Why does Skechers have such a decline in sales and profit in the fourth quarter.
I would think in wholesale they would ship out a lot of product in Q3
for the Christmas season and get paid for it sometime during Q4.
At the same time their retail shops have been expanding in number rapidly
yet they don’t lift Q4 either.
Are tennis shoes not a hot gift item?
JT
I would think in wholesale they would ship out a lot of product in Q3
for the Christmas season and get paid for it sometime during Q4.
Hello JT,
When SKX ships to wholesale, they book the revenue at that point in time, at the wholesale price. They do this by debiting accounts receivable and crediting sales. When they get paid, the accounting entry is to debit cash and credit accounts receivable. In your example, the Q3 revenue is much greater than Q4 because of the timing of the booking of the sales.
Not much attention has been paid to the reasons for the prospective decline in Q4 2016 vs. 2015. SKX is not expecting the domestic wholesale market to reverse its decline this year. Everyone is concerned about this malaise which is largely beyond their control.
There is another reason for softness in Q4 which is for certain a 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 up to retail who sell to customers. This is SKX’ lowest margin business as the distributor and retailer are taking a cut of the sales margin. The result of this change is that the So. Korean distributor will buy the absolute minimum
product in Q4 as they are “going out of business” and want to deplete their existing inventory. While the jv will buy inventory for its stores
these purchases will not be booked as revenue by SKX until they are sold in the stores as retail. Thus, there is a one-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 over time 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.
Best regards,
Mike
Mucho Gracias Mike!
I tend to forget that not everyone does their accounting on a pure cash basis like most of Us do.
JT
Thanks Mike, What a great explanation!
Saul
Mucho Gracias Mike!
“Gracias” is feminine and plural and the adjective must match both gender and number so it’s “Muchas Gracias.” 
http://www.businessspanish.com/leccion/gender.htm
Denny Schlesinger
VF Corp, which owns Vans, Timberland, and North Face (among other brands) echoed today the sluggishness in consumer retail, esp. clothing/shoes:
“We continue to operate in an uneven, global economic environment including especially sluggish retail conditions in the Americas, our largest market,” said CEO Eric Wiseman.
VFC now sees EPS at $3.13 this year, down from a previous projection of $3.20.
“Like other retailers, VF is grappling with the trend of declining traffic to malls. Visits fell 50% between 2010 and 2013, according to real estate research firm Cushman & Wakefield. And, 15% of malls are expected to disappear in the next decade, according to a study by Green Street Advisors.”
http://finance.yahoo.com/news/company-makes-vans-cut-guidanc…
Mue bueno Captain!
What can you expect from someone who’s lucky to correctly order beers or a cheap yet good haircut when visiting Los Algadonas or Zihuatanejo.
LGIH
On another note Ivy Zelman the private housing analyst was on CNBC a bit ago and is still bullish about trends for the next few years. Here’s a Barrons interview from last June;
Until 2006, Ivy Zelman was an obscure, if highly ranked, Credit Suisse analyst who followed the home builders. Then, as housing markets partied that year, Zelman downgraded the sector. That garnered her ridicule from the housing industry, the nickname Poison Ivy, and a backlash from her bosses. A few months later, Zelman left Credit Suisse to form her own firm with her husband, David. Then the housing market collapsed, and Zelman emerged as one of the few who had been right…
…Zelman: Four years in. The first increase was in 2012. There are multiple years ahead. We are still 35% below a normalized level of starts, and that’s for a single-family. Every cycle is different. This cycle will be elongated, and the slope of the recovery is flatter than what we thought the trajectory would look like when we called the bottom in 2012. Builders have been slower to see the growth. There’s a shortage of shelter. We’re pretty indifferent whether shelter should be owned or rented. We’re just saying there isn’t enough. The U.S. is at a 30-year low of inventory available for sale. We are predicting double-digit housing-starts growth this year, next year, and in 2018.
Large builders are only now shifting to more-affordable production. The unemployment rate for millennials was north of 14% at the peak and is now under 7%…
http://www.barrons.com/articles/ivy-zelman-housing-hazards-a…
JT
The change from distrubitor to joint venture was not just South Korea
From the earnings call:
“To further grow our business in several markets, we have transitioned several international distributors to our subsidiary or joint venture model, including Israel in the third quarter to a joint venture and we are in the final stages of South Korea moving to a joint venture as well”
http://seekingalpha.com/article/4013718-skechers-usas-skx-q3…
And I think we can expect this to continue as they grow the business, they want to grow margins, and this is a way to do that. So the conversions now may not be the last conversions.
To get an accurate idea of how the business is performing, it is important to go beyond surface numbers.
Flygal long Skx
And this is how mainstream they are targeting Korea.
I see these brand ambassadors all over Asia…
http://www.hallyustage.com/news/newly-appointed-skechers-bra…
May seem weird and may not mean much to Westerners but K-Pop is the movement of the moment in Korea and Asia.
Ant
Just as an FYI, here’s a Foolish take on Skechers’ latest quarter from contributor Rick Munarriz:
Skechers (NYSE:SKX) may want to check its laces, because the footwear giant keeps tripping itself up. Skechers stock plummeted 16.9% last week – hitting a new 52-week low in the process – after posting disappointing quarterly results.
Revenue of $942.4 million for Skechers’ third quarter was just 10% ahead of the prior year, and it also fell short of its earlier guidance range of $950 million to $975 million. A decline in its domestic wholesale business ate into growth at the retail level, something that also happened during the second quarter. Earnings of $0.42 a share fell short of Wall Street’s profit target, something that has happened in four of the past five quarters.
As bad as the third quarter may have been, guidance was somehow even worse. Skechers is now forecasting just $710 million to $735 million in net sales for the current quarter, and at the midpoint it would represent less than the $726.6 million that it served up during last year’s holiday quarter. You have to go all the way back to the second quarter of 2012 to find the last time that Skechers didn’t manage to post year-over-year growth on the top line.
Read the whole thing at http://www.fool.com/investing/general/2016/10/24/can-skecher…
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
It seems to me that the bottom may not yet be in. A great brand can out perform the market in general. Such as Nike or UA because the great brand is the most preferred product. The rest of the market comes and goes with general economic demand.
The fact that Skechers is actually guiding downward…oh ouch. We are in a slow growth economy at the moment. Less than 2%. For the United States this is unprecedented for any sustained period, but is what it is.
What happens if we go into recession? With growth at about 1.2%, doesn’t take much to nudge us into recession.
At present I think the odds of a slight downturn vs. a material upturn is much greater. That is what the Federal Reserve is saying as well as they resist raising rates any further despite long pent up desire to do so. They just cannot do so as the economy continues to under perform expectations.
This said, at some point, it becomes a buy again. Maybe this is the time. But I am not liking the pricing and demand power of SKX vs. the sort of thing one sees with Nike or UA or even Adidas. The share price skyrocketed because many thought Skechers might be the next great brand with similar characteristics to those companies. That has not panned out.
I once told a girlfriend that you know who your friends are during bad times, not good times. You also know who the best companies are as well. How they preform through adversity. 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.
That will create enduring sustainable advantages that can be market beating long-term. But you cannot beat the market if all you do is have your sales increase or decrease pursuant to the market.
Tinker
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
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.
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
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
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
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
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
“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.