Will Skechers Fit My Portfolio as Well as My Feet?

That’s an awful title, but it fits. I love Skechers, the product. One of the things that bartenders, waitresses, and barbacks routinely discuss is what brand of shoe is best for standing/walking for 8 hours straight. I am always firmly in the Skechers camp in each of these conversations, and have the evidence on my feet to back me up. So I love the shoe, but what about the stock?

So how did I get interested in Skechers U.S.A., Inc. (NYSE: SKX) the stock? I’ve kept an eye on it for awhile, without really digging into the story. A few Wednesdays ago I was at a local outlet mall at the Nike (NYSE: NKE) store with my wife. She has no brand loyalty when it comes to shoes, but we were there to buy something for one of her foreign family members. Apparently Nike is cheaper in America??? I don’t know.

I didn’t need shoes, but I got the bright idea to go look at the Skechers store to see how much business it had compared to Nike. So I walked over, resisting the temptation of the frozen yogurt store on this hot August day in the greater Reno area. Now I didn’t do an exact head count, but I estimated that there were almost the exact number of adult customers in each store. I owned and operated a retail business for nearly ten years, so I felt fairly confident in my estimation. The thing is, the Nike store is over twice as large. The Adult Customer Per Square Foot metric (The ACPSqFt) seemed favorable, so I want to buy Skechers, the stock.

Ok, so it’s not quite that simple. On July 21st Skechers reported earnings of 50 cents per share, vs analyst estimates of 52 cents. The stock tumbled from about $32 to $25, going as low as $22.50 around a week later. So why the huge drop in price?

Earnings were hurt by a few things that an investor might not consider game changing. There was a fire in a Malaysia factory, a tax bill due in Brazil, and the same old currency exchange issues that are affecting many companies that do business overseas. There was also an issue with the timing of some shipments from April into March that didn’t help the situation. But what was the real problem?

Second quarter revenue was up 9.7% from the second quarter last year, and set a new second quarter record. However, recent quarterly growth numbers have hovered around 25% or higher, so that was quite a disappointment. The problem here was domestic growth. Domestic wholesale sales (sales to non-Sketchers stores) were down 5.4% compared to the same quarter last year. Domestic retail was up 15.4% at Skechers stores, but that didn’t matter. Investors fear that the domestic market might be saturated with Skechers product. America has had enough of Skechers, so run for the hills, batten down the hatches, and maybe buy Nike? Or perhaps Underarmor, Inc. (NYSE: UA).

But hold on, at the same time that the domestic story was called into question, foreign sales were up 40% from the same period. And foreign sales made up nearly 42% of the business. Skechers is expanding overseas, building stores, building out shipping facilities, and just generally doing a fine job of exporting our footwear culture to the world. While domestic growth might be cooling off big time (might), international seems like a great opportunity that is still in full swing.

So what about some of the footwear alternatives out there? Skechers has a trailing P/E of about 14.5 and a forward P/E of around 12. Nike is running about 27 & 22, while Underarmor is around 100 & 55. I don’t put these numbers on a pedestal and warship them because the forward P/E is based on estimated earnings, which may or may not be correct. And even the trailing P/E, based on historical data, can be wildly different depending on what financial website you look at. This was the case here, so I kind of averaged it out. These numbers are close enough for me, and it seems like Skechers is, valuation wise, a better deal than some of its competitors, especially if you think they have room to grow internationally in any significant way.

But of course analysts and the financial news were none too kind to Skechers after the quarter. In doing my research for this piece I came upon a wonderful article on Seeking Alpha by Tansy Trading. The article is half about Sketchers and half about a very cynical view of how Wall Street works. I happen to agree with a lot of the cynicism. It’s a great read and I recommend taking a look.

Another reason I like Sketchers? The balance sheet. They have roughly $630 million in cash and cash equivalents. While there total liabilities are $767 million. They could pay off the vast majority of their TOTAL liabilities with cash. That’s a nice position to be in. If there were some rough times ahead for the company, it’s not like their liquidity or survival could be called into question.

I suppose the real question is this: do I believe that this mixed quarter represents a true slowdown in the company, or was it a bump in the road that’s simply giving me an opportunity to buy?  As I write this, SKX can be had for about $24. All things being equal, I’d say this was a good time for me to start a position. However, for those of you who’ve been following along, I’m expecting some pretty significant weakness in the market in the fairly near future. Maybe I’ll just wait and see on this one. Perhaps I can get it closer to $20? Under $20? Who knows? Most of my portfolio is in cash, and I’m playing a waiting game with the market. Will Skechers wait for me?

As always, feel free to look at my portfolio and see how I’m doing. Usually I own or plan to own stock in many of the companies I write about. Specific numbers I reference may not be completely accurate; different online financial sources often have somewhat conflicting information. Verify information via multiple sources you trust. Please READ MY DISCLAIMER. Make your own decisions, do your own research, and never rely on any single source for information. I am not a financial professional; do not rely on me as such.

Thank you,
Michael, the Stock Picking Bartender,

Reno, Nevada