SKX

I must say that I am astounded by some of the negative posts about Skechers, that almost sound as if the writers are hot the stock. Otherwise they are saying things that seem to fly in the face of reason. In their comparisons they seem to be ignoring that even with its slowdown, Skechers is growing almost twice as fast as Nike, and that UA has dropped about 40% in the last year (not so different than Skechers) and is selling at over 55 times earnings. And they are also ignoring (or not aware of) possible reasons for the low fourth quarter guidance (which Mike spelled out for us so clearly). Hard for them to have missed it actually as it received 27 recs just up-page. Here it is again slightly paraphrased:

Not much attention has been paid to the reasons for the prospective decline in Q4.

SKX is not expecting the domestic wholesale market to reverse its decline this year. Everyone is concerned about this malaise, which is largely beyond Skechers’ control.

There is another reason for softness in Q4, which is a completely non-recurring event. They have changed from a distributor model in South Korea to a joint venture model.

This is bullish long term, but will hit revenues and earnings in Q4 and some in Q1 of next year. The distributor buys the product wholesale and sells to retail stores who sell to customers. This is SKX’s lowest margin business as the distributor and retailer are taking a cut of the sales margin. The JV will also acquire inventory for its stores, but as it’s a JV these purchases will not be booked as revenue by SKX until they are sold in the stores at retail.

During Q4 the Korean distributor will buy the absolute minimum new product as they are “going out of business” and want to deplete their existing inventory, and while the JV’s inventory will not be booked as revenue until they are sold.

Thus, there is a one or two quarter lag before SKX will derive this revenue. However, the revenue will be recurring and most likely growing in perpetuity.

The effect of this change is that sales in South Korea will deliver more than twice the dollar amount per pair of shoes and more than twice the margin per pair of shoes. This is not small potatoes and will be a factor in next year’s growth and on down the trail.

And Skechers is also in the process of changing other smaller markets from a distributor model to a joint venture model, which have, and will, cause results in the same direction, but perhaps of smaller amplitude.

Now obviously, the required method of bookkeeping reduces recognized revenue for the last quarter and the next two quarters, but doesn’t have any effect on actual sales.

In addition they ignore the recent bankruptcy of Sports Authority (I believe it was) and some smaller shoe chains, and the subsequent nationwide clearance sales of their merchandise which affected Skechers’ sales as well this last quarter.

Let me assure you all that I too was disappointed, and that I have absolutely no assurance that Skechers will pull out of this, and start up again, but I am astounded by some of the passionate SKX bashing, and ignoring of positive facts or possibilities.

Just saying

Saul

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