We have downgraded our long-term recommendation on
California-based footwear manufacturer and retailer
Skechers U.S.A., Inc.
) to 'Neutral' from 'Outperform', based on its continuously
declining total net sales in fiscal 2012. As a result, we prefer to
remain on the sidelines until we witness a top-line growth.
Skechers' total net sales tumbled 26.2% and 11.6% in the first
and second quarters of 2012, respectively, reflecting lower sales
across all divisions except domestic retail in the first quarter,
whereas the sales dropped in the second quarter due to lower sales
across domestic and international wholesale channel.
Moreover, Skechers, which competes with
Deckers Outdoor Corporation
), does not have a long-term contract with any independent contract
manufacturers. Therefore, the fall in production, poor quality,
failure to meet production deadlines or increased manufacturing
costs could result in cancellation of orders or demand for
reduction in prices, which in turn, could adversely affect
Skechers' revenue and earnings.
On the flip side, Skechers is now showing some signs of
stability as evident from its better-than-expected second-quarter
2012 results. The company delivered a quarterly loss of 4 cents per
share that fared far better than the Zacks Consensus Estimate of a
loss of 12 cents, and showed a substantial improvement from a loss
of 31 cents incurred in the prior-year quarter. Skechers
anticipates returning to profitability in the second half of fiscal
2012, sustaining the momentum in 2013 and thereafter.
Further, management remains committed to focus on new lines of
products, opening of additional stores and increasing distribution
channels with the development of international distribution
agreements, to improve its sales and profitability. Therefore,
Skechers, through its subsidiaries and joint ventures, is poised to
enhance its global reach in the footwear market.
Another major element, which could prove accretive to the
company's growth and profitability, is its intention of lowering
operating expenses relative to total revenue in the rest of 2012.
Further, Skechers expects to double its company-owned subsidiary
business in Japan in the next 3 to 5 years.
Considering these factors, we think that the current valuation
is fair and adequately reflects Skechers' future growth prospects.
Our new long-term Neutral recommendation is supported by a Zacks #3
Rank (short-term Hold rating).
DECKERS OUTDOOR (DECK): Free Stock Analysis
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SKECHERS USA-A (SKX): Free Stock Analysis
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