Crocs for Docs: Footwear Company Donates Inventory (Chapter 06)

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Crocs gets props

Twitter users praised Crocs when it announced its Free Pair for Healthcare program to donate free shoes to any healthcare worker who requested a pair. In just one week, from the announcement date on March 25 to its quarter-end on March 31, 2020, Crocs had given away $1.7 million of inventory.¹ In the following quarter, Crocs reported giving away $8.2 million more shoes, after it expanded its donation programs to include delivery drivers and line cooks. In total, when these programs ended May 29, 2020, Crocs had given away $9.9 million worth of shoes.

Crocs, Incorporated
Income Statements
For the three months ended June 30
(in millions)	2020	2019
Sales revenue	$ 331.5	$ 358.9
Cost of goods sold	151.6	169.5
Gross profit	179.9	189.4
Selling, general, and administrative expenses	123.3	141.5
Income from operations	56.6	47.9
Other expense (income)	1.9	3.2
Income before income taxes	54.7	44.7
Income tax expense (benefit)	(1.9)	5.5
Net income	$ 56.6	$ 39.2

Where are inventory donations such as these reported in companies financial statements? Are they included in Cost of Goods Sold? Thats where Crocs reports other inventory-related expenses such as write-downs and the costs to design, produce, procure, and ship its footwear. Or, are they reported as a cost of promoting the companys business, similar to advertising expenses?

Publicly-traded companies rarely mention where their donations are reported, because either the amounts are too small to justify separate reporting or the companies dont want to risk being blamed for over-producing in a world increasingly concerned about environmental sustainability. Whatever the reason, donations are almost never called-out in financial statements, even when they benefit others. For example, Ralph Lauren Corporations 10-Q said nothing about the companys donation of 1.5 million apparel products to support front line workers and families in May 2020.² Likewise, Guess?, Incorporated did not discuss its donation of 45,000 clothing items during the pandemic, nor did The Gap mention its $60 million donation of unsold apparel, which was somewhat overshadowed by the companys $235 million inventory write-down.³

Crocs is the rare exception. Although its income statement (shown above) does not separately identify its inventory donation, the notes to the financial statements for the quarter ended June 30, 2020, report that $8.2 million was included in Selling, General, and Administrative Expenses. The companys inventory donations in the previous year were not material, so we cant say whether Crocs choice of classification in 2020 was normal or (dare we say it?) unprecedented.

¹All amounts and percentages in this reading pertaining to Crocs are based on data reported by Crocs, Incorporated, in its Form 10-Q for the period ended June 30, 2020, downloaded from sec.gov on October 10, 2020. ²FN Staff. Charity works: Michael Kors donates $35M in products to Delivering Good + more, Footwear News, June 12, 2020, downloaded October 12, 2020, from https://footwearnews.com/2020/focus/philanthropy/fashion-industry-charity-donation-news-may-2020-1202978016/. ³Dalton, Matthew. What happens to all of the unsold clothes? Wall Street Journal, August 12, 2020, downloaded October 12, 2020, from https://www.wsj.com/articles/fashions-big-question-what-to-do-with-all-those-unsold-clothes-11597328695.

CE6-4 Calculating and Interpreting Gross Profit Percentage [LO6-6]

Had Crocs included its $8.2 million inventory donation as part of Cost of Goods Sold,

a. What would be its Cost of Goods Sold (CGS) for the three-month period ended June 30, 2020? (Round the final answers to 1 decimal place.)

b. What would be its gross profit percentage (GPP) for that same period? (Show the GPP final answer as a percentage, rounded to 1 decimal place.)

c. Is this greater or less than the gross profit percentage Crocs actually reported for this period?