Skechers, my fourth biggest position, has one of the spectacular, straight up, earnings graphs I’ve ever seen. In spite of which it has a lot of skepticism from the investing community, because of past troubles that occurred before my time. This gives it a very reasonable price for its rate of growth. If you are not familiar with it, they make sporty shoes for walking, running and generally hanging out. I learned about them from my wife who doesn’t wear anything else.
I took a position in it about six months ago at an average price of about $46.50, and added another position at about $53.25 about two months later. Since then, believe it or not, it’s been up to $64 (which gave me a quick 38% rise on my initial investment), then down to $49.50, then back up to $61.50, and now back down to $55.75. All of this in six months. All of the actual news during that time was consistent, and all good. The downs came on the basis of rumors and channel checks that subsequently turned out to have been false or misinterpreted.
Here’s what their revenues have looked like the past nine quarters. December quarters are always less than September quarters because they ship for the Xmas season in the Sept quarter.
2012: 351 384 429 396 = 1.56 billion
2013: 452 428 516 451 = 1.85 billion
2014: 547 587 674
My off-the-cuff estimate for the December quarter would be $600 million, up from $451 million, or up about 33%. That would give them yearly revenue of about $2.41 billion
Adjusted EPS over the same quarters have been:
2012:-07-04 22 08 = 19
2013: 21 14 53 28 = 1.16
2014: 57 72 113
While Dec quarters are always lower than Sept, they never go back to the levels of the June quarter, so I’d estimate 80 cents (which seems very conservative to me). That would give them $3.22 for the year, and annual EPS of:
2012 – 19 cents
2013 - $1.16
2014 - $3.22
That seems pretty incredible! With a current price of $55.70 that gives them a trailing PE of about 17, which seems wildly low for that kind of growth. While some stocks seem as if they need to grow into their PE’s, Skechers seems as if it would take a lot of slow down to shrink into their current valuation. I know that clothing goes in and out of fashion, but really…!! They are opening new markets, opening stores, getting more distributors, starting new categories and new lines, etc.
Here are the December results they announced in October:
Net Sales were $674.3 million, up from $515.8 million.
Gross Margin was 45.2%, up from 44.7%.
Earnings from operations were $74 million up from $44 million.
We achieved a 30.7% net sales increase and record revenues, following record first and second quarter revenues, resulting in a 29.5% net revenue increase for the first nine months of 2014.
We achieved net sales increases of
18.5% in our domestic wholesale business,
60.6% in our international wholesale business,
and 25.0% in our company-owned global retail business,
which included an
11.0% increase in comparable net sales for the quarter,
on top of a double-digit increase last year.
Net earnings for the third quarter were $51.1 million up from $26.8 million.
Diluted EPS were $1.00 on 51.0 million shares, up from 53 cents on 50.6 million shares. (Our EPS was negatively impacted by foreign currency exchange losses of 5 cents per share, as well as 8 cents per share attributable to warehousing costs related to completing the first phase of the automation upgrade of the our European Distribution Facility and transitioning from a third-party warehouse to a Company-owned facility in Chile. In total, these expenses reduced EPS by 13 cents during the quarter.)
I added the 13 cents back to get $1.13. I usually take out foreign exchange gains or losses as they don’t reflect how the actual business is going.
As for the one-time warehouse costs, in the conference call they were asked extensively about it. While changing the warehouse in Chile to in-house, they had to keep both of the warehouses open for most of the quarter while changing over, and pay salaries in both. That was all finished just before the end of the quarter.
As for the automation of the plant in Belgium, they had to close part of the plant while they were doing it, and then run three shifts, in the other part, with lots of overtime, to keep up with demand and they had to outsource part of the shipping as I remember.
I think that all of these are clearly costs that don’t reflect the ongoing business and I feel comfortable in eliminating all of them and in accepting the companies 13 cent estimate for the whole thing, (which doesn’t seem excessive.)
As of September 30, 2014, our backlog increased more than 50% from its backlog a year ago.
We are extremely proud of our three consecutive quarters of record revenues and increasing sales around the world. Our product focus is on target and we are providing consumers of all ages what they want—from both a fashion and comfort standpoint. To broaden our reach with men around the globe, we recently announced the signing of the world’s most famous drummer, Ringo Starr, who we believe will have a positive impact on our men’s business in 2015.
Outlook - The more than 50% increase in our backlog and the strong sales during the first few weeks of October give us confidence that our momentum will continue for the remainder of the year and into 2015.
We are continuing our retail expansion and plan to open an additional 10 to 15 owned Skechers stores before the end of the year, in addition to the 22 that opened in the third quarter and the five that have already opened this month. We also plan to open another 35 to 45 Skechers stores through our international distributor and franchise partners before the end of the year—which will bring us to the 1,000 store milestone.
We are also improving our international efficiencies with the opening of a new distribution facility in Chile in the third quarter and the completion of phase one of the automation of our European Distribution Center in the fourth quarter. With our solid financial position, including, $440.8 million in cash, we are well positioned for continued growth. Though the Dec quarter is historically our smallest sales quarter for our international division, we remain comfortable with the analysts’ current consensus for revenue and earnings. Given the strength of our backlogs for the Mar quarter, we anticipate top-line growth to be 15 to 20%.
This all looks great to me and I have no plans to sell out of this position, but I will certainly keep my eye on it. I don’t think I could put it away for 10 years and forget about it.
Saul
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