SKX announced today they’re suing Steve Madden for patent infringement. Press release:
http://phx.corporate-ir.net/phoenix.zhtml?c=80336&p=irol…
This part sounds bad:
Steven Madden is selling its infringing footwear to SKECHERS’ wholesale customers and in other sales channels where the SKECHERS products are sold, and we believe this is causing us enormous damage.
I hope that’s not a hint of what’s to come when they announce earnings in a couple weeks.
Neil
Long SKX
Neil,
They’ve just filed an infringement suit. What do you expect them to say? Something like, “…and we believe this is sort of hurting our business we think.”
What do you expect them to say? Something like, “…and we believe this is sort of hurting our business we think.”
I’d expect them to just not say anything at all. If Steve Madden is infringing on their IP, then that’s reason enough to protect it. They can save their claims for the court. I’m just not sure what is gained by adding a statement like that to the press release beyond offering up an excuse for earnings.
But hopefully it’s just meaningless posturing, as you say.
Neil
Neil - I didn’t look at like that. I guess I agree with you. I too hope it’s not indicative of a slow down in earnings. I’m also long SKX.
I decided to reduce my position in SKX ahead of earnings. It was my 2nd-largest holding, after SWKS, and now it’s an average-sized position. My hope is that the statement in the press release is completely meaningless, and just legal posturing. Nike reported a great quarter, everyone expects Under Armor to report a great quarter, and so it seems perfectly reasonable that Skechers will also have a great quarter. Relative to TTM earnings growth, the P/E is very low, but it’s still high on absolute terms.
I will be watching earnings very closely. If Skechers posts a great quarter and continues showing that solid growth, I will rebuild my position. And as I said, I still have an average-sized position in the company.
Normally, this is not something I’d do: I’d traditionally just ride it out. But I’ve come to recognize that this is one of my weaknesses, and so I’m trying to be more proactive about spotting the early warning signs. Perhaps this is an overreaction 
Regardless, I’ll sleep a little easier going into earnings.
Neil
Long SKX
Neil,
I decided to look up Steve Madden to see wha the potential impact on SKX might be. The ticker is SHOO. Starting with info from the 10-K which includes FY2014 (ending 12/31/2014).
https://www.sec.gov/Archives/edgar/data/913241/0001628280150…
Business: Wholesale and Retail. Within Wholesale they have Wholesale Footwear and Wholesale Accessories (i.e. handbags, belts, etc.). Retain they have their own stores.
Stores: 160 retail (SKX has more than 1000); they plan to open 5-6 net new stores in 2015; they also sell through 2500 doors of 17 retailers such as Macy’s and Nordstrom but also low end retailers such as Walmart, JC Penney, Sears, Kohl’s and Target.
Net sales: $1.335B up 2% from the prior year (SKX had $2.378B in the same period and was up 28.8%). They were up 2% due to an acquisition; otherwise, sales were down 1%. The Wholesale Footwear business was 65% of their revenue or $860M, up about $65M or 8.3% from the prior year. The Wholesale Accessories business had $244M in sales, up 1% from 2013. The rest of the sales were from their Retail business: $210M. Looks like shoes make up about 3/4 of their business overall.
SSS: decreased 8.1% in 2014 compared to 2013.
More on Wholesale Footwear: 2014 GM=29.5%, 2013 GM=30.7%, 2012 GM=31.4% so margins have been dropping for the past 3 years. Margins in their Retail business unit have also been dropping.
Now, within shoes there are multiple segments and I question how much overlap there is between Sketcher’s and Steve Madden. When I have come shoe shopping (men’s shoes) at Macy’s, I recall seeing a Steve Madden section amongst other similar shoe types. However, I recall seeing them in the mid to low priced section of the dressier shoe type.
Based on what I’ve read about Steve Madden, I would be surprised if they are having any material impact on SKX sales. Their 8.1% growth is ok but not spectacular, and, considering that some of this growth is from an acquisition, I’m not too impressed. When you throw in their gross margin decline over the past several years, it would seem like they have to lower prices to achieve the top line growth. In contrast, SKX is growing more than 3 times as fast while raising prices and expanding margins (45.1% in 2014, 44.3 in 2013, and 43.8% in 2012). I will be holding all my shares and will wait to see what information is provided in their latest quarterly result.
Chris
Thanks for that analysis, Chris. The press release specifically calls out the Setta style of Steve Madden shoes.
It sounds like Steve Madden has a history of ripping off shoe designs, including Skechers designs, in the past. I’ve found multiple articles about blatant copying of various manufacturer designs.
Neil
From this past 4/22 1Q press release commenting upon the upcoming 2Q when they were already into the 2Q.
We are looking forward to what we believe will be record sales for a second quarter, delivering our back-to-school product, and a new annual sales record. We are comfortable with analysts’ estimates for the second quarter, and we see upside opportunity in the third quarter.”
Alex
This article contains a picture from the Skechers patent, alongside the offending Steve Madden Setta shoe.
Alex