A month has gone by since the last earnings report for Skechers (SKX). Shares have added about 18.4% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Skechers due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
Skechers Beats on Q1 Earnings, Coronavirus Hampers Sales
Skechers first-quarter 2020 results. Reduced activity in China majorly hurt the company’s quarterly performance. Margins also declined in the quarter. Owing to uncertainty tied to the current backdrop, management did not provide any revenue or earnings guidance.
Nevertheless, the company has been seeing strength in its e-commerce business amid such crisis. Impressively, company-owned e-commerce sales increased more than 70% in the first quarter and crossed 250% in the month of April so far. Management will continue to invest in the e-commerce business, with rolling out a POS system, new websites, mobile application and loyalty program. Lately, the company has been seeing a positive sales trajectory in its China business. It also looks to reopen stores globally.
Meanwhile, the company has taken steps to strengthen its business during such unprecedented downturns in the form of drawing down of its senior unsecured credit facility, controlling operating expenses and managing inventory levels. The company has drawn $490 million from its senior unsecured credit facility.
Skechers reported adjusted quarterly earnings of 39 cents a share that outpaced the Zacks Consensus Estimate by a penny. However, the bottom line tumbled 45.1% from the year-ago period. The company generated sales of $1242.3 million that beat the Zacks Consensus Estimate of $1,225 million, marking the fourth straight quarter of a positive sales surprise. However, the company’s top line declined 2.7% (or 1.2% on a constant-currency basis) from the year-ago period, thanks to significant reduction in activity in China in the months of February and March, and shutdown of majority global markets by mid-March. Sales declined 6.8% at its international business, while the same rose 2.9% in its domestic business. Its distributor business improved 1%.
The company’s international wholesale sales slipped 8.4% due to a 38.9% plunge in its joint ventures. The performance was mainly hurt by results in China, which saw a sales decline of 47%. The decline was somewhat offset by a 9.4% rise in sales at wholly-owned subsidiaries. Notably, international wholesale business would have increased 6.2%, excluding China. The company registered growth across various markets but sturdy performance came from subsidiaries in Germany, Central Eastern Europe and Japan, and our distributors in Australia, Scandinavia and Turkey. However, domestic wholesale sales increased 9% from the prior-year period, mainly benefiting from strength in women's and men's Go, men and women's USA, and street and work categories.
Meanwhile, direct-to-consumer sales fell 4.2% owing to an 8%-fall domestically, offset by a 2.5% rise internationally. Comparable same store sales in company-owned direct-to-consumer business dropped 8.1%, hurt by a decline of 4.7% in the United States and 16.6% internationally. This reflects the closure of most of its stores since mid-March. However, we note that in the first two months of the reported quarter, worldwide comparable same store sales grew 9.8% across company-owned direct-to-consumer business.
Margins & Other Key Things
Gross profit in the reported quarter dropped 7.2% from the prior-year figure to $547.7 million. Moreover, gross margin contracted 220 basis points to 44.1% on soft international results. Meanwhile, SG&A expenses came in at $508.1 million, up 18.2% year over year, and as a rate of sales, the metric grew 720 bps to 40.9%. Higher selling expenses were mainly attributable to increased digital advertising costs domestically. Also, higher costs in relation to the direct-to-consumer business led to the upside. Operating income came in at $44.8 million, down significantly from $165.9 million in the prior-year quarter. Operating margin also contracted 940 bps to 3.6% in the first quarter on lower gross margin coupled with higher SG&A as a rate of sales.
Skechers ended the quarter with cash and cash equivalents of $1,158.8 million, long-term borrowings (excluding current installments) of $669.2 million, and shareholders’ equity of $2,347.7 million, excluding non-controlling interests of $240.7 million. Further, total inventory was $985.7 million, up nearly 33% from the year-ago period.
Management’s capital expenditures of $61.3 million during the quarter were related to the acquisition of an office building in Shanghai and new retail outlets in China, directed toward direct-to-consumer stores and e-commerce investments and associated to enhancing distribution capabilities globally. Given the prevailing retail backdrop, the company has prioritized necessary and strategic projects, and now projects capital expenditures of $100-$125 million for rest of the year. This will mainly be used for the completion of its first company-owned distribution facility in China. Also, it has slowed down new store openings.
During the quarter, Skechers opened 14 company-owned stores in the United States, while shuttered three, taking the total domestic count to 508, as of Mar 31. Further, it opened two company-owned international stores and 25 joint venture stores in the reported quarter. Simultaneously, the company closed one company-owned international store and two joint venture stores, reaching the total company-owned international store count to 304 and total joint venture store count to 377. Furthermore, the company inaugurated 51 distributor, licensee and franchise stores in the first quarter, and closed 58 such outlets, taking the overall store base to 2,386 at quarter-end. Adding these outlets, Skechers’ total store count stands at 3,575 as of Mar 31.
How Have Estimates Been Moving Since Then?
It turns out, estimates review have trended downward during the past month. The consensus estimate has shifted -31.62% due to these changes.
At this time, Skechers has a poor Growth Score of F, however its Momentum Score is doing a bit better with a D. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Skechers has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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