Skechers USA Inc. (NYSE:SKX) is one of the largest branded footwear retailers in the United States. It recently hit a 52-week low, driving its P/E to a low of 6 as compared to competitors that trade at multiples of 17 – 30x. SKX has been profitable in all but two quarters in the last five years, has shown strong growth in the last year both top and bottom line and has cash of $5/share with very little debt. Despite this, SKX’s short interest has grown nearly 25% in the last month, analysts are downgrading the company and insiders are selling. What gives?
Whenever there is disagreement between the perceived direction the company is moving and the direction the company is trading, it is important to dive deeper into the company’s financial statements to find the cause. Sometimes, Mr. Market is overreacting to a news item (e.g. CEO resignation), in which case the value investor may decide now is a great time to buy. However, this isn’t always the case, and there is little success found in blindly being a contrarian.
SKX’s P/E is low, but it is low not just as a result of a declining numerator, but because of a historically and temporarily high denominator. SKX’s TTM earnings are 2.6x higher than their three year average, as a result of the introduction of its pioneering “toner” shoes, which have a rounded bottom that has led the company to make controversial health claims. These shoes are selling extremely well, but due to the effects of competition, sales are slowing as new entrants in this category have begun flooding the market with their own toners. This has led to a significant number of order cancellations in the last quarter, resulting in a build-up in inventory.
As a value investor, we know that the company’s long term track record is a more useful gauge for setting expectations about future performance than a short-term spike. If we use SKX’s three-year average earnings, we see that the company is trading at a much more reasonable (for the industry) P/E of 16. Still slightly below its competitors' range, but not providing a margin of safety.
On both a NAV and EPV analysis, SKX is accurately priced (or, ever so slightly overpriced). An investment in SKX would amount to a speculative bet on the company’s ability to confound expectations based on its historical track record and thwart its competitor’s efforts to enter the toner market. Currently, all evidence points to the contrary.
Disclosure: At publication, the author does not have a position in the securities of this company.