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Why More Pain Could Be Ahead for Skechers' (SKX) Stock

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Skechers U.S.A. Inc. (SKX - Free Report) failed to be part of yesterday’s stock market rally that was triggered by the Fed’s decision to keep the benchmark interest rate unchanged for the time being. Shares of this designer, developer, marketer and distributor of footwear plunged roughly 9%, and also hit a 52-week low of $20.90 before closing at $21.22. The stock was under pressure after being downgraded by research firm, Morgan Stanley.

As per media reports, Morgan Stanley pointed out that changing consumer preference from athletic shoes toward more fashionable ones poses a concern for Skechers. The company will take time to adjust its inventory for the same, and this might weigh upon its sales. Moreover, stiff competition from other players such as Adidas AG with respect to price and new fashion is a cause for worry that might hurt Skechers’ market share. The firm also stated that the company is spending more toward updating its global infrastructure than its expectations, which further compelled it to adopt a conservative view.

Fashion obsolescence remains the main concern for Skechers' business model, which involves a sustained focus on product and design innovation. The company’s pioneering position may be hurt by delays in its product launches. A dreary retail backdrop in the U.S., stiff competition and adverse foreign currency fluctuations are headwinds that may weigh upon the company’s performance.

After commencing fiscal 2016 on a high note, Skechers failed to carry the momentum into the second quarter amid the economic upheaval and a tough domestic retail environment. The company succumbed to a negative earnings surprise of 5.9% in the quarter, after registering an earnings beat of 18.9% in the first quarter. Foreign currency headwinds and higher G&A expenses hurt the bottom line. Even a 9.7% jump in net sales failed to act as a savior. We also observe that the rate of sales growth in the second quarter decelerated from 27.4% experienced in the first quarter.

Skechers currently carries a Zacks Rank #5 (Strong Sell).

Stocks to Consider

Better-ranked retail stocks include Urban Outfitters Inc. (URBN - Free Report) , Deckers Outdoor Corp. (DECK - Free Report) and Francesca's Holdings Corporation (FRAN - Free Report) , all sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

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