Friends,
Earnings Call transcript here:
http://seekingalpha.com/article/3990506-skechers-usas-skx-q2…
Snippets:
Although U.S. retailers are currently in a promotional retail environment, we believe we are a trusted and reliable brand for our customers and consumers who seek comfort, quality and style in their footwear. We look forward to maintaining our position as a brand leader and further growing our market share around the world.
Translation: “promotional retail environment” = We can’t sell as many shoes because competition has lowered prices and we’re losing sales to cheaper brands. We hope our brand is enough to stop the bleeding. Is it?
Now, turning to our business in detail, our domestic wholesale net sales decreased 5.4% in the second quarter, which is attributable to the significant pull forward of orders into the first quarter this year as well as the challenging and promotional retail environment, which included closing of some account doors and a surplus of product in the marketplace.
Translation: “surplus of product” = too many shoes! And we’re trying to sell shoes. So that is indeed a problem because when you have too much of something in the marketplace, prices have to drop. Shoes are a commodity, are they not? Unless they’re Under Armor or Nike. And Sketchers hopes that their brand means something as well. So what we learned here is that in order to survive a “surplus of product” Sketchers can’t rely on being cheaper and more comfortable. They have to rely on brand. Is this what we’re investing in? A brand that’s trying to become one?
We believe we are maintaining our position in the domestic marketplace, which is being impacted by both the political environment and an excess of sale price product.
Translation: “political environment” = an excuse to say we sold fewer shoes. When is it not a “political environment?” When have you ever needed new shoes and said, “wait, hold on, there’s a republic convention happening, let me hold off on buying footwear.” What rubs Monkey the most about this is that it’s not honest. They meant to say: “We sold fewer shoes because of increased competition. We’re spending on marketing to increase the value of our brand, and we hope that strategy works.”
With our biggest shipping month on record in June of 2016 for our North American distribution center, which primarily serves the United States and Canada and a strong start to July, we believe the third quarter will be a new record for the period. Though we remain cautious about the domestic market with political uncertainty uncertainty and a surplus of promotionally priced footwear, we are confident we will remain top of mind and a go to brand. Additionally, we believe our first and third quarters have the potential to become larger relatively to the balance of the quarters as our international business becomes a greater percentage of our total net sales. We believe our third quarter sales 2016 will be in the range of $950 million to $975 million.
Translation: We’re now looking at a 24% drop as Monkey pounds the keyboard. On the one hand, the business looks damaged by lower-priced competitors and its up to the brand name to save the company. If it can, the 24% will be a bargain. If it can’t, Sketchers is no Nike or Under Armor, and we learn now why a low p/e doesn’t tell the whole story. Brand can’t be bought with comfort and lower prices.
Q: And did you say how much July month-to-date sales are trending?
A: Both our overall shipments and our comp store sales are higher than we have in our model for those numbers, but it’s very early. The real big piece starts in the next couple of weeks as we get into back-to-school. So, we are off to a good start, but still too early to tell that anything has changed dramatically…
Translation: So much depends on Back to School. Because if Sketchers can’t grow selling more shoes with more stores with more marketing at a time when there’s a huge demand for new shoes, then the brand is dead.
So: is the 24% drop an over-reaction? Current Price 24.28/ 1.73 in last year’s earnings = 14. Sketchers is a tremendous value if the above isn’t corporate speak making excuses for a declining business. Otherwise, even the 14 p/e will seem expensive because no amount of marketing can save a business that is through and through a cheap and easily replicable commodity.
Monkey thinks the next quarter will tell all: no more of the push and pulls from previous quarters. Lots more new international stores. Maybe even no more fires? Plus the back to school season. But, alas, friends, it will remain a “political environment.” (Monkey wonders if Facebook will cite that excuse, by the way? Or Amazon?) If Sketchers can’t sell in the high end of their 950-975 million target––which, by the way, what do we make of that?––and maintain some kind of price premium and brand loyalty, the thesis is broken. Thoughts?
Monkey
(long SKX)