SKX: Estimates Still Too High

SKX jumped on the endorsement bandwagon (again) and shifted more capital away from fashion and towards performance. Bad move -- as they shift from their core and towards a much more competitive space. The stock is getting cheap, and sentiment is poor. But next near's numbers are way too high.



Just days after we see Nike re-sign Michael Vick, and UnderArmour endorse Kemba Walker, Skechers jumps in and endorses the Patriots’ Danny Woodhead. This is yet another reason why we’re going to wait for SKX to get cheaper before even considering getting involved. We’re not knocking the company for spending endorsement dollars, but we’re definitely concerned about who they’re endorsing. In the past, they’ve endorsed Carrie Underwood, Britney Spears, Kim Kardashian, Christina Aguilera, David Cooke, Rob Lowe, and Ashlee Simpson. The closest this got to being athletic-inspired was that Kardashian’s mother is married to Bruce Jenner.


Do we have a problem with this? Absolutely not. It works for Skechers. They’re all about being on trend with the right styles. That’s all and nothing else. That’s what they’re very good at.


But now with endorsements like Danny Walker, Karl Malone, Rick Fox, Broadway Joe, and (gulp!) Wayne Gretzky??? Sorry to notify the boys in Manhattan Beach – but when you start going this route, you have to innovate new product, not copy it.


In the fashion space they’re the 900lb gorilla -- competing with the Steve Madden’s of the world, as well as hundreds of smaller players in a non-consolidated space.


But on the performance side of the biz, it gets more gnarly… First of all, Nike Inc (which has about 45% of the market) could care less about fashion. But when Skechers tries to compete in Nike’s backyard (athletics), it should probably tread lightly. It’s not just Nike – as there’s another 4 players (Adidas, Reebok, Asics, New Balance) who each account for about 6-8% share of the industry. Under Armour has only 1%, but is on its way to 10%, and the fledgling Chinese brands (Li-Ning and Anta) have extremely deep pockets and a strong desire to export content to the US.  For SKX, there’s not as much room to grow.


We don’t want to come across as perennial cynics here. The reality is that SKX has offered tremendous opportunities in the past to catch 5-baggers in otherwise tepid markets. In addition, the brand has been around for a while, it has a relatively sound infrastructure, and when focused, it succeeds more often than not.


It’s not that we doubt they can keep pressing the performance category. Our point is very simply that it’s going to take significantly greater capital ADDED to the model in order to do this rather than reallocating capital from their extremely successful core fashion business. SG&A has been trending up, which is good in this case, but it has been entirely due to marketing dollars, not internal talent. This actually smells a lot like Reebok from about a decade ago. They meaningfully changed up their marketing budget towards sports performance, but abandoned their core. Pulling design, merchandising and sales talent from your cash cow to grow a new business is simply a bad idea. No one we’ve ever seen has done this successfully.


As for the stock, clearly expectations have come down. The stock is off 80% from its recent peak of $40, and is squarely in the ‘buy zone’ of the Hedgeye Sentiment Monitor. In addition, the consensus number of $0.45 this year is probably doable. But the problem is that next year, the Street is back up $1.32 – that’s very optimistic. If you believe those numbers, then by all means, stomach the near-term risk, be a hero and buy the stock. But our level of confidence that the company won’t earn over $1.00 is better than 75%. Management is selling on the way down. We'd follow their lead and resist the temptation to jump in too early here.


SKX: Estimates Still Too High - 7 8 2011 1 02 47 PM

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