Year End #8: SKX, My fourth biggest position

Investment Analysis Clubs Saul’s Investing Discussions
#5

In honesty, teenagers now a days would be embarrasses to wear SKX…it’s all about the “name brand” …which is currently Nke and UA…

I don’t know about that, when I was in high school (1999-2003), SKX were definitely popular in my affluent east coast college town. They were also popular in the middle school crowds according to my younger brother.

You’re definitely right about Nke and UA though being “name brand." Every jock/athlete in the school wore either nike or under armour gear. But Skechers beat them out in the hipster/trendy/skater/casual non athletic type crowds, and were definitely considered “cool."

Sweetadeline

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#6

I am staying away and continue to hold my long term investments in UA and Nke…

Hi Darrell,
Nike has a capitalization of $80 billion and Skechers has less than $3 billion. Skechers could triple their size in their little niche tomorrow and it wouldn’t be a blip on Nike’s radar screen. And SKX actually could triple in 2-3 years, but I can’t see Nike even doubling to $160 billion in even five years! Smaller company. Doesn’t mean it will happen, but it could.
Saul

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#7

Darrell,

You make some pertinent points. Fashion trends can be fickle and without a diverse revenue stream the risks are higher. COH with its dependence on so called ‘affordable luxury’ handbags is a good case in point.

In honesty, teenagers now a days would be embarrasses to wear SKX…it’s all about the “name brand” …which is currently Nke and UA…

I was intrigued by the point above. There’s a SKX showroom in the mall next door to our house in Australia. Whenever I have passed by their store, I have only seen teens and younger folks jostling and bustling in their store. Also, post Christmas, their store looked pretty busy because of all the promotions they have been running. In contrast, we also have a Nike showroom in the mall and whenever I have passed by it looks empty! That could have something to do with zero discounting at the Nike branded storefront.

The opposite, however, is true at the largest outlet mall. The Nike store has way too many people inside and the SKX store probably half as many and the Nike store is about 3x the size of the SKX store in the outlet mall.

All that said, watching people’s footwear in the gym it seems 90% wear Nike.

Anirban

(No position in NKE or SKX)

#8

If Nike grows 10-12 percent a year, I’ll get my double in 6-7 years plus dividends…I can live with those returns…

Maybe Nike buys out SKX this year for 5 billion…lol

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#9

Skechers Won the Boston Marathon. But Why Was It Even in the Race?

http://www.businessweek.com/articles/2014-04-21/skechers-won…

Teens arn’t the only market. And what’s cool about being like everybody else.
I own 3 pair, leisure,go walk and sandals and they are my go to shoes all the time. As was mentioned, big toe box.
Nike’s business is theirs to loose and there is room for Skechers to grab some and a little is all they need.

BGM

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#10

I don’t really think these companies are even competing with each other are they? NKE and UA compete for sure. Sketchers is a totally different kind of shoe. I am 41 and I like to run a little and try to convince myself I haven’t “lost it”, and I have some NKE running shoes. But I only need one pair of those, who needs two? I have some black and brown shoes for work. In the summer, I wear flip flops a lot if I am not wearing work or running shoes. But in the fall, winter, and spring, you need some knock around shoes. You may need different ones. In the past I have seen people have loafers, or topsiders, or those adidas “one star” type shoes that are popular. I see tons of Sketchers now. They are just everyday knock around shoes that are nice enough to wear to almost any kind of activity, athletic enough for active things, and which give you a reason not to wear sneakers all the time. I am a surgeon and have two pairs of Sketcher slip ons in the two operating rooms I work in, which I leave at work. They are affordable and multipurpose. I own more pairs of these kind of shoe than I ever would own athletic shoes, and I am very much the type to avoid shopping at nearly any cost!

I think there is a huge market for this stuff, and don’t see how this small company is trying to compete with UA and NKE for high end athletic stuff. I don’t expect a college football team to run out in Sketchers any time soon, but who cares!

Gator

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#11

I don’t really think these companies are even competing with each other are they? NKE and UA compete for sure. Sketchers is a totally different kind of shoe. I am 41 and I like to run a little and try to convince myself I haven’t “lost it”, and I have some NKE running shoes. But I only need one pair of those, who needs two? I have some black and brown shoes for work. In the summer, I wear flip flops a lot if I am not wearing work or running shoes. But in the fall, winter, and spring, you need some knock around shoes. You may need different ones. In the past I have seen people have loafers, or topsiders, or those adidas “one star” type shoes that are popular. I see tons of Sketchers now. They are just everyday knock around shoes that are nice enough to wear to almost any kind of activity, athletic enough for active things, and which give you a reason not to wear sneakers all the time. I am a surgeon and have two pairs of Sketcher slip ons in the two operating rooms I work in, which I leave at work. They are affordable and multipurpose. I own more pairs of these kind of shoe than I ever would own athletic shoes, and I am very much the type to avoid shopping at nearly any cost!

Wow, Gator! What a great personal testimonial. I loved it. If I didn’t have so much SKX I’d buy some more.

Saul

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#12

I agree. I don’t think they are in the same markets. Of course there are overlaps, but if you just look at the range of shoes and colours in a Sketchers store…I doubt UA would go that way. They want to be cool (although I love colourful looking shoes, I’m not a personal fan of sketchers, but am a massive fan of UA gear).

I do think it’s seen more as a kids and women’s brand, rather than for men. I doubt they’ll be able to steal any significant portion of the men’s market from NKE or UA. On the flipside, from what I can see, people love their sketchers and I don’t think there is any significant interest from the big cool companies to bully sketchers out of their niche.

NIKE flagship stores are rubbish. They sell only their most expensive gear there, never at a discount. It’s just advertising their presence. The only person who’d buy stuff from their stores is someone who doesn’t know better or to whom money is of no importance. You buy Nike from other shops.

I’m in UA for the long haul though rather than sketchers, as I’m a fan of the CEO and have used their stuff for 10+ years, and just happy it’s made its way over to the UK.

1 Like
#13

When SKX was one of my only stocks up yesterday, I thought to myself “Could our board be that powerful? No way!” Well I was right. There was a public article in the Wall St Journal. Here it is:

Saul

HEARD ON THE STREET

Skechers Backlog Puts Shares on the Front Foot

Stock May Have Further to Gain, as Past Results Suggest Guidance Is Too Low

Footwear maker Skechers in September said it was comfortable with analysts’ projections for fourth-quarter sales growth of 19%. BLOOMBERG NEWS

Jan. 4, 2015

Skechers USA may be following the cardinal rule of financial guidance: underpromise and over deliver.

The shoe company has been expanding quickly. This has been driven by international expansion, the popularity of its new styles of casual sneakers and its push into performance footwear, endorsed by the likes of Boston Marathon winner Meb Keflezighi. Skechers saw double-digit percentage growth in its domestic and international wholesale businesses in the third quarter of

When it reported those results in September, Skechers said it remained comfortable with analysts’ consensus for sales growth in the fourth quarter of 19%. But it may be being too modest.

Skechers’s reported merchandise backlog appears to be a relatively good indicator of sales growth in the following quarter. During its July results call, Skechers said its backlog had increased in the “mid-high” 20% range from the previous year. The company’s third-quarter sales rose 31%. Similarly, during its April call, Skechers said its backlog had increased more than 35%. It went on to report second-quarter sales growth of 37%.

In September, Skechers said its backlog had risen in the third quarter by more than 50%. Considering the close relationship of backlog and sales growth in prior periods, an expectation of 19% fourth-quarter growth seems low.

Granted, backlog hasn’t always been an exact indicator. During its results call for the last quarter of 2013, Skechers said its backlog had risen 30%, year over year. But first-quarter 2014 results saw sales rise 21%. Still, that nine-percentage-point gap is far narrower than the 31-plus percentage points that separate Skechers’s backlog growth last quarter and analysts’ sales-growth estimates for the current one.

Skechers’ stock trades at 16 times forward earnings, a premium to Foot Locker ’s 14.6 times and a discount to Nike at 24.4 times. But Skechers’s earnings estimates should rise if revenue expectations prove too low. Moreover, the company has net cash of $321 million on its balance sheet, which could potentially be returned to shareholders down the line. For investors, Skechers could be a good fit.

http://www.wsj.com/articles/skechers-backlog-puts-shares-on-…

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#14

Discussed Sketchers with my 22 year old granddaughter today . She is very much into fashion, and says Sketchers don’t appeal to her college age crowd.They are not “cool”.

I know, purely anecdotal.

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#15

SKX up 5.81% today.

Wish I had gotten on the Sketchers express, it’s too late for me to join the party now.

Congrats to all the people with positions, great day.

Sweetadeline

#16

I see a ton of fashion risk here. The younger demographic is particularly fickle. Think Crox, American Apparel, Pacific Sunwear, Aeropostale, Body Central or many other examples.

What is their competitive advantage? More specifically, what is the brand image of the company? I see the brand as weaker than their larger competitors, and I also see their shoe design as generally less attractive.

The comment about 50% increase in “backlog” seems quite odd. A plan to increase production / inventory is not backlog in the normal sense. 50% growth in the fashion industry is dangerous - it can turn into massive discounting and writedowns very quickly.

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#17

To me Skechers, is less about fashion and more about comfort, fun and being affordable. I started buying the stock when I saw all my kids are wearing Skechers and many of their friends. Often Skechers uses gimmicks like blinking LEDs and the kid love them. And the rate at which they go through sneakers Skechers makes the most sense. My oldest kid is eight and my youngest is 2. So I see Skechers filling a void that is not about being cool but playing to families or people who are thinking with a strict budget in mind. I live in Westchester NY and the cost of living is very high here.

Keith

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#18

To me Skechers, is less about fashion and more about comfort, fun and being affordable. I started buying the stock when I saw all my kids are wearing Skechers and many of their friends.

Hi Keith, Interesting that it was your kids. For me it was my wife. She has some problems with one of her feet and wears Skechers for comfort. She doesn’t ever even look at any other brands any more. To me that’s a whole different potential ballgame than Nike, where you might just have one or two pairs of sports shoes.

Saul

#19

Kids these days playing middle school, high school, AAU basketball have at least a half dozen pairs of basketball shoes which are named after different star NBA players and go for $100-150 a pair.

I remember playing against inner city kids in dirt poor neighborhoods who must have had $500 worth of nike gear in shoes alone…it’s all about having the new Jordans or Hardaways! Wearing different shoes for each game to match whatever color wrist bands or high socks they were wearing, wearing different shoes for your home jersey, your away jersey, all the new variations of jerseys the coaches give you.

I must have had 10 expensive pairs myself during my playing days (middle, high school) as well as all my old friends.

Just my thoughts.

Sweetadeline

#20

I keep going back and forth on this stock in my mind. Mid 2014, I did open a position, which at this point is slightly positive but basically breakeven. I have traded some options around it with good results, but I’m hesitant to increase the stock position at the moment.

The main reason I like it is that the PE is quite good for the growth we are seeing.

It is also a “boring” stock by wall st standards. To me, it seems like the main market is young kids and people who just want good enough shoes that sell at a decent price. Not bad, but not very interesting of a story. I mean, who cares about mid priced shoes that sell to average people but don’t particularly dominate a niche in the market anywhere?
This is both good and bad. One one hand, the growth is attractively priced because it’s underfollowed. On the other hand it’s not interesting enough for the big money to stay in it if earnings slow, and I could also see it dropping fast if that happened.

It’s also nearly doubled each year since 2012. This is going with the earnings, but lots of the market moving money may be quick to take their gains off if the market starts turning down, which could make it less attractive.

I don’t personally like the product and wouldn’t buy them. The style is kinda cheesey and kiddish in my opinion (no offense to anyone), and the fitness line looks to just be trying to jump in on the functional fitness and crossfit markets… that said, if half of planet fitness’ member bought them because they are better priced than inov-8, NKE, UA, or the reebok cf stuff; that’s good for SKX even if they never go to the gym.

That said, there is definitely a market for them, and me not liking the product doesn’t mean the stock is bad (prime example GMCR).

Personally I think the stock performance will lag the earnings performance because of perceptions of fickle brand loyalty in retail, but I do think there are still gains to be had. Definitely one to keep an eye on though. If growth starts to slow I think we will see a run for the exits, and for that reason I’m not taking a huge position here at this price, but I am still long and may add if growth increases.

Mike

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#21

Here’s an except from a Zacks trading newsletter today.

Buy xxx more shares of Skechers for approx. $xxxx (Now …… 9.5% allocation). Buy for $xx or less. Analysts are tripping over themselves with praise for Skechers this morning. Estimates are coming up nicely for this year. And WAY higher for next year. The key piece of evidence for analysts seems to be the 60% increase in backlog orders. I have also seen price targets raised up to a range of $83 to $102….yes, $102. It makes sense when you realize next year’s earnings are expected to around $5.

Yes, it’s hard adding to a stock that is already up 10% in just two days. This is a case of riding the momentum (buy high, sell higher). Especially as SKX has picked up a fairly large short position over the past year. I think these guys will be covering their shorts bit by bit over the next week…

Or simply, the way to look at this trade is to say SKX is trading for a LOT less than fair value. So it will be nice owning more shares as it makes its way towards its proper destination….

http://www.zacks.com/rta/?adid=TOP_ONLINE_NAV

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#22

If anybody hasn’t at least skimmed the Conference Call transcript, you should. Talking about euphoric! These guys have a business that is booming at a scale you’ll seldom see in an investing career. Building out stores, growing revenues, huge growth in earnings per share, huge backlog, enormous same store comps, expanding internationally very successfully, ability to raise prices, and a huge market in front of them. I don’t know how long they can keep growing so fast, but they are certainly there now and for the foreseeable future.

Saul

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#23

Wow…impressive…

I may have to admit I was wrong on this one…future growth and earnings look promising…

I was planning to add to my OTEX position, but may take a starter position in SKX…

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#24

Reporting from Switzerland, SKX are in all the stores here and more important I see them being worn by lots of people, I always stop them and comment on their shoes, and the Swiss love them as I do, I always like to point out how wearing them is like having little pillows on your feet, the funny thing is that the price here is the about the same as the states, but the Aasics I buy in the states at sports authority are triple the price here. Go figure!

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