Crocs stumble: anatomy of a fad or a rebound?

Maker of the fluorescent, smurf-like shoes appears to have staved off bankruptcy, but will it regain its former stride?

Crocs, the candy-colored foam clogs, have narrowly avoided going the way of the pet rock or mood rings.

The company, which has teetered on the edge of bankruptcy this year, last week reported a $30 million loss for the second quarter of the year, against a $2 million profit in the same period a year ago. But that result was much better than investors had expected, and the general market view was that the company will now find a way to survive. The company's stock soared on Monday.

But no analysts interviewed expect Crocs to return to its lofty heights, since the perfect storm that drove its early corporate success – a comfortable-but-ugly shoe fad married to a peaking stock market – has dissipated.

Like the mortgage models that didn't allow for the possibility that property prices could ever fall, Crocs and its investors assumed double digit growth was assured – and the company borrowed and expanded accordingly. Croc's shares debuted at $13 in 2006, surged to $70 at their height at the end of 2007 and today, can be picked up for about $6 (an interactive graph of the stock's performance is here.)

While analysts say that a market for its shoes will persist – probably among the nurses, cooks, and other people who spend a lot of time on their feet – the boom times are over.

Part of the reason is on display at Sports Experts, a busy shoe store in a Montreal shopping mall. A few racks of Crocs – the clunky hole-filled shoes adopted by boaters that went mainstream when the likes of Jack Nicholson and Brad Pitt started wearing them – had no takers.

"We don't sell a lot of these anymore. There's not a big demand," says Olivier Brunet, a store employee.

In their heyday nowhere were Crocs more popular than in Quebec, where they were born. This year, some Montreal stores canceled their orders.

Busts are part of a cycle

That was always in the cards, says McGill University marketing professor Robert Soroka. But, he notes, "Crocs had a longer life cycle than a typical fad." He says the smart thing for the company to do would have been to anticipate a loss of interest for its main product – and gotten to work on a replacement. "What we typically do with a fad is to enjoy the fad, know it has a finite life and use the proceeds to introduce a replacement product, the next greatest thing." In Crocs case, he says, there is none.

The company generated enough money in the second quarter to pay down all of its bank loans and gave an upbeat assessment after announcing earnings earlier this month. Company spokesperson Tia Mattson insists that Crocs will not be filing for bankruptcy, a rumor that circulated widely.

President John Duerden told analysts earlier this month that a Washington Post article published in mid-July about the company's demise triggered a record one-day spurt of Internet sales, topping 16,000 pairs. "The Crocs brand ... continues to resonate with a passionate consumer base," he said. Maybe abroad, but not in the US: Second quarter US sales fell 19.4 percent from a year ago; sales in Asia were up 31 percent over the previous year.

Quebec pride

The shoe and its patented "croslite" material (a resin that doesn't absorb waters or retain odors) were originally owned by Foam Creations, a Quebec company. Though that company was bought out by Crocs in 2004, Quebeckers were proud of Crocs as a provincial innovation that went global, like the Ski-Doo snowmobile. More than 100 million foam clogs have been sold.

But one of Crocs' first downsizing moves was the 2008 closure of its factory near Quebec City that employed more than 600 people. Then the company president at the time, Ron Snyder, said that the plant had to move to China to reduce production costs in the light of slackening sales. Some 2,000 jobs have been cut company-wide.

Crocs management says a downturn was unavoidable, given the global recession that began early last year.

But Soroka says tough economic times have revealed that Crocs are not a necessity. "In a bad economy, we tend to see more conservative shoppers. The basics, the essentials, will prevail," he says. "You always need the patent black leather shoes. You don't always need Crocs."