Skechers: Back in Growth Mode
- By Ishan Majumdar
Skechers (NYSE:SKX) is a well-known performance footwear, apparel and accessories brand for men, women and children. The company has witnessed a strong rebound in its business since the early months of the pandemic, which can be seen from its recent quarterly results.
There was continued demand for Skechers' comfort products, and the company has witnessed excellent momentum in the direct-to-consumer business. Its growth in China has been remarkable and the management is making substantial capital investments in distribution centers to drive scale and efficiency. The optimism of the Skechers management and the strong guidance for 2021 with an expected recovery of physical retail in the second half of the year could make the stock an interesting pick, in my opinion. Let's take a look.
Recent financial performance
Skechers' recent result came as a surprise for the markets as the company showed remarkable top-line growth and managed an all-around beat.
The company reported revenue of $1.43 billion for the first quarter of 2021, which represented 14.98% growth as compared to the $1.25 billion reported in the corresponding quarter of 2020. The company was comfortably able to beat the analyst consensus estimate of $1.35 billion.
These revenues translated into a gross margin of 47.80% and an operating margin of 10.99%, which was higher than that in the same quarter of last year, largely due to a unit-level price increase.
Skechers reported net Income of $98.57 million and adjusted earnings per share (EPS) of 63 cents, which was 14 cents above the average Wall Street expectation.
Recovery from the pandemic
The lockdown in various parts of the world has hurt the apparel and footwear industry worldwide, but in spite of a challenging backdrop, Skechers' business has rebounded rather well over the past year. The company's international business surged by 23.8% with China being the prominent market, witnessing triple-digit percentage growth. Additionally, the average selling price per pair of shoes increased 2.7%, reflecting the strength and appeal of new comfort products and technologies.
Apart from this, the domestic e-commerce channel of Skechers grew by 143% in the quarter and acted as one of the key growth drivers behind this stellar performance. It is worth highlighting that Skechers has been building out a global e-commerce presence to reach consumers directly and the management expects the e-commerce business to continue to perform exceptionally well given the current circumstances.
Skechers is also experiencing increased traffic and sales in its domestic retail stores, with brick-and-mortar revenues growing by 13.6% as more and more people are getting comfortable with physical shopping despite the pandemic. This increased consumer confidence is definitely a positive sign for the company.
Brand building efforts
I think Skechers has a durable competitive advantage when it comes to the comfort/ leisure shoe category, thereby avoiding the highly competitive pressure of the athletic footwear market. The company's marketing efforts have paid well in the past and continue to grow with the changing business environment.
To support the open regions during the first quarter, Skechers ramped up its marketing efforts, which included lead NFL commentator Tony Romo in the company's Max Cushioning commercial during the Super Bowl. Moreover, NFL coach Jon Gruden and sports analyst Howie Long appeared in new commercials for Skechers Arch Fit, and Brooke Burke got featured in Arch Fit and Skechers apparel commercials during the quarter. Skechers' new campaign went on television as well as digital platforms to support key initiatives for men, women and children.
Apart from this, Skechers has a large retail footprint whose products are available in over 170 countries. The company has a network of global distributors and sells its products through both online channels and through 3,891 company and third-party operated retail stores. In the first quarter, the company opened 12 company-owned Skechers stores, six of which are in international locations, including its largest store in India. An additional net 106 third-party Skechers stores opened in Q1, with most located in China and India.
Overall, Skechers has made heavy investments into its distribution network to support both the traditional brick-and-mortar and e-commerce channels, which will bode well for the company in the long term.
Valuation
As we can see in the chart above, the stock price of Skechers has gone up by more than 70% in the past 12 months, which is largely associated with the company's e-commerce channels growing by a triple-digit percentage, coupled with a slow recovery of retail in general.
The company is trading at a price-earnings ratio close to 52 and an enterprise-value-to-revenue ratio of 1.79, which are both well above the apparel and accessories industry median. The GF Value chart also points towards the stock as significantly overvalued.
While I believe that Skechers is not giving out strong buy signals, I definitely rate it as at least a 'Hold'. The company maintains a strong balance sheet, with close to $1.5 billion in cash and short-term investments, coupled with an excellent interest coverage ratio of 13.36 indicating low leverage. After taking all these factors into account, I believe that there is definitely some steam left in Skechers.
Disclosure: No positions.
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This article first appeared on GuruFocus.
