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Sketchers Soars on Strong Q1 Earnings

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Skechers USA Inc. (SKX - Free Report) kick-started 2014 as its top and bottom lines for the first quarter surpassed the Zacks Consensus Estimate and recorded year-over-year growth as well. Furthermore, the company set records of reporting the highest sales ever for the first quarter and second highest quarterly sales in its 22-year history of operation. Driven by the stellar results, shares of this footwear retailer rose approximately 13.9% in the after-market trade hours yesterday.

First-quarter earnings of 61 cents a share was favorable when compared to the Zacks Consensus Estimate of 33 cents. Moreover, the reported figure rose over fourfold from 13 cents in the prior-year quarter. The improved results were owing to strong top-line growth, effective cost management and a shift in a portion of advertising expenses to second quarter as Easter falls in April this year.

Increased demand for products, product innovation across multiple categories and healthy performance across all revenue channels led to a 21% rise in revenues to $546.5 million in the first quarter, which surpassed the Zacks Consensus Estimate of $507 million.

With increased focus on the new line of products, cost containment, inventory management, global distribution platform, healthy Apr 2014 order rates and backlogs, the company is confident of sustaining the growth momentum throughout 2014.

Q1 Discussions

Gross profit for the quarter soared 24.7% to $240.4 million while gross margin increased 130 basis points (bps) to 44.0%. The growth was primarily driven by increased sales and a favorable product mix.

Earnings from operations for the quarter increased over twofold year over year to $48.2 million while as a percentage of sales, it improved 540 bps to 8.8%.

Notably, the company’s effective tax rate increased substantially to 25.7% from 23.1% in the year-ago quarter due to inclusion of certain discrete items. Further, the company has lowered its upper-end tax rate projection to 28% from the earlier 30%. Therefore, Skechers now anticipates effective tax rate for 2014 in the range of 25%–30%.

Segmental Sales Synopsis for Q1

The domestic wholesale business marked a revenue increase of 20.7%, reflecting a jump of 14.8% in pairs shipped that benefited from relentless product development initiatives across multiple lines and an increase of 5.1% in the average price per pair. The company’s Lifestyle lines gained from double-digit sales growth at its women’s and men’s lifestyle product lines while sales at the SKETCHERS Kids division registered single-digit growth. Moreover, the company’s Performance Division remained strong with double-digit rise in sales.

Skechers’ international business revenue increased 26.3% on the back of a 27.7% rise in international subsidiary and joint venture (JV) sales as well as an improvement of 21.9% in distributor sales. Though tough macroeconomic conditions in several key markets impacted Skechers’ international distributor business, the company’s partners in Indonesia, Mexico, Turkey, Taiwan, South Korea, New Zealand, the UAE and Australia experienced growth.

Looking ahead, this Zacks Rank #3 (Hold) company expects the momentum witnessed in the first quarter in subsidiary and JVs to continue in the second quarter and last throughout fiscal 2014. Further, Skechers anticipates flat distributor sales in the first quarter but forecasts growth for the full year.

On a combined basis, retail business sales grew 15.9%. Domestic retail sales rose 10.7% while comparable-store sales (comps) increased 5.8%. International retail sales soared 48.8% and comps climbed 5.6%.

On the domestic front, the company triumphed over the unusually cold weather that impacted its retail business and the shift of Easter to the second quarter.

Store Update

Skechers had 399 retail stores and 497 distributor, JV and licensed stores under operation at the end of first-quarter 2014, bringing the total store count to 896. At the quarter-end, the company’s distributor, JV and licensed stores comprised 140 outlets under JVs in Asia, including stores operated by licensees, 327 distributor-owned or licensed Skechers retail stores globally and 30 company-licensed locations in Brazil, Canada, Spain, France, Portugal and Ireland.

During the first quarter, the company opened 10 stores, including 9 domestic stores and 1 international outlet. These comprise new concept stores in New York, Arizona, Puerto Rico, Maryland, Florida, Nebraska, Maine and Chile. Further, the company closed 1 domestic concept store in the quarter.

So far, in the second quarter of 2014, Skechers has opened 3 outlets, one new concept store each in New Jersey, Ohio and Texas. Going forward, the company plans to open 15–17 retail stores in the remainder of the second quarter and about 30 more stores across the globe in 2014.

During the first quarter, Skechers opened 22 distributor, JV or licensed stores, which included the company’s first store in Belarus and 3 stores each in Saudi Arabia and Philippines, 2 each in India, Taiwan and Malaysia and 1 each in Costa Rica, Croatia, France, Mexico, Brazil, Wales, Russia, South Korea and Indonesia.

So far, in the second quarter of 2014, Skechers has opened 4 distributor JV outlets. Going forward, the company plans to open about 80–90 more stores in 2014 across the globe and bring the distributor JV store count to about 600.

Overall, the company targets to increase its store count to about 1,070 by the end of 2014.

Strategic Initiatives

Management remains committed to its focus on new lines of products, opening additional Skechers stores and increasing distribution channels with the development of international distribution agreements to boost sales and profitability. Moreover, Skechers’ international business remains a significant sales growth driver for the company. Moreover, through its distribution networks, subsidiaries and JVs, Skechers is poised to enhance its global reach in the footwear market.

Other Financial Aspects

Skechers, which competes with Deckers Outdoor Corp. (DECK - Free Report) and Nike Inc. (NKE - Free Report) , ended first-quarter 2014 with cash and cash equivalents of $329.4 million, long-term debt of $113.4 million and shareholders’ equity of $963.0 million, excluding non-controlling interest of $50.3 million. Capital expenditures for the first quarter were approximately $11.4 million.

Other Stocks to Consider

A better-ranked stock worth considering in the shoe space is Brown Shoe Co. Inc. , which sports a Zacks Rank #2 (Buy).

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