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Skechers Turns Lower as Analysts Debate

Skechers shares dipped late Friday as Wall Street continued to debate the ramp-up in discounting of its Shape-ups line of toning sneakers.



) -- Shares of

Skechers U.S.A.

(SKX) - Get Free Report

dipped late Friday as Wall Street continued to debate the recent ramp-up in discounting of the Manhattan Beach, Calif.-based footwear company's popular Shape-ups line of toning sneakers.

The stock was


on Thursday after Susquehanna Financial Group lowered its rating to neutral, citing the discounting and the possibility of order cancellations, and BB&T Capital reportedly chimed in with its own downgrade on similar concerns today.

But Wedbush Morgan and Sterne, Agee & Leach were taking the other side of the argument, saying that although Shape-up sales appear to have slowed, the plus 12% sell-off yesterday was too much.

With around an hour left in the session, the shares were down 7 cents to $23.02 after running as high as $24.24 earlier in the day. Volume of 3.7 million was ahead of the usual churn of 2 million, but still a ways off the pace needed to approach Thursday's total of 9.4 million.

Wedbush maintained an outperform rating on the stock, but wasn't entirely bullish, dropping its 12-month price target more than 20% to $42 from $54. The firm said that while it's now "clear that toning sales have decelerated from earlier in the year," the pullback in the stock has pushed the stock down so far that "the market is assigning no value" to the toning products business, which it views as a mistake.

"We continue to believe the toning category will exist next year as vendors come to market with new products that have better aesthetics and appeal to a broader deomgraphic," Wedbush said, adding later: "Taking it all together, we see limited downside risk from current levels as catalysts for re-accelerating growth remain visible."

Sterne, Agee & Leach was on board with that view, calling the valuation of the stock, which was down more than 20% year-to-date through Thursday's close and is off even more since hitting a 52-week high of nearly $45 in late June, a "compelling entry-point."

The firm has a buy rating on the shares, and compared what's going on with the older generation Shape-ups to the product cycle of


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"We believe that the new styles of Shape-ups are more compelling than the originals, and the S1 will still be around, but in a more diminished role, relative to where it has been," the firm said in a note to clients. "We think of the Iphone 3GS, arguably a great machine, but it lost value after the introduction of the Iphone 4."

Stern, Agee acknowledged that the company's decision to proactively manage down inventory of the older product is "clearly not good for the stock right now" but said it's still confident Skechers can meet its estimates for earnings of $3.95 and $4.49 a share respectively in fiscal 2010 and 2011.

"The retailers with whom we regularly speak are very confident of the

toning category and have nothing but praise for the upcoming SKX Shape-ups offerings," the firm said, estimating Skechers could see revenue of $750 million from its toning products in 2011 versus 2010's projected $500 million.

Sterne, Agee also briefly mentioned Skechers' management team, saying its "aggressive nature" is what makes the company great but that it also gives investors angst, and raised the possibility that management could look for a way to return some cash to shareholders.

"SKX management has never bought back stock or offered a dividend, but we believe, perhaps foolishly that there may be a change in that regard, given the current PE multiple of 5.1X and EV/EBITDA

enterprise value/earnings before interest, taxes, depreciation and amortization multiple of 2.5X vs. our 2011 earnings estimate," it said.


Written by Michael Baron in New York.

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