2023-03-24 11:51:11 ET
Summary
- Revenue should benefit from healthy demand, China's reopening, and international growth initiatives.
- Margin should benefit from moderating freight costs and easing supply chain challenges.
- Valuation is attractive.
Investment Thesis
Skechers U.S.A., Inc. ( SKX ) is poised to benefit from several factors that should boost revenue growth. The company's products are competitively priced compared to other branded peers, which should help drive demand in this inflationary environment. In addition, China's economic reopening, new store openings, and a large and growing international presence are all likely to help the company's sales growth. On the margin front, SKX is expected to benefit from moderating freight costs and easing supply chain constraints. Furthermore, SKX is currently trading below its historical averages and at a discount to its major peers, making it an attractive investment opportunity. Hence, I have a buy rating on the stock.
Revenue Analysis and Outlook
Skechers' sales were impacted by store closures and reduced operating hours around the world during the pandemic. However, sales growth rebounded in 2021 and 2022 as the economy gradually reopened, boosting demand for footwear due to an increase in outdoor activities.
The growth momentum continued in the fourth quarter of 2022, as demand remained strong across all regions. However, this was partially offset by foreign currency headwinds and COVID-related restrictions in China. Overall, sales increased by 13.5% to $1.88 billion, with a 22.3% increase domestically and an 8.7% increase internationally. On a constant currency basis, sales grew by 19.1% year over year.
SKX's Historical Net Sales (Company Data: GS Analytics Research)
Looking ahead, I believe Skechers will be able to deliver revenue growth, benefiting from good demand across its end markets, China's reopening, new store openings, and a strong global footprint.
As everyday activities gradually return to pre-pandemic levels, consumers are spending more time outside, leading to increased demand for footwear and supporting SKX's sales growth. I also believe that demand for Skechers footwear should remain resilient during an economic slowdown due to the company's competitive price points compared to its peers. So, even if consumers begin to trade down due to inflation, Skechers products may have an edge over its peers due to its competitive pricing.
Furthermore, the Chinese government is gradually reopening its economy, which should support the company's sales in the coming years. China's market accounted for ~15% of the company's sales in FY22. This was a decline from ~20% of the total sales in 2021 and 2020 as COVID-related disruptions impacted Chinese sales in FY22. Now that the Chinese economy is reopening, SKX should be able to recover its sales in the region as the year progresses.
In addition, Skechers is continuously opening new stores globally, increasing its total operating stores by about 28% since 2019. In 2023, the company plans to open approximately 100-120 company-owned stores worldwide, with additional third-party store openings expected as well. Skechers is also launching its e-commerce website in more countries, boosting its direct-to-consumer segment, and driving sales growth.
SKX's Total Stores (Company Data, GS Analytics Research)
In FY22, international sales represented approximately 62% of Skechers' total sales, reflecting the company's operations in nearly 180 countries worldwide. This diversified global exposure is expected to provide protection against region-specific macroeconomic headwinds. Additionally, management has identified significant growth opportunities in emerging markets such as India, where demand for Skechers' competitively priced products is greater than in developed countries.
At Raymond James Institutional Investors Conference held on March 7, 2023, while answering a question regarding growth opportunities in India, CFO John M. Vandemore commented:
At the ground level to root level, we see enormous opportunity in that market (India). I mean, some people will off-handedly refer to it as a potential second China market, I don't think that's crazy to think of in terms of the scale, the populous, and the trends towards both consumerism and middle-class expansion. Most importantly for us, though, in all honesty, is that in that market, our product resonates. It's very similar to what we see elsewhere across the globe, but the most encouraging you think you need as a consumer brand is people have to -- they want the product and we see a lot of demand for the product…."
This should create a good long-term tailwind for Skechers' sales growth.
Management has provided sales growth guidance of between 4.2% and 8.1% for 2023, a range that I believe is achievable given the strong demand for Skechers footwear, China's economic recovery, and the company's expanding global presence. Therefore, I am optimistic about SKX's sales growth prospects.
Margin Analysis and Outlook
In the past few years, Skechers has faced challenges in maintaining its margins due to factors such as higher freight and logistics costs, as well as supply chain disruptions.
In the fourth quarter of 2022, these cost pressures continued to impact SKX's margins. Additionally, higher expenses related to promotions and marketing further weighed on margins. As a result, gross margin declined by 40 basis points year-over-year to 48.4%, while operating margin decreased by 100 basis points to 4.6%. The decline in operating margin was also partly due to the company incurring $25 million in incremental logistics costs worldwide to mitigate supply chain disruptions.
SKX's Historical Gross Margin and Operating Margin (Company Data, GS Analytics Research)
Looking ahead, while inflationary costs are still a concern in the near term, they have begun to moderate from peak levels, which should help SKX recover its margins. Ocean freight is one of the company's biggest expenditures, given its large international presence, and it has come down from its peak levels. This should support margin recovery in the coming year.
In addition, the company incurred ~$90 million in incremental logistics and distribution costs for the full year 2022 due to supply chain challenges. As supply chain constraints ease, the company is gradually experiencing fewer headwinds related to them. SKX incurred an incremental ~$50 million in logistics and distribution costs in Q3 2022 which decreased to $25 million in Q4 2022. Management expects headwinds from supply chain constraints and related logistics/distribution costs to decline further in 1H23. Additionally, SKX is expanding its distribution capacity by opening additional distribution centres in China, Canada, and India so that it can manage its inventory more cost-efficiently and support margin expansion in the medium to long term.
Therefore, I expect margins to increase from current levels as the major headwinds from higher freight and logistics costs ease.
Valuation and Conclusion
Skechers is currently trading at a forward P/E of 14.84x based on the FY23 consensus EPS estimate of $3 and 11.84x based on the FY24 consensus EPS estimate of $3.75, which is significantly below its 5-year historical average forward P/E of 21.03x. Moreover, the company is trading at a discount to its biggest peers like Nike ( NKE ) and Deckers ( DECK ).
Peers | FY23 P/E | FY24 P/E | FY23 EPS Growth | FY24 EPS Growth |
Nike, Inc | 37.53x | 30.10x | -24.37% | 24.68% |
Deckers Outdoor Corporation | 23.85x | 20.25x | 14.05% | 17.77% |
Skechers | 14.84x | 11.84x | 25.88% | 25.29% |
Source: Seeking Alpha
Therefore, given its good revenue and margin growth prospects over the next few years and its lower valuation compared to both its historical average and peers, I have a buy rating on the stock.
For further details see:
Skechers: Good Growth Prospects At An Attractive Valuation