Run Away From Footwear Maker Skechers, Despite Its Low Valuation

This former Wall Street darling has fallen from grace. Here is why the stock deserves the pessimism and should be avoided.
By Siddhi Bajaj ,

Investors and Wall Street have punished athletic footwear company Skechers (SKX) - Get Report after it reported dismal second-quarter results last week, sending the stock down 24% since the announcement.

For a stock that ran up more than 1,000% between June 2011 and last August, that drop is pretty significant.

The announcement triggered strong reactions from analysts, with Monness Crespi Hardt downgrading Skechers to neutral from buy.

But a weaker second quarter was expected, with orders shifting from April last year to March this year due to the timing of the Easter holiday. Is the beating then justified? 

Skechers, the hip footwear company that aggressively competes with Adidas, Nike and Under Armour, recorded year-over-year sales growth of 9.6% in the second quarter. This may not seem bad, but when comparing it with the previous three quarters' growth of more than 25%, it is cause for concern.

With second-quarter overseas sales up 40% from a year earlier, Skechers naturally felt the pinch of the stronger dollar. At the same time, domestic retail sales climbed 15.4%, while domestic wholesale sales slipped 5.4%.

The fact that Skechers had to shell out additional taxes in Brazil and cope with a warehouse fire in Malaysia didn't make matters any easier.

In addition, the company warned that third-quarter revenue would miss expectations, coming in between $950 million and $975 million, below analyst estimates of $981 million and $1.07 billion.

The company has faced the heat from market leader Nike, which introduced low-priced shoes, causing Skecher to further reduce its prices.

Meanwhile, Under Armour is expanding its range of running shoes. Even Adidas, which Skechers had dethroned as the second-largest U.S. seller of athletic shoes last year, has been fighting back to reclaim its position.

For all these reasons and more, investors should look for more resilient stocks than Sketchers.

However, despite the gloomy results and outlook, there are reasons to believe in Skechers for the long term.

The company is ramping up its international sales, especially in markets such as China and India, where it has seen robust demand. This will help it gain a strong foothold in relatively untapped markets, versus saturated U.S. markets.

Sketchers has seen declining wholesale orders from other retailers and department stores as they find it harder to draw in customers. However, it is responding by expanding its own retail footprint, with plans to open 200 stores by the end of the year.

The shift from wholesale to retail will help the company widen its margins. Skechers expanded its gross profit in the second quarter to 47.4% of net revenue, from 46.8% a year earlier.

But for now, avoid Sketchers, as its stock price will likely continue to come under pressure for some time.

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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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