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Skechers USA Inc. (SKX - Analyst Report), which has been grappling with the clearance of its excess toning inventory, is now showing signs of improvement as evident from its recently reported third-quarter 2012 results.

The company delivered earnings of 22 cents a share, which is a substantial improvement from the earnings of 17 cents in the year-ago quarter. However, earnings fell short of the Zacks Consensus Estimate of 25 cents.

With more emphasis on a new line of products, cost containment efforts, inventory management, margin improvement and upcoming holiday season, the company anticipates sustaining the growth momentum in the fourth quarter of fiscal 2012 and thereafter.

Sales

Skechers, which competes with Deckers Outdoor Corporation (DECK - Analyst Report) and Nike Inc. (NKE - Analyst Report), stated that total net sales for the quarter strengthened 4.2% to $429.4 million from the prior-year quarter, reflecting healthy performance across company owned retail businesses, domestic wholesale and international distributor. Moreover, total revenue came marginally ahead of the Zacks Consensus Estimate of $429 million.

The domestic wholesale business marked an elevation of 7.2%, reflecting a 9.1% increase in pairs shipped coupled with a strong growth across kids and performance divisions.

International distributor sales experienced a growth of 10.9%, reflecting strong growth across Pan-Asian distributors, Middle East, Indonesia, Philippines, South Korea, Taiwan, New Zealand and Australia. However, International subsidiary sales declined 14.6%, reflecting a difficult comparison as the prior-year quarter witnessed strong sales.

Moreover, a challenging economic climate in Europe and restructuring of the Brazilian business adversely impacted the business. However, management hinted that the subsidiary business will be accretive to the company’s growth in the coming quarters.

On a combined basis, retail business sales grew 13.9%. Domestic retail sales escalated 13.2% due to the addition of 23 new stores, while comparable-store sales increased 6.3%. International retail sales bolstered 18% reflecting the healthy performance of 4 new stores, whereas comparable-store sales remained flat.

The company’s licensing division has been another source of revenue, whereby the company licenses its name and images. The company generated $1.8 million in revenue during the quarter from its licensing affiliates, which includes apparel, eye wear, watches, backpacks, and socks.

Another highlight of the quarter was the 22% rise in the company’s e-commerce division. Though the company uses it as a marketing tool, the division remains successful in driving incremental sales during the quarter.

Margins

The quarter exhibited a marked improvement in the gross profit, which increased 7.2% to $187.8 million. Moreover, gross margin expanded by 120 basis points to 43.7% attributable to a rise in sales volume, enhanced inventory and strong product sales at retail stores.

Income from operations came in at $20.3 million, a sharp improvement from $2.2 million witnessed in the year-ago quarter. The improvement reflects lower Selling and General and administrative expenses on account of lower promotional expenditures and effective cost management.   

Stores Update

During the quarter, Skechers opened 23 domestic stores and 4 international stores, bringing the total company-owned Skechers retail stores count to 346.

At the end of the quarter, the company operated more than 100 outlets under joint ventures in Asia, including stores operated by licensees, and 237 additional distributor-owned or licensed Skechers retail stores worldwide.

During the quarter, Skechers opened 25 Skechers stores, including one each in Mexico, Hong Kong, Costa Rica and Ireland. In U.A.E., Indonesia and Australia, the company opened two stores each coupled with 15 stores in South Korea. Moreover, the company closed two stores during the quarter, one each in Costa Rica and the Baltics and ended the quarter with 72 freestanding Skechers stores.

Strategic Initiatives

Management remains committed to focus on new lines of products and opening of additional Skechers stores and increasing distribution channels with the development of international distribution agreements to boost its sales and profitability.

Moreover, international business remains a significant growth driver for the company’s sales. Management projects international sales to pick up in the coming quarters and expects to keep up the momentum in fiscal 2013. Moreover, Skechers expects to double its company-owned subsidiary business in Japan over the next 3 to 5 years.

Skechers, through its distribution networks, subsidiaries and joint ventures, is poised to enhance its global reach in the footwear market. Skechers’ joint ventures in Asia are portraying improvement with sales growth across Taiwan, Hong Kong, South Korea and Indonesia.

The company is sincerely striving to reposition itself for 2012 and beyond. These include lowering of selling and marketing expenses, consolidating North American distribution facilities under one roof, streamlining inventory, and new product offerings.

Other Financial Aspects

Skechers portrays a healthy balance sheet with cash and cash equivalents of $307.9 million, long-term debt of $70.2 million and shareholders’ equity of $872.8 million, excluding non-controlling interest of $43.5 million at the end of the quarter. Capital expenditures for the quarter were approximately $5.6 million.

Our Recommendation

Currently, we maintain a long-term ‘Neutral’ recommendation on the stock. Moreover, Skechers holds a Zacks #3 Rank that translates into a short-term ‘Hold’ rating.
 

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