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What is Troubling Skechers? Are the Remedies Sufficient?

Zacks

A glimpse of Skechers USA Inc.’s SKX share price movement unveils that it has fallen nearly 6% in the past three months wider than the industry’s decline of 2.4%. Let’s delve deeper and find out what is troubling this Zacks Rank #3 (Hold) stock.

Why is the Stock Struggling?

Disappointing Bottom-Line Performance

Investors remain apprehensive about Skechers’ bottom-line performance that has been declining for the past five straight quarters due to rise in selling and general & administrative expenses. Earnings per share have declined 20.8% and 4.8% in the second and first quarters of 2017, respectively, and 78.9%, 2.3% and 7.7% in the fourth, third and second quarters of 2016, respectively.


The company had also witnessed negative earnings surprises in four of the five trailing quarters, including 13.6% registered in the second quarter of 2017. The Manhattan Beach, CA-based company delivered quarterly earnings of 38 cents per share that missed the Zacks Consensus Estimate of 44 cents. In the preceding four quarters, it had underperformed the Zacks Consensus Estimate by an average of 19.2%.

Bleak Earnings Projection

Management projected third-quarter earnings per share in the range of 42-47 cents that was below the consensus mark. Consequently, the Zacks Consensus Estimate has witnessed a downtrend. We note that the Zacks Consensus Estimate of $1.55 and $1.99 for 2017 and 2018 has declined by 23 cents and 1 cent, respectively, in the past 60 days. Moreover, the same has plunged 14 cents to 43 cents for the third quarter.

Are the Remedies Sufficient?

Greater emphasis on the new line of products, corporate upgrades and store remodeling projects, cost containment efforts, inventory management along with global distribution platform may help lift Skechers performance. The company's domestic e-commerce business continues to register sales growth. It currently operates e-commerce sites in Chile, Germany and U.K., and has launched additional sites in Spain and Canada. Management projects third-quarter 2017 net sales in the band of $1.050–$1.075 billion compared with $942.4 million reported in the prior-year quarter.

The company is transitioning international distributors to subsidiary or Joint Venture (JV) model. Its Israel and South Korea distributors have been transitioned to JVs. The company’s JVs in Asia are exhibiting improvement. Skechers’ international wholesale business revenues, which constituted 35.1% of total sales, advanced 18.6% during the second quarter of 2017 on the back of a 19.4% rise in wholly-owned subsidiary and JV businesses and 16.1% growth in distributor business. The company’s JV business registered growth of 62.4% for the quarter buoyed by double-digit growth in China and sales from South Korea.

We believe that the blend of ample liquidity and innovative products, positions Skechers to capitalize on future growth opportunities.

3 Retail Stocks Hogging the Limelight

If you are interested in the retail space you can consider stocks such as G-III Apparel Group, Ltd. GIII flaunting a Zacks Rank #1 (Strong Buy), and The Gap, Inc. GPS and The Children's Place, Inc. PLCE both carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

G-III Apparel delivered an average positive earnings surprise of 3.5% in the trailing four quarters and has a long-term earnings growth rate of 15%.

Gap delivered an average positive earnings surprise of 9.3% in the trailing four quarters and has a long-term earnings growth rate of 8%.

Children's Place delivered an average positive earnings surprise of 16.3% in the trailing four quarters and has a long-term earnings growth rate of 9%.

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