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There are not a lot of cardinal rules in Retail investing. One of them is to never try to bottom-tick Skechers.

The tail end of fad-induced runs in retail are never pretty and SKX is no exception. While we’d like to give Skechers some credit for taking its lumps this quarter and getting more aggressive about reducing inventory, the reality is they had no choice. In addition to trying to sell through remaining product at the twilight of its relevance, SKX is starting to ship its next generation running and other ‘performance’ product for BTS. Of course "tests’have been positive", but aside from the fact that no CEO will ever state that tests aren't working, retailers are going to be understandably cautious before buying a front row ticket to toning part deux.

This one is going to take more than one quarter of pain to recover. We know full well that by the time we get any clarity, the stock will have moved on us. Furthermore, our SIGMA analysis below shows that despite the horrific (-65%) sales/inventory spread, that’s actually a sequential improvement from 1Q. The icing on the cake is that the most favorable stock price movement is associated with a move from the lower left quadrant to the upper left. And it looks like that’s where SKX wants to go.we think that some of this is already baked-into a low teens stock. And with a complete lack of clarity as to how the company unloads the remaining half of its excess toning inventory, coupled with the fact that we’re shaking out at $0.85 for next year we still don’t like this name here at $14.50.

Despite the silver lining of continued strength in the international business up 35%, domestic sales were down by the same magnitude and we expect this trend to continue driving total revs down 10% in Q3. While SKX is starting to rein in costs, gross margin variability continues to be a key issue that will have the company fighting to breakeven for the remainder of the year. Competition is getting tougher, and there’s no guarantee that this event is truly a kitchen sink event.

Again, there are not a lot of cardinal rules in Retail investing. One of them is to never try to bottom-tick Skechers.

SKX: Respect The Cardinal Rule… - 321