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.
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
12 Likes
“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.
1 Like
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.
1 Like
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
15 Likes
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
16 Likes
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
5 Likes
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.
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
3 Likes
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”
1 Like
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.
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.
11 Likes
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…
Other articles:
April, 2016:
…Under Armour’s (UA) footwear business registered an impressive 64.2% growth (VUG) rate in 1Q16 versus 1Q15. Footwear sales came in at $264 million in the quarter, representing 25.2% of the company’s total revenue. In comparison, footwear rival Skechers (SKX), which also released first quarter results on April 21, posted record quarterly sales of almost $979 million, up 27.4% year-over-year…
http://finance.yahoo.com/news/why-under-armour-footwear-sale…
October, 2016:
…Meanwhile, Under Armour said its profit rose 28% in the third quarter as it continued expanded its market share and benefited from sharply higher footwear sales.
During the back-to-school period, Under Armour ramped up its sneaker business and nearly doubled its share of the footwear market, amassing 8.2% of the market for the 13 weeks ended Oct. 1, up from 4.6% a year ago…
http://www.foxbusiness.com/markets/2016/10/25/under-armour-s…
Now this doesn’t invalidate your general thesis about the foot ware market’s status…just the part about it being “weak for everyone”.
Cheers!
Murph
Home Fool
(no position in SKX)
4 Likes
Murph,
I think you’re onto something with the “small base” remark about UA. The ramp-up potential due to their brand power should not be underestimated. We’ll see in a couple years if their footwear sales can continue to grow at that pace. It’s kind of like SKX growing their revenue 30% in 2014 and 2015. That kind of growth eventually sets up some difficult comps.
Bear
Murph,
I guess technically your phrase was “relative newcomer,” but you know what I mean.
Bear
No worries Bear!
Small base/relative newcomer…same basic thought.
Cheers!
Murph
Home Fool
While admittedly a relative newcomer to the foot ware space, Under Armour is bucking the trend you cite above.
Hi Murph, I don’t follow Under Armor but as I understand it, shoes are a relatively new line for UA and their sales are thus coming off a small base, so their percent of growth is higher. I doubt that they are competing at all in Skechers’ price range.
If I’m wrong about any of that, please correct me.
Saul
Hi Saul!
Per my original post, UA is a “relative newcomer” to the footwear space (2012 according to one of the quotes in the same post). OTOH, their footwear sales now exceed $1B, so they are significant.
Exact nature of/how direct UA competes with SKX is unknown to me.
The main purpose of my post was to point out that not “everyone” in the footwear space is declining.
“Avoid all generalizations…including this one” (and various quotes along these lines)…attributed to Dumas, Emerson, Twain, et al. 
Cheers!
Murph
Home Fool
2 Likes
Murph,
I think that noone would disagree that Underarmor is growing much faster than Nike and Skechers, the issue is that investing isn’t about only identifying fundamental trends, it’s also analyzing how much the market is demanding for those trends, then making an estimate as to whether that’s a fair price.
Skechers is priced at 10-12x cash flow, while Underarmor is still at 40x or so cash flow even after a 20% drop in the past few days. I understand you probably know this, just wanted to point out that only discussing fundamental merits without looking at price is a bit disingenious
That said, I think there’s probably a lot of anguish around these parts about Skechers because the stock has changed profiles, from a fast grower to more of a value play - psychologically, investors get a lot of discomfort if they think they are buying one category while they really end up with the other.
Holding a growth story feels good - everything is firing on all cylinders, you only get good news, and the price is at a premium. You make money because reality is even BETTER than the market prices it to be. Holding a value/turnaround story involves a lot of hand wringing, and you make money because reality isn’t as BAD as the market prices it to be - much more depressing
However, as I’ve disclosed earlier, I’m holding and monitoring for now, at least through 2nd quarter of 2017
2 Likes
Hello Tinker,
In the past you have referenced NIKE and UA to compare SKX and I limited my reply to reference NIKE. In this post you simply referenced UA. I am sure that you realize this, but not sure that all the readers here realize this:
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
I would posit that the real reason for the disparity between the companies is that UA is predominantly an apparel company and SKX is predominantly a footwear company.
I would submit that this difference is “a demonstrably ascertainable fact and circumstance”. Maybe there really is a FUD event.
Best regards,
Mike
2 Likes