A ‘Croc’ of a stock

Pressure to meet short-term sales targets or enhance stock prices can lead companies to engage in a deceptive practice known as channel stuffing. A recent lawsuit against Crocs Inc., alleging that the shoemaker misled investors with the practice, provides lessons about the financial and reputational consequences of channel stuffing, and the author offers strategies that can keep companies in their investors’ good graces.

In 2004, a costume designer with a limited budget discovered a startup company designing shoes that perfectly fit the comical, dystopian movie she was working on. Those shoes were absurd, bright plastic clogs called Crocs that seemed unlikely to ever become popular, so the costume designer featured them in the movie, “Idiocracy.” Now, two decades later, Crocs, Inc., the maker of those comical clogs, is facing a dilemma beyond its shoes’ improbable popularity, as investors accuse the company of coercing sales in a channel stuffing scheme.

Channel stuffing, as the name suggests, occurs when too much product is forced through the sales channel, overburdening the receiving end with more product than conceivably can be sold. Although it makes sales to third parties appear stronger, it results in prematurely recognized revenue and is considered a form of financial statement manipulation.