It has been about a month since the last earnings report for Skechers (SKX). Shares have added about 4.5% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Skechers due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
Skechers Beats on Q3 Earnings, Provides Upbeat View
Skechers USA Inc. reversed the preceding quarter's earnings miss of 27.5% with a 13.7% beat in the third quarter. Management also provided an upbeat view for the final quarter, which perked up investors despite the year-over-year earnings decline and top-line miss. The sluggish domestic wholesale business performance was compensated by double-digit increase in both international wholesale and global company-owned retail businesses.
This Manhattan Beach, CA-based company pointed that Skechers D'Lites is fast gaining traction on sturdy demand in North America and Europe after huge success in Asia. The brand is positioned for growth in South America, India and the Middle East.
Let's Delve Deep
This designer, developer, marketer and distributor of footwear recorded earnings of 58 cents a share that beat the Zacks Consensus Estimate of 51 cents and management's projection of 50-55 cents. In spite of top-line growth, earnings declined 1.7% from 59 cents in the year-ago quarter owing to escalating operating expenses, unfavorable foreign exchange impact and a higher effective tax rate.
The company delivered net sales of $1,176.4 million that rose 7.5% from the year-ago quarter but lagged the Zacks Consensus Estimate of $1,214 million following seven straight quarters of beats. We also note that the top line fell short of management's guidance of $1,200-$1,225 million.
Skechers' domestic e-commerce business saw a sales increase of 15%. The company currently operates e-commerce sites in Chile, Germany, the U.K., Spain and Canada.
Gross profit in the reported quarter rose 8.4% to $563.9 million and gross margin expanded 40 basis points (bps) to 47.9% owing to solid domestic margin on higher retail prices and improved segment mix, partly offset by unfavorable foreign currency exchange rates.
Operating income came in at $123.9 million, up 6.4% from the prior-year quarter. Meanwhile, operating margin contracted 10 bps to 10.5% due to higher general and administrative expenses.
Segmental Sales Synopsis
Skechers' domestic wholesale revenues fell 3% year over year in the quarter under review after declining 7% in the preceding quarter. The company shipped 1.5% more pairs, while average price per pair declined 4.4%.
The international wholesale business revenues, which accounted for 45.2% of total sales, rose 11.8% on 22.9% increase in joint venture business and 11.6% growth in distributor business. China is one of the key markets with about 5.6 million pairs shipped in the quarter, roughly 793 Skechers freestanding stores and 2,340 points of sale. Business in China grew 21.9% in the quarter.
Management expects its international distributor business to increase high single-digits, while international subsidiary and joint venture business is expected to improve double-digits in the final quarter.
On a combined basis, global company-owned retail business sales grew 10.6% on 1.9% comps growth. Domestic retail sales rose 8.1% and International retail sales surged 15.7%. Comps increased 3% at domestic retail stores but dropped 0.8% at international retail stores.
Skechers operated 681 company-owned retail outlets globally, comprising 216 international locations at the end of the quarter under review. During the quarter, the company opened 13 stores and remodeled, relocated or expanded six locations. So far in the fourth quarter, the company has opened four outlets. The company intends to open another seven company-owned Skechers stores and remodel, relocate or expand 10 more existing stores in the remainder of 2018.
During the quarter, 108 third-party owned stores were opened and 36 stores were shuttered. So far in the fourth quarter, the company has opened four third-party owned stores with plans to open another 75-100 third-party owned Skechers branded stores through 2018.
Other Financial Aspects
Skechers ended the quarter with cash and cash equivalents and investments of $959.8 million (up $223.4 million from Dec 31, 2017), long-term borrowings (net of current installments) of $69.8 million, and shareholders' equity of $2,024.4 million, excluding non-controlling interest of $142.9 million.
During the quarter, the company bought back roughly 1.4 million shares at a cost of $40 million under its existing share buyback program. The company has approximately $92 million left as of Sep 30, 2018.
Capital expenditures incurred during the quarter were $36.1 million on store openings, remodels, international wholesale operations and expansion of domestic distribution center. Management envisions capital expenditures of about $20-$25 million for the remainder of 2018, reflecting planned opening of stores, store remodeling projects and office renovation.
Management projects earnings between 20 cents and 25 cents a share compared with 21 cents delivered a year ago. The company anticipates net sales in the band of $1,100-$1,125 million compared with $970.6 million reported in the prior-year quarter.
How Have Estimates Been Moving Since Then?
Fresh estimates followed an upward path over the past two months. The consensus estimate has shifted 37.65% due to these changes.
At this time, Skechers has a strong Growth Score of A, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
Skechers has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.