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skechers shoeOn November 29th, 2011 Amvona published the article "Why we're still buying Skechers stock." The article indicated that shares in the company had been purchased for investor accounts between $11.86 and $12.77 per share.

Here were a few of the reasons for the purchase outlined at the time:

  • 20 years of successful operation and high growth
  • 2010 profit approx. double that of 2008 and 2009.
  • Split 2010 earnings in two (to cover 2010 and 2011), and you have consistent profitability from 2008 - 2011.
  • The enterprise value of the company (or its effective purchase price to an acquirer on November 25th, 2011 was only $498 mln. (for a company with about 2 bln in sales in 2010)
  • Net Current Assets (current assets minus all liabilities) is $523 mln. or $10.59 per share.
  • 60 mln. Tax refund due to the company in 1H 2012 (about $1.21 per share) - think of it as the lost 2011 earnings (since expenses were overstated in 2010). When this is added back to point 3 above, the company was actually even more profitable over the 2010-2011 time frame than the prior 2008-2009 period.
  • With the tax refund, the company's Net Working Capital, or Net Current Assets is actually $11.81 per share - the stock sold for $11.83 per share on November 23rd - basically just Net Working Capital (meaning the remaining ~420 mln. in tangible assets are essentially free at that price)
  • Price to book is only .65

Why we're still buying Skechers stock (Amvona, November 29th, 2011)

Performance

On November 28th, 2012 (one year later) the shares closed at $19.98. Here is how the investment performed in that time against the benchmark S&P 500:

Fig. 1 (SKX vs. S & P 500)

Issue

Date

Price

Date

Price

Perf.

Months

Annualized

SKX

11/28/2011

$12.77

11/28/2012

$19.98

56.5%

12.0

56.3%

S & P 500

11/28/2011

1192.55

11/28/2012

1314.88

10.3%

12.0

10.2%

As the figures indicate the investment outperformed the benchmark S&P 500 by 46.1% in the year that followed. However the shares were not kept for one full year, rather the position was disposed on June 12th, 2012. Here is the actual return (including annualized figures):

Fig. 2 (SKX Actual Return vs. S&P 500)

Issue

Date

Price

Date

Price

Perf.

Months

Annualized

SKX

11/28/2011

$12.77

6/12/2012

$20.36

59.4%

6.5

110.1%

S & P 500

11/28/2011

1187.89

6/12/2012

1314.88

10.7%

6.5

19.8%

The investment in SKX outperformed the S&P 500 by 90.3% on an annualized basis. Annualizing returns is important as a more accurate reflection of what the return on the capital might be since it is available for reinvestment. This of course only applies if returns are consistent.

In the article a comparison was also drawn to Skechers (NYSE:SKX) main competitor Nike (NYSE:NKE):

"Nike's management team is really second to none, but their shoes are expensive and well, so is their stock. For folks who don't want to pay a premium for a pair of shoes, there's always Skechers, and for investors who don't want to pay 4x + book for a stock, well again, there's Skechers. There is not only room for number two players, they are necessary - few other competitors have the breadth of product offerings and the multi-tiered approach to product delivery that SKX does - we like it - and we like the current price of the shares even more."

Why we're still buying Skechers stock (Amvona, November 29th, 2011)

Here is how the shares of SKX performed against shares of NKE in the same time period:

Fig. 3 (SKX vs. NKE)

Issue

Date

Price

Date

Price

Perf.

Months

Annualized

SKX

11/28/2011

$12.77

11/28/2012

$19.98

56.5%

12.0

56.3%

NKE

11/28/2011

94.91

11/28/2012

99.13

4.4%

12.0

4.4%

There are good and bad companies

"Although there are good and bad companies, there is no such thing as a good stock; there are only good stock prices, which come and go."

Benjamin Graham (The Intelligent Investor, p 473)

The above figures seem to prove this point, although NKE is the superior concern, as acknowledged in the article, SKX was by far the superior value, and in the twelve months that followed SKX investment, the shares outperformed NKE by 51.9%. In the end an investment in shares of NKE at the same time would have returned only 4.4% (less than real inflation).

"Last time we checked Mom and Pop ice cream shops sell for 38% of revenues, and discounts to book value? Deckers (NYSE:DECK) and NKE garner ~5-600% premiums over book, and NKE is growing owners equity only about half as fast as SKX - due to their size, they could not possibly have the same rate of growth potential of the much smaller SKX. DECK on the other hand is commanding a whopping ~600% premium over book for its shares. To put that in perspective DECK has half the revenue as SKX, yet roughly 3.5 x the market cap. Yes, they sell UGG's - but we've got $50 bucks that says UGG's will be selling about as well as toning shoes in six months. That is what the fashion industry is, that is what it has to be. Obsolescence is clothes is not as great as companies in that industry would like, so things have to come in and out of fashion, and then, when new ideas (if any exist) run out, the whole cycle starts over again."

SKX and the markets strange reaction to Sterne Agee (Amvona, December 22nd, 2010)

Tuesday, November 30, 2010, 2:43 PM Deckers Outdoor (DECK +4.2%) surges after announcing quarterback Tom Brady as pitchman for Uggs, and Jim Cramer calls the stock inexpensive compared to other shoemakers. Cramer says on CNBC that if the company has strong results from its men's footwear, then numbers will be dramatically raised. (PR)

Seeking Alpha (Currents)

Needless to say, the Amvona comments on UGG's was not that popular at the time. Six months later would have been June 22nd, 2011. Here is how shares in DECK performed between June 22nd, 2011 and November 28th, 2012:

Fig. 4 (DECK vs. S & P 500)

Issue

Date

Price

Date

Price

Perf.

Months

Annualized

DECK

6/22/2011

$82.09

11/28/2012

$39.31

-52.1%

17.3

-36.2%

S & P 500

6/22/2011

1287.14

11/28/2012

1409.93

9.5%

17.3

6.6%

As can be seen from the table, shares of DECK lost 52.1% of their value in just over 17 months, an annualized loss of about 36.2%, and underperformed the Benchmark S&P 500 by 61.6% on an annualized basis.

However the comparison between SKX (superior value) and DECK (overpriced) was made on Dec. 22nd, 2010, here is how the two issues performed since that time:

Fig. 5 (DECK vs. SKX)

Issue

Date

Price

Date

Price

Perf.

Months

Annualized

DECK

12/22/2010

$84.31

11/28/2012

$39.31

-53.4%

23.2

-27.6%

SKX

12/22/2010

19.41

11/28/2012

19.98

2.9%

23.2

1.5%

As can be seen, SKX outperformed DECK by 56.3% in a period of just under two years.

Groceries and Perfume

"...we advised the readers to buy their stocks as they bought their groceries, not as they bought their perfume. The really dreadful losses of the past few years (and on many similar occasions before) were realized in those common-stock issues where the buyer forgot to ask, 'How Much?'"

Benjamin Graham (The Intelligent Investor, p 8)

Here are a few more of the salient points raised in the Nov. 2011 Amvona article as it related to the purchase of SKX shares:

  1. Will this company continue to lose money (and therefore possibly go out of business) which is how the shares are priced, and if so, why (i.e. what is fundamentally wrong with the company)?
  2. Will the company resume it former profitable operations (as has been the case for several decades)?
  3. Do the current products reflect the potential for reasonable profits that are aligned with the industry?
  4. Is the current market pricing rational?

Why we're still buying Skechers stock (Amvona, November 29th, 2011)

It has been said that hindsight is 20/20. However, at the time 20/10 had to suffice, so back on that fateful 28th day of November 2011 a huge concentrated stake was taken in the shares - when the buying was finished SKX represented as much as 35% of assets in investor accounts.

The November 2011 article continued with the following.

"If the company had consistent earnings for 2010 and 2011 instead of a huge year in 2010 and no earnings or slight loss in 2011, would the market have punished the shares so radically (a decline of 73% peak to trough in about 18 months) even though the financial result is effectively the same? Was the toning deal all bad? They sold a boat load of shoes with their brand all over it. The line (which was highly profitable) surely funded a large part of their ad campaigns in 2011, and thus contributed to brand awareness - it brought the company to two billion in sales. Then, just as with all fashions and gimmicks, it was suddenly over. Maybe the question isn't "does the punishment fit the crime," but more appropriately "what's the crime again?" We seem to have missed it - perhaps we're just not smart enough to figure it out.

The investor in the shares today is still left with the same machine that dreamt up all the former money makers (including the traditional toning line), and they've dreamt up a few other nice products as well - SRR and LIV are doing well, though we think the GOrun line will take the spot light in 2012. Will they be the cash cows the traditional toning shoes were? Hard to know, and they don't need to be - we think they will lead the company back to profitability in 2012 regardless - if this comes to be, 2011 will seem like an anomaly."

Why we're still buying Skechers stock (Amvona, November 29th, 2011)

Wednesday, October 24, 4:45 PM Skechers : Q3 EPS of $0.22 misses by $0.03. Revenue of $429.4M (+4% Y/Y) beats by $1.6M. Shares +5.7% AH. (PR)

Seeking Alpha (Currents)

In Q3 2012 SKX, as predicted in the Nov. 28th, 2011 article, did in fact return to profitability.

Smoking Cigar butts

"If you buy a stock at a sufficiently low price, there will usually be some hiccup in the fortunes of the business that gives you a chance to unload at a decent profit, even though the long-term performance of the business may be terrible. I call this the "cigar butt" approach to investing. A cigar butt found on the street that has only one puff left in it may not offer much of a smoke, but the "bargain purchase" will make that puff all profit."

Warren Buffett (1989 Annual Report of Berkshire Hathaway)

not for everyoneSmoking cigar butts is not for everyone. Shares of SKX would not be purchased again, at least not at current prices. While the shares are likely worth more than the current price, perhaps as much as $36, the earnings pictures in the last 10 years has been too inconsistent to be considered as a safe investment (and certainly not immune to excessive volatility). Rather the company fits the profile of a "special situation" investment (a much more specialized operation), that is to say one where significant value is likely to be unlocked only as a result of a corporate event, rather than the company's ability to consistently produce owners earnings. It is not clear that a catalyst, such as a takeover is imminent, and therefore, the shares would only represent a possible opportunity if the margin of safety were more significant, that is to say if the shares were to trade in the range of $12-15 again. However even at those prices exceptional research ought to be done particularly on the question of capitalization and corporate governance.

The shoe business is extremely saturated (see also the brand index on a sites such as Zappos.com) making it difficult to discern enduring competitive moats. Retail and fashion as larger segments are themselves especially vulnerable to trends and fads. The Skechers investment produced an extraordinary result for investors but one which is not easily repeated since it was essentially purchased (in late November 2011) for less than Net Current Asset Values (NCAV) alone - the result of exceptional pessimism regarding the company's prospects, and disregard for the product cycle. In that sense it was very similar to the investment in Force Protection - however, in the shares of FRPT, the specter of a take-over was much clearer - it is important to note that both were situations that are rarely found.

Source: Update: Why We're Still Buying Skechers Stock