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Skechers Shape-ups Sales trends

|Includes: Skechers USA Inc. (SKX)

I don’t subscribe personally to Sportscan given the $25k annual fee, but yesterday I was yesterday given access to analyze Sportscan data in detail and my analysis leads me to conclude that too much is being made of their ‘estimated’ weekly sales volume data for the toning category. The toning category only launched in 2009 and there has been no seasonal history to evaluate trends.

What is clear to me now is that, as( so far) mainly a ‘white shoe’, toning has a seasonal peak through Spring and early summer and a huge peak around Xmas.

Now that we have a 12 month history, I can predict that for Skechers toning Xmas will again be huge, at about $15 to $20 million per week for 3 weeks. Then sales will run at around $6mm to $8mm per week until late March then kick up to the $12 to $14 million range through the end of May.

If Skechers could boost the amount of black/brown and boot shipments to retailers, then winter sales volumes would also improve, but I don’t yet see enough of this in the stores. I understand Skechers management is aware of this opportunity.

Usefulness of and how to use data:

Sportscan data is helpful, but is not an all inclusive indicator of trends. The Sportscan system is especially strong in collecting athletic shoe trends since it captures retail sales date from most of the big athletic retailers, so it‘s great for example for basketball shoes. There are some omissions, like Dicks, but athletic coverage is quite comprehensive.

But, Skechers Shape-ups are mainly sold through family footwear channels and mid tier and better department stores.

In terms of family footwear the Sportscan data is more limited, since many big retailers don’t subscribe to the service, such as Shoe Show (1200 stores), none of the better Department Stores, some mid-tier dept stores, including Kohl’s with 1300 stores which is the # 2 retailer of Shape-ups, and Zappos.com the $1Billion online shoe retailer, the # 4 retailer of Shape-ups.

Nor do the huge number of independent family footwear retailers subscribe. NPD, a rival company, are the specialists in capturing department store data and I don’t have access to that data base.

Sportscan uses a proprietary model to ‘extrapolate’ the sales data they collect to numbers meant to capture the whole industry sales statistics, but they don‘t disclose how this works. Unfortunately it’s a bit of a black box.

Seasonality:

Toning has so far been mainly a ‘white shoe’, so Spring is the peak season, (along with the huge holiday gift sales at Xmas, spiking at $21mm SKX sales per week last Xmas, per Sportscan) running from late March to late May, when the weekly sales in 2010 jumped from $6mm per week in early March to around $12/14 mm per week throughout the Spring / early summer period.

Since toning only launched in 2009, there was really no history to benchmark in establishing seasonal trends, though retailers should have done a better job in recognizing that sandals dominate in summer and black/brown and boots dominate in winter and that kids don’t buy toning shoes, so BTS was a low point for toning sales as mums focused on their kids’ needs.

So, we have excess Shape-up inventory at several retailers, which has encouraged retail discounting and is holding back some of the needed black/brown sku’s and boots deliveries.

The $6mm to $8mm current run rate compares to $3mm per week during Oct 2009, but toning was only gathering distribution in Oct 09, so the trend comparisons are still not that helpful.

Promotions obviously spike sales, albeit at lower margins for the retailer. No discount has been passed from SKX to retailers, so YTD margins at SKX will remain strong and therefore 3rd qtr results should be excellent.

 

 

SKX market share trends:

There are three main channels of distribution and only the first two are partially captured by Sportscan:

Family Footwear chains

Athletic chains

Better Department stores

Family Footwear stores are the most important channel of distribution for Skechers, where they have a 66% market share in toning during the past 4 weeks. Reebok at 22%, Avia at 4%, New Balance 4%.

So, SKX is still dominating sales in the most important distribution channel for toning.

In the Athletic channel (much smaller for toning, given the younger audience), Reebok is bigger with 52.95% share vs. 38.15% for SKX and 5.66% for New Balance during the past 13 weeks. It’s actually quite surprising that Skechers was able to penetrate the athletic channel given the dominance of the long established athletic brands. The most visible presence is in Lady Footlocker.

Sportscan’s ‘all channels’ market share estimate for the past 13 weeks has SKX at 59% and Reebok at 31%.

In the family channel the share for the past 13 weeks was:

SKX 71%

Reebok 19%

Avia 4%

New Balance 3.28%

SKX toning sales in the Family channel have bounced around a lot since the BTS low at around $6mm per week, jumped to $12 million during the promotion, subsided to $6mm again, back up to $8mm for several weeks then down to $6 again. Strangely, Reebok toning sales remained pretty flat during this period at about $2mm per week.

I note that Skechers Shape-up is rapidly becoming a comfort work shoe of choice and selling without discount. This will be a great core, basic sku for many years.

Retailers feel that the toning product from secondary brands like Avia, New Balance, etc will not be included in OTB going forward, due to poor relative sell through. So, SKX and Reebok will continue to dominate. It remains to be seen whether Nike will respond with toning product. I talked to the Chief buyer at a family footwear chain with over 1000 stores and he felt indicated that he thought Nike and Reebok brother Adidas would try to enter the toning market next year with a ‘comfort walking shoe’. He indicated that Nike know that it has ‘dropped the ball’ on this toning trend and missed a great opportunity. He confirmed that toning / comfort walking was going to evolve as a huge new category.

 

Margins:

With hindsight SKX might have been wiser to have restricted Shape-up distribution and quantities which would have averted the retailer compulsion to discount. The discount genie was released with the Nordstrom anniversary promotion in August. Family footwear retailers reacted. When Reebok toning started underperforming the athletic channel started discounting Reebok and the promotions spike was underway.

Now that customers have been exposed to $80 and $90 (current average $83) price points it will be difficult for SKX to return to the original price points and the discounting is already affecting the pricing of the new models of Shape-ups, with a $115 price point being reduced to $99.

So, the analysts are probably correct to build into their models a slight erosion of gross margin in 2011, as retailers will be pressing for lower wholesale prices in negotiating 2011 prices. Still the Shape-up margins are very high, so the realized margin ( if average selling prices settle at about $85 after the inventory rebalancing) will still be in the 44% range. All of the analyst reports I’ve read have a good handle on this margin evolution domestically, though they are possibly underestimating the potential margins next year in the international business given the dollar weakness and freshness of the toning concept internationally.

The ASP at retail bounces around according to the retailer discounting. During BTS it was $80, then bounced up to $90, last week it was $83. This pricing pressure at retail will remain until inventories are rebalanced.

Not all retailers are overstocked. I talked for one and a half hours yesterday with the Chief buyer for a chain with over 1000 stores and he indicated that his toning category inventory was ‘just right’.

China:

There is a lot of talk about increasing shortage of labor for Chinese shoe factories as well as material cost pressures. Having high inventories of a best seller may well turn out to be a blessing given the increasing difficulty of sourcing and price increases. This reality will give the brands some leverage in discussing pricing for next year and may induce more reluctance to discount at retail.

Summary:

Overall, this obsession with evaluating SKX as an investment by using weekly ‘estimated’ sales statistics is a bit silly. The factual data will emerge on Oct 27th, but margins will remain strong which bodes well for earnings.

The analysts have correctly lowered their estimates for 4th qtr, reflecting slower shipments while retailers lower inventories. I’ve read all 5 analyst reports and they are very sensible. Some of them are too pessimistic about toning sales in 2011, since they are extrapolating October #’s into 2011 and not factoring in the inevitable seasonal tends.

Clearly there is an under appreciation of the seasonality of toning sales and I expect toning sales in 2011 to be similar to 2010, at slightly lower margins. But, international sales of toning are going to ramp up, so there will still be further EPS growth from the toning category in total. It’s hard for me to see how SKX can make less than $3.50 in 2011, so on that basis the stock remains cheap. And international growth is planned to grow at 40% each year. SKX has big push underway in big markets such as Europe, Brazil, and China. The growing internationalization of the brand is not yet recognized in the p/e multiple.



Disclosure: LONG SKX