Changing fashion trends can indeed spell death for a company. My first stock trade ever was in a little known footwear maker known as LA Gear. Long-time stock market players will definitely remember this stock. It acted like an Internet stock, before the Internet boom was created; the share price rocketed from mere cents to triple digits then back again. Millions upon millions were made and then lost by those not wise enough to sell when profitable. In other words, the true believers in the stock got caught holding the bag big time. LA Gear was strictly a fashion brand and when fashions changed, the company took a bath.
I can't help but remember LA Gear when I consider the present fashionable shoe company du jour, Skechers (NYSE:SKX). Although there are many differences and Skechers has a much wider selection and market penetration than LA Gear, there are eerie similarities.
First and foremost, the company calls itself a "fashion brand.” Quoting from its site, "Our secret? We thrive on fashion, design without limits and aim to succeed while having fun in the process."
Eeek, that stock killing fashion word again.
Well, it looks like Skechers may have made a fatal flaw in guessing fashion. The company made a significant investment in so called toning shoes inventory. According to Sterne Agee, who recently downgraded the shares to sell, many retailers are exiting the toning shoe category. Skechers has 4 million of these shoes in inventory. In addition, Skechers shoes are starting to appear in discount retailers stores. Could this be a sign that the Skechers brand is in its decline? I think it’s a clear signal. Shares have already dropped over 50% from their high of $44.90 in June.
Technically, price is below the 20-day SMA and has just broken below the 200 week SMA indicating a major change in trend. However, light technical support exists in the $19.50 per share range. Stern Agee is calling for $16 per share but I believe this is wildly conservative. This stock could easily be sub $10 per share by the third quarter 2011. My call right now is Sell. Good luck!
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.