Skechers USA Inc.
/ (SKX-NYSE) /$21.41
Note: More details to come; changes are highlighted. Except where highlighted, no other sections of this report have been updated.
Reason for Report: Flash Update: Skechers Misses, Reverts to Earnings
Note: April 24, 2013; Flash Update: Appointment of New Auditors and 1Q13 Preliminary Results Announcement
Prev. Ed.: April 3; 2013; 4Q12 Earnings Update.
Flash News Update [Note: earnings update in progress; final report to follow]
Skechers Misses, Reverts to Earnings – May 15, 2013
Skechers USA, Inc. posted 1Q13 earnings of $0.13 per share compared with a loss of $0.07 delivered in the prior-year quarter on the back of growth witnessed across domestic wholesale, international, company-operated retail businesses and e-Commerce operations.
However, the bottom-line results missed the Zacks’ expectations of $0.18 per share. Management stated that the quarterly earnings were hurt by $0.08 per share due to foreign currency translation loss of $3 million and a credit of $2.5 million to an account that bought a major part of excess toning inventory way back in 2011.
Let’s Unveil the Picture
Skechers stated that total net sales for the quarter surged 28.6% to $451.6 million from the prior-year quarter, reflecting increased demand of products and healthy performance across all revenue channels. Moreover, total revenue outpaced the Zacks Consensus Estimate of $442 million.
With more emphasis on the new line of products, cost containment efforts, inventory management and global distribution platform, the company anticipates sustaining the growth momentum in 2013. Skechers hinted at significant growth in the third quarter in comparison to the second quarter due to early Easter on Mar 31 this year, and back-to-school deliveries going into the 3Q13.
The domestic wholesale business marked an elevation of 44%, reflecting a jump of 47.1% in pairs shipped coupled with strong performance across men’s, women’s and kids’ divisions. The company’s Performance Division portrayed an exceptional performance attributable to Skechers GOrun, Skechers GOwalk, Skechers GOrun Ride, and Skechers GOrun2. The company has also introduced Daddy's Money for Juniors and SKCH+3 product lines.
Skechers’ international business soared 20.7% on the back of 29.9% growth in international distributor business and an 18.1% rise in international subsidiary and joint venture sales. The tough macroeconomic conditions weighed upon the company’s performance in Spain and Italy. However, Italy is now witnessing a soft recovery. Pan-Asia region (including Japan), Russia, Scandinavia, the Baltics, Turkey, Greece, Philippines, South Korea, Australia/New Zealand, Middle East and Africa all portrayed growth momentum.
Management now expects its international business to remain even in the second quarter due to early Easter and booking trends, but hinted sustained growth from the third quarter.
On a combined basis, retail business sales grew 16.9%, whereas comparable-store sales advanced 12.2%. Domestic retail sales rose 16.2%, while comparable-store sales increased 11.3%. International retail sales jumped 21.6%, whereas comparable-store sales climbed 19.4%.
The company’s licensing division has been another source of revenue, whereby the company licenses its name and images. The company generated $1.8 million in revenue during the quarter from its licensing affiliates, which include apparel, eyewear, backpacks, and socks.
Another highlight of the quarter was a 24% rise in sales from the company’s e-Commerce division. Though the company uses it as a marketing tool, the division remains successful in driving incremental sales during the quarter.
The quarter exhibited a major improvement in gross profit, which soared 23.8% to $192.7 million, reflecting higher sales volume, enhanced inventory and contemporary products. However, gross margin shriveled 160 basis points to 42.7%. The contraction in gross margin was due to lower selling price, product mix and offloading of inventory at a discount.
Stores Update
Skechers had 353 retail stores under operation at the end of the first quarter. The company during the quarter opened 1 store each in Puerto Rico, Utah, Fla., and Glasgow. The company shuttered 5 outlets in the quarter. So far, in the second quarter of 2013, Skechers has opened one outlet in Puerto Rico, one in Phoenix, and its first store in Santa Barbara. A new location was inaugurated in Japan, bringing the total count to 4. The company plans to open 3 more stores and close 5 outlets during the second quarter. For the remaining part of the year, the company anticipates opening 28 to 32 outlets.
At the end of the quarter, the company operated 118 outlets under joint ventures in Asia, including stores operated by licensees, 260 distributor-owned or licensed Skechers retail stores globally, and 21 company-licensed locations in Canada, Spain, Portugal, Ireland, and the Netherlands.
During the quarter, Skechers’ under its joint ventures and through its franchisees and distributors, opened 10 outlets, which included 2 each in South Korea, China, and Hong Kong, and 1 each in Saudi Arabia, the Philippines, Denmark, and Lebanon. The company now operates 75 stores in South Korea and 56 in China. So far in the second quarter, the company has opened 12 outlets with 20 more on the cards. In the first quarter, the company shuttered 5 outlets, 1 in Indonesia and 4 in Russia. In the second quarter, 1 location was closed in Singapore.
Strategic Initiatives
Management remains committed to focus on new lines of products, opening of additional Skechers stores and increasing distribution channels with the development of international distribution agreements to boost its sales and profitability. Moreover, international business remains a significant growth driver for the company’s sales. Skechers, through its distribution networks, subsidiaries and joint ventures, is poised to enhance its global reach in the footwear market.
Other Financial Aspects
Skechers ended the quarter with cash and cash equivalents of $264.7 million, long-term debt of $125.5 million and shareholders’ equity of $883.1 million, excluding non-controlling interest of $46.1 million. Capital expenditures for the quarter were approximately $7.8 million.
MORE DETAILS WILL COME IN THE IMMIMENT EDITIONS OF ZACKS RD REPORTS ON SKX
Portfolio Manager Executive Summary [Note: Only highlighted material has been changed]
Skechers USA Inc. (SKX) designs, develops, and markets a diverse range of footwear for men, women, and children under the Skechers name, as well as under several uniquely branded names. Skechers footwear is available in the United States via department and specialty stores, Company-owned Skechers retail stores, and e-Commerce websites are also available in over 120 countries and territories through the company’s global network of distributors and subsidiaries in Canada, Brazil, Chile, Europe and Asia.
Analysts’ Opinions: Almost 60.0% of the analysts in the Digest group covering the stock were positive, 40.0% were neutral, while none were negative. Target prices provided by the firms range from a low of $18.00 to a high of $30.00. The average is $23.75, implying a return of 12.3%.
Positive or equivalent outlook (3/5 firms or 60.0%) – These firms remain confident about the company’s new line of products and foresee adequate growth opportunities at both domestic and international segments. Moreover, these firms believe that the company is trying every means to return to the growth trajectory with improved owned brands and leveraged store expenses. Skechers is primarily focusing on its core strategies, which in turn will facilitate the company to generate positive retail comparable store sales (comps) and retail unit growth in the coming quarters.
Neutral or equivalent outlook (2/5 firms or 40.0%) – The firms believe that the company’s continued development of the fitness segment and its innovative and in-vogue products will boost sales going forward, both in the domestic and international markets. The firms anticipate that the company will sustain its profitability in the coming years.
However, international growth still remains a matter of concern considering the sluggish macro backdrop. Moreover, gross margins expansion remains uncertain on account of rising inventory levels. Further, they believe that the stock is fairly valued at this juncture.
Apr 3, 2013
Overview [Note: Only highlighted material has been changed]
Founded in 1992 and headquartered in Manhattan Beach, Calif., Skechers U.S.A. Inc. (SKX) designs, develops, markets, and distributes footwear for men, women, and children in the United States and overseas under the SKECHERS name, as well as under several uniquely branded names. Through its distribution networks and subsidiaries in Canada, Brazil, Chile, Europe, and Asia, Skechers products are available in more than 120 countries and territories. Skechers introduced its first line, Skechers USA Sport Utility Footwear, in Dec 1992.
The firms have identified the following issues as critical for evaluating the investment merits of SKX:
Key Positive Arguments / Key Negative ArgumentsStrong Global Network: The company’s products are available through wholesale customers in more than 100 countries and territories through its global network of distributors and its Canadian, Brazilian, Asian, and European subsidiaries. / Competitive Pressures: Skechers faces intense competition in the footwear industry from other established companies such as Nike, Reebok, Adidas, and Puma.
Diversified Portfolio of Brands: The company’s footwear comes in a broad range of style and categories, including fashion, athletic, non-athletic, and work. The company offers eight uniquely branded designer, fashion, and street-focused footwear lines. / Fashion Misses: Risk of fashion misses and consequent same-store sales deceleration.
International Growth: Skechers has several opportunities for long-term growth from its international business. The firms believe that Skechers’ international business will be its primary growth driver in the years ahead. / Consumer Spending: Skechers’ customers remain sensitive to macroeconomic factors including interest rate hikes, increase in fuel and energy costs, credit availability, unemployment levels, and high household debt levels, which may negatively impact their discretionary spending, and in turn, the Company’s growth and profitability.
Skechers offers casuals, comfort and lightweight, sandals, and casual fusion categories for men and women under the Skechers USA brand; sport footwear for men and women, including men’s lifestyle athletic footwear, lightweight women’s sneakers, and sport sandals under the Skechers Sport brand; and fusion and sport fusion sneakers for females of all ages under the Skechers Active brand. The company also provides a line of sneakers, skimmers, and sandals for young women under the Skechers Cali brand; casuals, field boots, hikers, and athletic shoes for men and women under the Skechers Work brand; boots, shoes, sandals, dress sneakers, and lighted footwear for infants, toddlers, boys, and girls under the Skechers Kids brand; stylish fitness footwear for men and women under the Shape-ups by Skechers Fitness Group; and casual and athletic-inspired sandals targeting the 18-34 years old fitness and trend-conscious women under the Tone-ups by Skechers.
Skechers reports under 4 segments - domestic wholesale sales, international wholesale sales, retail sales (which includes domestic and international retail sales), and e-Commerce sales.
Skechers owns and operates stores both domestically and internationally through three integrated retail formats concept stores, factory outlet stores, and warehouse outlet stores. Its website is: http://www.skechers.com.
Note: The company’s fiscal year coincides with the calendar year.
Apr 3, 2013
Long-Term Growth [Note: Only highlighted material has been changed]
The firms continue to believe that there are growth opportunities for Skechers in various geographic markets and product categories in the long run. Moreover, the firms are of the opinion that the company’s international businesses will be its primary growth driver in the coming years.
Skechers intends to double its businesses in Japan over the next three to five years by transitioning its operations from a third-party distributor to a wholly-owned subsidiary. Japan has been one of the company’s biggest distribution outlets. Thus, the company aims to rollout new SKECHERS retail stores across the country, including its collection of performance and lifestyle footwear for men, women and children to enhance revenues.
The company is trying every means to reposition itself through initiatives, such as lowering of selling and marketing expenses, streamlining inventory and new product offerings.
According to the firms, focus on new products will provide the company the opportunity to broaden the targeted demographic profile of its consumer base, increase its shelf space, and open up opportunities without detracting from the existing business. In addition, the firms point out that by selling its shoes in a variety of outlets, Skechers will further diversify its revenue stream.
Management believes the potential exists for opening new domestic stores as it helps SKX to boost its top line, further diversify sales, and generate higher profit margins. An added benefit of the company-owned stores is that Skechers can use its stores to test new brands, styles, or merchandise and advertise its brands. The company also seeks to increase its global presence by opening new stores.
According to management, the company focuses on maintaining its position in the domestic and international markets by offering stylish products at a good value. Management continues to invest in business globally with the launch of a new subsidiary in Chile; further establishing its brand in Brazil; continuing to open new points of sale in China and Hong Kong through joint ventures; and selectively opening Skechers stores in the United States and other countries, where Skechers directly handles distribution.
Skechers, through its distribution networks, subsidiaries and joint ventures, is poised to enhance its global reach in the footwear market. Skechers’ joint ventures in Asia are portraying improvement with growing operations in China, Taiwan, Hong Kong, Singapore and Malaysia.
Further, management is cautious about the current soft global economic environment, but remains confident that the company is well positioned for sustainable long-term profitability and will continue to increase its share in the global footwear market.
Apr 3, 2013
Target Price/Valuation [Note: Only highlighted material has been changed]
Rating DistributionPositive / 60.0%
Neutral / 40.0%
Negative / 0.0%
Avg. Target Price / $23.75↑
Maximum Target / $30.00↑
Minimum Target / $18.00
No. of Analysts with Target Price/Total / 4/5
Risks associated with the target price primarily include the Company’s inability to adapt itself to changes in consumer tastes, potential cost increases from distribution centers near capacity, inability to expand newer fashion and urban brands, intense competition in both the U.S. and international markets, and consumer weakness due to macroeconomic factors.