With expectations depressed, Skechers (NYSE: SKX) handily beat its own revenue guidance for the fourth quarter. The company's $764.3 million of sales topped analyst estimates by more than $40 million, and 3.6% comparable sales growth at its stores impressed at a time when many other retailers are struggling to attract shoppers.
It should be clear from Skechers' recent results, though, that the company is no longer the explosive growth stock it once was. Revenue grew by just 5.8% during the fourth quarter, a far cry from the 26.8% growth reported during the fourth quarter of 2015. The company expects first-quarter revenue to jump 8.3% year-over-year at the midpoint of its guidance range, compared to 27.4% during the first quarter of 2016.
Image source: Skechers.
This isn't to say that Skechers isn't investing in growth. The company's fourth-quarter earnings were knocked down by various factors, including spending related to new stores, international growth, and increased headcount in the domestic wholesale business. Skechers can certainly produce solid growth going forward, driven by its international business, but a return to 20% to 30% levels is probably unrealistic.
With growth slowing and cash piling up on the balance sheet, I think it's the right time for Skechers to do something with its excess cash.
Swimming in green
Thanks to Skechers' impressive run over the past five years, with revenue more than doubling and margins expanding, the company has built up quite the rainy-day fund. At the end of 2016, Skechers had $719 million of cash and just $73 million of debt, good for a net cash position of about $646 million. Cash represents about 17.5% of the company's market value.
Unfortunately, Skechers CFO and COO David Weinberg made it clear during the fourth-quarter conference call that management hadn't yet had the discussion about what to do with its excess cash. He did suggest, however, that buybacks would likely take priority over dividends. In response to an analyst question about the company's plans, Weinberg responded:
I'm not sure. We haven't had that discussion as at what point we do that. I would think when we decide to return some of that cash, and we think our big growth is over and we don't have a lot of building or distribution centers or new countries to open, that the first step would be stock repurchase, rather than dividends.
There's nothing wrong with share buybacks if the price is right. Skechers stock currently trades for a little less than 18 times earnings, which seems reasonable given the company's growth potential. I wouldn't be opposed to buybacks at that price, but a dividend would be nice as well.
There's also nothing wrong with maintaining a rock-solid balance sheet. Skechers will no doubt continue to make investments in its international business to drive growth, and having plenty of cash available is certainly a plus.
But I think the company has reached the point where it has more cash than it needs. Free cash flow should be strong in 2017, especially with Skechers guiding for a substantial decline in capital expenditures. Skechers generated $175 million of free cash flow during the twelve months ending Sept. 30, which simply piled up on the balance sheet. Skechers should have no problem funding its growth out of its cash flow going forward.
Given management's comments, I wouldn't be surprised if Skechers began buying back shares sometime this year. Analysts are going to keep questioning management about its cash hoard each quarter, which will become more difficult to ignore as it grows. My preference would be for a mix of dividends and buybacks, but that looks like a long shot in the near future.
Skechers' success over the past few years has created a problem that's good to have -- the company can't possibly invest each dollar of cash flow it brings in each year. It's time for the company to return capital to shareholders.
10 stocks we like better than Skechers
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor , has tripled the market.*
David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Skechers wasn't one of them! That's right -- they think these 10 stocks are even better buys.
Click here to learn about these picks!
*Stock Advisor returns as of February 6, 2017
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.