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Skechers Up More Than 23% in 6 Months: Growth Plans Pay Off

Zacks Equity Research

Skechers U.S.A., Inc. SKX is focused on its new line of products, corporate upgrades and store remodeling projects, cost-containment efforts, inventory management, and global distribution platform. The company's domestic e-commerce business is also performing well. Such well-chalked plans have helped this Zacks Rank #3 (Hold) company gain 23.8% in the past six months, outperforming the industry’s growth of 11.7%.

That said, let’s delve deeper into the other factors aiding the stock.

A Brief Introspection

Although the stock came under pressure for a moment due to the third successive quarter of sales miss and soft second-quarter earnings view, it is now back on track. In this regard, solid performance in the international wholesale and the global retail businesses acts as a catalyst. Further, Skechers completed the transition of Indian joint venture to a wholly-owned subsidiary and entered a deal to form a joint venture in Mexico with its current distribution partner. Both investments are expected to be accretive to 2019 earnings.

Moreover, Skechers’ domestic e-commerce business registered an increase of 35.3% during the first quarter of 2019. This apart, the company is making efforts to boost sales and profitability.  In sync with this, efforts toward product innovation, additional store openings and expanding distribution channels through distribution agreements bode well for the stock.

Skechers’ international business is a significant sales growth driver, with Europe and China being important markets outside the United States. Notably, the company witnessed sales growth of 9.3% during the first quarter of 2019 across its international business, representing 57.8% of total sales. Skechers’ international wholesale business grew 8.7%, while the direct-to-consumer business grew 13.2%. Management expects the international business to sustain growth momentum and increase at a mid-teen rate both in the second quarter and full-year 2019. However, the company is grappling with elevated general & administrative expenses. In the first, second, third and fourth quarters of 2018, general & administrative expenses rose 25.8%, 21.5%, 11.9% and 10%, respectively. During the first quarter of 2019, the same increased 1.2% on account of extra spending of $7.8 million to support continued growth in China and $8 million in retail to support the operations of 40 new stores, including 12 opened in the quarter. Persistence of this trend may weigh on margins in the near future.

Additionally, domestic wholesale business fell 10.9% during the first quarter of 2019, following a decline of 4.8% in the preceding quarter. As a result, Skechers witnessed a decline of 6.3% in its domestic business. Going ahead, management expects domestic wholesale business to be down mid-single digits in the second quarter and flat on a full-year basis.

All said, we hope that these above-mentioned strategies will help provide some support to Skechers’ top line in the near term.

3 Stocks to Bank On

Children’s Place PLCE, with a long-term earnings per share growth rate of 8%, carries a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

L Brands LB, with a long-term earnings per share growth rate of 11%, carries a Zacks Rank #2 (Buy).

Kering SA PPRUY, with a long-term earnings per share growth rate of 10%, carries a Zacks Rank #2.

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