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Skechers (SKX) Down 10.6% Since Last Earnings Report: Can It Rebound?

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It has been about a month since the last earnings report for Skechers (SKX - Free Report) . Shares have lost about 10.6% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Skechers due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Skechers Q1 Earnings Decline Y/Y, Revenues Increase

Skechers USA, Inc. came out with its first-quarter 2019 results, wherein the top line improved year over year but the bottom line declined from the year-ago period. We note that this was the third successive quarter of sales miss and management also provided soft second-quarter earnings view.

Management guided earnings in the range of 30-35 cents a share, whose mid-point of 32.5 cents came below the Zacks Consensus Estimate. The company had reported earnings of 29 cents in the second quarter of 2018. The company now anticipates second-quarter 2019 net sales in the band of $1.200-$1.225 billion compared with $1.135 billion reported in the prior-year quarter.

Nevertheless, management pointed that international wholesale and global retail businesses are the primary growth drivers. Also, the company informed that it shipped a record number of pairs from its distribution centers in Japan and Europe, and registered sturdy performance across international distributors and joint ventures, including China. Further, Skechers completed the transition of Indian joint venture to a wholly owned subsidiary and entered into a deal to form a joint venture in Mexico with its current distribution partner. Both of these investments are expected to be accretive to 2019 earnings.

Let’s Delve Deep

This designer, developer, marketer and distributor of footwear posted earnings of 71 cents a share, down 5.3% from 75 cents reported in the year-ago period. On an adjusted basis, earnings for the quarter under review came in at 73 cents. The Zacks Consensus Estimate for the quarter is pegged at 72 cents.

The company delivered net sales of $1,276.8 million that increased 2.1% (or 5.2% on a constant currency basis) from the year-ago quarter but came below of the Zacks Consensus Estimate of $1,291 million.

The company witnessed sales growth of 9.3% (or 15% on a constant currency basis) across its international business representing 57.8% of total sales. Skechers’ international wholesale business grew 8.7%, while direct-to-consumer business, which included a 2.3% increase in comparable sales, grew 13.2%.

The company’s international wholesale business grew on account of 10% increase in joint venture business, 2.4% growth in international subsidiary business and 36.3% surge in international distributor business. Within subsidiaries, the significant dollar gains came from Germany, Spain, India and Japan and joint ventures in China, Singapore and South Korea. China remains one of the important markets with about 1.1 million pairs shipped during the quarter, and ended the period with roughly 900 Skechers freestanding stores and 2,399 points of sale and a 32% increase in online business.

Management expects international and direct-to-consumer businesses to sustain growth momentum and increase at a mid-teen and mid-single-digit rate, respectively, both in the second quarter and for the full year.

Skechers witnessed a decline of 6.3% in its domestic business. The company’s domestic wholesale business fell 10.9%, while direct-to-consumer business, which included a 35.3% surge in domestic e-commerce business, grew 3.3%. The company expects domestic wholesale business to be down mid-single-digits in the second quarter and to be flat on a full-year basis.

The company-owned global retail business rose 6.7%. Comparable store sales in company-owned stores and e-commerce inched up 0.7%, comprising 0.2% in the United States and 2.3% internationally.

Gross profit for the reported quarter grew 1.3% to $590.5 million. However, gross margin contracted 40 basis points (bps) to 46.3% on account of lower international margins due to deep discounts and adverse foreign currency exchange rates. This was partly offset by improved margins at company-owned domestic retail business. Operating income came in at $165.9 million, up 11.5% from the prior-year quarter, while operating margin increased 110 bps to 13%.

Store Update

Skechers operated 474 company-owned retail outlets in the United States and 284 international locations at the end of the quarter under review. During the quarter, the company opened eight stores, shuttered 4 stores, remodeled two, relocated two and expanded one location. For the remaining part of the year, the company expect to open an additional 30-35 Skechers stores in the United States.

During the quarter, 89 third-party owned stores were opened and 27 stores were shuttered. At the end of the quarter, the company operated 2586 international retail stores, of these 2302 are owned and operated by international distribution partners, joint ventures and a network of franchisees.

Other Financial Aspects

Skechers ended the quarter with cash and cash equivalents of $687.5 million, long-term borrowings (net of current installments) of $93.8 million, and shareholders’ equity of $2,062.5 million, excluding non-controlling interest of $173 million.

During the quarter, the company bought back roughly 458,000 shares at a cost of $15 million under its existing share buyback program. The company still has approximately $35 million as of Mar 31, 2019.

Capital expenditures incurred during the quarter were $51 million, of which $10.2 million related to the construction of distribution center in China, $8.6 million related to 12 new company-owned domestic and international store openings and nine store remodels and $9.9 million related to international wholesale operations.

Management now envisions capital expenditures of about $250-$275 million for 2019. This includes an additional 40-50 company-owned retail stores and 15-20 store remodels, expansions or relocations. This also includes the construction of new distribution center in China, enhancements of existing distribution centers in the United States and Europe, and the expansion of corporate headquarters in California.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -6.67% due to these changes.

VGM Scores

Currently, Skechers has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Skechers has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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