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Skechers' Earnings Surge Y/Y; but Miss Ests

Zacks Equity Research

Skechers USA, Inc.’s (SKX) third-quarter 2013 earnings came in at 53 cents a share, missing the Zacks Consensus Estimate of 61 cents but rising over twofold from 22 cents delivered in the prior-year quarter. The robust increase was driven by strong sales across domestic and international wholesale operations, and company-owned retail and e-Commerce businesses.

Increased demand of products and healthy performance across all revenue channels led to a 20.1% jump in revenue to $515.8 million. However, total revenue of this Zacks Rank #4 (Sell) stock fell short of the Zacks Consensus Estimate of $519 million.

With more emphasis on the new line of products, cost containment efforts, inventory management, global distribution platform and strong backlogs (up 19.7%), the company anticipates sustaining the growth momentum in the upcoming holiday season as well as in 2014.

The quarter exhibited a major improvement in gross profit, which soared 22.7% to $230.5 million, reflecting higher sales volume. Moreover, gross margin expanded 100 basis points to 44.7%, reflecting increased sales and a favorable product mix. 

Sales Details

The domestic wholesale business marked an elevation of 30.1%, reflecting a jump of 25.2% in pairs shipped coupled with a 3.9% increase in average price per pair along with growth witnessed across the men’s, women’s and kids’ divisions. The company’s Performance Division remained strong with double-digit gain at the men's Performance line.

Skechers’ international business increased 5.8% on the back of a 16.1% rise in international subsidiary and joint venture sales. However, distributor sales declined 17.3%. Tough macroeconomic conditions in Spain and Italy impacted the results. However, China, Chile, Canada, Hong Kong, Malaysia and Singapore portrayed growth momentum. The company, which entered the Indian turf in a joint venture, remains optimistic about the market, and expects it to be accretive in the next 2 to 3 years.

Citing economic and political challenges in several markets, such as Venezuela, Colombia, Egypt and Kenya, Skechers apprehends international distributor sales to be low for the year. However, with product demand remaining strong across the U.S. and international subsidiaries, the company anticipates it to favorably impact international distributor business next year.

On a combined basis, retail business sales grew 19.8%, whereas comparable-store sales advanced 16.9%. Domestic retail sales rose 19.5%, while comparable-store sales increased 17.3%. International retail sales soared 22.2%, whereas comparable-store sales climbed 14.4%.

The company’s licensing division has been another source of revenue, whereby the company licenses its name and images. Skechers generated $1.6 million in revenue during the quarter from its licensing partners, which includes eyewear, socks and backpacks.

The 30.3% rise in sales from the company’s e-Commerce division was one of the highlights of the quarter. Though the company uses it as a marketing tool, the division was successful in driving incremental sales during the quarter.

Stores Update

Skechers had 370 retail stores under operation at the end of the quarter. During the quarter, the company opened eight each domestic and international locations. These comprise new concept stores in New York, New Jersey and Puerto Rico, 2 stores in Toronto and 1 in Leeds. The company also opened 3 outlets in Spain and another outlet in Chile, taking the total count to 22 in the region. Two U.S. locations were shuttered during the quarter.

So far, in the fourth quarter of 2013, Skechers has opened 4 outlets, comprising a new concept store in Paris. The company closed 1 location and has no further plans to close stores in the remaining part of the year. The company plans to open another 17 to 20 outlets in the year in the U.S., Chile, Canada and the UK.

At the end of the quarter, the company operated 128 outlets under joint ventures in Asia, including stores operated by licensees, 294 distributor-owned or licensed Skechers retail stores globally, and 26 company-licensed locations in Canada, Spain, Portugal, Ireland, and the Netherlands.

During the quarter, Skechers’ under its joint ventures and through its franchisees and distributors opened 26 outlets, which included the company’s first stores in Turkey and Brazil, and 5 stores in Mexico (taking the count to 31 in the region) 3 in the Philippines, 2 each in India, Indonesia, Peru, Saudi Arabia and Taiwan, and 1 each in Australia, Canada, Hong Kong, Malaysia, Portugal and South Korea.

The company opened its first store in Kazakhstan, and anticipates opening another 40 to 45 distributor, joint venture or licensed outlets in the remainder of the year.

Strategic Initiatives

Management remains committed to focus on new lines of products, opening of additional Skechers stores and increasing distribution channels with the development of international distribution agreements to boost its sales and profitability. Moreover, international business remains a significant growth driver for the company’s sales. Skechers, through its distribution networks, subsidiaries and joint ventures, is poised to enhance its global reach in the footwear market.

Other Financial Aspects

Skechers ended the quarter with cash and cash equivalents of $332.8 million, long-term debt of $119.5 million and shareholders’ equity of $916.8 million, excluding non-controlling interest of $48.3 million. Capital expenditures for the quarter were approximately $9.5 million.

Other Stocks to Consider

Besides Skechers, other stocks worth considering include Deckers Outdoor Corp. (DECK) and Brown Shoe Co. Inc. (BWS), both carrying a Zacks Rank #1 (Strong Buy) and Nike, Inc. (NKE) sporting a Zacks Rank #2 (Buy).

Read the Full Research Report on NKE
Read the Full Research Report on SKX
Read the Full Research Report on DECK
Read the Full Research Report on BWS

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