Skechers’ Turnaround Is On Track

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) delivered a substantial earnings beat when it reported second-quarter earnings in late July. The company continues to recover from the toning shoes disaster in 2011, which caused a steep fall in its revenue and profitability. The strong recovery is a result of the company’s overall efforts to develop new products and diversify its product line. The changes are evident in Skechers’ top and bottom lines, which have grown substantially over the last four quarters, along with a gross margin recovery.

Earnings highlights

Skechers reported second-quarter earnings of $0.14, far ahead of analyst estimates of $0.03, and an improvement over last year’s loss of $0.07. Revenue increased 11.5% to $428 million. Gross profit margin rose to 45.5% from last year’s 44.6%. Comparable store sales rose 16.5%, helped by strong demand for new products.

This growth is even more impressive given that Easter fell into the first quarter this year, as opposed to the second quarter last year. The weather was also not helping, with unseasonably cooler spring temperatures in the U.S. and other regions, which makes the results even more impressive.

Skechers’ CEO, Robert Greenberg, noted that the positive feedback from the company’s domestic, international, and retail teams at the company's 21st annual Global Sales Conference was overwhelming. He believes that this is due to a more diversified product balance. Skechers Performance Division has grown into a successful business. The company’s active marketing efforts, including numerous mens, womens and kids television campaigns are seen as having a positive impact around the world. Management expects the strong momentum to continue through this year and into the next year.

Skechers is experiencing a solid fundamental turnaround, with strong revenue and earnings growth followed by gross margin improvement. Two other important ingredients are earnings surprises and analyst expectations, and both are positive. Earnings surprises ranged from 16.7% to as much as 366% in previous three quarters. And analyst estimates are rising in the last 90 days, from $0.97 to $1.16 in 2013, and from $1.39 to $1.77 in 2014.

Strong peer group

Skechers’ strength also results from strong peer group performance. Skechers is up 51% year to date; Deckers Outdoor (NASDAQ: DECK) is not far behind; but Nike (NYSE: NKE) is a slower grower, mostly because of its size.

Deckers is expected to grow at a slower pace, with revenue seen increasing 7% this year and 8% in 2014. In comparison, Skechers’ revenue is expected to grow 17% this year and 10% in 2014. Deckers is still largely dependent on its Ugg brand, which saw sales drop 6.9% in the latest quarter.

Nike is the leader in the field, and is doing a great job selling its Jordan, LeBron James, and Kobe Bryant basketball products, among others. Nike’s growth is on track, too, with earnings and revenue rising 27% and 7% respectively in the latest quarter.

<img alt="" src="" />

SKX data by YCharts

Bottom line

Skechers is a great fit for a growth portfolio. The positive earnings cycle, reflected by growing earnings and revenue and expanding margins, along with rising analyst estimates and positive earnings surprises, should propel the share price higher. Strong industry trends are expected to continue, and Skechers is bound to benefit from these movements, too. At the same time, these are the main ingredients to keep an eye on, in order to catch a possible turning point for the worse in the future.

Dusan Jovanic has no position in any stocks mentioned. The Motley Fool recommends Nike. The Motley Fool owns shares of Nike. 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!

blog comments powered by Disqus