Skechers Upgraded to Outperform

Zacks

We believe that California-based Skechers U.S.A., Inc. (SKX); through its distribution networks, subsidiaries and joint ventures; is poised to enhance its global reach in the footwear market. Moreover, the company recently posted better-than expected first-quarter 2012 results. As a result, we upgrade our recommendation on the stock to Outperform from Neutral.

Skechers, which has lately been focusing on clearing its excess toning inventory, is now showing some signs of stability through its increased emphasis on new line of products, cost containment efforts, inventory management and margin improvement.

In the recently reported first quarter, the company delivered a quarterly loss of 7 cents per share that fared far better than the Zacks Consensus Estimate of loss of 27 cents, and improved substantially from a loss of 54 cents incurred in fourth-quarter 2011. Total sales of $351.3 million also surpassed the Zacks Consensus Estimate of $336.0 million.

Based on the initiatives taken, Skechers anticipates returning to profitability in the second half of fiscal 2012, and sustaining the momentum in 2013 and thereafter. Moreover, international business remains a significant growth driver for the company’s sales. Management projects international sales to pick up in the back half of the year.

Skechers portrays a healthy balance sheet with cash and cash equivalents of $391.6 million at the end of the first quarter of 2012. The company also maintains a low debt-level of $84.1 million. The blend of ample liquidity and innovative products positions it to capitalize on future growth opportunities.

Moreover, Skechers continues to offer a diversified portfolio of brands that includes a wide range of fashion, athletic, non-athletic, and work footwear at compelling prices. This multi-brand strategy enables the company to roll out new products without cannibalizing its existing brands and helps to expand the targeted demographic profile of customers.

Skechers, which competes with Deckers Outdoor Corporation (DECK) and Nike Inc. (NKE), is trying every means to reposition itself for 2012. These include lowering of selling and marketing expenses, consolidating of North American distribution facilities under one roof, streamlining inventory, and new product offerings. Further, the company also intends to lower its operating expenses relative to total revenue in the later half of 2012.

Based on the above analysis, we believe Skechers has strong fundamental outlook and expect it to continue accelerating revenue and earnings growth over the next few quarters. Our new long-term Outperform recommendation is supported by a Zacks #2 Rank (short-term Buy rating).

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