Skechers Q3 Mid-Quarter Update

| About: Skechers USA (SKX)


Skechers is a top performing stock in 2014- up 76% year to date.

Skechers has been called the hottest footwear company.

Recent sell throughs continue to show massive gains year over year.

Analysts estimates have vastly understated revenue and earnings gains for the past 3 quarters.

So where are we now with 2 months booked for the 3rd quarter of 2014? Analysts have become extremely bullish on Skechers with 6 buy recommendations and raised price targets recently. Susquehanna, Sterne Agee and Citigroup all have price targets between 65 and 70 and have written about the strong sell throughs of their products at the major footwear chains in July and August. July had a roughly 30-40% increase in retail sell throughs and August is more in the 40-50% range in year over year increases in sell throughs. The magnitude of these increases is almost hard to comprehend, but the fact is that Skechers brand is taking significant market share from its competitors. Skechers combination of comfort, styles, color and low price are resonating with the consumer and sharp increases in demand are bearing that out. The strength this quarter is following the trend of Q1 and Q2 where revenue increased 20% and 37% respectively and earnings per share increased by 400% and 500% respectively. As a caution, last year's Q1 and Q2 were coming off a low base so this year's earnings growth is a bit exaggerated, but the main point is that demand is rising sharply for the company's products.

So what is the set up for Q3 revenue and earnings? The company did 517 million in revenue and .53 per share in earnings in last year's 3rd quarter. Revenue and earnings estimates have been steadily rising as analysts see the growth in sell throughs and raise their numbers accordingly. The current revenue estimate is 626 million and the estimate for earnings per share is for .91 cents. This would represent 21% revenue growth and 71% earnings per share growth year over year. While the quarter is still on going and more sell through data will be coming through for September, we will boldly say that the current estimates again look extremely low. Based on 20-25% increases in backlog coming into Q3 and the 30-50% increase in sell throughs, we believe a revenue number of 650 million and above to be a minimum case for this quarter. We also believe earnings per share of at least 1.10 per share is already the most likely scenario. If the red hot trends continue through September and consumer spending for the back to school season shows any strength, we believe revenue could exceed 675 million and possibly approach 700 million. Earnings per share of 1.20 could be possible with that level of revenue. With this level of demand and this level of market share gain, revenue gains year over year should be in the 30% range which gives us a 670 million revenue estimate for q3. For now, we will stick with that prediction until more information becomes available.

The strength of the current sell throughs has significant implications for Q4 as well as for 2015. Key customer meetings are showing increased shelf space devoted to new and innovative products from Skechers as well as average price increases of 5-7% per pair. This is significant for future growth prospects as well as a very positive read through for gross margins. So Q3 is important, but the current strong demand has very positive longer term implications as well.

One of the big trends in the marketplace is the athletic-casual apparel category. This category is experiencing significant growth led by Lululemon and the additional competitors coming into the space. Demand has been high in this category and appears to be able to continue. Trend right, comfortable casual athletic sneakers with varying design have complemented this trend very well and can explain some of Skechers explosive growth. Skechers is in the beginning stages of rolling out its casual athletic apparel lines which at this point remains insignificant. By mid 2015, apparel could become a more meaningful contributor to their top and bottom lines.

How does the growth interpolate to the current stock price? Obviously, with another potential revenue and earnings per share report well above analysts estimates for Q3, the stock should be headed higher. That said, the stock price has come a long way in the last 2 years(up 76% year to date) and some sideways action would seem to be possible. That said, the sentiment turn in the Skechers name is still not complete. Analysts have turned bullish, fund buying has stepped up in recent quarters, but most investors are still waking up to the story. We feel the Skechers story still has a long way to go on the upside.

We have generally not discussed the potential shorter term volatility of the stock price. A leveling off of the stock price or a short term pull back from current levels is of course possible based on the huge share price increases of the last 2 years. We do believe that longer term the company's growth prospects will play out very well. We are in the process of 20-30% or greater revenue growth year over year for 2014, and we believe the company can sustain 10-20% revenue growth over the longer term and earnings per share growth at a rate higher than that. It is important to stress the long term nature of an investment in Skechers to take advantage of the significant growth potential over the next 5 years.

We projected a fair value price target for Skechers of 60 dollars per share back in July when the stock was 48. We reached the 60 level in August. The 60 level represents a 3 billion market cap. With 2014 and 2015 ebitda estimates of 230 million and 300 million respectively, we feel that 10 times next year's ebitda is very cheap considering the growth prospects ahead for the company. The company is investing heavily to become a 4 billion dollar revenue company by 2020, and earnings per share at that size could approach 8.00 per share. The long term growth story should continue to play out in Q3 and in subsequent quarters and years. We believe a 3 billion market cap could grow to a 4 to 5 billion market cap as the company executes on its growth plans. With one of the strongest balance sheets in the industry and significant annual free cash flow, the company has all the capital it needs to grow and actually has substantial excess capital that could fund future dividends or buybacks. Barring any unforeseen negative macro economic issues and with continued shoe design and innovation improvements, distribution build out and international expansion, the growth appears very likely to continue unabated.

Disclosure: The author is long SKX.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.