Why Skechers Just Can't Stand Still

| About: Skechers USA (SKX)

Skechers U.S.A. (NYSE:SKX) sports a line of trendy footwear (oxfords, boots, sneakers, sandals, and semi-dressy shoes) geared toward 12- to 24-year-olds. Skechers (street slang for "can't stand still") are sold through department and specialty stores, as well as more than 100 company-owned stores (mostly outlets) and its Web site. Its manufacturing is outsourced primarily to Chinese contractors. Robert Greenberg and his family control about 90% of Skechers' voting power. In recent years Skechers has entered into dozens of licensing agreements for men's, women's, and children's apparel.

If you bought this stock in 2003, when it sold for $5.20 a share, you would have made almost 700% on that investment. Now with the stock trading at an all time high, investors have to wonder if this is one stock that hasn't reached its limit for a while.

The first reason being valuation. The Price to Earnings ratio [P/E] is at an all time high of 26. The average annual p/e ratio has been between 8.5 and 21. When a p/e ratio starts to push upper limits, it means investors are expecting even faster growth from the company. While there are many new products in SKX's portfolio, they'll all have to kick it up a notch to fulfill investors' expectations.

Earnings have been doing very well. Hence the stock doing very well. Coming from a deficit of 31 cents a share in 2003, the company earned 59 cents a share in 2004, $1.06 in 2005, expected to finish 2006 with $1.57 and in 2007 show $1.80. Revenues are ramping as well, having gone from $835 million in 2003 to a current run rate of $1.4 billion for 2007.

The company recently raised guidance for 2007. Estimates are for sales to have increased by 34% in the fourth quarter of 2006 and per share earnings doubling from the same period last year. Order backlog was up 29% at the end of 2006. According to recent sales results, December was a great month, followed by a January that didn't show much decrease in revenues. Better advertising and new products from non-Skechers brands account for much of that improvement, brands such as Michelle K, 310 Motoring, Mark Nason, Rhino Red, Unltd. by Mark Ecko and the new line Zoo York. These shoes probably sold more than $100 million of rubber, leather and canvas in 2006, doubling 2005 sales. Coming up is a new line of shoes for AVIREX, a division of Mark Ecko Enterprises. Look for it this spring.

The company is searching abroad for more growth. International sales, at the wholesale level, were only 16% of total revenues in 2006, about the same as 2005. It's already selling Skechers directly to retailers in Japan, Western Europe, Canada and through distributors everywhere else. So the pipeline has been built, now SKX has to fill it with new brands.

A few other numbers: Return on Equity is a healthy 13%. All insiders own 85.1% of class B stock (voting stock) and 37.5% of the class A stock. Debt is only 20% of capital. Current assets are double current liabilities. Look for sales to grow by 7% a year over the next 5 years while earnings to improve by 31% a year, on average, in the same time period.

It's that last number that have investors bidding up the stock. The efficiency potential that Skechers has, when sales increase only slightly while profits jump ahead, is what investing dreams are made of. Investors are always looking for companies that are expanding internally while growing earnings much faster than sales. SKX seems to be one of those. But this is a trendy market. What's hot today isn't so tomorrow. Check out Tommy Hilfiger for a recent victim. For the moment, Skechers is hot.

SKX 1-yr chart
SKX

Disclosure: Author has no position in SKX.

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