Burning Rubber

A few years ago, three friends from Boulder started a shoe company called Crocs, created a worldwide fashion phenomenon, and made millions of dollars for themselves. Then the trouble began.

But by the time I met with him this spring, Snyder was in damage-control mode. With the stock trading near its then-low of around $17 a share, the U.S. economy had significantly cooled just as summer—one of Crocs' most important seasons—was on the horizon. The company's first-quarter revenue was $198.5 million, nearly $25 milion less than its original forecast. By then, inventory had climbed to $265.5 million, and observers were wondering if the company would reach its initial $1 billion revenue goal for the year.

And then the rubber met the road. In mid-March, a New York-based foam company called Cellect LLC alleged in court documents that Crocs violated a 1999 patent owned by Sentinel Products Corp.—Cellect's joint-venture partner at the time—that covered a rubberlike material similar to the one Crocs had dubbed Croslite. (Crocs bought the original Canadian wholesaler in 2004 and acquired the material's recipe, which it has not patented.)

The New York suit added to the growing list of troubles for Crocs, which by then already was under scrutiny for its patent of the original Beach model—the one Seamans had introduced on the boat in 2002. Although Crocs threatened legal action against companies it thought was infringing on its popular shoe, rival shoemakers have alleged that Seamans' rubber-strapped clog is nothing more than a copycat itself. In a deposition last year for the International Trade Commission, Seamans acknowledged the existence of an Italian shoe that was sold at least a year before Crocs hit the market, though Seamans said he didn't notify the Patent and Trademark Office. A judge ruled against Crocs this spring; the company has appealed the ruling.

In the midst of its patent fight, Crocs announced that it would lay off more than 600 employees—15.5 percent of the company's entire workforce—from its original Quebec plant. (A couple of weeks later, Crocs laid off 27 employees in Niwot.) Snyder also announced that inventory had increased again, this time by 10 percent, amid a "challenging retail market" and colder-than-usual temperatures across the United States. While Crocs would still likely post record yearly revenues, it became obvious the company's momentum had slowed dramatically. Analysts and financial journalists who once touted the stock turned on it overnight.

"We believe these sales are at risk of significant decline as consumers, especially in the U.S., begin to move away from the style that defined Crocs," Wedbush Morgan Securities analyst Jeff Mintz wrote to investors.

"Today...the worst is still to come," read a story on the Motley Fool, a financial web site. "No one is saying so, but now that this once-tropic stock is giving arctic guidance—and inventory levels remain in the stratosphere—I wonder if we were crazy to believe that Crocs would successfully extend its brand."

"Crocs bites the dust," Robert Samuels, an analyst at J.P. Morgan Securities Inc., wrote. "Revenue guidance will give further fuel to the argument that the brand's popularity is in sharp decline, and it is tough to argue otherwise.... A miss of this magnitude represents a significant mismanagement of expenses." Crocs stock dropped again after Snyder's analyst call, falling 43 percent in 16 hours. By early May, the stock had lost almost 90 percent off its high value six months earlier. At press time, CROX was trading at $11.39.