SKX - Skechers: Despite Domestic Challenges Global Momentum Diverse Products Make It Attractive

2023-08-19 05:25:43 ET

Summary

• Skechers exceeded expectations with an EPS of $0.98 and a 7.5% YoY revenue increase of $2.01 billion.
• The company saw growth in international markets, particularly in APAC and EMEA regions, but domestic wholesale sales decreased.
• Skechers has a healthy balance sheet, with increased cash and reduced inventory, positioning it well for future growth.

Since my previous article on Skechers U.S.A., Inc. ( SKX ), investors have been rewarded with returns of 10.12%. The company's Q2 2023 earnings report exceeded expectations with an EPS of $0.98, surpassing projections by $0.44. Additionally, Skechers achieved a 7.5% year-over-year revenue increase, totaling $2.01 billion. These impressive results highlight the company's ongoing success and strong market presence.

The company saw impressive top-line growth due to the China market slowly recovering and healthy growth in its direct-to-consumer channel. Although cautious of market uncertainties and a downturn in domestic sales. The company has not yet benefited from a fully recovered Chinese market, and its direct-to-consumer (D2C) channel continues to develop long-term upside potential as it aims to increase total sales to $10 billion by 2026 . Therefore, I maintain a bullish stance on this stock.

Q2 2023 Earnings update

Skechers exceeded expectations in the second quarter of 2023 by reporting strong financial results. The company achieved a sales record of $2.13 billion and a gross margin of 52.7%. The direct-to-consumer segment saw a 29% increase, and international growth was in double digits, contributing to the positive results. Compared to the previous year, Skechers experienced an 8% increase in sales, with D2C sales growing by 29%. Although the Americas region saw a slight decrease in sales, the APAC and EMEA regions experienced growth of 20% and 16%, respectively.

Skechers has invested considerably in its distribution centres to enhance inventory availability and delivery speed. Opening new distribution centres in Canada, India, and Chile is anticipated to improve overall efficiency.

International growth and domestic decline

The company has a plan in place to expand into international markets. With 4,705 Skechers stores across the globe, the acquisition of long-term distributor Sports Connection in Scandinavia has further broadened the brand's reach in the Nordic region. While the overall results are positive, the domestic wholesale segment encountered some challenges due to inventory-related issues that impacted Skechers' partners. As a result, domestic wholesale sales decreased, balanced out by continued success in the D2C and international wholesale segments. Skechers saw notable growth in international markets, particularly in the APAC and EMEA regions, with a 19% increase in sales in China, indicating a promising recovery in that market. The company remains cautiously optimistic about China's recovery and potential for growth.

For FY 2023, Skechers predicts sales between $7.95 and $8.1 billion and diluted EPS between $3.25 and $3.40. The company is showing positive upwards top and bottom line growth and increasing its brand dominance in several key geographic markets.

Balance sheet and cash flow

Skechers has demonstrated strong financial performance with a healthy balance sheet. As of the end of the quarter, the company had $1.07 billion in cash, cash equivalents, and investments, which is a 13.5% increase YoY. Notably, inventory decreased by 5%, totalling $77.9 million, compared to the previous year. Furthermore, due to strategic inventory management, inventories have significantly reduced by 18% to over $300 million since December 31, 2022. This puts Skechers in a favourable position to meet consumer demand and continue introducing innovative products, especially during critical back-to-school and holiday periods. Additionally, levered free cash flow has increased over the past three quarters, with a positive $186 million TTM. This allows the company to reward investors, pay off debts, and reinvest in the business.

Valuation

As per the market cap, Skechers ranks seventh among all footwear companies worldwide. However, its position and market cap have slightly decreased since my last article on the stock in June 2023. It has been surpassed by Puma and On Holding in terms of market cap.

However, since my first article, the average target price has increased from $58.76 to $61.87 . Various noteworthy analysts have continued to increase their price targets, such as UBS, from $63 to $68 , maintaining a Buy rating. There is also very little short interest at 2.06%. We can see a positive and bullish trend towards the stock that continues to trade below its average target price. Furthermore, if we compare Skechers to some of the footwear giants, we can see that the stock has been one of the most rewarding to hold over the last year, with returns of 26.26%.

Compared to larger companies such as Nike and Deckers Outdoor, Skechers FWD has an attractive price-to-earnings ratio of 14.94. Furthermore, its price-to-sales and price-to-book ratios are favourable compared to most of its peers, indicating that the stock may be undervalued.

Risks

In Q2, 2023, we saw that inventory issues related to wholesale partners impacted the company's domestic performance. The wholesale segment depends on its wholesale partners' success and operational efficiency, which can introduce volatility to its sales and financial performance. Furthermore, there are ongoing macroeconomic uncertainties that can impact Skechers' business. Economic conditions like inflation, currency fluctuations, and global market conditions could affect consumer spending patterns and overall demand for footwear products. Lastly, the company is cautiously optimistic about the Chinese market recovery. However, this is not a guarantee and can impact performance if the Chinese market is affected by regulatory changes or changing consumer behaviour patterns.

Final thoughts

The most recent Q2 2023 earnings report has shown encouraging growth signs on the top and bottom lines. Although there has been a downturn in the domestic market, international growth has increased in the double digits, and the company continues to benefit from its D2C sales strategy. The company is strengthening its brand through collaborations, investing in innovations and improving its efficiency and effectiveness. While we should be cautious of domestic wholesale challenges and macroeconomic uncertainties, Skechers' global momentum, diverse product range, and growth plans make it attractive. Therefore, I maintain a bullish stance on this stock.

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