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Coronavirus Deals a Blow to Skechers: Any Respite in Sight?

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Skechers U.S.A., Inc. (SKX - Free Report) has been scarred by the devastating impact of coronavirus, compeling the company to adopt a cautious approach while entering 2020. Investors are losing confidence in the stock lately. Resultantly, shares of this Manhattan Beach, CA-based company have plunged 33% in the past three months, much wider than the industry’s 15.5% decline.

Let’s Take a Look

Coronavirus concerns resulted in temporary closure of both company-owned and franchise stores in China. Consequently, Skechers has been witnessing below-average traffic and comparable store sales (comps). Management further cited that it may alter the guidance if the situation worsens in China, which will affect businesses outside China and disrupt the global supply chain.

At its fourth-quarter 2019 earnings call, management stated that travel restrictions and uncertain consumer discretionary spending patterns are likely to affect first-quarter 2020 performance. Management issued a soft earnings view for first-quarter 2020. Earnings are envisioned in the range of 70-75 cents a share, whose mid-point of 72.5 cents falls short of 73 cents earned in the year-ago quarter.

Meanwhile, concerns related to escalating operating expenses cannot be ignored. Also, rising selling, general and administrative (SG&A) expenses on account of higher advertising costs might hurt the company's margin and in turn the bottom line. In the fourth quarter of 2019, SG&A expenses rose 25.5%. Additional spending in relation to its direct-to-consumer business and company-owned Skechers stores are also bumping up costs.

 

Areas That Show Strength

Despite a slowdown in the company’s operations in China, Skechers’ international and domestic businesses hold promise. Strength in its e-commerce business is likely to continue, given the technology investments, particularly in the direct-to-consumer channel.

Skechers’ international business has been a consistent sales growth driver. Notably, the company witnessed sales growth of 31.2% in its international business during the fourth quarter of 2019, representing a record 59.3% of net sales.

Meanwhile, it is focused on product innovation, additional store openings and increasing distribution channels by entering into distribution agreements. Skechers is poised to enhance its global reach in the footwear market through its distribution networks, subsidiaries and joint ventures (JV). Its JV in Mexico is also performing well.

As of now, it is difficult to say whether Skechers will be able to overcome the coronavirus crisis anytime soon. But definitely, this Zacks Rank #3 (Hold) company’s concerted efforts hold promise.

Key Stocks to Consider

Deckers Outdoor (DECK - Free Report) has an impressive long-term earnings growth rate of 12.4% and a Zacks Rank of 2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Ralph Lauren (RL - Free Report) has an expected long-term earnings growth rate of 11.9% and a Zacks Rank #2.

G-III Apparel Group (GIII - Free Report) , also a Zacks Rank #2, has a long-term earnings growth rate of 11.4%.

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