SKX - Skechers: A Slam Dunk In Footwear Growth

2024-01-09 03:08:47 ET

Summary

• Skechers has shown strong financial performance and resilience, with strong revenue, net income and cash flow growth in the past year.
• The company has gained popularity among boomers, achieved international success, and is expanding its reach among younger demographics through campaigns and new markets, such as basketball shoes.
• The stock's valuation has increased, reflecting its strong earnings growth, but it is still competitively valued relative to larger industry peers.

Since my last bullish article, Skechers U.S.A. Inc. ( SKX ) has risen from seventh to fourth in market cap among footwear companies. It’s gained popularity with affluent boomers adjusting to high inflation and is targeting younger customers with initiatives like collaborations with Snoop Dogg and the release of Sketchers basketball shoes . The company also has impressive growth in international markets, especially China and is expanding its e-commerce channel. Despite an 18.01% stock increase, it remains competitively priced relative to peers. It has beat EPS expectations for the last four quarters, increased its FY 2023 guidance and has upside growth potential across a number of markets. Therefore I remain bullish about the stock.

Company Updates

Skechers has strategically positioned itself in the footwear industry, leveraging a projected 5.69% CAGR until 2027 . The company's compelling appeal lies in its ability to adapt and innovate, while maintaining a brand strongly associated with comfort and affordability . Skechers has successfully increased its popularity through targeted marketing campaigns featuring celebrities such as Cha Eun-woo, Snoop Dogg, and Harry Kane. These campaigns have not only boosted brand visibility but also helped the company connect with a diverse customer base. Investments in new styles, comfort technologies, and product lines have further enhanced Skechers' market position. The company's commitment to innovation is evident in its product offerings, which cater to a wide range of customer preferences .

In recent times, the company has entered the basketball industry by introducing a new range of basketball shoes before the NBA season. They have invested in partnerships with popular NBA players such as Jamal Murray, RJ Barrett, and Julius Randle. These partnerships are expected to increase the company's market share in the highly competitive footwear industry.

A significant growth driver for Skechers has been its expanding international omnichannel presence. The company's international business, which accounted for 60.5% of its total sales in Q3 2023 , has been the primary engine of growth. Particularly noteworthy is the company's performance in China, Europe, and Latin America. In China, Skechers' largest international market, the company achieved a 23.4% year-over-year growth and a 58.9% increase compared to Q3 2021. This growth was driven by strong e-commerce sales and increased store traffic.

In summary, Skechers' compelling market position, innovative strategies, and impressive growth make it a noteworthy player in the competitive footwear industry.

Financial Update

Skechers' has an impressive and upward trending top and bottom line if we look at the long term trend and TTM results. The company has reported TTM revenue of $7.92 billion, up 18.8% year-over-year and 41.4% compared to the same period in 2021.

If we look at the bottom line, Skechers has reported TTM net income of $534.13 million, up 147.8% year-over-year. This growth in the bottom line suggests that Skechers is effectively managing its expenses and increasing its profits, which could lead to higher returns for shareholders.

The company has also reported record TTM operating cash flow of $1.2 billion. Furthermore we can see that the levered free cash flow TTM of $667.4 million is positive for the first time in four financial years. A positive LFCF indicates that after meeting its financial obligations, Skechers has cash left over that could be used for expansion, reward investors, or reducing debt.

The company’s balance sheet remains strong and flexible, with $1.16 billion in cash and cash equivalents, $1.66 billion in total debt, and $3.95 billion in equity as of September 30, 2023. The company’s current ratio was 2.52, indicating its ability to meet its short-term obligations.

Valuation

Despite intense competition in the market, Skechers has shown trending financials upward, increased its FY2023 guidance, has high rankings in recent shoe polls and has significant growth in market capitalisation. The stock has gained 39.75% over the last year, outperforming the S&P 500 index, which has gained 23.35%. If we compare it to some of its largest footwear peers, such as Nike ( NKE ), adidas ( OTCQX:ADDYY ), Crocs ( CROX ), V.F. Corporation ( VFC ) and Deckers ( DECK ), we can see that the stock is the second highest performer after Deckers.

Turning to valuation metrics, Skechers’ forward price-to-earnings (P/E) ratio stands at 17.71, which, although less attractive than a few months ago, remains compelling when compared to Nike’s 29.81 and Deckers’ 27.24. Moreover, Skechers’ Price/Earnings to Growth ((PEG)) ratio, which takes into account future growth, is the most attractive among its peers at 0.64. This figure suggests that the stock may be undervalued, presenting a potential opportunity for investors.

Risks

Investing in Skechers is not without its risks. One of the primary risks is the intense competition in the highly fragmented footwear industry. Skechers competes with numerous established brands like Nike and Adidas and emerging ones, which may have more substantial financial, marketing, and distribution resources. The rise of online platforms like Amazon and Alibaba, offering a wide variety of footwear at lower prices and faster delivery, adds to this competitive pressure. Another risk is potential disruptions in Skechers’ global supply chain. The company relies heavily on third-party manufacturers, suppliers, and distributors, primarily located in China, Vietnam, and Indonesia. These regions are subject to various political, economic, and social uncertainties that could lead to supply chain disruptions.

Final Thoughts

Skechers has proven itself a strong player in the footwear industry this year, demonstrating international growth, a versatile product range, and a business model that has shown resilience in various market conditions. The company beat EPS expectations for the last four quarters. Skechers has not only increased its full-year guidance, anticipating sales to reach $8 billion but also set an ambitious target of $10 billion by 2026. In addition, the company has a series of strategic initiatives, such as Skechers basketball shoes and campaigns with popular celebrities, aimed at boosting brand recognition and fostering customer engagement. Given these factors, I remain bullish about the prospects of this stock.

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