Fools,
Skechers is pretty new to me, which means that, except for pure numbers, a lot of the analyses I have done lacks historical perspective.
Regardless, after going through the earnings release and the conference call transcript, here are my observations.
1. Skechers Business
Skechers designs and markest Skechers-branded lifestyle footwear for men, women and children, and performance footwear for men and women under the Skechers GO brand name. Skechers.
Skechers footwear reflects a combination of style, quality and value that appeals to a broad range of consumers. Skechers brands are sold through department and specialty stores, athletic and independent retailers, boutiques and internet retailers. In addition to wholesale distribution, our footwear is available at our e-commerce websites and our own retail stores.
Skechers seek to offer consumers a vast array of fashionable footwear that satisfies their active, casual, dress casual and athletic footwear needs. Skechers core consumers are style-conscious men and women attracted to Skechers youthful brand image and fashion-forward designs, as well as athletes and fitness enthusiasts attracted to Skechers performance footwear.
Many of Skechers best-selling and core styles are also developed for children with colors and materials that reflect a playful image appropriate for this demographic.
Skechers believes that brand recognition is an important element for success in the footwear business. Skechers has aggressively marketed its brands through comprehensive marketing campaigns for men, women and children.
Basically, they have their hands in a lot of customer segments, which seems like, at least from a marketing perspective, a larger scope than that of Nike, Under Armor or Adidas, who don’t target kids, leisure, comfort, walking and workplace. Instead, they are geared towards marketing themselves primarily using organized sports (soccer, football, baseball, golf).
2. The Stock Price
So where are we today? Although it doesn’t feel like it, we’re basically at the average valuation range we’ve seen over the past couple of years.
Take a look at the value ranges:
Qtr EPS QoQGr TTMEPS TTMGr Hi Lo Close P/E P/E Hi P/E Lo 1YrPeg
Mar-11 $0.08 $7.89 $5.95 $6.85
Jun-11 -$0.21 $7.16 $4.43 $4.83
Sep-11 $0.06 $5.96 $4.44 $4.68
Dec-11 -$0.39 $5.14 $3.92 $4.04
Mar-12 -$0.02 -129.2% -0.57 $4.90 $3.74 $4.24 -7.5 -8.6 -6.6
Jun-12 -$0.01 -93.5% -0.37 $7.17 $4.17 $6.79 -18.2 -19.2 -11.2
Sep-12 $0.07 29.4% -0.36 $7.46 $6.02 $6.80 -19.1 -20.9 -16.9
Dec-12 $0.03 -106.8% 0.06 $6.91 $5.06 $6.17 97.4 109.2 79.9
Mar-13 $0.04 -285.7% 0.13 -122.9% $7.54 $5.67 $7.05 54.2 58.0 43.6 -0.44
Jun-13 $0.05 -450.0% 0.19 -150.9% $8.17 $6.66 $8.00 42.1 43.0 35.1 -0.28
Sep-13 $0.18 140.9% 0.29 -182.2% $10.52 $7.98 $10.37 35.4 35.9 27.2 -0.19
Dec-13 $0.09 250.0% 0.36 468.4% $11.65 $8.87 $11.04 30.7 32.4 24.6 0.07
Mar-14 $0.20 369.2% 0.52 300.0% $12.26 $8.82 $12.18 23.4 23.6 17.0 0.08
Jun-14 $0.23 385.7% 0.70 268.4% $15.84 $11.05 $15.23 21.8 22.6 15.8 0.08
Sep-14 $0.33 88.7% 0.86 192.0% $21.56 $14.82 $17.77 20.7 25.2 17.3 0.11
Dec-14 $0.14 53.6% 0.91 151.9% $20.78 $15.92 $18.42 20.3 22.9 17.6 0.13
Mar-15 $0.37 80.3% 1.07 105.8% $24.75 $18.41 $23.97 22.4 23.1 17.2 0.21
Jun-15 $0.52 127.9% 1.36 94.3% $38.26 $23.33 $36.60 26.9 28.1 17.2 0.29
Sep-15 $0.43 34.8% 1.46 70.0% $54.53 $36.53 $44.69 30.7 37.4 25.1 0.44
Dec-15 $0.23 58.1% 1.54 69.9% $57.65 $26.12 $33.00 21.4 0.31
Currently, the P/E is just under 23, which is at the higher end of the range over the past couple of years, except for the last two quarters, during which the P/E spiked. After the recent significant drop in price, it feels like the price of the stock is cheap. But, as one can see here, it is not. At least it’s not expensive, especially considering growth prospects. If Skechers hits their expected earnings next quarter, the P/E will go down to 21.4, which is also reasonably within this range.
So what happened that would cause the stock to shoot up as it did, only to drop even faster? It’s not the business. According to management, they had order at the end of June that generally would have come in July.
Responding to an analyst question, about wholesale being up 12% with half of that from price gains, management said that, "… it was obviously the 20 million that moves from July to June and we weren’t anticipating the next return in September, for whatever reason although we were selling really well.” Also, they replied on another question that, “September wasn’t a great month, there was no step up as we’ve seen in the last two or three quarters.”
The way I interpret this is that they got a lucky break in June that they couldn’t replicate in September to compensate for the resulting shortfall in July.
Given the memory of past inventory issues as well, there were a lot of questions on the call about inventory, which shot up. But it didn’t unreasonably shoot up given the increase in sales and the geographical expansion that needs product to sell.
Finally, there were a bunch of temporary items, which reduced EPS. These include currency translation & exchange losses, increased deferred rent expense for the 5th Avenue store, a 2nd Times Square store as well as litigation expenses that are expected to go away some time next year. They say that these took about $.15 off of earnings altogether.
Basically, the market freaked out that they didn’t kill it again this quarter like they did last quarter and took away the premium it gave it for doing so last quarter, using all of these items as reasons to take the stock back down to its historical range.
But what about the business? Here are some items I took out of the conference call:
•Domestic Wholesale Business up 11.8%
•Average Price/Pair up 6.8% - Double-digit in Men’s & Women’s footwear
•International Wholsale Business 52.9% - up Double-didgit in Europe & Tripple-digit China & Middle East
•3 distribution channels - UK, China & U.A.E.
•Europe Subsidiaries sales up 28.4% (led by UK, DE, IT & ES) - Doubling size by mid-2016 of this distribution center for growth expectations
•New subsidiary in Central-Eastern Europe - Budapest
•JVs in Asia up 121.9%, 175% in China
•714 Skechers branded stores owned and operated by JVs, 378 distributor owned or franchised, 263 in Asia JVs & 73 company-franchised
•Company-owned stores sales up 20.9% including:
•64 net new stores since same period (18 this Q & 17 transitioned from New Latin American subsidiary) + 5th Avenue store
•WW retail store count 1,210 stores, 496 company-owned with 119 of which international)
•Backlog up 28%
•No. 2 Athletic Brand in US
•See strong upcoming holiday season with new lines (including Star Wars)
•First 9 months = 40% international - expect 50% within 3 years
•Inventory = $500.2 MM, up $137.2 MM (37.8%) from prior year - believe needed to meet 2015/2016 demand
•Greatest potential for growth international
•Record revenues despite sluggish domestic retail environment & currency headwinds in key international markets
•Double-digit retail store comps
•6.8% price increases per pair of shoes overall and pricing power internationally
•Significant EPS upside for FY16 due to international growth
•Margins getting better as a result of price increase with no increase in inventory
3. The Financials
Here are revenue and gross profit figures as well as the QoQ performance.
Rev Mar Jun Sep Dec Tot GrPr Mar Jun Sep Dec Tot
2011 476.2 434.4 412.2 283.2 1,606 2011 192.6 143.3 175.2 112.6 624
2012 351.3 384.0 429.4 395.6 1,560 2012 155.7 171.3 187.8 168.5 683
2013 451.6 428.2 515.8 450.7 1,846 2013 192.7 269.4 230.5 200.6 893
2014 546.5 587.1 674.2 569.7 2,377 2014 240.4 269.4 304.5 257.6 1,072
2015 768.0 800.5 856.7 2,425 2015 332.5 374.6 389.3 1,096
QoQ Mar Jun Sep Dec Tot QoQ Mar Jun Sep Dec Tot
2011 2011
2012 -26% -12% 4% 40% -3% 2012 -19% 20% 7% 50% 10%
2013 29% 12% 20% 14% 18% 2013 24% 57% 23% 19% 31%
2014 21% 37% 31% 26% 29% 2014 25% 0% 32% 28% 20%
2015 41% 36% 27% 2% 2015 38% 39% 28% 2%
Margins are generally improving:
GrMar Mar Jun Sep Dec Tot OpMar Mar Jun Sep Dec Tot
2011 40% 33% 43% 40% 39% 2011 3% -11% 1% -36% -8%
2012 44% 45% 44% 43% 44% 2012 -1% 0% 5% 2% 1%
2013 43% 63% 45% 45% 48% 2013 3% 4% 9% 4% 5%
2014 44% 46% 45% 45% 45% 2014 9% 9% 11% 6% 9%
2015 43% 47% 45% 45% 2015 11% 14% 11% 12%
EBITMar Mar Jun Sep Dec Tot NIMar Mar Jun Sep Dec Tot
2011 3% -12% 0% -34% -8% 2011 6% -21% 5% -51% -11%
2012 -2% -1% 4% 2% 1% 2012 -2% -1% 6% 2% 1%
2013 2% 3% 8% 4% 4% 2013 3% 3% 12% 7% 6%
2014 8% 9% 10% 5% 8% 2014 13% 13% 17% 9% 13%
2015 11% 14% 10% 12% 2015 17% 21% 17% 18%
And here are the EPS figures.
EPS Mar Jun Sep Dec Tot
2011 0.08 -0.21 0.06 -0.39 -0.46
2012 -0.02 -0.01 0.07 0.03 0.06
2013 0.04 0.05 0.18 0.09 0.36
2014 0.20 0.23 0.33 0.14 0.91
2015 0.37 0.52 0.43 1.31
EPSQoQ Mar Jun Sep Dec Jan
2011
2012 -129% -94% 29% -107% -114%
2013 -286% -450% 141% 250% 468%
2014 369% 386% 89% 54% 152%
2015 80% 128% 29%
Overall, the company executed well. They didn’t kill it like last quarter. But they are seeing their business grow both in the US and accellerating internationally. The timing of some big orders caused the fantastic (very good) performance in the June (September) quarter. Valuations were getting high and are now at reasonable levels as investors probably got spooked by the lack of growth this past quarter. The business is on track.
Skechers has a long runway for growth if it executes well. With the broad market it reaches and its increased efforts in marketing the brand, the company could grow nicely for a really long time.
Hopefully, I will learn more about Skechers and its industry so that I can be a better at investing in them.
DJ