Skechers: looking to establish itself in intense competition (NYSE: SKX)

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Thesis

Skechers USA, Inc. (NYSE: SKX) is an American designer, developer, and marketer of footwear for men, women, and children. Having posted losses along with the broader market, despite respectable financial performance and a proven business model, the attractiveness of the company as a potential investment is examined throughout this analysis.

Recent stock market performance

After a solid decade, in which business expansion drove the stock steadily higher, despite some bouts of volatility, SKX appears to have been caught up in broader market turmoil. At $40 per share and a market cap of $6.2 billion, at the time of writing the stock is trading at a 29% discount from 52-week highs, posting a return of -5.2% over 1 year. Year-to-date, SKX has seen a decline of around 10%, in line with broader market declines. Over the past 5 years, the stock has seen a price growth of 46%. Currently, the company does not pay any dividends.

Stock history

Looking for Alpha

business model

Sketchers operates through three main segments: Domestic Wholesale, International Wholesale and Direct-to-Consumer. The company primarily focuses on casual and athletic product styles, while also offering retro fashion sandals, boots and shoes at affordable prices. Comfort aims to offer an optimal combination of comfort and style while incorporating innovative solutions to stay ahead of consumer trends. By the end of 2021, 65% of sales came from outside the United States, ensuring geographic diversification as the company has established a presence in 180 countries, now over 4,000 stores globally.

Q4 2021 results

The company continues to maintain its long-term growth trajectory, with Q4 2021 results reinforcing potential, which many analysts and investors often overlook. Non-GAAP EPS of $0.43 beat estimates of $0.34 by an impressive 26%. Revenue hit $1.65 billion, also beating estimates, looking for $1.55 billion, by a smaller 6%. International wholesale and direct-to-consumer sales increased by 30%. On the domestic front, the market looks more saturated and of course highly competitive, with revenue up 5%, signaling that penetration of international and DTC sales will be the main driver of growth. Despite higher costs, primarily due to higher freight and material costs, the company maintains gross margins of 48%, significantly above the Consumer Discretionary industry averages of around 35%.

In terms of short-term guidance, Skechers management expects that for the first quarter of 2022, it will achieve sales between $1.675 billion and $1.725 billion, compared to a previous analyst consensus of $1.59 billion. dollars and diluted earnings per share of between $0.70 and $0.75 compared to consensus. of $0.68. Management also authorized an additional $500 million share buyback program, seeking to continue to build shareholder value through buybacks.

Growth trajectory

Breaking down revenue performance, revenue growth is examined across all three segments. For the international wholesale segment, Skechers recorded compound annual sales growth of 15.0% from 2017 to 2021, maintaining a gross margin of 44%. With domestic sales struggling to grow, the domestic wholesale segment has seen moderate growth of 3.6% over the past 5-year period.

The more digitally-focused direct-to-consumer segment, although initially designed to complement the wholesale business and improve Skechers’ profitability prospects, is also showing good growth prospects. Registering a CAGR of 11.3% in revenue between 2017 and 2021, the segment’s gross margins stand at +65%, increasing the profitability capacity of the organization, as the segment increases its sales volume. The company’s overall growth history is illustrated in the chart below, provided in the company’s most recent investor presentation.

Revenue increase

Investor Presentation

Health check

The company is in good shape vis-à-vis its balance sheet. Total assets are showing steady growth, while liquidity remains solid (current and fast ratios of 2.33 and 1.18). Skechers is also under-leveraged, with its current cash balance able to cover all long-term debt, 3 times as much. One area of ​​possible concern is the recent decline seen in the company’s return on capital. Levels of around 20% saw a significant decline in 2020 as the business struggled to meet the challenges of Covid-19. That said, a big rebound is being noticed in 2021 and hopefully return levels should soon rebound to pre-pandemic highs.

finance

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Competetion

The global footwear industry is expected to reach $440 billion by 2026, with the US market worth $106 billion in 2021, according to a study. The athletic footwear segment is expected to grow at a CAGR of 2% for the next 5-year period. This segment currently represents a 37.6% share of the global footwear market. The casual footwear segment is expected to grow at a CAGR of 2.6%. Slowing growth and fierce competition are two headwinds for the company’s outlook. Facing giants like Nike, Adidas, New Balance and even more niche brands like Crocs, the next few years will test Skechers’ ability to keep its current profitability performance intact.

An attractive valuation

Currently, Skechers is trading at what could be considered an overall attractive valuation. Provided the company is able to sustain some long-term growth, despite peer pressure, the current multiples of 15.9x P/E and 1.02x P/S seem reasonable. SKX trades at a slightly higher valuation than the consumer discretionary sector, and exactly at the sector’s median P/S ratio, indicating an overall fair value stock. It is also trading slightly below its median 3-year P/S of 1.16x, P/E of 18x and EV/EBITDA of 10.6x (currently at 8.7x).

Final Thoughts

After all, Skechers is in a healthy financial position as well as moderate growth prospects, having delivered strong year-end 2021 results. Given, however, the intensity of competitive forces and weak prospects for expansion industry, I would like to see a bigger valuation discount on the stock before review. For these reasons, I would assign an expectation rating.

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