New Products Bring Profits for Skechers
Dusan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Skechers (NYSE: SKX) is recovering from a disastrous fall the company faced in 2011. The fallout in toning shoes brought earnings into negative territory with a 20% drop in revenue. The stock price followed, falling more than 70% in the process. The situation has changed since, and Skechers has done an overhaul. The company turned for the better, with new products and new initiatives. Skechers’ stock price has increased almost 100% since January 2012, and its growth prospects are looking good.
New Products and Categories
The company is not dependent on a sole product or category anymore, making it less prone to the disaster it faced in 2011. Running shoes are one of the company’s new products, produced within a new performance division. Skechers GOrun shoes are becoming popular, and they are becoming a serious player in the market. Together with the GObionic, the Skechers Performance Division equips athletes from the track to the gym. There are also other products that are doing well, like GOtrain and GOwalk, and the new GOrun2, which was advertised in this year's Super Bowl.
Earnings and Revenue Turnaround
All of this effort translates into higher revenue and profits. After a 20% fall in revenue and negative earnings in 2011, the company reported a 3% drop in revenue in 2012, due to inventory cleanup in the first half of the year. Earnings then turned positive, with $0.19 earnings per share for the year. The company is expected to report $0.97 earnings per share, a 410% increase on a 17% rise in revenue. Earnings are expected to rise 43% in 2014 with a 9% increase in revenue. With an expected revenue of $2 billion in 2014, the company will finally return to that level, which it achieved in the booming 2010, but earnings have a long way to go to reach 2010 levels, as expected EPS in 2014 will be roughly half of those achieved in 2010.
Skechers has 350-plus company-owned stores, and the company plans to open 30 new stores this year. Sales at company-owned stores rose in the low double-digits in the fourth quarter, while the international business did exceptionally well, surging 30%.
Legal Issues and Earnings pre-announcement
One legal issue the company faced recently was the change in auditors, as KPMG resigned as auditor due to “the impairment of KPMG's independence resulting from to its now former partner's alleged unlawful activities.” The issue was on KMPG’s behalf, and was not related to Skechers’ financial statements or its accounting practices. The company recently announced that the Board of Directors appointed BDO USA LLP as the new auditor. The company also announced preliminary earnings, and expects to report $440 million to $450 million in revenue, and adjusted earnings in $0.15 to $0.19 range. This revenue would be above analyst estimates of $438 million, though Skechers would need to deliver earnings at the high end of guidance in order to meet estimates of $0.19.
Skechers faces stiff competition in the footwear industry. Nike (NYSE: NKE) is the largest in the group and has performed very well recently, with its stock reaching new all-time highs last week. Nike's new Flyknit created a lot of excitement with consumers. They also advanced three of their most successful shoe franchises in history: Air Jordan, Air Force 1 family and the Air Max. Skechers is trying to push into these markets with its new performance division.
Deckers Outdoor (NASDAQ: DECK) is making a turnaround as well after falling 75% in 2012 when its Uggs boot line fell out of fashion. Crocs (NASDAQ: CROX) is still way below its all-time highs after its shoes fell out of fashion in 2008, but the company is attempting to recover and also has diversified its product line. Both Deckers Outdoor and Crocs represent an example of turnaround efforts, and can be looked as similar to the recent developments in Skechers. Deckers Outdoor is looking to diversify geographically with increased expansion of its stores in China, which represents a huge market opportunity. Crocs is trying to diversify its product mix and bring in all-year growth with products for all seasons.
Skechers is a compelling turnaround story in the making. It diversified its product line, and is no more dependent on a sole product category like it was prior to its fall in 2011. Revenue and earnings growth are on track, and are expected to continue to grow. If they continue to deliver the growth, the share price is bound to benefit.
Dusan Jovanic has no position in any stocks mentioned. The Motley Fool recommends Nike. The Motley Fool owns shares of Crocs, Nike, and Skechers. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!