SKX - Skechers USA, Inc.

[Rabbitisrich]

I won't be able to dig into the company until later today, but this name caught my attention with the 18% drop on earnings. It seems like Skechers overestimated demand for 3Q, and ended up with too much inventory, which will result in margin pressures over the next 6 months (per management guidance).

 

On the hand, the balance sheet appears to be very clean, and the stock appears to be cheap on an earnings basis net of cash.

 

Anyone have more insight into the name?

[Myth465]

I dont like the shoes and it seems to have a very low cash flow yield. Thats my 2 cents after 1 minute or 2 looking at the financials.

[hyten1]

for me due to the nature of biz (moat is not much) i like a lower multiple to its normalize earning. i am being conservative i have a normalize earning of approx 65mil per yr. and its current trading at approx 10x ev, i would like it lower due to the small moat (8 or 7 times)

[Rabbitisrich]

Thanks for your thoughts. My second glance was not as exciting as my first.

 

Regarding cash flow, keep in mind that the company is in an expansionary mode having opened 101 retail stores from '06-'09, a warehousing construction project to consolidate existing warehousing operations, and 5% and 15% annual sales increases for domestic and international wholesale revenues, respectively.

 

Regarding the moat, to some extent I agree, but gross margins have been pretty stable and healthy despite the downturn. For example, retail gross margins still come in at 65.7% in 2Q compared to 60.7% last year and 61.5% in 2005.

 

What I missed at first glance is the operating leases of almost $70 million a year, which busts the net cash valuation that got me excited in the first place. You also have to consider that the Greenberg family effectively controls the company with a dual voting structure; this is likely to be a trend given the 10% dilution of passive shareholders for management compensation since 2006.

 

None of this means that the company is not a buy, but it  isn't an easy buy and will require actual homework.

[ValueSlant]

Well it is even lower now. It looks cheap to me here. Overreaction to the fade of the toning line and temporary excess inventory. What are the risks beyond just the macro that consumer spending slows? Family control is maybe an issue, but they seem to run the company well and it seems more than discounted as these levels.

 

Is the legal threat from people suing over the tone ups marketing really an issue? It doesn't seem to have much merit. The company isn't promising you will lose weight or anything if you wear them.

 

Posted more thoughts here:

http://valueslant.com/2011/06/17/skechers-usa-skx-healthy-business-stock-needs-toning/

[Deepdive]

Does anyone know what happened to Skechers? What caused them to have such a big turnaround? If I recall correctly, they were a dying brand that was a net net at a certain point and now it has doubled revenue in 3 years.

[Broeb22]

What is the current view on Skechers? Why has the stock flat-lined while the company has grown EBIT at a 20% CAGR over the last 3 years?

 

Is there a lower perceived moat that prevents the company from earning a higher multiple? I get that selling $50 pairs of shoes with has-been celebrity endorsements isn’t the sexiest thing in the world, but if I’m a retiree living on a fixed income, these have to be pretty attractive options.

 

Even if I get 10% EPS growth going forward, thats pretty solid and the multiple provides decent protection from further devaluation.

 

What is the bear case?