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Skechers Now in Neutral Lane

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On May 17, we downgraded our recommendation on Skechers U.S.A., Inc. (SKX - Free Report) to Neutral with a price target of $22.00. This designer, developer and distributor of footwear for men, women and children in the United States and overseas currently holds a Zacks Rank #4 (Sell).

Why the Downgrade?

The lower-than-expected first-quarter 2013 results compelled us to revise our recommendation. Skechers posted quarterly earnings of 13 cents a share that missed the Zacks’ expectations of 18 cents. Management cited that foreign currency translation loss of $3 million and a credit of $2.5 million to an account that bought a major part of excess toning inventory way back in 2011 hurt the earnings by 8 cents a share.

However, the top line showcased strength. Total net sales surged 28.6% to $451.6 million, reflecting increased demand of products and healthy performance across all revenue channels. Moreover, total revenue outpaced the Zacks Consensus Estimate of $442 million.

With more emphasis on the new line of products, cost containment efforts, inventory management and global distribution platform, the company anticipates sustaining the growth momentum in 2013. The domestic wholesale business marked an elevation of 44%, international business soared 20.7%, retail business sales grew 16.9% and e-Commerce sales rose 24%.

However, Skechers hinted that due to early Easter on Mar 31 this year and back-to-school deliveries going into the third quarter of 2013, second-quarter performance would be soft. Management also projects international business to remain even in the second quarter due to early Easter and booking trends. We observed that the Zacks Consensus Estimate for 2013 dipped by 2 cents to 97 cents in the last 7 days.

Given the pros and cons embedded in the stock we prefer to be on the sidelines at this juncture.

Stocks that Warrant Look

There are certain other stocks in the consumer discretionary sector that warrant a look. These include Zacks Rank #1 (Strong Buy) Iconix Brand Group, Inc. (ICON - Free Report) as well as Francesca's Holdings Corporation (FRAN - Free Report) and Deckers Outdoor Corporation (DECK - Free Report) with a Zacks Rank #2 (Buy). These stocks are expected to continue with their upbeat performances.

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