Skechers: Ignoring Obvious Value 7 comments
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Old news now, but Skechers (SKX) second quarter was less than stellar. It was sort of a replay of the December '07 quarter, weak top line and a miss on the bottom line. Gross margin looked great, but G&A expenses deleveraged the sales line. A positive swing in interest expense and other income boosted the eps comp by 2 cents, while a lower tax rate also modestly detracted from earnings quality. Inventories rose 31%, so shoppers better show up in Q3 or that may become a burden.
The midpoints of management guidance for the September quarter are revenues, up 9.5%, and earnings per share, up 15%. That suggests positive operating leverage, which was exceptionally good in the March quarter, will return. To be fair, the Street does not seem to do a great job of modeling earnings for the company, with the Sept '07 quarter 21% ahead of the Street, December 10% below, March 17% ahead, and then June '08 9% below consensus. Such a pattern suggests simply ignoring expectations and focusing on the trend of growth and quality of earnings. SKX has an easy comparison for the full year 2008 and coupled with compelling valuation, makes it a stock worth examining.
However, to further confuse the analysis, Wednesday evening SKX made a cash offer to buy Heelys (HLYS). At first glance, the appeal seems absent, since HLYS is currently struggling with falling revenues and negative earnings, suggestive of the crash and burn of a typical "fad" stock in the same vein as Crocs (CROX). The proposed purchase price of $142.8MM in cash puts a large dent in SKX' cash hoard of $240MM. This analyst lacks any insight into the strategic value of HLYS to SKX, but if the brand can be turned around, the opportunity could be interesting. I say that because HLYS has $96.8MM in cash, and zero debt, on its own balance sheet, so SKX is proposing to buy the company for a net cost of $46MM which is only 25% of last year's revenues.
Impediments to this transaction: HLYS insiders control two-thirds of the shares, and the stock is way down in price. What will motivate them to sell absent a bleak outlook for turning the company around? Thus, if the outlook is indeed grim, SKX may not be getting a bargain even at this seemingly low valuation, especially if the price needs to be sweetened to get a friendly deal in place.
Lastly, with SKX shares over 20% below recent highs near $25, 
one wonders why management does not step up and buy in the stock they know best, that of their own company? That is especially true since SKX is selling at a ridiculously low multiple of 10X 2008 estimated earnings. Moreover, when we strip out the cash from SKX stock price, the shares are valued at only 8X earnings.
Stay tuned to see how this plays out. In general, my bias is against unfriendly acquisitions, and against faded fads in retailing. My bias is in favor of organic growth, investing in the core existing business, and using surplus cash to buy in stock while avoiding the distraction of assimilating acquired assets. Perhaps readers of this post can comment on insights they may have on the management of either SKX or HLYS.
Disclosure: Long SKX
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This article has 7 comments:
The aging of the U S & world population is just a fad? Individuals being able to deduct the purchase of diabetic Crocs shoes from their health savings accounts and/or tax returns(with a doctor's note as to medical necessity fo conditions other than diabetes) is just a fad?
The great dancer Fred Astaire tried skateboarding in his seventies, so I guess all seniors will desert Crocs and embrace wheelies.
Get a clue. Just because a couple of old geezers buy some CROXs doesn't mean they are a viable company. Yes, they are a fad. Check the stock price out!!! It has fallen to $4 per share and is on its way to zero. Do you get it? When a company trades at zero it is out-of-business.
"With explosive growth in emerging markets and more companies with worldwide operations, a corporation's official "headquarters" will become less relevant, says Jeremy Siegel, a professor of finance at the University of Pennsylvania's Wharton School. "People think they're diversifying by investing in a country, and it leads to inadequate diversification," he says, "because the country of origin or incorporation is not the primary influence on the stock price."
"More important for individual investors will be understanding where a company produces and sells its products, since an outfit based in France but selling products in Egypt doesn't truly represent the French economy. Siegel foresees the birth of the "international corporation"—a business globally diversified in where it produces and sells goods and not identified by its specific country. "
Thank you, Professor Siegel. Forget Croc's U S problems-focus on international growth.
finance.yahoo.com/reti...
1) A 0.7% sales decline 2qtr 08 v. 07 is hardly a big sales negative, especially when many U S retailers are reporting cahallenged 2d qtr results; thus, CROX is not exactly a bad performer in a stellar field.
2) Yes there are a number of INFERIOR Crocs knockoffs; however, despite CROX's inability to enforce their patents, there is another intellectual partner who WILL enforce their patent gor Croslite, DuPont. I believe CROX has an exclusive footwear agreement for Croslite with DuPont.
3) Croslite is what makes Crocs so comfortable. The loyal core of Crocs users, including myself will gravitate to their new styles, as long as Croslite is imbedded in the sole.
4) I am 62 years old and judging by your picture you are probably a contemporary. I cannot understand your referring to Crocs as a fad a their market ranges from ages 5 to 100. As you know, older consumers are more loyal to a brand and less fickle than the 8-18 crowd. Do you really think that a 65-year old woman will abandon her Crocs in favoe of stilleto high heels?
5) Pleasd do two things: A) visit crocsrx.com for a glimpse of a very promising market; B) visit a local store that carries Crocs and try them on-you will be pleasantly surprised by their comfort.
6) Bear is mind that footwear, unless one plans to go barefoot, is not a discretionary item. Wearing Crocs does reduce the potential for expensive foot doctor bills.
7) The cheapness of CROX makes it an ideal target for the likes of Adidas. Adidas or Nike or Brown Shoe can take out hundreds of millions in CROX overhead.
8/18/08 WSJ says it best:
Dollar Revival Reaps Roses and Thorns
Stocks Likely to Gain on Mergers, Profits;
Caution for Commodities and Exporters
By JEFF D. OPDYKE and CRAIG KARMIN
August 18, 2008
Worries that the dollar could continue strengthening have already boosted cross-border M&A activity. U.S.-based targets are still cheap -- thanks to the nearly seven-year bear market in the dollar -- but are suddenly getting more expensive to foreign acquirers. That could be "a strong enough factor to hasten a decision," says Boon Sim, head of mergers and acquisitions at Credit Suisse.
The dollar's turnaround played a role in expediting some recent trans-Atlantic deals, including a bid by Switzerland's Roche Holding AG to buy the shares in Genentech Inc. it doesn't already own, and Belgian brewer InBev NV's takeover of Anheuser Busch Cos., according to people familiar with the transactions.