Skechers Is Hitting Its Stride And Has Upside

Summary

• Skechers should see robust growth this year, as physical retail re-emerges and as consumers seek outdoor activities.
• It has seen fast growth in China and is making capital investments in distribution centers to drive scale and efficiency.
• I also highlight the valuation, balance sheet, and risks worth considering.

Photo by Justin Sullivan/Getty Images News via Getty Images

Value investors understand that investing isn't a popularity contest, and that opportunities are often found in fly-under-the-radar plays. This brings me to Skechers USA (NYSE:SKX), which has performed well since my last bullish take on it. Since the end of December, SKX has risen by 21%, far surpassing the 10.5% return of the S&P 500 (SPY) over the same time frame. In this article, I show why I see continued upside from the current price, so let's get started.

What Makes SKX A Buy

Skechers is a performance footwear and apparel brand, whose products are available in over 170 countries. It has a network of global distributors and sells its products through both online channels and through 3,891 company and third-party operated retail stores. In 2020, Skechers generated $4.6B in total revenue.

I see Skechers as having a durable advantage, with its niche branding in comfort/leisure shoe category. This helps it to avoid the highly competitive pressures of the athletic footwear market, dominated by the likes of NIKE (NKE), adidas (OTCQX:ADDYY) and Puma (OTCPK:PMMAF). This has helped Skechers to achieve a fairly stable and respectable operating margin in the 10% range over the 5 years prior to the pandemic.

Skechers' business has rebounded rather well over the past year. Prior to the pandemic, Skechers posted record-breaking sales in 2019 at $5.2B in total revenue. Sales took a dip in the first half of 2020 before strongly clawing their way back in the second half of last year.

This is reflected by strong fourth-quarter results, in which revenue landed at $1.3B, just 0.5% below the Q4 record set in Q4'19. This was driven by domestic wholesale, which grew by 1.2% YoY and robust China sales, which grew by 30% YoY. I'm also encouraged by the improvement in operating margin and expect for it to trend towards the 10% range by the middle of this year, given the seasonality effect on margins that Skechers traditionally experience.

(Source: YCharts)

Looking forward, I see Skechers resuming to its growth trajectory, as physical retail has largely reopened across the globe, and as consumers increasingly seek athletic gear for outdoor activities amidst the lingering pandemic. Plus, I see strong continued growth potential in China, due to the burgeoning middle class there. I also see potential for efficiency and margin improvements stemming from capital investments in China and North America. These projects and guarded optimism around the first half of this year was noted during the recent conference call:

"The automation of our new 1.5 million square foot China distribution center remains on track for full implementation by midyear and we continue working on the expansion of our North American distribution center which will bring our facility to 2.6 million square feet in 2022.

We anticipate many markets will remain challenged in the first half of the year due to the pandemic, but believe some countries are showing signs of recovery. During this time, we will continue to manage the flow of our inventory to fulfill demand where we are open, spend prudently in markets still impacted and drive sales where possible."

Meanwhile, Skechers maintains a strong balance sheet, with $1.5B in cash and short-term investments. It also comes with a net debt to EBITDA of 1.8x, which is well below the 3.0x-level that I prefer. It's also worth noting that the full year 2020 EBITDA was impacted by weakness in the first half of the year due to the pandemic. If we were to apply the 2019 (pre-pandemic) EBITDA, then the leverage ratio falls to a very safe 0.85x.

Turning to valuation, I continue to see value in SKX at the current price of $43.17, with a forward PE of 22.2. As seen below, analysts expect earnings to grow rather robustly at an average annual rate of 26.3% in the years 2022 and 2023, bringing the forward PE down to just 13.9 based on 2023 estimates.

(Source: Seeking Alpha)

Plus, SKX's current forward PE is well below its normal PE of 26.1 over the past decade. Analysts currently have a Strong Buy rating on SKX, with an average price target of $45.36. I find this to be a rather conservative estimate and see potential for SKX to reach $50, given the strong international growth and the robust forward earnings trajectory.

(Source: F.A.S.T. Graphs)

Risks to Consider

No investment is risk-free, and it's worth noting that a delayed opening of the economy due to a COVID resurgence could put a damper on Skechers' continued rebound. This could not only hurt retail sales, but could also cause supply chain disruptions. In addition, consumer tastes can change over time. This could negatively impact Skechers if it fails to innovate and maintain consumer relevancy through marketing efforts. These are risks worth considering.

Investor Takeaway

Skechers is a fast-growing consumer footwear and apparel company that has carved a niche for itself in the comfort/leisure category. I see continued growth for Skechers this year, as physical retail emerges from lockdown, and as consumers increasingly seek outdoor activities. Meanwhile, management is investing for future growth and efficiencies through its capital investments in North America and in the fast-growing market of China. I continue to see value and further upside potential in SKX at the current price.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

This article is for informational purposes and does not constitute as financial advice. Readers are encouraged and expected to perform due diligence and draw their own conclusions prior to making any investment decisions.

Comments

[Nevin_S]

@Gen Alpha your article was right on target. My comments were not directed at you.

[Gen Alpha]

@Nevin_S thank you for clarifying. I strive to cover all the salient points. Have a good day.

[Nevin_S]

Regarding valuation - I think you have to take several things into account before pronouncing multiple x, y or z is appropriate.

First, I think you have to look at what value the "brand" has because as we see across the retail spectrum brand translates into sales with less marketing cost which translates into margin. (and for you nay-bobs that say that Skechers is not a valued brand just start your own shoe company and see if you can find anyone who will sell your product let alone customers who will purchase it)

Second, I think you need to look at the footprint of this company which has expanded to nearly every corner of the globe in recent years because this gives them the platform from which to leverage sales (move new styles and products thru the sales channel).

Third, I think you have to look at the balance sheet. You'd be hard pressed to find another soft goods brand name company with a better balance sheet. In fact I can't find another company in this space (not shoes but all clothing) that is this well capitalized. Why is this important? Look at all the other retailers that have gone into bankruptcy over the last year. How are their shareholders doing?

So assigning a multiple to a company is not only a function of how fast they are growing earnings but also a function of how well they are run and how well they are capitalized.

[Gen Alpha]

@Nevin_S Good points, however, I did cover those items you mentioned. Otherwise, my article would have been limited to just the valuation section and that would be it. There's no need to reiterate every qualitative point in the valuation section as those points are already a given.

[Jkl Sedricks]

The reason to buy skechers stock is the same as the reason to buy their shoes: they are the most comfortable and well-made leisure shoes on the market.

[Allinvestor]

Rather aggressive P/E multiple that you assign there in my opinion as the 2011-2015 years are not very representative of go-forward growth rates. In fact, earnings were negative in 2011 and very low in 2012, creating quite a skew on your blue "Normal P/E" line. I think since 2015 the stock has on average been trading at more like a 15-17x multiple. In my view the stock is therefore already trading in line with FY22 expected earnings and could be considered a trim above $45-$50 if you see better opportunities in the market (which is admittedly tough at the moment).

Long SKX, but not seeing an attractive entry point here.

[Judoguy]

From your Lips to Gods Ears.......This stock has been a dog for 2-3years .......so I am still holding it.The profit on SKXX stock has been a bust!

[dhdu]

SKX has the history of high volatility at low valuation, making it a safe candidate for short term trades and option play. I made more money from SKX than from any other stock.

[nocnurzfred]

@dhdu Did something similar with $BGS over the years. Hold for the [then 11% dividend], and or sell at a higher price, sometimes both in a couple short months.

[WiseGuyInvestin]

At a 26x p/e the stock would be $86 by 2023 so why would you sell at $50?

[Gen Alpha]

@WiseGuyInvestin I stated that “I see potential for SKX to reach $50.” That’s my price target for the near term. How did you go from that to thinking it is a sell at $50?