Skechers (SKX): Lacing Up for a Bull Run or Tripping on Valuation?

Skechers USA (NYSE: SKX) has reported its second-quarter financial results, revealing a mixed bag of achievements and challenges. This report aims to provide a comprehensive analysis of whether SKX is a buy at its current price, synthesizing information from various sources, critically evaluating the data, and considering recent developments and market trends.

Financial Performance and Key Metrics

Sales and Revenue Growth

Skechers reported record sales of $2.16 billion for Q2 2024, a 7.2% increase year-over-year. On a constant currency basis, sales rose by 8.7% to $2.19 billion. This growth was driven by a 9.2% increase in Direct-to-Consumer (DTC) sales and a 5.5% rise in Wholesale sales. International sales also saw a 7% increase, with notable growth in Europe, the Middle East, and Africa (EMEA) at 14%.

Despite these positive figures, Skechers missed analyst revenue expectations of $2.23 billion by approximately 3.23%. This shortfall, coupled with a decline in diluted earnings per share (EPS) from $0.98 in Q2 2023 to $0.91, raises questions about the company’s ability to meet market expectations consistently.

Earnings and Profitability

Skechers’ net earnings attributable to the company were $140.3 million, down 8.2% from the previous year. The gross margin improved to 54.9%, up 220 basis points, attributed to lower costs per unit and a favorable mix from DTC sales. However, operating expenses increased by 16.0% to $977.9 million, raising the operating margin slightly to 9.6%.

The company’s financial health is further supported by a robust cash and investments total of approximately $1.55 billion, an 11.6% increase from the end of 2023. This liquidity provides a cushion for future investments and potential market fluctuations.

Market Position and Strategic Initiatives

Share Repurchase Program

Skechers’ Board of Directors authorized a new $1 billion share repurchase program, effective July 25, 2024. This move is aimed at enhancing shareholder value and reflects the company’s confidence in its long-term growth prospects. Share repurchase programs often signal to the market that the company believes its stock is undervalued, which can be a positive indicator for potential investors.

Global Expansion and Market Share

Skechers continues to focus on expanding its global infrastructure, with over 5,260 stores worldwide. The company’s international sales, which make up 60% of total sales, highlight its strong global presence. The EMEA region, in particular, showed significant growth, which is a positive sign for the company’s international strategy.

Innovation and Product Development

Skechers’ emphasis on comfort technologies and innovative product lines has resonated well with consumers. The company’s ability to adapt to market trends and consumer preferences is a key strength. However, challenges such as supply chain disruptions and macroeconomic issues in key markets like China and India could impact future growth.

Analyst Ratings and Market Sentiment

Consensus and Price Targets

The consensus among analysts is overwhelmingly positive, with a Strong Buy rating and an average price target of $80.91, indicating a potential upside of 27.00% from the current share price of $63.71. Notable firms such as Wedbush, Stifel Nicolaus, and Morgan Stanley have maintained Buy ratings, with price targets ranging from $79.00 to $83.00.

Insider Sentiment

Despite the positive analyst ratings, insider sentiment has turned negative, with 47 insiders selling shares in the last quarter. This could be a red flag for potential investors, as insider selling might indicate a lack of confidence in the company’s short-term prospects.

Valuation Metrics

Skechers’ current P/E ratio stands at 16.77, which is relatively attractive compared to the broader market average. The company’s PEG ratio of 0.91 suggests that it may be undervalued, considering its expected earnings growth of 60% over the next few years.

Risks and Challenges

Earnings Miss and Revenue Shortfall

The recent earnings miss and revenue shortfall highlight potential risks. While the company has shown strong sales growth, its ability to meet market expectations consistently is in question. This inconsistency could lead to volatility in the stock price.

Supply Chain and Macroeconomic Issues

Supply chain disruptions and macroeconomic challenges in key markets like China and India pose significant risks. These issues could impact the company’s ability to maintain its growth trajectory and meet its ambitious sales targets.

Insider Selling

The recent increase in insider selling is a concern. While insider transactions are not always indicative of future performance, a significant number of insiders selling shares could signal potential issues within the company.

Future Outlook and Strategic Goals

Sales and Earnings Projections

For Q3 2024, Skechers expects sales between $2.30 and $2.35 billion and diluted EPS between $1.10 and $1.15. For the full fiscal year, sales are projected to be between $8.875 and $8.975 billion, with EPS expected between $4.08 and $4.18. These projections indicate a strong growth trajectory, despite the challenges faced in Q2.

Long-Term Goals

Skechers aims for long-term sales of $10 billion by 2026. Achieving this goal will require continued innovation, effective management of supply chain issues, and successful expansion in international markets. The company’s strong cash position and strategic initiatives, such as the share repurchase program, provide a solid foundation for future growth.

Conclusion

In conclusion, Skechers USA (SKX) presents a compelling investment opportunity, despite some recent challenges. The company’s strong sales growth, robust cash position, and strategic initiatives, such as the share repurchase program, indicate a positive long-term outlook. However, potential investors should be cautious of the recent earnings miss, revenue shortfall, and insider selling.

Given the overwhelmingly positive analyst ratings and attractive valuation metrics, SKX appears to be a buy at its current price. However, investors should closely monitor the company’s ability to meet its sales and earnings projections and navigate supply chain and macroeconomic challenges. Overall, Skechers’ strong market position, innovative product offerings, and strategic focus on global expansion make it a promising investment for those willing to accept some level of risk.