SKX

PaulWBryant · October 25, 2016, 10:51am

Tinker,

Let’s take a step back and realize that SKX sales are up 12% in 2016 (even if they just meet the lowish expectation for Q4). And the stock is down more than 50% in the last ~12 months.

Your beloved UA is down about 40% in the last ~12 months. It STILL has a PE of about 57. Don’t you think it is expected to grow a lot faster than SKX (PE of about 11)?

SKX is growing faster than NKE, yet NKE has a PE of 23.

You seem overly concerned about Q4 guidance. It’s a little low, but it’s also probably conservative. It’s also only one quarter – their cyclical down quarter. I don’t even think they’re guiding down, right? Just flat. At any rate, I think you’re overreacting.

Then you’re worried about a recession? What, are people going to stop wearing shoes? This really doesn’t seem to have anything to do with SKX.

This said, at some point, it becomes a buy again.

What!? Why? If you’re really concerned SKX might permanently lose pricing power or that the brand might be “just a choice in the discount aisle,” then clearly you should not own the stock.

SKX outpaced UA in growth in 2014 and 2015. It’s cooling off a bit now, but there’s no reason it can’t ramp up again, and I think the model they are rolling out allows for this future growth. SKX is simply a less diversified and more volatile company than NKE or UA, and with the stock down from 50+ to 20-, it’s absolutely a great opportunity to buy…if, of course, you actually like the company. Is it the bottom? Who knows. But it’s just as silly to say it’s not.

Bear

jdc115 · October 25, 2016, 11:10am

You seem overly concerned about Q4 guidance. It’s a little low, but it’s also probably conservative.

Hard to tell unless they have a history of giving conservative outlooks. But when they missed their own projection, maybe the worry is that they will miss the next one which is already low.

XMFCochrane · October 25, 2016, 11:58am

But when they missed their own projection, maybe the worry is that they will miss the next one…

This is my worry, JDC. I bought a little more last quarter basing numbers off of their guidance. Well, they missed and we know what happened. this is a tough one for me.

Also, just an interesting side note:

In the past two years, UA is almost exactly flat. SKX is up about 10%. NKE is up about 10%. WWW is down about 25%. And all of these, with the exception of WWW because it was down so much the year before, are down a good bit the past 12 months. I guess, my point is is that SKX isn’t exactly underperforming the shoe market. And, of all these, SKX has by far the most attractive PE.

This is a hard one for me. I am holding but doubt I will add more before next quarter. Still one of my two largest positions.

Matt
Long SKX
MasterCard (MA), Nestle (NSRGY), PayPal (PYPL), and Verizon (VZ) Ticker Guide
See all my holdings at http://my.fool.com/profile/CMFCochrane/info.aspx

PaulWBryant · October 25, 2016, 1:15pm

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?

ColdDay,

Great point that I think needs to be emphasized. Pretty much ALL of the stocks we discuss on this board are extremely volatile. (I think NFLX is too, and if the market ever realizes that it’s not going to be able to live up to growth expectations, I think NFLX shareholders are in for an awakening ruder than we’ve experienced in SKX.) PN, INFN, RUBI, LGIH, SKX (now) and many other stocks discussed on this board have flirted with single-digit PE’s. Many times because of fear. Others because of slowing (or negative – like INFN) growth. But the point is, even a “cheap” stock can get cheaper. To go from a PE of 20 to 10 is to lose 50% of your $$. Imagine if NFLX ever slows down…dropping from a PE to 300 to anywhere near 10 would mean pretty catastrophic loss.

However, a volatile stock is a good thing. It gives you a chance to buy cheaper. A volatile business is another thing. That’s why I usually sell companies whose businesses I can’t understand. INFN’s sales or RUBI’s…I don’t feel I can predict what demand will be at all. But SKX, so far, appears to have typical growing pains. They’re not having a terrible time moving shoes. They don’t have a big buyer who is not buying this quarter or this year. They’re just dealing with slower growth. They’re still growing. They’re expanding worldwide. You just have to be patient with them. As long as you believe in the product and the TAM, all is well with the business.

So with that distinction between business volatility and stock (valuation) volatility, I will reiterate: “Saul stocks” are volatile. But that’s why I like 'em. But that does mean keeping a keen eye on the companies. Winning means understanding the businesses better than the market – no easy task.

Bear

CandyGram4Mongo · October 25, 2016, 2:00pm

Matt - like your comparisons to other shoe/clothing/apparel companies.

Almost inadvertently, I am now long all three of these. First SKX, then NKE, now today I picked up some UA.

I didn’t mean to be so “in-diversified” I just ended up that way.

I am still way heavy SKX though, and am going to hold on.

Brian

SaulR80683 · October 25, 2016, 2:03pm

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

PaulWBryant · October 25, 2016, 3:00pm

Oh and regarding valuation, note that even with projected revenue growth in decreasing single digit amounts for the next 10 years, this article still claims that SKX is worth $27/share.

http://seekingalpha.com/article/4014178-skechers-bull-case

creelon · October 25, 2016, 3:25pm

Hello Tinker,

Skechers will deserve a market premium when it can prove that its brand is more than just a choice in the discount aisle and a sought after brand that differentiates itself from the also rans.

Sketchers is clearly already more than just a choice in the discount aisle. It has attained the #2 position in US footwear, just ahead of Adidas and far behind NIKE. It has certainly not attained the branding power of NIKE or UA. It seems to me that sketchers is willing to cede the bulk of the performance, premium-priced market to NIKE and is attempting to build a brand based on comfort and value. For children and older folks there is a great appeal in comfort and style at a price less than half of the performance shoe that is not required. It seems to me that as they build the brand, they will become more resistant to recessions due to their lower pricing points.

As to recessions, the US footwear industry has been in one for nearly a year as shown by discounting of major brands due to the shrinkage of shelf space mostly due to bankruptcy of larger retailers. SKX has been impacted by this along with the rest of the industry. How long this will go on is not yet known, but it certainly won’t last forever.

Sketchers is not yet a great company. However, it is trying to be and making some progress on that. As they put the international expansion in place and the industry domestically rights itself, we will see if their progress continues. If it does, then there is a lot of upside. If not, there doesn’t seem to be a lot of downside.

Best regards,

Mike

gettinsumcoffeee · October 25, 2016, 5:56pm

“SKX bashing”

I think I did a little of that myself Saul… said I was done with this stock.

But then I didn’t sell my shares. Because I knew that if I did sell my shares on that day, they would go up right after I sold

And of course that is what happened. Still not sure about what I will do for the longer term.

Phoolio18 · October 25, 2016, 6:03pm

I’m waiting this out for a longer term. While I won’t call a bottom, I believe the chances are quite good their valuation won’t dip too terribly low as their business is still healthy and the PE seems quite low as is.

If it does dip lower, I would view it as an opportunity.

While we don’t talk much around here about options, I intend to strangle at least a portion of my shares expecting SKX to bounce around without increasing too much. Of course there are risks with the stock moving too quickly in one direction.

At any rate, I intend to hold as I see potential future value here.

Take care,
A.J.

XMFBreakerTinker · October 25, 2016, 6:35pm

There is nothing personal here, I am just expressing my opinion based upon a sizable amount of experience. Low valuation stocks are low valuation for a reason, and stocks that have to lower guidance, particularly after specifying the in prior quarter that their forward guidance may be “conservative” are having worse business problems than they had previously suspected they would have.

It is called reading between the lines. All these things have a deeper meaning. So don’t shoot the messenger. In the end what I wanted to get down to is the question of WHY the valuation is low, and what real world information is out there (not hoped for, wished for, imagined, or speculated might exist) to show that the market may be wrong. Because, one will never outsmart the market on a straight forward issue like PE and accounting issues. If we can see it, the pros at Wall Street and in mutual funds can see those things.

This said, at some point we may be on the verge of a FUD event. And I love FUD events. FUD events have limited downside and large upside. And they often exist because the market is unable to be nuanced, even about known information that is more difficult to put into relevant context, and is also 6 months or more into the future. But such circumstances only truly exist if you have enough information to know that you are not fooling yourself and basically hoping or wishing for something to happen. Hope and wish or speculate will destroy your investment thesis nearly every time. You simple have to “know” from real world information.

Reviewing the discussion here, the FUD event I see is that the market is discounting the brand value of Skechers, which I agree, is not going anywhere. The market is also not anticipating the fact that the lost shelves from bankruptcies will not be filled in the future when inventories normalize again. These are events that are nearly certain to exist, and they will exist more than 6 months out.

I’m not sold on this FUD event yet, but I think it is a legitimate one for consideration given where SKX has fallen to on a relative valuation basis.

Tinker

SaulR80683 · October 25, 2016, 6:50pm

Let me clarify a few points:

On the domestic shoe market – It’s been weak for everyone, not just for Skechers. It’s not Skechers fault and there’s not much it can do about it until it turns around. Will it be weak forever? You can answer that. I doubt it!
On the Sports Authority bankruptcy – It resulted in them flooding the market selling off all their stock at fire sale prices. Naturally that cut into Skechers’ sales. In the conference call, Skechers intimated that they believed that that was now finished.
On the change from distributor to joint venture in Korea – Skechers recognized revenue when it sells to a distributor. It recognizes revenue when a joint venture sells the shoes, much like a company-owned retail store. This means that for one to two quarters they’ll be recognizing hardly ANY income from Korea, which is actually a thriving market for Skechers, because

A. The distributor is no longer a customer. When it sells off its inventory it doesn’t count as it was already recognized as revenue when the distributor bought it from Skechers.
B. The joint venture will be getting the shoes the distributor used to get but doesn’t recognize the revenue. Why? Because as a joint venture it doesn’t recognize revenue until it sells the shoes retail!

The reduction of Korean sales from thriving to almost zero is clearly a one-time occurrence, and clearly is enough to drop revenue estimates for the quarter.

Saul

captainccs · October 25, 2016, 7:23pm

The market is also not anticipating the fact that the lost shelves from bankruptcies will not be filled in the future when inventories normalize again.

Tinker

Why did the bankruptcies happen in the first place? The people who shopped in the malls didn’t die. They changed their shopping habits. They are either shopping elsewhere or buying different stuff.

I used to resell Apple computers in what we used to call a computer boutique. Back then buyers needed a lot of handholding. As buyers became more savvy they no longer wanted handholding but better prices which computer chains could deliver.

The problem I’m seeing with this discussion is that it’s too focused on the shoe company and not enough on wider retail market. The Buckle (BKE) is a terrific retailer and despite lower SSS its still profitable with a P/E of 8 yet it’s down over 60% from its 2015 high. Why? What changed in retail?

One secret everyone knows or should know is that The Fed is ruining pension plans and savers with ridiculously low interest rates designed to save banks on the back of anyone handy with a buck in his pocket. People are worried about the weird election coming up in less than a month. The market does not like uncertainty. As I watch my portfolio I can’t make heads or tails of this crazy market. It’s suffering daily whiplash.

This is the current retail market with SKX superimposed:

AMZN: online
BKE: consumer discretionary
ROST: off-price retail

http://softwaretimes.com/pics/amzn-bke-skx-rost.gif

I don’t claim to be able to calls bottoms but it’s not here yet.

Denny Schlesinger

Phoolio18 · October 25, 2016, 7:38pm

I don’t claim to be able to calls bottoms but it’s not here yet.

I should qualify my earlier statement when I said I don’t think SKX will go much lower. Of course, in a market downdraft, anything will go lower. My assumption was the market itself keeps bumping around to positive. If it goes completely the other direction (down), of course, all else will go down in the storm.

A.J.

XMFBreakerTinker · October 26, 2016, 2:23am

http://www.fool.com/investing/2016/10/25/you-couldve-seen-sk…

May be a bit of Monday morning quarterback but is an honest assessment of SKX’s declining business, at least growth wise.

My assessment comes from a holistic opinion that I think allows me to read between the lines. This assessment is strictly from the numbers.

Possibly it is the change in business firm, from wholesale in Korea to joint venture. However, my retort would be that SKX’s international sales are still growing nicely. It is the domestic
Business that has stopped growing and even declined.

Yes, UA’s stock has fallen, but it is still growing at
20%+ per year domestically. SKX is performing at a much lower level than this. This the valuation discrepancy.

There is real reason for the valuation discrepancy between the companies.

In the end I don’t buy future speculative business issues as a FUD event. Not when it severely underperformed its peers. I’m sure others will differ on this.

For a FUD event to be real, the underlying reason for the fear uncertainty and doubt must derive from demonstrably ascertainavle facts and circumstances, and not from speculation or hypothesis. If Inhave tonoptimisticallybprojec, then it does not qualify as a FUD event for my purposes.

Tinker

EdGrey · October 26, 2016, 9:06am

Another Fool article on Skechers:

http://www.fool.com/investing/2016/10/25/you-couldve-seen-sk…

“You Could’ve Seen Skechers’ Big Miss Coming a Mile Away”

EdGrey · October 26, 2016, 9:07am

Sorry for the redundancy. I didn’t refresh my browser from earlier, and didn’t see this article already getting cited. I can’t delete or edit my previous post.

anindakumars · October 26, 2016, 11:29am

I have little respect for articles like the one you posted Tinker. It claims the one could have seen this big miss coming from miles away.

Okay, great! So why is the author posting his thoughts now. I mean if he could see this from miles away, perhaps his article should have come months ago. Otherwise it sounds like a Hindsight is 20/20 case. The article is simply cherry picking facts to suit a per-determined narrative that the author wants to sell.

On contrary, Tinker, your thoughts were refreshing to read.

Ani.

TMFMurph · October 26, 2016, 11:41am

1. On the domestic shoe market – It’s been weak for everyone, not just for Skechers…

Hi Saul!

While admittedly a relative newcomer to the foot ware space, Under Armour is bucking the trend you cite above.

From the earnings call transcript:

…Our footwear business went from $239 million in 2012 to approaching $1 billion in revenue this year…

http://seekingalpha.com/article/4014683-armour-ua-q3-2016-re…