Missed earnings estimates pretty badly, down 13.25% in AH action.
http://seekingalpha.com/news/3215417-skechers-misses-0_05-mi…
Sincerely,
Charlie
2 Likes
…and here’s a TMF take:
http://www.fool.com/investing/general/2016/10/21/3-reasons-w…
Cheers!
Murph
Home Fool
(no SKX position)
2 Likes
Should we take into account that apparently a couple of competing shoe store chains went out of business during the last two quarters and sold off their stock at cheap prices, impacting Skechers’ sales? That does seem like a non-recurring event.
Saul
5 Likes
…Should we take into account that apparently a couple of competing shoe store chains went out of business during the last two quarters and sold off their stock at cheap prices, impacting Skechers’ sales? That does seem like a non-recurring event…
Well, Saul, it would seem to me that one would have to look at the number of outlets/sales estimates for shoe store closures this year…and compare with the same info for this time last year in order to estimate non-comparable impact on SKX…after adjusting for geographical non-overlap…and then, how does one calculate how much of the lost sales went to online outlets, etc.
Quite a chore!
Cheers!
Murph
Home Fool
(no SKX position)
IMO, while it’s disappointing that SKX seems to have turned from a “growth” stock to now a “turnaround” stock, the expectations embedded in the current price seems to be much too pessimistic for actual business results. If results continue to trend downwards, then the current price seems to be justified, but at 10-12x cash flow while YOY growth is still double digits, for me it’s not yet a sell.
Since growth has slowed so much, it’s no longer a bargain - I have about 20% allocated and now I’m going to be riding it out. A lot of the EPS miss was due to currency and tax rate change estimates, top line still grew 10% for the quarter YOY and is up 15.4% for the 9 months YOY. One worry is that there’s likely to be a lack of catalyst until Q2 of 2017 - remember that Q1 is going to be a very difficult comp, since they did well Q1 of this year with sales being pulled forward
5 Likes
Seems like the growth thesis is broken or at least has stalled.
It’s okay to change your mind when the information changes.
If you like turnaround plays, great…but you don’t have to get your loses back the same way you lost them.
3 Likes
For reference with today’s decline I have a 5.45% position in SKX that is down over 32%.
I see a lot of people saying that 10% revenue growth is fine and makes SKX cheap. Sure, 10% growth would decent given the current valuation, but that is this quarter only. Management missed their own guidance this quarter by quite a bit and are now projecting a YOY decline in revenues for next quarter. To me this looks really bad on the surface and it looks like it will be at least 2 quarters until we know whether or not the company can return to some level of growth. I know 6 months is a really short time frame, but it just makes me wonder if my money is better off invested in something else, instead of trying to bank on a turn around story.
I have added on the previous drops because I thought the valuation was reasonable given the amount of growth we can expect, but I won’t be adding on this one and am considering selling. Next quarter we’ll likely be dealing with either break even or lower revenues, and likely lower earnings. To me that means that the price should probably be even lower after next quarter’s results, and that’s if the valuation stays the same.
I have not read the transcript yet, so perhaps I am not seeing or not understanding how much of a difference currency effects have affected their top and bottom lines. I’ll have to read the transcript and go from there. Maybe that’s something we should talk about, I see that Saul has already started a bit in another thread.
One last thing that has been nagging me – this stock has been trading at a “low” valuation for quite some time, yet every quarter we manage to find a new bottom, and violently so. One of the reasons I like a lot of the stocks that Saul picks is because we’re usually getting into companies that are growing quickly with reasonably low valuations. I would have thought that stocks like that shouldn’t see such violent movements. SKX for example is down 18% today while Netflix was up 18% when they reported. What I’m saying is that even though the valuation for SKX is “low” it tends to have movements that are around equal to the size that a more risky, much more volatile stock like NFLX has. Does that say anything about the riskiness of SKX? We’ve also seen big movements in SWKS in the past, another company that currently has a PE of only 15. I am also invested in NFLX (my biggest position), so I am not adverse to risk, but I’m wondering am I/are we grossly misjudging how risky these companies are?
I would love to hear what others think.
24 Likes
The problem I see (for me, at least), is I end up getting in these stocks when the growth ends up being at a peak. If the growth continues, all is supposed to be fine, and it looks relatively cheap. Invariably, though, the growth starts to slow as soon as I’m in, and the stock price starts tanking along with it. And not only does the growth slow, that causes the P/E to start contracting because a slower grower rightly shouldn’t command the same valuation. All this tanks the stock even quicker!
I still like a lot of these companies (I know, a mistake, in that I become emotionally attached to them), and tend to continue to hold for a recovery, which of course, may or may not happen, and who knows in what time frame.
Just venting some…
8 Likes
Foodles,
You have to be pretty nimble with momentum investing, which is espoused here. It’s not my cup of tea 'cause I’m not nimble - and I don’t like paying tax and I don’t like paying trading fees.
There was a fairly high level of scorn (which may be an overstatement) some time ago on this board regarding folks choosing UA over SKX. (probably due to the high PE ratio - but that never tells the whole story).
Sketchers story, at least in my opinion, has been largely anecdotal for some time now.
carver
long UA since original HG rec.
no position in SKX (ever)
16 Likes
I said it last quarter, I it last year, etc. never ever buy a stock on the basis of a low PE. Just never do it.
At this point however, all hope seems lost. If the economy would gro at more than 1.2% (fat chance these days) then Skechers will rebound. Unfortunately Skechers is competing against the bargain bin unlike UA and Nike, stocks that are not so “cheap”.
Never try to outsmart the market on straight forward and public ally available information. It is the nuances the market cannot get right, and even then, a great company will always be somewhat “overvalued”.
This said, so was Skechers and it crashed. But I put forward that it will happen far less often that an “overvalued” stock craters with no return, than happens when an “undervalued” or even cheap stock just gets cheaper.
You cannot beat the market on the basis of PE.
TINKER
18 Likes
This said, so was Skechers and it crashed. But I put forward that it will happen far less often that an “overvalued” stock craters with no return, than happens when an “undervalued” or even cheap stock just gets cheaper.
Do you have anything to back that up at all?
3 Likes
My portfolio bears out the statement. NTES, ATVI, GOOG, AMZN, ELLI, FB, MELI, NVDA, even UA is up 100% the last three years.I am trying to figure out how I keep losing money on the low PE stocks, or at least not making much. My biggest losses are by far the low PE stocks.
Htownrich
14 Likes
I feel like I have the same type of results. I’m buying at what appears to be the peak growth rates then it starts to slow.
In reading the transcript, I get the feeling SKX’s management is making good strategic decisions in diversifying their markets. I get that predicting currency movements is challenging. However, I feel like the tax rate change was something that should have been anticipated.
Finally, I see comparisons to Nike and UA. I think those two brands are a little different because they are also into apparel. I know people who will only wear one brand or the other. SKX is all about shoes. Should they consider getting into apparel? Adidas is like that as well, but have more of an international appeal.
I have held since this past spring, so I am feeling some pain. I am questioning whether my money would be better off in another stock until SKX gets its momentum turned around.
3 Likes
Do I have anything to back that up I am asked?
Yes, years of dramatic and successful (and sometimes not) experience.
It also makes analytical sense. Investments are forward looking. What do I expect to earn from this in the future. A low backward PE indicates that the market in its self interested and collective wisdom sees relatively little growth or a high degree of risk.
We are not smarter than the market using on your face information. You beat the market by buying stocks that beat market expectations. A lot is expected (by higher valuations) of market leading and great companies with long term sustainable advantages. These companies had the qualities to become market leaders and develop long term SUSTAINABLE competitive advantages, and these qualities also tend to enable these companies to beat even elevated market expectations year after year.
The other way to beat the market is during FUD events (fear uncertainty and doubt that create undue panic but this veil of panic has sufficient opaqueness that you can know (not hope, but know) that the fear is overblown. Tessa car fire from a few years ago as an example.
Wall Street does not give up money by placing assets on sale. A low valuation is for a reason. The key is determining why. And if it is simply a good buy because of a low PE, that is not ascertaining why.
Tinker
10 Likes
My portfolio bears out the statement. … My biggest losses are by far the low PE stocks.
Low P/E stocks are what Ben Graham used to call “cigar butts” and that’s how Warren Buffett started out but later changed his view to “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
http://www.brainyquote.com/quotes/quotes/w/warrenbuff165269…
The P/E ratio is supposed to be a measure of the wonderfulness of the price relative to wonderfulness of the company. But there is a big problem with how the P/E ratio is bandied about. Back when Ben Graham started writing, bonds were investments and stocks were speculation. Bonds don’t grow, they expire between zero and par value. Stocks can grow which changes the dynamics of the P/E ratio. In other words, Mr. Market pays for growth. If you have an 8% interest coupon on a bond for which you pay par, the P/E ratio is 12.5 – price over yield. This would be true for a company that does not grow and pays a steady 8% dividend.
If you buy the same bond at a discount, you figure the “yield to maturity” which includes capital gains in addition to the interest. In effect, if you buy the bond at a discount to par your P/E drops below the P/E at par which seems a bargain until you figure out why you are getting the bargain. If general interest rates (prime, LIBOR, etc.) have not changed then Mr. Market must have lost faith in the ability of the company to pay the interest or the principal in full. The lower P/E is not a sign of value but a compensation for the increased risk.
Now suppose you had a growing bond. Suppose the par value and dividend increased by 2% a year (to compensate for inflation), the yield to maturity would be higher than a bond that does not change in par value. Mr. Market would put a higher price on this bond than on a regular one and the P/E ratio would also be higher. The higher P/E ratio is in compensation for the lower risk this bond has. Growth reduces risk! No wonder Mr. Market is happy to pay for growth.
High growth can sustain a high P/E ratio but not forever, that’s why stock prices paint “S” curves.
https://www.google.com/search?q=%22S%22+curves.&num=50&a…
Another way to look at the P/E ratio is to realize that both the P and the E are current numbers that don’t take into account the future except as built into the P. That’s why analysts also use “forward” P/E.
Denny Schlesinger
6 Likes
The problem with low PE stocks is that there are two reasons a stock can have a low PE.
It can have a low PE because it has decent earnings today, but the future is poor or far too uncertain. Or it can have a low PE because it is a good business that is temporarily out of favor with the market.
The trick is telling these two apart before the fact.
Sometimes, they’re obvious - almost always because the future prospects are not good. These might have unrealistic plans for the future. The future earnings are too risky to gamble on, or poor leadership, or the investing equivalent of one-hit wonders. Or they might have pretty reliable earnings going forward, but too much debt. The earnings are there, but much of those earnings need to go to creditors to service debt instead of to stockholders.
The diamond in the rough is the second kind of business - one that is temporarily out of favor for some reason. Perhaps they had a bad quarter or year in a business that is otherwise healthy. Perhaps they’re one of the couple good businesses in a bad sector.
In short, you can’t end your analysis with the PE ratio. Low PE might make a decent screening tool, but it’s still going to allow a fair number of bad businesses through the screen. You’ve got to dig further to find out why they have a low PE.
Unfortunately, I don’t know any short cuts to that. As an accountant, I’d be inclined to head to the balance sheet and look at debt and equity. Anyone with a lot of debt in relation to equity would be screened out. That wouldn’t screen all of the bad choices, but it should eliminate a few. There’s still a lot of digging into annual reports and other communications to get a good handle on the business.
–Peter
20 Likes
Peter,
I agree with you, it is the “why” that is the important thing.
The one thing that we differ on is that I have never seen a great company ever have what is considered to be a cheap P/E on a standard basis. P/Es on such growth companies are always more expensive than any “value” investor would consider.
Such companies do become “cheap” however, you just cannot identify this from a P/E that falls to traditional “value” levels.
In the end all great growth companies remain at valuation levels, through good and bad that make anyone investing in them nervous.
Tesla and ISRG are two prominent examples I will use. If you follow NPI I got hot on Tesla during the fire incident a few years ago. I ran back of the envelope calculations based upon future perceptions of valuation, and TSLA was CHEAP. Yet at $130, it was vastly overvalued on traditional fundamental terms.
When ISRG fell into the $90s after the housing crunch, its P/E remained astronomical, and never value to traditional value levels, even at the worst of the market crash.
These are but two examples, of innumerable examples. That compares to companies who fall down to traditional value levels. At that point in time, if the market lets the company fall into those sort of valuation levels, and it is suppose to be a growth company with long-term sustainable advantage and growth, then something has really broken with that company. I would just stop looking at it. I have seen that happen too many times.
You can see it playing it. As an example, LHSP was going to dominate the world in language recognition software. It had the world by the … fill in the word, but the market only valued it by traditional metrics. The market knew something.
Valuation tells us something. It is up to us to ascertain why. Undue exuberation says stay away, but a stock that is suppose to be a growth stock with long-term sustainable advantages falls to cheap in traditional valuation metrics can safely (although not with 100% certainty) be assumed to that it is not a growth stock with long-term sustainable advantage.
I am a value investor, but not on these traditional metrics. If you invest like everyone else, then you have no advantage over the market. Rule Breakers is a methodology, as an example, that is value investing, but from a far different perspective that appears absurd to traditional metrics. It works because it is not doing what everyone else does, even though it finds “value” in stocks that are invested in.
I have my issues with some of Rule Breakers methodologies, but with some variations, no doubt it is a contrarian investing style that proves that value is not found in low P/E.
We can have a separate discussion about when a stock is overvalued. I think, as an example that, a certain former autonomous driving technology supplier to Tesla is overvalued.
Tinker
7 Likes
I sold SKX a month ago. Then inexplicabley (to me) bought back in before market close, the day of their earnings report.
Glad I didn’t buy too much. But it was definitely more than I should have bought, given that I had already decided that this company (for me) was not worth owning any longer. I initially bought back in Jan and March.
I own a pair of their shoes, but for now, I’m done with the stock.
Frank
Buying SKX has been catching a falling knife for the last 15 months. Water the flowers not the weeds. I sold all mine and put it in companies that are rising, or at least not in a long term decline. When, and if, SKX starts performing better, I can always get back in and don’t mind missing out on a few dollars. I have added to AMZN, SHOP, MTCH, and NTES in the last six months.
Htownrich
2 Likes
Seems like the growth thesis is broken or at least has stalled.
I posted this on the MF Skechers board and forgot to post it here. Perhaps it helps a bit to see the numbers.
The revenue guidance for this quarter is $710 - $735, the midpoint of which is $722.5 ($722.7 Dec 2015). This would result in a marginal QoQ decrease in sales, which could cause still more investors to sell.
Earnings attributed to Skechers shareholders…
SkNI Mar Jun Sep Dec Dec
2011 11.8 -29.9 8.3 -57.7 -67.5
2012 -3.7 -1.8 11.0 4.0 9.5
2013 6.7 7.1 26.8 14.2 54.8
2014 31.0 34.8 51.1 21.9 138.8
2015 56.1 79.8 **66.6** 29.4 231.9
2016 97.6 74.1 **65.1**
… compared to earnings adding back in earnings attributable to noncontrolling interests…
NetE Mar Jun Sep Dec
2011 12.2 -30.1 8.4 -58.0
2012 -3.4 -1.3 11.6 3.7
2013 7.6 8.8 28.3 16.1
2014 33.0 38.2 55.1 25.9
2015 61.7 87.1 **73.8** 38.5
2016 109.6 84.0 **76.5**
… shows that the non-controlling interests increasing portion of the earnings pie. I believe these interests have something to do with international business. But I don’t know.
Gross, operating, and EBIT margins show no discernible move downward:
GrMar Mar Jun Sep Dec Tot
2011 40% 33% 43% 40% 39%
2012 44% 45% 44% 43% 44%
2013 43% 63% 45% 45% 48%
2014 44% 46% 45% 45% 45%
2015 43% 47% **45%** 46% 45%
2016 44% 47% **46%**
OpMar Mar Jun Sep Dec Tot
2011 3% -11% 1% -36% -8%
2012 -1% 0% 5% 2% 1%
2013 3% 4% 9% 4% 5%
2014 9% 9% 11% 6% 9%
2015 11% 14% **11%** 8% 11%
2016 14% 11% **11%**
EBITMar Mar Jun Sep Dec Tot
2011 3% -12% 0% -34% -8%
2012 -2% -1% 4% 2% 1%
2013 2% 3% 8% 4% 4%
2014 8% 9% 10% 5% 8%
2015 11% 14% **10%** 7% 11%
2016 14% 11% **11%**
But the net income margin does, due in large part to a higher tax rate and the relative increase in non-controlling interest income.
NIMar Mar Jun Sep Dec Tot
2011 6% -21% 5% -51% -11%
2012 -2% -1% 6% 2% 1%
2013 3% 3% 12% 7% 6%
2014 13% 13% 17% 9% 13%
2015 17% 21% _**17%**_ 9% 16%
2016 23% 18% _**15%**_
The balance sheet has improved. This from the earnings release:
At quarter end, cash and cash equivalents was $665.3 million, an increase of $154.6 million, or 30.3 percent over the same period last year. Nice cash generation.
Total inventory, including inventory in transit, was $523.3 million, a $23.1 million increase, or 4.6 percent over September 30, 2015, and a decrease of $96.9 million or 15.6 percent when compared to December 31, 2015. Inventory controls have been better.
Working capital was $1.23 billion versus $995 million on September 30, 2015. Working capital greatly improved too.
If we look at the expectations for the next quarter, revenues will be flat. As a larger percentage of business is done internationally, the tax rates and income attributable to non-controlling parties will increase. These elements will put pressure on earnings left to Skechers shareholders.
Looking at the opening price, the market is probably repricing itself to reflect the lack of growth. Combine this with higher taxes and non-controlling income, international growth needs to be relatively better than domestic to move the needle.
Before earnings, I thought the price was inexpensive. After earnings, despite the lower than expected number, the price is even more of a value. Perhaps we need to ask ourselves how long it will take for international business to lift earnings to growth.
Last summer after they blew away the numbers, Greenberg mentioned that he sees the company doubling in 5 years. It looked like sandbagging with percentage growth in the mid 30s at the time. Now it looks like it could be a challenge.
Nevertheless, the stock is really inexpensive, and I intend to buy some more (glad I didn’t or couldn’t buy the leaps I looked at yesterday).
The moment growth picks back up (if and when it does), there should be significant price appreciation. Naturally, after lower than expected earnings and a flat sales outlook together with other elements making it harder to generate earnings, I am not as enthusiastic in the short term. However, Mr. Buffet told us that you pay a very high price in the stock market for a cheery consensus. The flip-side to this is that you pay a very low price in the stock market for a gloomy consensus. As long as there is growth in the not too distant future, the consensus is probably too gloomy.
DJ
17 Likes