NEW YORK (
) -- Shares of
tumbled Tuesday after the previously bullish Sterne Agee lowered its rating on the stock by two notches, citing growing inventory issues and declining sale prices for the company's toning sneaker products.
"Given conversations with industry contacts, we view it as likely that SKX will print an inventory number north of plus 80-90% y/y
year-over-year on the 4Q10 call, of which $100 million will be toning," the firm said in a research note detailing its downgrade of the stock to sell from buy. "This is particularly concerning given continued deceleration of sales in toning and indications that margins are already collapsing."
The stock finished Tuesday at $19.60, down 7.7%, on volume of 6.1 million, a little less than three times the issue's trailing three-month daily average. Based on that close, the shares are now down 28% year-to-date, although they've dropped more than 50% since hitting a 52-week high of $44.90 on June 21.
Sterne Agee, which also slashed its 12-month price target to $16 from $30, had been holding out as a bull on Skechers, even as other firms grew leery of the company's prospects. As recently as Dec. 2 the firm issued a note maintaining its buy assessment, noting the inventory overhang and declining sales of toning products but still saying potential rewards outweighed the risks.
On Tuesday, the firm finally changed its tune. The appearance of Skechers' product in discount retailers such as
was viewed by Sterne Agee as especially disconcerting, along with the company's continued expansion of its variety of toning models even as sales tail off.
"Our contacts suggest many retailers are significantly shrinking open-to-buy dollars, if not outright exiting the toning category," the firm said. "Meanwhile Skechers is actually increasing the styles, color-ways and models thereby heightening the possibility of inventory issues lingering into 2H11
the second half of 2011."
Sterne Agee had been expecting the company's inventory issues to be resolved by the first quarter of fiscal 2011, and it believes the stock's valuation will now be constrained until the situation with the toning products plays out. And while it brought its earnings estimates for the company down significantly as part of Tuesday's call -- going to a profit of $1.56 a share for fiscal 2011 from a prior view for EPS of $2.37 -- it believes the numbers could come down further.
For example, the firm thinks average selling prices for the shoes "are nearing levels that would necessitate a writedown" and estimates a 20% writedown of the company's toning inventory would translate to an additional earnings hit of 27 cents a share in 2011. And while the logic of lower earnings leading to a lower stock price is straightforward enough, Sterne Agee said Skechers could see an even deeper sell-off that the numbers might justify because of the uncertainty surrounding toning.
"We also believe the multiple is likely to be aberrantly low until there is some visibility into the prospects of toning and investors (as well as management) have some confidence that margins have bottomed and the worst of the inventory issues pass," Sterne Agee said. "In essence, Skechers has a $100M liability on the balance sheet in the form of 4M pairs of toning shoes."
Manhattan Beach, Calif.-based Skechers is slated to report its fiscal fourth-quarter results for the three months ending Dec. 31 on Feb. 18, 2011. The current average estimate of analysts polled by
is for earnings of 19 cents a share on revenue of $408.6 million. That performance would be down significantly on a sequential basis from its third-quarter profit of 74 cents a share on revenue of $554.6 million. For fiscal 2011, the consensus view is for a profit of $2.48 a share.
Wall Street's opinion on Skechers has shifted markedly in the past two months, and the depth of Sterne Agee's downgrade is a significant blow to sentiment. Just two months ago, four of the six analysts covering the stock had either strong buy (3) or buy (1) ratings, not including Sterne Agee. Prior to Monday's change of heart, four of those firms had already moved to hold ratings.
Even with the sell rating in place, Sterne Agee, a market maker for Skechers' stock, offered up a vestige of its positive view of the company.
"We do believe there is core value in SKX, particularly with the fast-growing kids/international and an annuity-like work and basics business," the firm said. "However, similar to the past 18 months, the merits of the bulk of the business will be obfuscated by toning."
Shareholders may not want risk seeing further declines in the stock price before that "core value" is able to come to the fore.
Written by Michael Baron in New York.
>To contact the writer of this article, click here:
>To submit a news tip, send an email to:
Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.