We’ll see what they have to say on the conference call. But here’s an excerpt from our 10/12 report (Toning Footwear – A Year Later, What’s Next?) showing how the company’s expectations for Toning sales were simply too high. The primary reason? People buy in units, not in dollars. With every other brand coming out with Toners at price points less than half of where SKX is selling, only bad things can come.
There’s a lot of laughter in Beaverton right now.
“In looking at Skechers’ share of the industry in 2010 and gradual deterioration thereof, we assume the brand will account for ~45% of the domestic market in 2011 compared to ~60% in 2010. With price deterioration, cost inflation, and margin degradation, we estimate that incremental Shape-up margins will come in closer to 20% in 2011 from 25%-30% EBIT in 2010. The combination of share loss and compressed incremental margin is likely to reduce 2011 EBIT dollars by $40-$75mm. That’s on an base of what we estimate to be ~$170-$200mm of Shape-Ups related EBIT in 2010. In order to simply keep EBIT dollars flat, we’d have to assume that either: 1) Skechers maintains 60% share of the category, or 2) the domestic toning industry would have to grow 50%-75% in 2011 to $1.7-$2.0Bn. For many reasons, this simply will not happen. This has yet to be reflected in consensus estimates assuming mid-to-high single digit EBIT and earning declines in 2011 – we’re shaking out down 30%.”