Skechers (SKX, Financial), the maker of fashion and casual footwear, fell 22% to $24.99 per share Friday after releasing second-quarter results.
Skechers’ earnings missed theZacks’ estimate of 61 cents per share coming in at 48 cents per diluted share. Second quarter revenue came in at $877.8 million. The stock has fallen 17% year to date. Investors were especially disappointed with the company’s domestic sales which accounts for roughly 37% of overall revenue. Domestic wholesale net sales fell 5.4% in the second quarter versus the same quarter last year. In contrast, international sales showed strength as they increased by 25.5% or $61.6 million in the second quarter or 37.2% and $196 million for the first six months of 2016.
Other highlights for the second quarter:
- Gross profit was $416.3 million equaling 47.4% of net sales, compared to $374.6 million, or 46.8% of net sales, for the same quarter of last year.
- Operating earnings were $100.4 million, equaling 11.4% of net sales, compared to $112.3 million, or 14.0% of net sales for the second quarter 2015.
- The company incurred higher SG&A costs from expanding its store base.
- Gross margins of 47.4% resulted from higher international sales.
- Skechers expanded aggressively by opening 120 third-party stores including locations in Norway, Finland, Belgium, China, Saudi Arabia, Taiwan, India, Australia, Hong Kong, Indonesia, Israel, Malaysia, Turkey, Brazil, Portugal, Thailand, Armenia, Bahrain, Canada, France, Hungary, Ireland, Italy, Japan, Kenya, Kuwait, Mexico, Nepal, New Zealand, Nigeria, the Philippines, Poland, Spain, Trinidad, the UAE and Vietnam.
- Total store count was 1,548 at quarter end.
- International wholesale accounted for 34.6% of total sales in the quarter and 39% for the first six months.
- Skechers has a short-term goal of increasing international sales to 50% of total sales.
Parting thoughts
The bullish thesis for Skechers is that the company can continue to grow its revenues by growing sales volume.
The company's international growth has been impressive. However, there isn’t any evidence that Skechers has pricing power. Some investors argue that Skechers should be valued at multiples in line with companies such as Nike (NKE, Financial), Under Armour (UA, Financial), or Lululemon (LULU, Financial). Skechers currently has a trailing PE of 14.4 while Nike, Under Armour and Lululemon have PEs of 26.3, 80 and 40.4.
My sense is that those companies have more pricing power and thus more customer loyalty than Skechers. When you think of Nike, you think of athletic excellence. Similarly, Under Armour also targets performance-minded athletes. Lululemon rose to prominence focusing on yoga-minded customers. What does the Skechers brand stand for? I would argue that the company's customer base is value conscious and doesn’t have much if any emotional attachment.
Skechers should be seen more as a teen retailer where its customer base can switch brands quickly. The company’s strategy involves endorsing celebrities like Demi Lovato and Meghan Trainor. The company’s history illustrates sales volatility. In 2010, sales jumped to $2 billion from $1.44 billion in 2009 and then fell dramatically to $1.6 billion in 2011. For comparison, teen retailers like Abercrombie & Fitch (ANF, Financial), American Eagle Outfitters (AEO, Financial) and Urban Outfitters (URBN, Financial) trade at PE ratios of 23.62, 14.4 and 16.2.
The other, more important reason Skechers may trade at a discount is because of its shareholder-unfriendly management. Last year, I discussed how its management has a history of questionable behavior including how the CEO sold off $74 million of stock before a huge earnings miss. Management continues to sell its shares. As depicted in the chart below, insiders including the CEO and other family members have sold off more than 550,000 shares for approximately $17.9 million since May.
| Insider | Position | Date | Buy/Sell | Shares | Trade Price ($) | Cost ($1000) |
| GREENBERG, JEFFREY | Director | July 1 | Sell | 10,000 | $30.15 | 301.5 |
| GREENBERG, JEFFREY | Director | June 1 | Sell | 10,000 | $31.36 | 313.6 |
| NASON, MARK A. | Executive Vice President | May 26 | Sell | 9,055 | $30.00 | 271.65 |
| PACCIONE, PHILLIP | General Counsel & Secretary | May 26 | Sell | 3,500 | $30.23 | 105.81 |
| GREENBERG, ROBERT | CEO, 10% Owner | May 16 | Sell | 300,000 | $31.44 | 9432 |
| GREENBERG, MICHAEL | President | May 2 | Sell | 200,000 | $33.87 | 6774 |
| WALSH, THOMAS | Director | May 2 | Sell | 1,500 | $33.40 | 50.1 |
| GREENBERG, JEFFREY | Director | May 2 | Sell | 10,000 | $33.55 | 335.5 |
| GREENBERG, JEFFREY | Director | May 2 | Sell | 10,000 | $33.55 | 335.5 |
Disclosure: The author does not own any stocks mentioned in this article.
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