Skechers Tops Expectations - Analyst Blog

Skechers USA Inc. ( SKX ), which has lately been grappling with the clearance of its excess toning inventory, is now showing some signs of stability as evident by its better-than-expected first-quarter 2012 results.

The company delivered a quarterly loss of 7 cents a share that fared far better than the Zacks Consensus Estimate of loss of 27 cents, and showed a substantial improvement from a loss of 54 cents incurred in the fourth quarter of 2011. The company had earned 24 cents in the first quarter of 2011.

With more emphasis now 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.

Let's Dig Deep

Skechers, which competes with Deckers Outdoor Corporation ( DECK ) and Nike Inc. ( NKE ), stated that total net sales for the quarter dropped 26.2% to $351.3 million from the prior-year quarter, reflecting lower sales across all divisions, except domestic retail. However, total revenue came in ahead of the Zacks Consensus Estimate of $336 million.

The domestic wholesale business tumbled 36.8%, reflecting a difficult comparison due to robust sales witnessed in the last year quarter on account of offloading toning inventory.

International wholesale business experienced a decline of 30% on account of 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. However, management hinted that both Japan and Brazil will be accretive to the company's growth over the next year.

On a combined basis, retail business sales grew 6%. Domestic retail sales increased approximately 7% due to the addition of 43 new stores, however, comparable-store sales fell 3.7%. International retail sales fell marginally by 1%, whereas comparable-store sales dropped 10.4%.

The company's licensing division has been another source of revenue, whereby the company licenses its name and images. The company generated $1.1 million in revenue during the quarter from its licensing affiliates, which include eyewear, kids apparel, backpacks, watches, luggage, and socks.

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.

Gross profit plunged 19.2% to $155.7 million, however, gross profit margin expanded 390 basis points to 44.3% attributable to an increase in full-price products in the market. The company said that average price per pair increased 5.8% during the quarter. Skechers also hinted that the number of pairs sold during the quarter fell 40% compared with the prior-year quarter, when the company had resorted to sell the products at heavy discounts to clean its inventory.

Stores Update

During the quarter, Skechers opened 11 domestic stores and closed 1 location bringing the total store count to 339. So far in the second quarter, the company has opened 3 concept stores and closed 1 outlet, and plans to open 10 to 15 additional locations over the remaining year.

Skechers concept stores registered favorable comparable-store sales and witnessed a double-digit growth in pairs sold.

The company's international distribution affiliates opened 11 stores during the quarter in Saudi Arabia, Mauritius, Mexico, Columbia, Taiwan, Hong Kong, Malaysia and South Korea. The company at the end of the quarter operated 78 outlets under joint venture countries in Asia, including stores operated by licensees, and 214 additional distributor-owned or licensed Skechers retail stores worldwide. During the quarter, one store in South Korea and two locations in Russia were closed.

Strategic Initiatives

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, 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, consolidating North American distribution facilities under one roof, streamlining inventory, and new product offerings.

The company also intends to lower its operating expenses relative to total revenue in the back half of 2012. During the quarter, total operating expenses dropped 9.9% to $161.2 million.

Further, Skechers expects to double its company-owned subsidiary business in Japan over the next 3 to 5 years.

Other Financial Aspects

Skechers has been right-sizing its inventory. Consequently, total inventories at the end of the quarter were $214.6 million, reflecting a decrease of 43% from the year-ago quarter.

Skechers portrays a healthy balance sheet with cash and cash equivalents of $391.6 million, total long-term debt of $84.1 million and shareholders' equity of $856.7 million, excluding non-controlling interest of $40.4 million at the end of the quarter. Capital expenditures for the quarter were approximately $11.6 million.

Currently, we maintain a long-term Underperform recommendation on the stock. However, Skechers holds a Zacks #3 Rank that translates into a short-term Hold rating.

DECKERS OUTDOOR ( DECK ): Free Stock Analysis Report

NIKE INC-B ( NKE ): Free Stock Analysis Report

SKECHERS USA-A ( SKX ): Free Stock Analysis Report

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

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

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