A month has gone by since the last earnings report for Skechers (SKX). Shares have added about 17.2% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Skechers due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
Skechers Q4 Earnings Beat, Revenues Miss Estimates
Skechers USA, Inc. registered second straight quarter of positive earnings surprise, when it reported fourth-quarter 2018 results. Further, management’s first-quarter 2019 earnings view is also above the Zacks Consensus Estimate. Cumulatively, these raised investor’s sentiment sidelining the second consecutive quarter of sales miss. Moreover, both the top and bottom lines grew year over year.
The company witnessed sales growth of 17.9% across its international business, comprising company-owned retail, distributor, subsidiary and joint venture, and sales increase of 4.1% at its domestic business. The international business remains a significant growth driver. Of late, Skechers completed the transition of India joint venture to a wholly owned subsidiary and entered into a deal to form a joint venture in Mexico with its current distribution partner.
Let’s Delve Deep
This designer, developer, marketer and distributor of footwear recorded earnings of 31 cents a share that beat the Zacks Consensus Estimate of 23 cents and management’s projection of 20-25 cents. We also note that in spite of increase in cost of sales and higher operating expenses bottom line surged 47.6%. Certainly, healthy top line fueled the growth.
The company delivered net sales of $1,080.8 million that increased 11.4% (or 13.7% on a constant currency basis) from the year-ago quarter but came below of the Zacks Consensus Estimate of $1,097 million. We also note that the top line fell short of management’s guidance of $1,100-$1,125 million.
Skechers’ domestic e-commerce business contributed to sales growth in the quarter, registering an increase of 8.9%.
Gross profit for the reported quarter grew 13.6% to $515.7 million, while gross margin expanded 90 basis points (bps) to 47.7% on account of solid domestic margin due to higher retail prices and improved product mix, partly offset by adverse foreign currency exchange rates. Operating income came in at $83.7 million, up 50.4% from the prior-year quarter, while operating margin increased 200 bps to 7.7%.
Segmental Sales Synopsis
Skechers’ domestic wholesale business sales grew 4.8% year over year in the quarter under review, after declining 3% in the preceding quarter.
The international wholesale business sales, which constituted 44.3% of total sales, advanced 18.4% on the back of 19.5% increase in joint venture business and 14.4% growth in international subsidiary business. The company’s international distributor business surged 19.7%. China remains one of the important markets with about 22.8 million pairs shipped in 2018, and ended the year with roughly 876 Skechers freestanding stores and 2,390 points of sale. Business in China grew 21.5% during the quarter.
On a combined basis, global company-owned retail business sales grew 7.5%. Comparable store sales in company-owned retail stores, including e-commerce, rose 1.1%, reflecting an increase of 3% and 0.4% in its international stores and in the United States, respectively.
Skechers operated 692 company-owned retail outlets globally, comprising 222 international locations at the end of the quarter under review. During the quarter, the company opened 11 stores, remodeled five, relocated five and expanded three locations. So far in the first quarter of 2019, the company has opened two outlets and closed four.
During the quarter, 195 third-party owned stores were opened and 40 stores were shuttered. So far in the first quarter of 2019, the company has opened 25 third-party owned stores and closed three stores. The company plans to open more than 500 third-party owned Skechers branded stores in 2019.
Other Financial Aspects
Skechers ended the quarter with cash and cash equivalents of $872.2 million, long-term borrowings (net of current installments) of $88.1 million, and shareholders’ equity of $2,035 million, excluding non-controlling interest of $154.3 million.
During the quarter, the company bought back roughly 1.7 million shares at a cost of $41.9 million under its existing share buyback program. The company still has approximately $50 million as of Dec 31, 2018.
Capital expenditures incurred during the quarter were $45.6 million on store openings, remodels, international wholesale operations and expansion of domestic distribution center. Management now envisions capital expenditures of about $275-$300 million for 2019.
Management now projects first-quarter 2019 earnings between 70 cents and 75 cents a share compared with 75 cents delivered in the year-ago period. Additionally, the company anticipates first-quarter net sales in the band of $1.275-$1.300 billion compared with $1.250 billion reported in the prior-year quarter.
While providing the guidance, the company has considered the existing foreign-exchange headwinds and shift in some sales from the first quarter to the second quarter due to the timing of Easter this year.
How Have Estimates Been Moving Since Then?
Fresh estimates followed an upward path over the past two months. The consensus estimate has shifted 11.28% due to these changes.
Currently, Skechers has a strong Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. Following the exact same course, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
Skechers has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.
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Skechers U.S.A., Inc. (SKX) : Free Stock Analysis Report
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