Skechers (NYSE:SKX) has been one of the best performing consumer goods stocks this year as the company has executed a remarkable turnaround. The California based shoe retailer releases its Q2 earnings this week and is expecting record sales. Analysts are looking for EPS of $1.00 with revenues slightly north of $735 million.
Consumers have been reacting positively to Skechers product line. Q1 was significant for Skechers as the company's sales increased 40.5% YOY to record-high levels. This exceptional growth was driven by global demand for Skechers products, which more than offset a strong US dollar and sizable currency headwinds. The company experienced double digit increases in several key countries that were impacted by currency headwinds, and grew triple digits in two of its largest international markets, including China. The company's' margins also have been performing well, up 5.9% in Q1.
Skechers has grown into the #2 footwear company in the United States behind Nike after its Q1 performance. The footwear and athletic apparel industry has been performing very well as of late due to the recent "athleisure" trend. Skechers has been successful at adapting to new styles and trends in the footwear marketplace. The company has been performing well in the segment, as Skechers was able to carve out a niche in the footwear market through the 12-24 and 50+ age demographic. This has been displayed through recent ad campaigns highlighting Joe Montana, Joe Namath, Mark Cuban, Sugar Ray Leonard, Ringo Starr, Pete Rose, Demi Lovato, and Mariano Rivera, amongst others. This lineup seems to resonate especially well with the 50+ age demographic, as the lineup features iconic stars from the Baby Boomer Generation, a demographic which doesn't seem to be highlighted by Under Armour (UA) or Nike (NKE).
Skechers scored a particularly crucial endorsem*nt victory with Olympic runner Meb Keflezighi. While Keflezighi may not be a household name, his departure from Nike and subsequent endorsem*nt by Skechers in 2011 has catalyzed a shift in running shoe trends, propelling Skechers into second place in the sports footwear market. In 2014, Keflezighi became the first American to win the Boston Marathon since 1985, and he did so while wearing Skechers shoes. Since his victory, shares of SKX have soared more than 230%. Meb has become a brand ambassador for the company and its running shoe segment, which has shown much success. Skechers has even made a several signature shoe lines around him, Go Meb P3's.
One of the catalysts for Skechers' running shoes enormous success behind Keflezighi was Skechers' "vast network of retail partners outside of the realm of specialty running retailers". According to Brian Meltzer, editor-in-chief of Competitor magazine, SKX has an immediate advantage in the running shoe industry thanks to its distribution:
"[SKX's network includes] thousands of lifestyle mall stores and more than 900 Skechers retail stores around the world. Consider that there are between 800 and 1,000 specialty running stores in North America and it's easy to see that Skechers has a leg up on the new brands and smaller brands fighting for space on the shoe walls at those specialty running stores."
We believe this early-stage leg-up widens SKX's economic moat as it enables the company to compete for market share within a shorter time frame. We believe this advantage will translate to golf, a market Skechers entered just over a year ago with the signing of golf star Matt Kuchar. Kuchar will help endorse the company's new golf shoe line, Go Golf, much like Meb did for SKX's running segment 3 years prior.
Skechers has been improving significantly in the global shoe market. Global sales accounted for 37% of the company's business MRQ, and guidance suggests that the company is aiming for these figures to grow to 50% of total sales. The global running apparel and footwear market is expected to grow at a 6.28% CAGR between 2014 and 2019. This healthy macro growth should only help Skechers' global penetration. Organically, SKX has seen very healthy international growth trends. International retail comps increased 14.8% MRQ, on top of 19.1% the previous quarter.
Despite these fantastic international comps, the company is still significantly boosting its international marketing presence in the countries in currently operates in. Skechers opened 181 new domestic, international, and joint venture stores and shop-in-shops in 2014, growing its total number of stores 23% from 2013 to 843. These openings including 19 new international stores. The results of these investments were seen as early as Q1, where Skechers' international wholesale and distribution segment sales increased by 59.5%. This is on top 43.9% growth in 2014. We believe that rising popularity of the SKX brand (surging comps) coupled with continued expansion (strong inorganic growth) position the company to soon successfully reach its 50% international sales target.
We see E-Commerce as a strategic avenue for growth for the company. E-commerce sales grew 7.9% MRQ, but still account for less than 1% of the company's net sales, equipping Skechers with plenty of runway for e-commerce growth concurrent with international expansion.
We believe that through targeting and capturing a unique audience, Skechers is poised to continue its accelerated growth. We do not believe Skechers is competing directly with Nike, Under Armour, or Adidas, but rather operating on a separate playing field. While the Big 3 vie for athletic supremacy and choice popularity, Skechers is quietly becoming the preferred tier-2 athletic footwear brand. Skechers aren't for the Stephen Currys or Jordan Spieth's of the world; the shoes are for the Joe Montanas and the Matt Kuchars. This under-the-radar, more tangible marketing strategy is resonating well with consumers both domestically and internationally, and we expect this to continue.
The company plans to open 45 to 55 stores in the remainder of FY15, with 10 to 15 of those coming in Q2, and as seen above, new store openings tend to have an immediate effect on revenue growth. E-Commerce remains a very fractional percentage of revenue, and gives the company a separate avenue for growth after the SKX hype moderates. Given these factors, we believe analysts calling for 25.40% YoY sales growth in Q2 actually seems quite conservative. By comparison, net sales grew:
21% in Q1Fy14,
37% in Q2Fy14,
31% in Q3Fy14,
26% in Q4Fy14,
40% in Q1Fy15.
We believe 2015 trends suggest a continued strong YoY sales growth, and having Q1's 40% YoY growth slip to 25% seems unusually low and uncharacteristic for SKX.
In terms of value, SKX is cheaper than its peers despite being the best-performing stock in the group. SKX trades at 21.9x forward earnings on expectations of 29.10% growth, yielding a 1-year forward PEG of 0.75. UA trades at 61.4x forward earnings on expectations of 32.70% growth, yielding a 1-year forward PEG of 1.88. NKE trades at 23.8x forward earnings on expectations of 13.70% growth, yielding a 1-year forward PEG of 1.74. Not only is SKX the only stock of these 3 trading at a sub-1 one-year forward PEG, but SKX's one-year forward PEG is considerably more attractive than both UA's and NKE's. On a sales basis, SKX trades at 2.4x trailing sales, while UA and NKE trade at 5.66x and 3.15x trailing sales, respectively. From all angles, SKX is comparatively undervalued.
Given SKX's favorable valuation and the company's international and e-commerce penetration opportunities, we do not believe the run-up in SKX shares is over. SKX's unique marketing strategy could actually position the stock to continue to be one of the better performers in the market. Factor in a potential earnings surprise and a pending patent infringement suit with Steve Madden (SHOO), and the stock has attractive near-term firepower.
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Analyst’s Disclosure: I am/we are long SKX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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