Crocs Tussles with Wall Street

A Sterne Agee report takes the footwear company to task for its “rigid internal structure” where “all major decisions come from the top.”

Fashionable footwear company Crocs may have thought it had an urgent problem on its hands earlier this month when a racy, unauthorized ad featuring Crocs’ shoes popped up on YouTube. But that incident required nothing more than a straight denial that the company was involved.

Now, though, Crocs and its investor relations team have a slightly more complex controversy on their plates.

Sounding more like an activist investor than a Wall Street brokerage firm, Sterne Agee published a client note on Crocs (Nasdaq: CROX) Thursday that downgraded the shares to underperform. The report heavily criticized the senior leadership of the casual footwear company and questioned an undisclosed distributor relationship that the Niwot, Colo.-based company had with BackJoy.com, a company largely run by ex-Crocs executives.

Crocs, a publicly held company that has been featured in CFO, missed second-quarter earnings estimates by about 25%. On the company’s June 24 earnings call, Jeffrey Lasher, Crocs’ CFO, said that “various challenges” affected the company’s results, challenges “that we did not expect when we had the Q1 call guidance.” They included lower margins, unfavorable foreign exchange, macroeconomic forces and “ongoing expenses associated with [an SAP implementation] and marketing investment.”

Also on the call, Sterne Agee analyst Sam Poser, one of the note’s authors, did not get a direct answer to a question about how many more stores Crocs planned to open in 2013.

On Aug. 8, Poser and fellow analyst Ben Shamsian came out with guns blazing. They told investors to sell their positions in Crocs because “we believe that key factor that has led to the poor performance at CROX is the lack of senior leadership.” The report pointed out that managers of the company’s operations in Asia, Latin America, and North America had left the company, and that Crocs had “burned through” three marketing directors in three years.

The reason? A “rigid internal structure” at Crocs where there is a “very tight group loyal to the CEO” and all major decisions come from the top. The dynamic has caused “numerous, talented people” to leave the company, the analysts said. “We sensed this internal pressure on the 2Q13 call when management had clearly decided to reduce its [2013] store openings from 90 to [about] 60 but refused to come straight out and acknowledge the change,” Poser and Shamsian wrote.

The other major problem Poser and Shamsian have with Crocs management is that they believe Crocs and BackJoy.com — a retailer of posture improvement products — “are too close for comfort.” The analysts said they recently discovered that Crocs was licensing its insoles to Backjoy.com — or at least it appeared that way on the BackJoy website. A Crocs’ 10-K from 2012 disclosed that there is one-third party licensee for Crocs insoles but did not identify BackJoy.com

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