SKX - My Mid-Quarter Review
Who is Skechers?
This company was founded in 1992 and is headquartered in California. My take, which may be completely wrong, is that where Nike is primarily a sneaker and sport shoe manufacturer, and it sells clothes too, and Under Armor is primarily a clothing store and it sells some sports shoes too, Skechers seems to me to be primarily a shoe seller, actually primarily a comfort shoe seller, and sells sport shoes, and sneakers, and kids shoes, too. They are only just starting to experiment with clothing (socks, leg warmers, etc) but don’t think they will be a significant source of income for a couple of years as they are trying to start slowly and get it right. They operate approximately 1,300 Skechers retail stores, including flagship stores in Times Square, but also sell through department stores etc.
Skechers designs, develops, markets, and distributes footwear for men, women, and children, as well as performance footwear for men and women under the Skechers GO brand name. It operates through four segments: Domestic Wholesale, International Wholesale, Retail, and E-commerce. The company offers casual footwear, including boots, oxfords, slip-ons and sandals for men and women; dress casuals, seasonal sandals and boots, and relaxed fit casuals for men and women. It also sells Skechers memory foam styles, lightweight performance-inspired athletics, classic athletic styles, and others under Skechers Sport brand name… (This goes on and on and on, but you get the idea).
You should know that they had a bit of a scandal some years back when the FTC said that their Shape-Up line didn’t provide all the health benefits they were promising. Their sales fell off a cliff for a short while and then bounced back as they introduced new lines. They are now much larger and much more diversified, and they’ve learned their lesson about health claims.
What is your history with them?
I’ve been a stockholder for roughly a year and nine months now. They just passed SWKS to become my largest position but this can change from day to day as their position sizes are very similar. They have been one of my top three for a long time. I took my initial positions at $15 to $18.
Aren’t they a fashion fad and likely to go out of fashion?
Skechers shoes are about as far from high fashion as you can get. They specialize in comfortable shoes that are inexpensive (comparatively speaking), and people buy multiple pairs of them because they are so comfortable. I know people who now won’t buy anything else simply because of the comfort factor. Chris posted about a little girl whose mother was complaining because the girl wouldn’t take off her Twinkle Toes Skechers at night to go to bed. That doesn’t sound like high fashion to me.
How is the company doing?
Well, let’s see. Their earnings for the past four years have gone like this in cents (adjusted for a 3-1 split). Can you say “straight up?”
2012 06
2013 39
2014 91
2015 150
Well, the earnings they just announced were up 65%. How about revenue? Here it is in billions of dollars.
2012 1.56
2013 1.85
2014 2.38
2015 3.15
From 2013 to 2014 revenue was up 29%. From 2014 to 2015 it was up 32%.
No wonder that the price fell all the way from from $53 to $25 in the past three months with all that awful news! I guess they missed some analyst’s estimate. SKX closed Friday at $30.40 and had a PE of 19 and a rate of growth of trailing earnings of 65%. For comparison, NKE whose revenues were up all of 4% last quarter, and earnings were up 22% (compared to Skechers 32% and 65%), has a PE of 29.
Here’s management’s analysis of the quarter and the future
“Surpassing $3 billion in annual sales was remarkable and to achieve this growth across both our domestic and international businesses speaks to the global strength of the Skechers brand. In the US, we are the number two footwear brand and the number one walking and work brand, and we were named the Company of the Year and received the Athleisure Design Excellence award from Footwear Plus magazine. Our accelerated international growth is an indicator of the global acceptance of our brand. While we continue to take increased shelf space within our existing accounts worldwide, the Skechers retail store count has also grown to more than 1,300 locations at year-end. Pivotal to this growth has been continued product innovation and expansion into more categories, enabling us to appeal to an even broader demographic. As the sponsor of the Skechers Los Angeles Marathon and the running sponsor of the European Ironman, we are reaching elite athletes and running enthusiasts like never before. As we continue to focus on comfort, style and quality in every shoe design, we are expanding our business within both existing doors and into new accounts and countries as well. With an additional 330 to 340 retail stores opening worldwide this year, there will be more than 1,650 Skechers stores by year end, of which approximately 575 stores will be Company-owned. Looking at 2016, we plan to continue to grow worldwide and we believe we will see strong double-digit and, in some cases, triple-digit gains in countries around the world.
The record net sales growth we achieved for 2015, both the gains of 22% in our domestic wholesale channel and gains of 59% in our international distributor channel, is very significant given the sluggish domestic retail environment, as well as declining currencies in several key countries.
“As we look at the coming year, we believe our owned retail stores are on target with mid- to high-single digit retail comps in January and we are continuing to gain market share.
We have had a very strong start to the first quarter with January sales up approximately 35% as well as a strong first week of February. Our backlogs were up 9.5% at the end of the year, and they were impacted by some distributors pulling forward orders from January to December.
During the fourth quarter, our distributor sales increased 91.6%. Also, our incoming order rate in January was very strong with both our domestic wholesale and European businesses ordering closer to season, which is resulting in improved backlogs for the first quarter. It is important to note that our backlog does not include our owned retail stores, of which we have 68 more stores than in the prior year, as well as our joint ventures in Asia, including China, which we expect will have very strong double-digit growth in 2016. Our financial position is strong with $508 million in Cash.
We have improved efficiencies in our distribution centers, which allowed us to ship more than 100% more pairs from our European distribution center in January than the year before. With the anticipated completion of the final expansion phase of our European distribution center in May, we will have more than a million square feet of space. With the strong start to the first quarter and the broad acceptance of our brand worldwide, we see significant potential to continue to grow our international business.
We remain comfortable with the analysts’ consensus range for the first quarter of $885 million to $920 million in sales and 50 to 55 cents in earnings per share.”
To summarize
This company is doing wonderfully, with no obvious threat in sight. It sold off for no particular good reason, except that the price had risen a lot this year. I’m comfortable with it as my first or second largest, and quite oversized, position. This is a great company, and selling at a very low price when compared to other companies in the same field.
Saul
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