Explosive New Report Takes A Bite Out Of Crocs

A new report from Sterne Agee suggests dubious management practices at Crocs.

Something very wrong may be happening at Crocs.

Sterne Agee analysts are calling for clients to sell shares of the company after learning about Crocs’ dubious sales arrangement with a website called Backjoy.com and raising the possibility that its former chief executive officer may have been fired for pointing out irregularities after an internal audit. Further, Crocs lacks managers in Asia, Latin America, and North America and has “burned through three marketing directors in three years,” Sam Poser and Ben Shamsian wrote in a note today.

Crocs, which made more than $1 billion in sales last year, didn’t return requests seeking comment. The shares fell 5.6% to $13.23 on Thursday.

Crocs, which noted in its latest annual filing that it has one third-party licensee for its proprietary Croslite material, failed to say that it was Backjoy.com, which sells posture-improving products. Four of Backjoy’s executives, including the chairman, are ex-executives at Crocs, and after asking Crocs’ management if the relationship is “at arms’ length,” the analysts said they “were provided with insufficient information to convince us.”

Backjoy fails to mention the Croslite material on its website, and Crocs’ relationship with the ex-executives probably prevented the company from finding the best licensing deal for the material, the analysts wrote.

Adding to the apparent management fraternization, John Duerden, Crocs’ former CEO from February 2009 to February 2010, appears to have been fired after initiating an internal audit of organizational structure and processes, after which he decided to dismiss then-Chief Operating Officer John McCarvel, the analysts wrote. McCarvel and two members of the board came from a company called Flextronics, and following Duerden’s recommendation, the board chose to fire him and replace him with McCarvel, who is the CEO of Crocs today.

As for the leadership void, the analysts “contend that the aforementioned voids
in management are the result of a rigid internal structure that does not empower
managers and all major decisions come from the top,” the analysts wrote. “Our checks indicate that there is a very tight group that is loyal to the CEO. Unfortunately, it appears that those that concur with the top executives remain at the company at the expense of numerous talented people who have left.”

Crocs contends that the report contained “factual inaccuracies,” in an e-mailed statement to Buzzfeed today.

“We have general managers or interim general managers in place in all regions except Asia, where our regional GM recently left the company,” McCarvel said in the e-mail. “As for BackJoy, we had an immaterial relationship with them when they first started. We never had a licensing agreement with them and no longer have an ongoing commercial relationship with them. We were not aware that BackJoy was using the Crocs brand in their marketing materials and we’ve asked them to cease.”

He added that the report “doesn’t contain any new factual information.”

“We believe the fundamentals of our business remain strong and nothing about them has changed since our most recent earnings call,” he said. “We operate a diverse global business with a strong experienced management team and continue to focus on our strategies for profitable growth. Sterne Agee has already corrected other inaccuracies in their earlier note.”

Crocs’ second-quarter earnings report on July 24 disappointed Wall Street after the company said net income dropped 43% as discounting increased late in the second quarter.

The Sterne Agee analysts put a price target of $10 on Crocs, which closed at $14.01 yesterday.

UPDATE - 5:15 p.m.: The analysts stated in an earlier note that the majority of Crocs’ board came from Flextronics when in fact it was two members. They also clarified that the audit by former CEO Duerden was to review company structure and process, not financial irregularities. The article has been updated to incorporate those changes, as well as a comment sent by Crocs.

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