Skechers Rolls With The Punches, Delivers New Shoes

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Shape-up toning shoes were all the rage in 2010.

They gaveSkechers ( SKX ) a big sales lift and, then, thump. They fell flat.

Skechers would just as soon forget about the product's spectacular fall, which caused a profit loss of 60 cents a share in 2011 on a 20% drop in sales as retailers cleared out excess inventory at discounts.

As they were clearing out Shape-up inventory, wholesale customers were reluctant to place big orders with Skechers on other products.

Skechers' wholesale customers include department stores, such asMacy's ( M ) andDillard's ( DDS ) and footwear specialty stores, such as Famous Footwear.

"Skechers was put in the penalty box for quite a while. Retailers didn't want to take the risk of getting slammed again," said Sterne Agee analyst Sam Poser.

Skechers went back to the drawing board.

"They redeveloped a lot of their product lines, and they came up with new product in a lot of different segments," said analyst Jeff Van Sinderen of B. Riley & Co. "That product has been gaining strong traction for the last couple of quarters."

Performance Division

Running shoes were among the new lineup, part of a new performance division that also includes lightweight, active and sports shoes for men, women and kids.

Without one mention of Shape-ups in its last earnings report or conference call, Skechers reported a 39% jump in fourth-quarter sales vs. the prior year, to $395.6 million.

From dress and casual footwear to running shoes, its products have lately been selling well in wholesale channels and in the company's 350-plus company-owned stores.

Same-store sales at company-owned stores rose in the low-double-digits in the fourth quarter while international business leapt 30%.

In the year-end report Feb. 13, CEO Robert Greenberg called 2012 "a remarkable year for Skechers" as the Manhattan Beach, Calif.-based company broadened product lines and grew earnings 132% over 2011's 60-cent loss.

Sales, however, were down 3% for the year as excess inventory continued to be liquidated, especially in the first half of the year.

Earnings in the fourth quarter grew 121% to 8 cents a share. In the same quarter of 2011, earnings had plummeted 657% for a 39-cent per-share loss. For all of 2011, profit fell 122% to a loss of 60 cents a share.

'Strong Start'

Greenberg said the first quarter of this year got off to "a strong start." Shares are up almost 25% since the first of the year.

Business with one top wholesale customer,J.C. Penney ( JCP ), has suffered, however, due to Penney's own internal problems. David Weinberg, Skechers' chief operating and financial officer, told analysts the company expects some decline in the first quarter and is unsure how Penney's business will unfold the rest of the year.

Still, analysts expect first-quarter profit to climb from last year's 7-cent loss to 19 cents a share. For the full year, they see earnings rising 442% to $1.03. Revenue is expected to grow 17% to $1.82 billion.

First-quarter results have been postponed following the resignation earlier this month of Skecher's auditor, KPMG. Federal prosecutors have charged KPMG's lead audit partner in Los Angeles with passing inside tips on Skechers andHerbalife ( HLF ) .

KPMG has stated that it has no reason to believe Skechers' financial statements were materially misstated, and Weinberg agreed, adding in a statement that the quarter should show "significant growth."

Shape-ups' rise and fall "seems like ancient history," said Van Sinderen, who noted that the curved-bottom shoes are "pretty much gone now."

Skechers led the toning category and so was the hardest hit when sales started falling for all participants, including Reebok, Avia and New Balance, among others.

In the 12 months ended February 2012, industrywide toning sales in the U.S. fell 58% to $306.5 million, according to the NPD Group. They fell another 77% in the year ended February 2013, to $70.4 million.

Skechers was especially hobbled by claims that it had used deceptive advertising in claiming that the shoes helped wearers gain muscle and lose weight.

The company agreed to pay $50 million to settle federal and state charges.

"Now, they have a broader mix of good product," said Poser. "Not one item will crash and burn and cause the whole thing to go down the way toning did."

Skechers is actively promoting its expanded product line. New commercials were aired late last year for GOwalk, Daddy's Money and SKCH+3. And its Bobs line was supported with actress-model Brooke Burke of "Dancing With the Stars."

Relaxed Fit

The company's Relaxed Fit was supported with three spots featuring sports icons Mark Cuban, Joe Montana and Tommy Lasorda.

This year's Super Bowl aired a new ad for the new GOrun2 running shoe, pitting man against cheetah to highlight the shoe's speed.

"They're gaining traction in pretty much every segment of the business," Van Sinderen said. Performance shoes such as GoRun and GoTrain are selling especially well, he adds. "Product is back on track."

Meanwhile, Skechers plans to open at least 30 new stores this year. And it plans to roll out apparel to retail stores and wholesale channels on a limited basis to test the waters.

Asked in a conference call how big the apparel business could get, Weinberg said, "Oh, I hope it's about $1 billion. But I have no idea. I mean, apparel is pretty big and it could be (big)."



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: DDS , HLF , JCP , M , SKX

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