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Will Skechers (SKX) Let Investors Down This Earnings Season?

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Skechers U.S.A., Inc. (SKX - Free Report) is slated to release third-quarter 2018 results on Oct 18. This renowned footwear designer, marketer and distributor delivered a negative earnings surprise of 27.5% in the last reported quarter. The company has a mixed surprise record in the trailing four quarters. Let’s see what’s in store for the company this time around.

Multi-Brand Strategy, International Wholesale Business Solid

Skechers should gain from its multi-brand strategy and constant focus on innovations. The company’s multi-brand strategy enables it to rollout new products without cannibalizing its existing brands. The strategy also helps it expand the targeted demographic profile of customers. Notably, Skechers D’Lites is gaining traction. Also, additional store openings and increasing distribution channels by entering into distribution agreements are likely to boost sales.

Moreover, Skechers’ international business is a considerable sales driver, with Europe and China being significant external markets. Skechers is poised to enhance its global reach in the footwear market through its distribution networks, subsidiaries and joint ventures (JV).

Skechers’ 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 JV businesses. The company’s JV business registered growth of 42.6%, while wholly-owned international subsidiary business grew 23.1% during the second quarter of 2018.

These factors along with e-commerce sales growth helped the company post top-line growth of 10.6%. Clearly, these factors give out positive signals for Skecher’s third-quarter sales.

Incidentally, the Zacks Consensus Estimate for third-quarter revenues stands at $1,214 million, reflecting nearly 11% growth on a year-over-year basis.

Higher Costs Keep Bottom Line Under Pressure

Despite registering top-line growth, Skechers’ bottom line plunged 23.7% to 29 cents in the second quarter on account of higher operating expenses, unfavorable foreign exchange impacts and a higher effective tax rate. We note that selling expenses have increased 37%, 31.6%, 32.1% and 7.4% in the first, second, third and fourth quarters of 2017, respectively.

Following the same chronological order, general & administrative expenses have increased 16.6%, 25.5%, 21% and 24.7%, respectively. In the first and second quarter of 2018, selling expenses increased 14.4% and 14.1%, while general & administrative expenses rose 25.8% and 21.5%, respectively.

Operating income came in at $81.4 million, down 5.7% from the prior-year quarter, while operating margin contracted 120 basis points to 7.2%. This can be attributed to increased international advertising and distribution-related costs.

Persistence of these headwinds is a threat to the company’s upcoming earnings. In fact, management’s muted outlook makes us even more cautious about third-quarter earnings. The company projected earnings of 50-55 cents a share compared with 59 cents delivered in the year-ago period. To top it off, the Zacks Consensus Estimate for the quarter under review is pegged at 51 cents, which went down 10 basis points in the past 30 days.

What the Zacks Model Unveils

Our proven model doesn’t show that Skechersis likely to beat bottom-line estimates this quarter.  For this to happen, the stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold). You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Skechers’ Zacks Rank #4 (Sell) combined with an Earnings ESP of -2.72% makes us apprehensive about the company’s upcoming performance.

Stocks Poised to Beat Earnings Estimates

Here are some companies you may want to consider as our model shows that these have the right combination of elements to post earnings beat:

Lululemon Athletica Inc. (LULU - Free Report) , a Zacks #1 Ranked stock, has an Earnings ESP of +2.97%. You can see the complete list of today’s Zacks #1 Rank stocks here.

Ralph Lauren Corp. (RL - Free Report) , a Zacks #2 Ranked company, has an Earnings ESP of +0.79%.

PVH Corp. (PVH - Free Report) has an Earnings ESP of +0.23% and a Zacks Rank #3.

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