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It's been a rocky year for investors of the shoemaker


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. At Wednesday's closing price of $22.31, the stock is up 29% from its August lows, but still down some 33% year to date.

Skechers shares sank this summer after the company warned of a 15% year-over-year decline in second-quarter profits, as management was hit with higher costs to open new stores, a distribution center and launch its new Cali Gear footwear line. The company operates about 150 outlets, and also sells its casual shoes and accessories through many other department store retailers.

But on Oct. 24, Skechers reversed that trend, posting better-than-expected third-quarter results. The company earned 53 cents a share, which was a full 9 cents ahead of the consensus analyst estimate. Quarterly revenue grew 19% from the previous year to $382 million, and was also $13 million ahead of expectations. Cali Gear sales were strong in the third quarter, justifying the earlier marketing spending that hurt profits earlier in the year.

Examining these recent upticks at Skechers, should you buy shares in the company? Does Skechers hold value at current levels, or will the stock trade back toward it recent lows in 2008?

Even following the rally from its summer lows, Skechers' shares appear inexpensive at just 11.3 times expected 2008 earnings. That price/earnings valuation represents a 13% discount to the company's historical average and is also below the 18% profit growth that management is targeting for next year.

The company said Tuesday that it will expand its distribution network in China, through a joint venture, that could help Skechers generate $10 million to $15 million of sales in the world's most populous country for 2008. International sales currently account for about 20% of the company's total revenue, but I believe that management's best near-term growth prospects remain in the U.S.

That's because some of Skechers said on its latest conference call that top customers like


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are reporting strong shoe sales, and have committed to increasing the shoemaker's shelf space in the new year.

In the meantime, Skechers has a pristine balance sheet with $207.7 million of net cash ($4.54 a share). The company currently does not have a buyback program, but after the stock's poor performance in 2007, I believe that management will be pressured to find a constructive way to put this cash to work in the coming months.

Despite the tepid U.S. retail environment, Skechers appears positioned well to have a solid holiday season. The company is sitting on a lot of cash and is trading at a discounted valuation, even with growth potential from new products and expansion overseas.

If Skechers posts a second straight solid quarter, I believe the market will forgive management's earnings shortfall from earlier in the year. As a result, the stock can trade back up toward $30 over the coming quarters.

David Peltier is a research associate at In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Peltier appreciates your feedback;

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