Skechers: Revenue Beat May Be Just The Beginning

| About: Skechers USA (SKX)


Skechers reported strong revenue growth and provided positive guidance for the first quarter of 2017.

Shares jumped 20% after the news.

This signals a sentiment change and might indicate the beginning of a new uptrend.

Skechers (NYSE:SKX) reported a strong Q4, beating revenue estimates and providing a very positive guidance. I think the outlook for the stock remains positive, as the growth acceleration may reverse the negative sentiment that has affected the stock in the last one and a half years. At roughly 15 times forward earnings and 1.15 times forward sales, the stock remains an interesting GARP play.

In January, I published an article with the title "15 stocks for 2017 and beyond", in which I listed some stocks that I think will perform good this year (and maybe beyond). Skechers was one of those stocks. I also provided a quick explanation of why I was long:

Shares of this footwear company skyrocketed in the last few years, fueled by strong revenue and income growth, but then fell by almost 65% from the top reached in August 2015. The company keeps reporting solid growth numbers and margin expansion, and I think the market is not properly discounting the company's growth prospects in the medium term, especially in Asia. The heavy insider buying from the CEO in November helps support the idea that the stock may be undervalued. Trading at a TTM P/E of 14 and with earnings expected to grow at a 9% CAGR for the next 4 years, the stock could start a significant uptrend if the company didn't miss estimates for Q4. Given the heavy insider buying, I think there is a good chance that the company will not disappoint in Q4, triggering a sentiment change.

I was betting on positive results in Q4, and I am glad that the company didn't disappoint me. Although there was an earnings miss, the company really impressed with a strong revenue growth and a very positive guidance. The company reported sales at $764.3 million, an increase of 5.8% YoY, against $723.72 million consensus, and record annual net sales of $3.56 billion, up 13.2%.

Strong top-line growth was not the only positive sign. Gross profit for Q4 2016 was $356.2 million, or 46.6% sales, compared to $329.9 million, or 45.6% of sales in Q4 2015.

Operating profit fell from $54.7 million to $28.3 million, and operating margin significantly contracted, from 7.57% to 3.7%. This is due to higher SG&A expenses, which have risen from $221 million to $273 million. I think the reason is that the company is bearing higher costs for international expansion and, according to management's comments in the earnings call, revenue growth in the next quarters (starting from Q2), will start to dilute SG&A expenses. COO David Weinberg declared:

Obviously, given the guidance we've put in the first quarter, we're going to de-leverage a bit and have higher sales, but that's because we're still carrying costs for places that can't leverage quite yet which would be Latin America, Korea, and Japan. So we're getting them started and that's where the big increase in expenses were.

Guidance for Q1 2017 was very positive. Management expects revenue of $1.05B-$1.075B in Q1 vs. $1.04B consensus and EPS of $0.50 to $0.55. These numbers are significantly higher than the $1.04B consensus and, using the midpoint of the guidance, indicate that revenue is supposed to grow by 8.5% YoY, which is a significant acceleration from the current growth rate.

I don't think we can find reasons to complain about the company's performance in Q4 and 2016 as a whole. At the same time, the balance sheet is rock-solid, with a current ratio of 3.0 and a Debt/Equity of 0.42. Cash and cash equivalents alone ($719 million) are enough to cover current liabilities ($622 million).

It might be just the beginning

This long is working much better than I expected, since I see the stock up 20% while I write this. We now understand the reasons behind the heavy insider buying by the CEO in November. The company's growth is accelerating again, and guidance is well above consensus.

I am not a short-term trader, and not a momentum trader. But I can see the impact of accelerating growth on a stock that has been beaten down so much. SKX is trading at a Forward P/E of 15 and a Forward P/S of 1.15, based on estimates that have shown to be too conservative.

I think that besides the accelerating growth and raised guidance, the market cares a lot about the company's prospects in the United States, where the overall fashion and apparel industry has been in bad shape for a while. But for Q1, management is guiding for growing sales in the domestic market, which is comforting.

Takeaway and final thoughts

I think there are some macroeconomic factors that could materially impact the company's growth prospects. In the short term, the overall consumer spending environment could benefit from increasing business and consumer confidence resulting from tax cuts promised by Trump.

On the other side, an import tariff could seriously hurt the whole industry. I think it's not likely to happen, but we must consider that this possibility exists.

We should keep our eyes on what happens in the White House but, all in all, I think that SKX remains a compelling buy, even after the 20% spike. The sentiment is changing, while the stock is still trading at relatively low multiples.

Disclosure: I am/we are long SKX.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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