SKX: Past, present, future

Let’s have a look at what happened to earnings over the past few quarters and then look forward to Q4 2015 and FY 2016.

THE PAST

In Q1 2015, we had bad weather, the port shutdown, strong dollar, and some other issues with their distribution. They reported a weaker than expected quarter but still showed strong toppling and bottom line growth. EPS was $0.37. Despite these problems year over year EPS growth was 80.3% and year over year revenue growth was 40.5%. 1 year TTM EPS growth was 105.8%

In Q2 2015, SKX posted a MONSTER quarter with EPS of $0.52 (forecasts were for $0.32 if I recall correctly). Now this amazing quarter was only partially due to their business growth. The rest of the “growth” was not really growth because they “took” business from Q1 2015 and Q3 2015. So the observed strength in Q2 was in large part due to “weakness” in Q1 and Q3. SKX customers order product in June that should have been ordered in July.

As mentioned above, the reported number in Q3 2015 were lower because of the June order that came a month early. It’s really a timing issue as it was with AMBA last quarter and AMBA’s “low” guidance for the quarter in progress. In addition to the shift in orders, the legal costs (2 lawsuits) were an additional drag on earnings.

THE FUTURE

In Q4 2015, we can expect good growth in revenues over Q4 2014. Earnings, however, may not show that good of growth because the legal issues are still ongoing in the current quarter. Also, there was some weakness in the US but this is likely temporary. So, without the legal impairments we may be expecting $0.24 EPS versus $0.14 in Q4 2014. This would be a year over year increase of 71%. Perhaps the legal costs will be 5 cents so we might get EPS growth of 36% (19 cents minus 14 cents is 5 cents which is divided by 14 cents to arrive at 36%). Also, Q4 is SKX’s weakest quarter but it was also the weakest quarter in 2014 so it’s an apples to apples comparison (not considering the legal costs in 2015).

In Q1 2016, we should see substantial year over year growth because SKX’s business still growing so fast and because Q1 2015 was weaken as cited above.

In Q2 2016, we should see a crappy quarter because Q2 2015 was strengthened as noted above.

Then in Q3 2016, we should see another amazing growth quarter because Q3 2015 was weakened by several factors.

This is how I see it. Of course, there could be factors in future quarters which affect the reported EPS numbers. We do not yet know what will happen, but we do know how the numbers lined up in the recent past. It seems the “market” and the stock price reacts violently to the reported numbers even when deviations from expectations can be explained either by sales transferring from one quarter to the next (or previous) or by one-time charges which we do not expect to see in the future. This seems to have happened with AMBA and now with SKX.

Chris

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It seems the “market” and the stock price reacts violently to the reported numbers even when deviations from expectations can be explained either by sales transferring from one quarter to the next (or previous) or by one-time charges which we do not expect to see in the future. This seems to have happened with AMBA and now with SKX.

Hi Chris, I think that the short-term trading computer algorithms don’t even TRY to figure out what is causing the deviations. They just say sell, or short, or whatever. Then more rational heads take control over the longer term. (Voting machine vs Weighing machine).

Saul

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I think that the short-term trading computer algorithms don’t even TRY to figure out what is causing the deviations. They just say sell, or short, or whatever. Then more rational heads take control over the longer term. (Voting machine vs Weighing machine).

Saul,

I would agree that you are likely correct about this. However, I would add that the stock price drop and the first brush reaction of an earnings “miss” without any analysis probably scare people out of a stock which further drives down prices.

Chris

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Saul, this is exactly the phenomena which I believe is driving a tremendous amount of volume in the markets today. There are computer algorithms which can be rather sophisticated, they can even do natural language analysis and react to news reports, so they are not strictly driven only by numbers (i.e. price, volume, earnings report, sales, etc.). Combined with this, there are a large number of unsophisticated, uninformed traders in the market who react primarily to stock price. These two actors interact to create spirals of selling activity; computer trades drive the price down, as the price falls, human traders enter sell orders, pushing the price down further, this triggers more computer trades and so on (incidentally, this is the primary reason I’m an advocate of a transaction tax).

The reason the sell reaction is stronger and faster than buying is because it is easier to determine selling triggers, and fear of loss is a very strong motivator. The selling syndrome dominates all other activity until most of mechanical volume has taken place - which can be complete in a matter of a few hours, but may go on for days. Eventually, rational investors perform an analysis of the fundamentals of the company. If the realization is that the company is still sound (not necessarily always true), they will take advantage of the discount and the stock price will begin to recover.

But the recovery always goes slower than the crash. Recovery requires human intervention - thought, analysis and caution. The mechanical trades have generally reinvested the funds from selling elsewhere. For the most part the traders will be reluctant to buy back into a company they’ve just sold out of. So the recovery is a crawl until momentum is reestablished.

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