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Why Is Skechers (SKX) Down 11% Since Last Earnings Report?

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It has been about a month since the last earnings report for Skechers (SKX - Free Report) . Shares have lost about 11% 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 drivers.

Skechers Beats on Q2 Earnings, Provides Upbeat View

Skechers USA, Inc. posted remarkable second-quarter 2019 results. Both the top and bottom lines surpassed the Zacks Consensus Estimate as well as increased year over year. In fact, this was the fourth straight quarter of positive earnings surprise. Impressive performance prompted management to provide an upbeat view for the third quarter.

This designer, developer, marketer and distributor of footwear posted quarterly earnings of 49 cents a share. The figure not only outpaced the Zacks Consensus Estimate of 33 cents but also increased substantially from 29 cents reported in the year-ago period.

The company generated net sales of $1,258.6 million that increased 10.9% (or 13.7% on a constant currency basis) from the year-ago quarter and also beat the Zacks Consensus Estimate of $1,217 million.

Management guided third-quarter 2019 earnings in the range of 65-70 cents a share and net sales in the band of $1.325-$1.350 billion. The company had reported earnings of 58 cents and net sales of $1.176 billion in the prior-year quarter.

The company’s international wholesale and direct-to-consumer businesses acted as the primary catalysts. Management informed that the company witnessed growth across all regions with prominent markets being India, the Middle East and China. Moreover, the joint venture in Mexico with its distribution partner is performing well. The company is making strategic investments to improve its infrastructure worldwide, primarily e-commerce platforms and distribution centers. The company is also focusing on designing and developing of new products for the next year.

Let’s Delve Deep

Skechers witnessed sales growth of 19.8% across its international business and 1.5% in its domestic business. The company’s international wholesale business grew 18.2%, while company-owned global direct-to-consumer business rose 14.4%.

The company’s international wholesale business improved on account of 30.7% increase in distributor business, a 13.4% jump in joint ventures and an 18.5% growth in wholly owned subsidiaries.

Management expects international and direct-to-consumer businesses to sustain growth momentum and increase at a mid-teen and high single-digit rate, respectively, in the remaining part of the year.

The company’s domestic wholesale business fell 3.8%. However, we note that the rate of decline has decelerated from 10.9% witnessed in the preceding quarter. The company anticipates domestic wholesale business to be flat to slightly positive on a full-year basis.

Comparable store sales in company-owned stores and e-commerce jumped 4.9%, comprising 4.2% in the United States and 6.7% internationally.

Gross profit for the reported quarter grew 8.7% to $609.8 million. However, gross margin contracted 90 basis points to 48.5% on account of promotional efforts to clear seasonal merchandise in select international markets. This was to an extent offset by higher domestic margins due to improved retail pricing and product mix in direct-to-consumer and domestic wholesale businesses.

Operating income came in at $111.1 million, up 36.5% from the prior-year quarter, while operating margin increased 160 basis points to 8.8%.

Other Financial Aspects

Skechers ended the reported quarter with cash and cash equivalents of $779.3 million, long-term borrowings (net of current installments) of $100 million, and shareholders’ equity of $2,132.9 million, excluding non-controlling interest of $190.8 million.

During the quarter, the company bought back roughly 511,000 shares at a cost of $15 million under its existing share buyback program. The company still has approximately $20 million as of Jun 30, 2019.

Management incurred capital expenditures of roughly $86.2 million during the quarter and plans to spend approximately $150-$175 million in the remaining part of the year.

Store Update

During the quarter, Skechers opened four company-owned domestic stores and closed one taking the total count to 477. Again, eight company-owned international stores were opened, while one was shuttered, which took the count to 291. Further, the company ended the quarter with 306 joint-venture stores and 2,098 distributor, licensee and franchise stores. Total store count at the end of the quarter was 3,172.

How Have Estimates Been Moving Since Then?

Fresh estimates followed an upward path over the past two months. The consensus estimate has shifted 5.88% due to these changes.

VGM Scores

Currently, Skechers has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. However, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

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

Outlook

Skechers has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.


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