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Skechers (SKX) Crashes on Q2 Earnings Miss, Bleak View

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Shares of Skechers USA Inc. (SKX - Free Report) plunged roughly 25% during after-market trading hours on Jul 19, following the company’s soft second-quarter 2018 results. This comprises sluggish performance across its domestic wholesale and international distributor businesses. Even management’s statement of revival in both units during the second half of the year failed to lift investor spirit, which was bogged down further by muted third-quarter earnings view.

We note that shares of this Zacks Rank #3 (Hold) stock have declined 18% in the past six months compared with the industry that advanced 13%.

This Manhattan Beach, CA-based company’s quarterly earnings fell short of analysts’ expectations, following an in-line earnings in the preceding quarter. This designer, developer, marketer and distributor of footwear recorded earnings of 29 cents a share that missed the Zacks Consensus Estimate of 40 cents and management’s projection of 38-43 cents. We also note that in spite of registering top-line growth, the bottom line declined 23.7% from 38 cents reported in the year-ago period on account of higher operating expenses, unfavorably foreign exchange impacts and a higher effective tax rate.

Skechers U.S.A., Inc. Price, Consensus and EPS Surprise

Skechers U.S.A., Inc. Price, Consensus and EPS Surprise | Skechers U.S.A., Inc. Quote

 

The company delivered net sales of $1,134.8 million that increased 10.6% from the year-ago quarter and also came marginally ahead of the Zacks Consensus Estimate of $1,132.7 million for the seventh straight quarter. Notably, the top line came within management’s guidance of $1,120-$1,145 million. Sales for the quarter primarily benefited from healthy performances at the international wholesale business and company-owned global retail business.

Skechers prominent international markets, which includes Canada, China, South Korea, Germany, India, and the U.K., witnessed double-digit sales growth in the quarter under review. China remains one of the important markets with about 5.6 million pairs shipped in the quarter, roughly 775 Skechers freestanding stores, 2,350 points of sale, and a sturdy e-commerce business that registered double-digit growth.

Let’s Delve Deep

Skechers’ domestic e-commerce business contributed to sales growth in the quarter, registering an increase of 10.8%. The company currently operates e-commerce sites in Chile, Germany, the U.K., Spain and Canada.

Gross profit for the reported quarter grew 14.9% to $561 million, while gross margin expanded 180 basis points (bps) to 49.4%. Operating income came in at $81.4 million, down 5.7% from the prior-year quarter, while operating margin contracted 120 bps to 7.2%. This can be attributed to increased international advertising and distribution-related costs.

Segmental Sales Synopsis

Skechers’ domestic wholesale revenues fell 7% year over year.

The international wholesale business revenues, which constituted 41% of total sales, advanced 24.9% on the back of a 34% rise in wholly-owned subsidiary and joint venture (JV) businesses, offset by 6.1% decline in distributor sales partly due to sluggishness in the Middle East. The company’s JV business registered growth of 42.6%, while wholly-owned international subsidiary business grew by 23.1% for the quarter.

On a combined basis, global company-owned retail business sales grew 12.8% driven by comps growth of 4.5%. Domestic retail sales rose 7.2%, while International retail sales surged 25.5%. Comps increased 2.2% at domestic retail stores and 11.3% at international retail stores.

Store Update

Skechers operated 668 company-owned retail outlets globally, comprising 209 international locations at the end of the quarter under review. During the quarter, the company opened 12 stores and shuttered one domestic concept store. So far in the third quarter, the company has opened one store in Canada and one in Peru. Looking ahead, the company anticipates opening additional 30-35 company-owned SKECHERS stores and remodel or relocate 15-20 existing stores.

During the quarter, 107 third-party owned stores were opened and 36 stores were shuttered. So far in the third quarter, the company has opened 11 third-party owned stores and closed one with plans to open another 300-325 third-party owned SKECHERS branded stores in 2018.

Other Financial Aspects

Skechers ended the quarter with cash and cash equivalents of $844.8 million (up $108.4 million from Dec 31, 2017), long-term borrowings (net of current installments) of $70.2 million, and shareholders’ equity of $1,971.1 million, excluding non-controlling interest of $142.4 million.

During the quarter, the company bought back roughly 510,000 shares at a cost of $15 million under its existing share buyback program. The company still has approximately $132 million as of Jun 30, 2018.

Capital expenditures incurred during the quarter were $25.3 million on store openings, remodels, international wholesale operations and expansion of domestic distribution center. Management now envisions capital expenditures of about $40-$45 million for the remainder of 2018, reflecting planned opening of stores, store remodeling projects and office renovation.

Outlook

Analysts pointed that bleak earnings projection for the third quarter also hurt investor sentiment. Management now projects earnings between 50 cents and 55 cents a share compared with 59 cents delivered in the year-ago period. We note that the company’s guided range is significantly down from the current Zacks Consensus Estimate of 66 cents, which could witness a downward revision in the coming days.

Additionally, the company anticipates net sales in the band of $1,200-$1,225 million compared with $1,094.8 million reported in the prior-year quarter. Analysts polled by Zacks expect third-quarter net sales to be $1.24 billion.

Looking for High Performance Stocks

Deckers Outdoor (DECK - Free Report) has a long-term earnings growth rate of 12.2% and a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Under Armour (UAA - Free Report) has a long-term earnings growth rate of 20.7% and a Zacks Rank #1.

Wolverine World Wide (WWW - Free Report) , with a long-term earnings growth rate of 10%, carries a Zacks Rank #2 (Buy).

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