Skechers Has Strong Quarter, But Misses Estimates

Oct.28.10 | About: Skechers USA (SKX)

Skechers USA Inc. (SKX), the designer, marketer and distributor of footwear, recently delivered third-quarter 2010 results that missed the Zacks’ expectation for both the top and bottom lines. The Zacks Consensus Estimate had been falling prior to the earnings announcement.

The quarterly earnings of 74 cents a share jumped 42.3% from 52 cents delivered in the prior-year quarter but missed the Zacks Consensus Estimate of $1.00.

Skechers, which competes with Deckers Outdoor Corporation (DECK), said that total net sales for the quarter soared 36.8% year-over-year to $554.6 million driven by growth across wholesale and retail businesses, but fell short of the Zacks Consensus Revenue Estimate of $566 million. However, the company notified that the quarterly sales reached a record level in its 18-year history.

The domestic wholesale business surged 54%, whereas the international wholesale business rose by 24% during the quarter. Total domestic and international retail sales climbed approximately 17.5%, reflecting a 14% increase in domestic sales and a 52% rise in international sales. The combined retail same-store sales climbed 6%.

Skechers, which holds a 55% market share of the toning shoe category in the U.S., indicated that it has witnessed order cancellations. Consequently, total inventories at the end of the quarter under review were $326.7 million, reflecting an increase of $102.6 million from December 31, 2009. Management also stated that extended delivery times were also the reason behind the inventory pile-up.

Gross profit surged 37.5% to $252.7 million, whereas the gross profit margin expanded 30 basis points to 45.6%, driven by increase in the top line, fewer store closures, higher-margin product mix and increase in price.

During the quarter, Skechers opened 13 company-owned retail stores bringing the total store count at the end of the quarter to 275. The company also opened 6 distributor-owned or licensed Skechers retail stores and closed one store during the quarter. At the end of the quarter, there were 137 distributor-owned or licensed retail stores.

The company continues to focus on new lines of products, opening of additional Skechers retail stores and distribution channels and the development of international distribution agreements in India, South Korea, Croatia, Taiwan, Greece and Mexico, which should increase sales and profitability.

Moreover, with growing operations in Chile, Hong Kong and China, we believe that going forward international business will become a significant growth driver for the company’s sales. Skechers through its distribution networks, subsidiaries and joint ventures is poised to enhance its global reach in the footwear market.

Skechers portrays a healthy balance sheet with cash and cash equivalents of $248.8 million, total long-term debt of $31.6 million and shareholders’ equity of $942.6 million, including non-controlling interest at the end of the quarter. Capital expenditures were nearly $35.9 million for the quarter.

We believe that given lower-than-expected results and order cancellations, a negative sentiment may be palpable among the analysts covering the stock, and we could witness a fall in the Zacks Consensus Estimates in the coming days. Currently, we have a Neutral rating on the stock. However, Skechers holds a Zacks #5 Rank, which translates into a short-term ‘Strong Sell’ recommendation.