SKX: Predictably Disastrous. Numbers Still Too High

No, Skechers is not missing and guiding down because of a ‘weak retail environment’ or ‘tough consumer’ as management suggests that they are. It is because the confluence of factors that allowed this company to triple its margins over 4 years has hit its breaking point. Its’ sales/inventory/margin triangulation has shifted into the worst place possible (see Exhibit below) and I think it is destined to stay there for quite some time. Unfortunately, the company still does not believe it. They did not set expectations low enough. I won’t touch this stock until it approaches $5.

I’ll repeat the narrative I threw out to clients on September 3.
A) Over the past four years, a shift in fashion towards low profile (SKX sweet spot) accelerates growth and propels margins from 0% to 9%.

B) Low profile growth finally losing share to Performance – starting this fall.

C) Along the way, SKX opens up more high-fixed –cost company-owned retail stores to get product to consumers despite less interest from retail.

D) SKX broadened wholesale distribution to more marginal channels (Goody’s, Mervyn’s).

E) SKX is taking its next leg of growth overseas. Grows more aggressively into Hong Kong and Macao with a goal to triple sales there in 3-years. Maybe they should have thought of this 3-years ago before a 20% run in FX? FX moves are always hindsight 20/20, but this is another example of a poorly managed company in this space deploying capital reactively. Proactive always wins in my book. I think Skechers’ recent announcement that it is expanding its Asian JV with the Onwel Group is another nail in the coffin.

F) SKX has become more litigious, suing a smaller brand after years of fighting against economic harm from knocking off styles.

G) In August, SKX bid for Heely’s. C’mon team Greenberg…Are you serious??

H) We have not even started talking about losing space in Asian factories to more established brands, and increased cost pressure SKX will see starting in 1Q due to higher FOB costs (freight on board – or total fully loaded import cost). This will be a margin crimper.

There’s no doubt in my mind that margins are getting cut in half here – as I’ve noted since my initial June 4th note (SKX: Can It Really Be This Simple?).

I’ve got EPS going from $1.70 in ’08 to $0.85 in ’09, and EBITDA declining by a similar magnitude. The bottom line is that I would not even think of buying this stock until it was at a 3x EBITDA multiple on my numbers. That equals $5.10.