Skechers USA Inc
), which has lately been grappling with the clearance of its excess
toning inventory, is now showing signs of stability as evident by
its better-than-expected second-quarter 2012 results.
The company delivered a quarterly loss of 4 cents a share that
fared far better than the Zacks Consensus Estimate of loss of 12
cents, and showed a substantial improvement from a loss of 62 cents
in the year-ago quarter.
With more emphasis on a new line of products, cost containment
efforts, inventory management and margin improvement, the company
anticipates returning to profitability in the second half of fiscal
2012, and sustaining the momentum in 2013 and thereafter.
Skechers, which competes with
Deckers Outdoor Corporation
), stated that total net sales for the quarter dropped 11.6% to
$384 million from the prior-year quarter, reflecting lower sales
across domestic and international wholesale channel. These were
partially offset by increased sales from new stores and Performance
lines. Moreover, total revenue came ahead of the Zacks Consensus
Estimate of $373 million.
The domestic wholesale business tumbled 18%, reflecting a sales
decline in toning and non-Skechers branded product.
International wholesale business experienced a decline of 16%,
reflecting a difficult comparison due to strong sales witnessed in
the prior-year quarter on account of offloading toning inventory
and transition to lower-priced products from the toning category.
A challenging economic climate in Europe, the transition of
business in Japan from distributor-operated business to a
company-owned subsidiary, and restructuring of Brazilian business
also adversely impacted the business. Management expects to witness
year-over-year growth in Japan in the second half of 2012, and
hinted that Japan will be accretive to the company's international
business in 2013.
On a combined basis, retail business sales grew 5%. Domestic
retail sales increased 6% due to the addition of 33 new stores,
while comparable-store sales fell 3.4%. International retail sales
increased 3%, whereas comparable-store sales dropped 6.7%.
The company's licensing division has been another source of
revenue, whereby the company licenses its name and images. The
company generated $1.6 million in revenue during the quarter from
its licensing affiliates, which include apparel, eye wear, watches,
backpacks, and stocks.
Management hinted that Li & Fung, one of the leading attire
and accessories manufacturers, will launch fitness apparel for both
men and women under the Skechers' brand in 2012. This will open up
another important source for revenue.
The quarter marked a significant improvement in gross profit,
which increased 19.5% to $171.3 million, reflecting cost
containment efforts. Moreover, gross margin expanded by a whooping
1160 basis points to 44.6% attributable to an increase in
full-price products in the market coupled with enhanced inventory
and strong product sales at retail stores. The company stated that
average price per pair increased 8.4% during the quarter in the
domestic wholesale segment.
The company reported a loss from operations of $1.5 million, a
sharp improvement from a loss of $48.2 million witnessed in the
year-ago quarter. The improvement reflects a 26.4% and 3.1% decline
in selling expenses and general and administrative expenses,
During the quarter, Skechers opened 6 domestic stores and 1
international store in Chile, and closed 2 stores bringing the
total company-owned Skechers retail stores count to 344. So far in
the third quarter, the company has opened 1 concept stores in Chile
and plans to open 5 to 7 additional locations over the remaining
year. Notably, Skechers concept stores registered a 4% increase in
comparable-store sales during the quarter.
The company at the end of the quarter operated 98 outlets under
joint venture countries in Asia, including stores operated by
licensees, and 219 additional distributor-owned or licensed
Skechers retail stores worldwide. During the quarter, Skechers
opened 18 Skechers stores, including one each in Philippines,
Thailand, Serbia, Jordan, Venezuela and Guam. In Mexico, Malaysia
and Australia, the company opened two stores each coupled with six
in South Korea. Moreover, the company closed two stores in South
Korea and one in China.
Management remains committed to focus on new lines of products,
such as 'Skechers GOrun' and 'Skechers GOwalk,' opening of
additional Skechers stores and increasing distribution channels
with the development of international distribution agreements to
improve its sales and profitability.
Moreover, international business remains a significant growth
driver for the company's sales. Management projects international
sales to pick up in the back half of the year. Skechers expects to
double its company-owned subsidiary business in Japan over the next
3 to 5 years.
Skechers, through its distribution networks, subsidiaries and
joint ventures, is poised to enhance its global reach in the
footwear market. Skechers' joint ventures in Asia are portraying
improvement with growing operations in China, Taiwan, Hong Kong,
Singapore and Malaysia.
The company is trying every means to reposition itself for 2012
and beyond. These include lowering of selling and marketing
expenses, streamlining inventory and new product offerings.
Other Financial Aspects
Skechers has been right-sizing its inventory. Consequently,
total inventories at the end of the quarter were $258.1 million,
reflecting a decrease of $67.7 million from the year-ago
Skechers portrays a healthy balance sheet with cash and cash
equivalents of $374.2 million, long-term debt of $71.3 million and
shareholders' equity of $853.3 million, excluding non-controlling
interest of $40.7 million at the end of the quarter. Capital
expenditures for the quarter were approximately $11 million.
Currently, we maintain a long-term 'Outperform' recommendation
on the stock. Moreover, Skechers holds a Zacks #1 Rank that
translates into a short-term 'Strong Buy' rating.
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