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Bear of the Day: Skechers (SKX)

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Earnings season can be a tricky time as investors look to digest a plethora of new financial data, and sometimes, reactions to report surprises—be they positive or negative—end up being overstated. However, when a company proves that its core business is struggling majorly, and if its stock has failed to recover from similar selloffs in the recent past, investors should avoid buying the dip.

One such company is Skechers (SKX - Free Report) , a designer of lifestyle and performance footwear for men, women, and children. Skechers shoes are available through its own stores and e-commerce platforms, as well as third-party retail outlets around the world.

Last week, shares of Skechers dropped more than 25% after the company posted disappointing quarterly results. Earnings of 29 cents per share were well below both the Zacks Consensus Estimate of 40 cents and management’s guidance of 38 to 43 cents, and revenue of $1.13 billion also missed expectations.

That revenue figure was actually up nearly 11% year over year, casting more of a cloud on the earnings result, which declined about 24% from the 38 cents reported in the year-ago period. Skechers faced profitability headwinds on account of higher operating expenses, unfavorably foreign exchange impacts, and a higher-than-expected effective tax rate.

This is should be the first red flag for investors. The company’s quarterly earnings drastically missed management’s own guidance range, mostly because management was wrong about how recent tax reform would affect the effective rate. Should we really trust this type of management with leading a rebound?

Making matters worse was Skechers’ outlook for the remainder of the year. In the most recent quarter, the company saw sluggish performance in its domestic wholesale business, and although management remarked that this unit could see a revival in the second half of 2018, its actual guidance was not encouraging.

Skechers now projects earnings between 50 cents and 55 cents a share for the current quarter, which compares to the 59 cents delivered in the year-ago period. Investors should also note that the Zacks Consensus Estimate for earnings was pegged at 66 cents prior to this report.

This should be another red flag for investors, as it is likely that analysts are only just starting to revise their estimates downwards. In fact, we have seen three negative revisions for this period’s earnings in the past week, and our consensus projection is already 12 cents lower.

But still, a 25%+ selloff is dramatic, right? Well, the stock has already recovered bounced about 12% from its post-earnings lows, meaning that the opportunity to buy the dip could already be past, and it is also worth remembering that SKX has proven an inability to recover from drastic selloffs in the recent past.

Earlier this year, during Q1 earnings season, the stock plummeted about 35%. Sure, it recovered some of those losses too, but shares were still a long, long way from their 52-week highs prior to this report, and I see no reason why they’d surge back much further anytime soon.

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