2023-06-05 06:26:47 ET
Summary
- Skechers has been growing its market share in the competitive footwear industry through value-oriented pricing and direct-to-consumer sales, with a stock price increase of 12.46% and a five-year return of 77.08%.
- The company's financials show record-high quarterly sales of $2 billion, a YoY increase of 10%, and improved balance sheet with total cash of $930.3 million, while its valuation ratios suggest potential undervaluation compared to peers.
- Risks to consider include the highly competitive nature of the footwear industry, potential impact of trade tensions between the USA and China, and the company's negative free cash flow for the past four financial years.
Through its value-orientated pricing strategy and focus on direct-to-consumer infrastructure, Skechers U.S.A., Inc. ( SKX ) has increasingly been growing its market share position in the highly competitive footwear industry while improving its top and bottom line fundamentals.
Since my last article , the stock price has increased by 12.46%, and the analyst average target price has risen to $58.76 since the release of its Q1 2023 Earnings report and a confident sales outlook for FY 2023. We can see that over the last five years, the stock has rewarded investors with returns of 77.08%.
I believe that this stock is a good investment because Skechers is experiencing double-digit growth in its direct-to-consumer sales, and international sales are being boosted by the recovery of the China market. Additionally, the company is maintaining steady growth in the American market. The popularity of the Ske chers brand is also increasing due to its attractive price-to-value proposition, which is especially appealing in today's economic climate where shoppers are more careful with their spending.
Although cautious of consumer discretionary headwinds, the company aims to achieve $10 billion in sales by 2026, which will solidify its position as one of the top global footwear companies.
World's largest footwear companies by market cap (Companiesmarketcap.com)
Q1 2023 updates and strength of direct-to-consumer infrastructure
Skechers generates income through its wholesale and its direct-to-consumer segments across the globe. A significant growth catalyst has been the company's investment in its direct-to-consumer infrastructure and the quicker-than-expected recovery of the Chinese market . Direct-to-Consumer sales grew by an impressive 24.5% YoY. Direct sales include the company's 1,360 retail stores, commercial websites, mobile applications and sales through marketplaces such as Tmall. The company has been investing in its infrastructure by increasing its online capabilities and expanding its retail footprint globally.
Direct-to-consumer infrastructure (Investor presentation 2023)
Financials and valuation
Skechers delivered record-high quarterly sales of $2 billion, a YoY increase of 10%. The company experienced a YoY increase across direct-to-consumer and its wholesale segments. International increased YoY by 21.1%. The rise in wholesale is attributed to an average selling price increase rather than an increase in volume, which decreased by 1.9%. Direct-to-consumer sales growth was due to volume increase which saw a YoY growth of 27.2% and an average selling price decrease of 2.2%. The gross margin continues to improve at 48.9%, net earnings grew to $160.4 million, and expenses grew due to increased operational processes.
Skechers is improving its balance sheet, with total cash of $930.3 million, showing an increase of 18% from the previous year. Inventory decreased by 17.4% across local and international markets, bringing it down to $1.50 billion. The company's liquidity ratios indicate a favorable current ratio of 2.41 and a quick ratio of 1.29. In addition, it has a positive TTM levered free cash flow of $206.1 million. However, Skechers has produced negative free cash flow for the past four financial years, which may not be attractive to investors seeking financial rewards. Skechers has a share repurchase program with approximately $395.7 million available. The company predicts sales for Q2 2023 to be between $1.85 and $1.90 billion, and for the entire year 2023, it predicts sales to be between $7.9 billion and $8.1 billion.
If we look at the company's valuation, Skechers is rated as a Buy by various analysts with an average target price of $58.76, under the current stock price. We saw noteworthy analysts such as Raymond James and UBS increase their price target after a strong Q1 2023 earnings report release. There is also very little short interest at 2.38%.
When comparing Skechers FWD to bigger peers like Nike and Deckers Outdoor, its price-to-earnings ratio of 16.37 is attractive. Additionally, its price-to-sales and price-to-book ratios are appealing compared to most of its peers, suggesting that the stock could be undervalued.
Risks
If you are thinking about investing in Skechers, it's crucial to be aware of the risks associated with consumer discretionary products, especially during a slowing economy. Skechers is part of the highly competitive footwear industry, where it competes with major players like Nike and Adidas. The company's success may be affected by the decisions made by its competitors, who have economies of scale on their side. Additionally, Skechers operates globally, with the majority of its products manufactured in China and Vietnam. With the ongoing trade tensions between the USA and China, there is a potential for this to impact the company's future growth.
Final thoughts
Skechers has been successfully expanding its market share while also improving its financial performance. The company's increased emphasis on selling directly to consumers through both online and physical stores has greatly contributed to its rising sales and improved profit margins. The company is optimistic about its expected results for FY 2023 and is aiming to achieve $10 billion in sales by 2026. With Skechers experiencing growth both domestically and internationally, including in the recovering Chinese market, I remain bullish on this company.
For further details see:
Skechers: Top And Bottom Line Growth Via Direct-To-Consumer Strategy