the edge because it tends to lean into things like personalization, massive suedes of inventory to suit different styles around the globe.

Flippen: It’s an interesting question to think about what would have happened to Crocs had the great recession not happened. I tend to think that Crocs, to your point, Asit, probably still over-invested in a lot of things, personalization being one, inventory being one, SKUs definitely being one. But when you look at part of the reason why Crocs had this big failure in 2008, 2009, was largely because of the great recession that Crocs plummeted. It reached an all-time high in 2007, and then discretionary spending really came to a halt in 2008, 2009 and Crocs suddenly was stuck with a ton of inventory, tons of SKUs, just sitting on their books alongside a decent amount of debt. For a period, people were convinced Crocs was just going to go bankrupt as a result. There was also this belief in saturation, I think, and maybe that’s a problem that still exists today, is that when people buy a pair of Crocs, they do last forever so you’re not finding yourself needing to replace them, feeling particularly compelled to go back and purchase more shares. There’s a Washington Post article I found from 2009 that talked a bit about the bankruptcy and I loved this quote they said “Who needs a second pair of Crocs in a recession?” and that kind of, I know colors, I guess, how Crocs got to where it is today.

Sharma: I lift that, Emily, because, so here’s my side of the story. Our kids were young during the great recession. They were in middle and elementary school, so we have three kids, and we bought Crocs for all of them and never replaced them. I think maybe we might have replaced one pair because they were lost, but they are very durable. If you’re buying them for utility, you really don’t need more than a couple of pairs. Some people buy the rain boots so that’s one variation you can have in your closet, but I saw that firsthand. I also saw that it’s a very personal choice. I couldn’t, again, imagine myself putting on a pair of Crocs, but my kids when they’re younger, really like this. Now, footnote to that story, none of my boys, I have two in college and one in high school, none of them like Crocs or think that they created a shoe that they’ve moved on to other types of shoe. Although that demographic is becoming once again, a really avid buyer of this shoe.

Flippen: That’s probably, again, what makes today different from Crocs in the past. Was the move toward both Gen Z consumers as well as just streetwear and counter culture actually accepting Crocs as a real fashion trend catalyzed by a lot of agreements and I guess partnerships Crocs has made with big brands and big designers out there. So, when you look at what exists for Crocs today versus the stagnation than it was in post-recession, I’d say the fundamental difference between what we experienced in those periods where Crocs was, I guess, performing well, 2006, 2007 before the great recession, and what we’re experiencing today is that Crocs are fashionable. Maybe not to your kids, Asit, but my very little level of primary research says people think Crocs are cool.

Sharma: Yeah, for sure and they are doing a great job in targeting a young demographic and also a fun loving demographic. It’s a very irreverent brand. They’ve got a really nice presence on TikTok, they tend to do very wild and crazy things. There’s a Croc stiletto that is going to sell in 2022 for about a thousand bucks made by a major Italian fashion designer so there you go. I think that you have a brand which really knows how to appeal to a new audience. I mean, there is a younger audience younger than my kids who have grown up without seeing that whole cycle through the great recession where they became uncool after they were cool. The cyclicality of this brand is just fascinating.

Flippen: When you look at the style differences between what Crocs is doing today versus in the past and that cyclical nature is still there as you mentioned it. I think that’s always going to be there when you have a fashion brand in any sense, maybe not to the extreme that Crocs has had historically, but there’s always some aspect of cyclicality there. I think one of the big focuses, and maybe you can talk more about this as their management team has changed, has just been moving away from having way too many SKUs, the store keeping units. So when you get on their website and you look through the different shoe offerings, it’s just the number of different offerings they provide and they had over 5,500 SKUs at their peak in 2007, which is a huge amount of SKUs for a Crocs brand in particular. It was part of the reason why they had over-invested inventory that then had a really hard time moving and in recent years, management has made it a priority to cut back on those SKUs. While they haven’t broken it down, at least not in any of the reports that I read, management has made comments saying they reduced SKUs count in the order of 40% to 70%.

Sharma: Yeah. I think that this is something that is going to be an ever-present question for investors if you buy this company for the long term. You’ll have to monitor that SKU count because they have to lean into capacity when interest is high, as it’s been through the great recession. We haven’t even mentioned yet how much of a boost this company got out of COVID simply because it became a go-to-brand for at-home comfort while people were on Zoom calls. In fact, some surveys of the contemporary shoe market show that this is the only major brand to take market share during the great recession, almost everyone else experienced a general decrease in market share last year as people stayed home. Some lifestyle brands were able to expand, but among major brands, Crocs stood out for its acceleration last year and that’s continued into 2021. Now, part of this, I think, it’s just smarter management of inventory and of the life cycle, mini life cycles of this brand. You can trace this to a second wave of reorganization that occurred between 2014 and 2017. I see a second wave because they had a first wave of reorganization during the great recession. 

What you were describing earlier, Emily, when the company was flirting with bankruptcy, they emerged from that, but again started to see difficult times about seven or eight years later and this propelled one really prominent private equity firm to take an interest in Crocs. In 2014, Blackstone (NYSE:BX), which is one of the largest managers of assets in the world, bought $200 million worth of shares and that gave the company sort of a lifeline at the time. I think its market capitalization made them like $800 million. You’re talking nearly a quarter of shares if I remember correctly. They installed a gentleman named Andrew Rees as President who has a lot of brand acumen but also is very good at managing supply chains and operationally has a lot of strength. Rees was appointed CEO in 2017. Blackstone essentially forced out anyone left who was originally associated with the company, Rees took over, he was able to reduce overhead. He focused on the classic brand SKU, so going back to the company’s first iterations and making sure that where Crocs was allocating capital, it was promoting its evergreen brand because that is a core component of their revenue stream. Then he also started marketing to what were at that time millennials. Now, they have followed on with the younger generations since 2017 over the last four years. 

Then also, one thing that Rees achieved was a lot of brand extensions, the wacky one-offs that we see today. We should also mention here that Emily, this company reminds me in some ways of Funko, which makes the collectible bobblehead dolls that you see both online and even in Walmart and Target. Some Crocs have become collectible items and they sell out. I wonder if some of those might have been on sale when your boyfriend was trying to buy his Crocs this weekend because they have been noted for the long lines around their stores. Some people are trying to get at inventory that’s not going to be replaced, so they can just keep it in their closet, and watch it go up in value, which I find to be a really savvy business move.

Flippen: Look, the Crocs, I’ll let it fly, but the moment he tries to bring Funko toys into this house, that’s where the line is going to be drawn. I can tell you that much. 

Sharma: Well, I have to weigh in on his side because that may be a money making proposition. You don’t know.

Flippen: That would change everything, wouldn’t it?

Sharma: True that.

Flippen: Before you move on, one of the things that Rees did that I thought was really interesting is as CEO, you mentioned he focused on back-to-basics of the brand and that was the classic clog. What he did was move the clogs to the back of the store. So the best-selling items pushed all the way in the back of the store. So when people came in, they had to walk all the way to the back just to get what they wanted. The end result was not only building a brand by building more of that store presence, but also higher sales. It’s an interesting move that I can’t help but wonder how much of the success that we’re seeing today is a result of his work as CEO and how much is a result of just fads and trends. It’s hard for me to separate these two things in my mind.

Sharma: It is for me as well and I wonder too if the pendulum doesn’t swing back a bit. Now, we know that Crocs has really thrived during the recession. It was doing pretty well though in 2019, and its comparable sales versus 2019 look strong early this year. But the question is, will there be another sort of full-circle reckoning among buyers as they grow a little older. I think you’ll always have a core component of buyers who are sold on Crocs for their comfort. There is that little hitch though that you don’t need ten pairs in your closet, one pair is going to last a long time. They are beloved, I know, in the medical industry for that reason. Think of the times you’ve gone into a doctor’s office or at least in a hospital and it seemed someone in scrubs and Crocs walking by, it seems almost like part of the uniform now, but they are extremely durable. So that does hit the extension a little bit in terms of sales per customer and lifetime value. But I think this is such a company that rides on its brand strength and that is a little different than brands out there that are either higher or lower on the scale of desirability. So if you look at really high-end goods, they tend to have a very steady state of demand and the same with goods which are relatively cheap but have a lot of brand love behind them. Coca-Cola (NYSE:KO) is an example of a company which has relatively inexpensive products and even as soda volumes have declined, they’ve been able to sell a lot of coke just because of the love for the brand. Then you’ve got brands which can be found in major department stores like Tiffany’s and Nordstrom (NYSE:JWN), which have just the sustained desire behind them on the consumers’ end. Crocs fit somewhere in the middle. 

It’s interesting, Emily, they actually went through a phase where they tried to focus Crocs as almost a luxury item and I believe there’s a period early in the company’s history where Nordstrom was its biggest retail outlet. It quickly moved back to a lower value or a lower cost proposition. But when you do that and your brand has this, as I named it before, a bifurcated view in the wider fashion world, then you’ve got to lean on those times where the whole left side of that fork which are the people who love it are piling in. Because you’ll never, ever get the people on the right side of the fork, those that are never going to have a pair of Crocs in their closet.

Flippen: Hey, never say never. Part of the reason why their product is so popular with so many people is their proprietary material. I was talking to my dad about this episode before I was making the outline, he was like, “Well, can’t people just 3D print their own Crocs?” It gave me a chuckle, but the answer is no, they actually can’t because Crocs has a proprietary material that Crocs are made out of. I believe it’s Croslite if I’m pronouncing it correctly, and it’s proprietary, it’s patented. Supposedly, what makes a Croc so special and so comfortable is this material that is hard to replicate. I don’t think we’ve seen it replicated with such success in other brands. I’m convinced there are people out there who think, “I will never own a pair of Crocs,” who may be surprised yet.

Sharma: I totally get that. I remember waves of knockoffs that you could buy on Amazon when we were buying Crocs for our kids. But the scuttlebutt from friends who had bought those was that they didn’t feel the same and they weren’t as durable. With this patented material, I think Crocs has such a big advantage on the comfort scale for people who like it, and the design has become iconic. I will bring up one little drawback which I think could affect the cyclical popularity of this shoe because it was an issue during the great recession and that is the resin material itself, this foam resin material. It’s chiefly made of something called ethylene-vinyl acetate and this is a plastic-like polymer. This polymer gives Crocs their elasticity, and it also gives Crocs that non-porous resistance to water. Even though this shoe has holes in it, they don’t really absorb water, so they are really easy to dry out and to shake off if you happen to get caught in the rain. 

Now, this material, because it is essentially a plastic-like material, is not recyclable because although it has certain elements of plastic that could be recyclable, the injection of this resins material keeps that from being recycled. They’re non-bio-degradable, so you can’t compose them for example. I wonder if that doesn’t become a concern again. I remember this was one of the reasons that we made the decision to move away because our friends were talking about the fact that they weren’t very environmentally friendly. Now, this could be said about a lot of footwear, so I think we shouldn’t unfairly dump on Crocs for the fact that it’s got a certain type of polymer that you can’t recycle and it won’t biodegrade. At the same time, this is something that’s going to stick around in landfills for a long time. I do think that you see this pop back into people’s consciousness. We’ll see as we go along. Right now, I was not able to find anybody online who’s even talking about this issue unlike the days from 10 or 11 years ago where that was a bigger concern.

Flippen: Yeah, I wasn’t even aware that that was a concern until you just mentioned it now, which I think is a testament to maybe not my research skills, hopefully not my research skills, but to exactly what you said at the end there, which is nobody seems to be talking about it. I like that as a risk factor because I do think at one point, especially when things catch fire, the flip side always comes to light, and with Crocs, the flip side of that durability and non-porousness is something that is durable against human nature as well, mother nature, I should say. Definitely, something to think about. But let’s move on to some recent performance for Crocs. We’ve managed to avoid really talking about any numbers so far, which I’m proud of us for, but let’s get some numbers out there because I’m sure everybody is wondering what could possibly have happened over the last five years to justify that 900% gain in Crocs stock price. I know when I looked at the most recent quarter, I was pretty shocked by some of the numbers I was seeing. They have record levels of revenue over the last three quarters and in the most recent quarter, they had 64% year-over-year growth on top of that stellar 2020 largely driven by trends across the U.S.

Sharma: This was really amazing to me after we decided on this ticker to take a look at. It did not really cross my consciousness for so many years and here they are with this explosive growth. Really high gross margins for a company that’s manufacturing and distributing essentially footwear. I believe their gross margin hovers around 55% and operating margins are also very decent. When you look at this company, operating margins of 30% in the quarter they just reported on in April, so they will be due for another report soon, that is a company that looks like it’s got a great business model if they can sustain the growth and continue with their strategy of expansion in Asia and Europe. That they should be able to put a lot of excess cash on their balance sheet and maybe not be in quite the precarious situation they were during the great recession. 

By the way, Emily, I went back and glanced at those financials from 2008 and 2009 when the auditors were saddling them with a going concern comment as you mentioned to me in our notes, which is one of the worst things that can happen. That means that your auditors are unsure if you will be able to continue on within a year past the date they signed their letter. That’s a pretty big deal. The balance sheet actually wasn’t that bad in 2008 and 2009, and they still had positive operating cash flow. But I think at the time because the environment was so poor and credit was so hard to access during the great recession that the auditors were probably worried if this brand had staying power and the thesis looked poor at that point. But we should give Crocs some credit in that their base margins seem to always supply them, except in extreme circumstances, with positive operating cash flow when you convert those sales into cash. I think it’s really a resilient business model from that standpoint. 

I wanted to knock on this as I was going in because I don’t like this shoe, but I found, to be honest, that they seem to have a pretty resilient business model. Now, let’s talk a little bit about how those sales are composed. When we look at that most recent quarter, about 32% of the sales were digital and that includes wholesale and direct-to-consumer sales. Wholesale revenue grew about 50% versus direct-to-consumer and that itself was up about 131% year-over-year in the U.S. It’s hard to really punch a hole in their growth story over the last year. As I said before into 2021, Emily, they’re succeeding both at a retail level in their own stores, in other department stores, and also with their direct-to-consumer business. It reminds me a little bit of Yeti, which is a company which also has strong brand power that both of us have said many times on this podcast. We missed it because of the strength of the brand. 

There is something of a brand story that’s propelling all these numbers. You have to give Crocs, I think, some long-term sustainability from a brand perspective. Just to maybe make a counter to what we’re saying before about the cyclicality of the brand and the peaks and troughs here, when you look at the numbers to me, it looks like the company that will be able to maintain a base case of profitability even in hard times. What are your thoughts?

Flippen: The first thought I had when looking at the financial performance was, similar to yours, Asit, I was shocked at how free cash-flow-positive this business was even during challenging years, even when Crocs weren’t suddenly a popular cool shoe to own. I was just amazed that this seemingly great business has gone under my radar for so long. I think management’s aware of that brand power that you talked about. They’ve been increasingly, I guess, being skeptical is maybe a strong way to put it. They’ve been rethinking their relationships with a lot of their wholesalers, people who they say they don’t see as representative of its brand. But I’d take it to mean, people who don’t move a ton of their product, don’t have a lot of cache with consumers, so they can drive more direct-to-consumer sales, which are obviously more higher-margin product sales. In 2020 alone, wholesale revenue was a pretty sizable portion of that top line, around 50% of all sales. There’s a really big opportunity for Crocs to pull more demand straight into Croc stores as well as their website.

Sharma: Certainly. Having said that, what about this debt picture now in the 2008, 2009 period, the company was saddled with debt, it eventually paid down some of that debt. When looking at the balance sheet and do you have any concerns going forward about how that financial picture pans out, are they exposed to too much long-term debt or do you feel it’s manageable?

Flippen: If you just look at the numbers, I think as much as they’re pulling in an operating profit right now, you’d probably say, “No that’s fine.” I think I tend to be a little bit more concerned that this is a business that has been issuing a sizable amount of debt. In part, they’re using that debt to pay off their higher-interest debt so they can have an overall lower interest expense. But it’s still somewhat concerning to me because they are still spending a lot of money and they have money up to $1 billion in share repurchases. This is a business taking on debt that tends to be cyclical, admittedly in a low-interest rate environment, but also spending money on a lot of share repurchases. It makes me nervous only because I’m really familiar with the Crocs’ history which, as we mentioned, their debt load was part of the reason why they were so close to bankruptcy back during the great recession. I worry that they’re setting themselves up in a similar position this time.

Sharma: I noticed just in the first quarter of this year, their long-term borrowings almost doubled from $180 million at the end of 2020 to $341 million at the end of the first quarter in 2021. That itself is a little concerning. This chasing of expansion, of course, can be parsed in terms of a very long-term growth story as they seek to expand in Asia and Europe, as I was mentioning earlier. Looking at the rest of the balance sheet, their current ratio, the ratio of current assets, it’s ready money versus current liabilities. Liabilities that need to be paid within a year look fairly strong. It’s a more than 2:1 ratio. They’ve got about $27 million in current assets versus about $326 million in current liabilities. I will point out though, $200 million of those current assets are in their inventory and $229 million of those assets are in accounts receivable still, what we call quick assets, that is assets that can be readily converted to cash. However, that inventory balance has been rising alongside, and Emily, I know you. That’s probably also a concern in your mind. Rising inventory, rising debt levels starts to sound a little bit like 2006-2007, right before the hammer came down.

Flippen: That was actually the question I found myself coming back on at the end of all this research on Crocs. The question I had after all of this was just, is Crocs making the same mistake twice or is this time different? Because when I look at those numbers, when I look at the increasing amount of debt, when I look at the huge amount of inventory. It’s up over 50% in comparison to where it was in 2019. I see management taking the same moves that they took back right before the great recession that did not set them up for success when the tides turned against them. The other aspect that I think is concerning is management has focused so much in prior years of bringing down the number of SKUs. Today, we are talking about increasing the number of SKUs as Crocs have become popular again. It’s almost like this fair-weather strategy that when tides are in their favor, they will make decisions that act as if the business is going to grow at infinite levels for the foreseeable future without really having a prudent plan in place for if and when Crocs stop being so attractive and stop being so popular. That makes me nervous and the other thing I’ll quickly add is in the most recent earnings call, management said this, I think almost three or four times at the call was that they expect clog growth to outpace sandals this year. But over the longer-term, sandals will grow faster than clogs. Clogs are over 75% of their total revenue right now. They think that their sandal line is going to start ruminating I guess with customers. I don’t see that happening today at peak Crocs popularity. 

All of that makes me feel like, “I think Crocs could be making the same mistake twice.” I really want to root for this business because I love a good underdog story and it was such a pleasure to walk around their store, truly kiddish and fun and exciting. I want them to succeed but I have a hard time swallowing this pill.

Sharma: Let’s break that down a little bit. We’ve got, on the one hand, what seems to be a story that repeats itself. On the other hand, Andrew Rees is still the CEO. We should mention that the company bought back some of the shares that BlackRock owned. They called back a little bit of that investment. Nonetheless, BlackRock, I think, still owns about 17% of the company. They still have board representation. This big private equity concern is guiding Crocs and I think that they are to step in when the company starts to extend itself. The other side of the coin is, why haven’t they stepped in yet? The message from BlackRock seems to be, “Yeah, go ahead and plow into the demand right now. Go ahead and expand the footprint, expand the styles.” What you just mentioned, Emily, is a departure from the base case. We’ve mentioned this a few times already in this podcast that the company’s best strategy has been the back-to-basics emphasis on its classic design clog. Will those sales materialize for sandals? Will that become an accelerated part of the revenue puzzle? I don’t know. The other thing that I think we should be wary of is, is management also keen on the growth rate of Jibbitz. Jibbitz is growing at a much faster rate than the rest of the product lines. But this little ornament which lets you customize your shoe only makes up about 4% of total revenue. Maybe it plays a role in the overall sale. The fact that you can customize the shoe, but Jibbitz itself is not going to be the key to revenue growth if the sandals growth falls through. 

What we could see is a deceleration of sales as people start to get back outside and do other things with their lives where the Crocs shoe is a nice to have in the closet, but not necessarily what you’re putting on to go for a hike or even to go back to work unless of course, you work in a hospital, as I was saying earlier and that is […] for your daily outfit. I think that what we’ve got here is a company that’s had some phenomenal success in terms of share price, the future is just not as certain to me and I have to put my own thoughts and feelings about the shoe itself and give some props to the brand. But I do think that the past history is weighing here on the forward case. If Crocs had a history of stable growth and stable brand management and was able to appeal to different generations of buyers in all kinds of weather, it’d be a lot easier to buy shares of this company. Maybe an example of a company that seems easier to invest in after accelerated growth, which we talked about a few weeks ago is Trex. Trex is an environmental company. It makes outdoor decking, and Emily, although we came away from that episode saying yeah, Trex’s run up a bit, both of us felt really good on how solid the demand has been an all-environment since Trex’s became public. This is not so, this is more a company that is at the whim of the consumer, and I think that it does have that opportunity for the love to swing to hate for a time. Scenario-wise here, what happens if this momentum reverses and instead of sales acceleration, we see a return to the norm, or worse, just a slowdown in sales. To think through what this would do to both the brand and the share price. It makes me reluctant to want to go out and buy its shares.

Flippen: I find myself saying the age-old adage of buying the product, don’t necessarily buy the stock. I think that’s where I find myself as a consumer. I would be surprised after spending all of these hours thinking about Crocs that I don’t find myself eventually making a purchase, especially of one of their sandals. But at the same time, I’m also very aware of the fact that Crocs, in my mind, are always going to be a little bit controversial, always going to be a little bit fatty. But if you’re listening and you’re like, Asit, where you, maybe you have this deep seated hatred toward the Crocs and you can’t quite figure out why. There is a once-popular blog that is still up and running today that I stumbled upon called and it made its last post in 2011, only recently last month having come back to make another post, their first one in a decade. But I liked the last post that that blog poster, his name is escaping me right now, made in 2011. He said, “Crocs as a company really does try. You have to give them that.” I thought that was a nice line to leave today’s podcast on.

Sharma: I love that. I have to say one more thing with the stock price, which has rocketed up 229% over the last trailing 12-months. There was something that needed to wake the sleeping giant. I think it’s more the resurgence of popularity in current culture than the stock price, but they are the sleeping giant. 

Flippen: Asit, thank you so much for joining in, providing your valuable insight on Crocs, as always. 

Sharma: Thanks so much, Emily. Unlike you, I think I’ll pass on buying a pair in the near future.

Flippen: Listeners, that does it for this episode of Industry Focus. If you have any questions, or you want to reach out to say “Hey,” shoot us an email at [email protected] As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against any stocks mentioned, so don’t buy or sell anything based solely on what you hear. Thanks to Tim Sparks for his work behind the screen today, for Asit Sharma, I’m Emily Flippen. Thanks for listening and Fool on!

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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