Skechers (SKX) Q3 Earnings Beat, Sales Miss; Stock Falls
Despite delivering a positive earnings surprise for the third consecutive quarter in 2015, shares of Skechers USA Inc. SKX nosedived 29.3% during after-market trading hours yesterday. The stock plunged as the top line fell short of expectations, after seven straight quarters of revenue beat, taking investors by surprise. Management hinted that a soft domestic retail environment and foreign currency headwinds impacted Skechers’ sales performance. However, it was quick to add that the company attained the highest quarterly sales in its 23-year history.
The company posted third-quarter adjusted earnings of 58 cents a share that beat the Zacks Consensus Estimate of 54 cents by 7.4%. Moreover, quarterly earnings of this Manhattan Beach, CA-based footwear retailer surged from 36 cents earned in the year-ago quarter.
Net sales came in at $856.2 million, short of the Zacks Consensus Estimate of $868 million but soared 27%, driven by aggressive marketing initiatives, product innovation across multiple categories, and healthy performance across all revenue channels. However, we observed that the rate of sales growth decelerated sharply from 36.4% and 40.5% recorded in the second and first quarters of 2015, respectively.
Skechers has been steadily gaining ground by offering stylish and casual shoes at a more compelling price than conventional athletic brands. The company has benefited from the so-called athleisure trend that has been sweeping the retail sector. The growing preference for cheaper shoes in the nation has been boosting the company’s market share. People now want to avail cheaper sports shoes, which they can put on to make a fashion statement, irrespective of whether they work out or not.
With increased focus on the new line of products, cost containment, inventory management, a global distribution platform and sturdy backlogs, the company remains confident of sustaining the growth momentum in 2015 and 2016. The company’s backlogs jumped 28% year over year.
Gross profit for the reported quarter increased 27.1% to $387 million, whereas gross margin of 45.2% remained flat year over year. Operating income came in at $95.6 million, up 28.9% from the prior-year quarter, while as a percentage of net sales, it improved 20 basis points to 11.2%.
Segmental Sales Synopsis
The domestic wholesale business recorded revenue increase of 11.8%, reflecting a jump of 4.6% in pairs shipped, and a rise of 6.8% in average price per pair.
Skechers’ international wholesale business revenues surged 52.9% on the back of a 45.3% rise in international subsidiaries and joint venture (“JV”) sales, as well as an improvement of 72.2% in distributor sales.
In the first nine months of 2015, international sales constituted 40% of total sales. Management remains confident that overseas operations will contribute 50% to total sales over the next three years.
On a combined basis, retail business sales grew 20.9%, whereas comparable-store sales advanced 10.4%. Domestic retail sales rose 17.7%, while comparable-store sales increased 10.1%. International retail sales soared 33.8%, whereas comparable-store sales improved 11.5%.
Store Update
Skechers operated 714 branded stores internationally, owned and operated by JVs, franchisees and distributors at the end of the reported quarter. Of the total, 378 are distributor-owned or franchised retail stores; 263 are JV stores, and 73 are company-franchised stores in countries where Skechers directly distributes its products.
During the third quarter, 78 third-party stores were opened. So far in the fourth quarter, Skechers has opened 12 third-party stores. The company plans to open about 45–55 more stores during the rest of 2015.
Skechers operated 496 company-owned retail outlets globally, comprising 119 international locations at the end of the quarter. During the quarter, the company opened net 18 stores. So far in the fourth quarter, Skechers has opened 5 stores. The company intends to open approximately 12–17 retail stores during the remaining part of the year.
Management aims at a total Skechers store base of over 1,280 by the end of the year.
Strategic Initiatives
Management is focused on product innovation, additional Skechers store openings and increasing distribution channels by entering into international distribution agreements to boost sales and profitability. Moreover, Skechers’ international business remains a significant sales growth driver for the company. Also, Skechers is poised to enhance its global reach in the footwear market through its distribution networks, subsidiaries and JVs.
Other Financial Aspects
This Zacks Rank #2 (Buy) company ended the quarter with cash and cash equivalents of $510.7 million, long-term borrowings (net of current installments) of $70.1 million, and shareholders’ equity of $1,285.5 million, excluding non-controlling interest of $40 million. Capital expenditures incurred during the quarter were $25.2 million. Management now envisions capital expenditures of about $40–$45 million for the final quarter of 2015.
Stocks to Consider
Other well-ranked stocks include Nike Inc. NKE and Carter's, Inc. CRI, both sporting a Zacks Rank #1 (Strong Buy), and Foot Locker, Inc. FL, carrying a Zacks Rank #2.
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