Skechers Tumbles on Downgrade

Shares of footwear company Skechers sold off sharply on Thursday with Susquehanna Financial Group.downgrading the stock to neutral.
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Updated with further analyst comment, closing stock prices.

NEW YORK (

TheStreet

) -- Shares of

Skechers U.S.A.

(SKX) - Get Report

sank Thursday as Susquehanna Financial Group downgraded the stock to neutral from buy.

The firm cited concerns about sales slowdown and a recent boost in discounting of the company's popular Shape-ups toning sneaker product.

"Based on conversations with retailers and SportScan POS

point-of-sale data, we have concerns over sluggish volume trends, and more recently the significant increase in Shape-ups discounting unfolding over Labor Day weekend," Susquehanna said in its research note.

The stock finished down 12.6% at $23.02. Volume of 9.4 million was more than four times the issue's trailing three-month daily average of 1.9 million. At current levels, the shares are down nearly 50% since hitting a 52-week high of $44.90 on June 21.

Susquehanna is still confident in its estimate for a profit of $1.15 a share in the company's current fiscal third quarter ending this month, but it believes the fourth quarter and beyond could be challenging.

"

We suspect there is some risk to 4Q and FY11 sales and earnings (we are meaningfully below consensus on both)," the firm said. "We feel that it will be difficult for Skechers to grow the category in the U.S. during 1H11 given recent volume trends, retailers need to discount product (pricing integrity) and

there are difficult comparisons from March through May."

The current average estimate of analysts polled by

Thomson Reuters

is for earnings of $1.17 a share in the September quarter. For the fourth quarter of fiscal 2010 and the whole of fiscal 2011, Susquehanna is projecting earnings of 53 cents a share and $3.32 a share, respectively. The current prevailing estimates on Wall Street are for earnings of 68 cents a share in the December quarter, and $4.24 a share for fiscal 2011.

In its note, Susquehanna said it thinks a recent 20%-off sale on the Shape-ups that ended on August 4 may not have been as strong as initially expected, and expressed consternation about the company's decision to go to a minimum advertised pricing, or MAP, policy for toning/fitness products for its retail partners at the end of August, rather than sticking with a minimum allowed retail price, or MARP, policy.

"The MAP policy sets a minimum price to be used in all advertising for toning product," the firm said. "That said, retailers are allowed to sell the products at lower prices in-store."

Sam Poser of Stern Agee & Leach, which makes a market in Skechers' stock, took a different view of the Shape-ups discounting in a phone interview with

TheStreet

, saying he thinks what the company is doing reflects a "well-planned" approach to managing the transition away from first-generation Shape-ups.

"There's so much new product coming," Poser said, citing the company's XF Accellerator and SR Trainer models. "They are doing what they have to do to work inventory down to the right amount."

Poser, who has a buy rating on Skechers with a price target of $52, also noted the hot summer may have played a part in a slowdown in unit volume, and says he doesn't view discounts of in the range of 12%-25% as significant for the first-generation product given where they are at in the cycle. He added that Shape-ups aren't for kids so they can't be expected to see a bump from back-to-school season.

The weakness in Skechers' stock this summer has come despite the company beating the consensus analyst views in the first two quarters of fiscal 2009, most recently

blowing past

the estimate for the second quarter by almost 90%, reporting a profit of 82 cents vs. Wall Street's estimate of 44 cents.

But the stock remains very sensitive to fashion trends, and as hot as its toning sneakers have been, investors are skittishness about any signs that demand for the product is flagging.

Shares of another footwear maker,

Crocs Inc.

(CROX) - Get Report

also

saw heavy selling

in Thursday's session with the stock closing down 16% at $11.63. Volume of 18.7 million was more than six times the typical churn. A spokesperson for Niwot, Colo.-based Crocs wasn't immediately available for comment on the drop.

Crocs' stock is up 140% so far in 2010. The company reported its second-quarter results on August 5, posting a better-than-expected profit of $32.3 million, or 37 cents a share, on revenue of $228 million. The performance bested Wall Street expectations for earnings of 22 cents a share on revenue of $220.5 million.

--

Written by Michael Baron in New York.

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