Footwear company Skechers (SKX 11.20%) is on pace to sell around $8 billion worth of products this year. That's up from less than $2 billion a decade ago. This explosive growth has been fueled in part by the company's push into direct-to-consumer sales. There are now over 4,700 Skechers stores around the world, including more than 1,500 that are owned and operated by the company.
Skechers' second-quarter results blew past analyst estimates. Revenue of $2.01 billion was up 7.7% year over year and about $90 million ahead of analyst expectations, while earnings per share of $0.98 soared 69% year over year and beat estimates by $0.44. That huge beat on the bottom line was one reason why the stock soared last week.
Beyond the headline numbers, there are a few reasons investors should consider Skechers stock for their portfolios.
1. Lowering the dependence on wholesale
Skechers sells its products through two channels: Wholesale and direct-to-consumer. Although wholesale remains an important business for Skechers, the company has been successfully shifting toward direct-to-consumer.
This shift comes with some important benefits. For one, selling directly through its own stores or online is far more profitable. Globally, the wholesale segment generated $1.07 billion in sales and a 40.2% gross margin during the second quarter. The direct-to-consumer segment generated $940 million in sales and a 66.9% gross margin. That's a huge profitability gap.
The wholesale segment can also be volatile. Wholesale revenue can be negatively affected by retail and distributor customers reducing inventory levels or shifting their purchases toward other brands. Hedgeye recently named Skechers one of its top short candidates due to concerns that Nike's move back into wholesale would hurt sales. That's certainly possible, but thankfully, the wholesale channel is far less important to Skechers today than it was a few years ago.
2. A rock-solid balance sheet
Consumer spending can be fickle, especially in a tough and uncertain economic environment. Skechers is already seeing its wholesale channel negatively affected. Wholesale customers are reducing their inventories as demand slows, leading to sales declines for Skechers. In the second quarter, total wholesale revenue was down 5.9%.
While this weakness could eventually creep into the direct-to-consumer segment as well, Skechers is well prepared to weather just about any storm. Skechers has $977 million in cash and short-term investments on its balance sheet, paired with roughly $350 million in debt. The company has aggressively reduced its own inventory levels over the past six months, freeing up cash in the process.
With a potential recession on the horizon, it's a good idea to invest in companies with the financial stability to make it through to the other side. Skechers is one such company.
3. A reasonable valuation
Analysts expect Skechers to generate earnings per share of $3.34 this year and $4.04 next year. With a stock price hovering around $55 per share, that puts the price-to-earnings ratio at about 16.5 based on the 2023 estimate and 13.5 based on the 2024 estimate.
Those ratios seem reasonable, particularly given Skechers' track record over the past decade of growing sales, expanding profits, and investing in its direct-to-consumer business. A further shift toward direct-to-consumer sales, which carry a much higher gross margin, could accelerate Skechers' earnings growth in the years ahead.
There's always the chance that Skechers' earnings growth gets derailed if consumers pull back on spending. Historically, Skechers earnings have been volatile, and there's little reason to believe anything is different now. But the company's strong balance sheet should give investors some confidence that it can handle even a severe downturn.
With the S&P 500 trading for around 26 times earnings, Skechers stock certainly doesn't look overpriced. Given the company's strong results and cash-rich balance sheet, it looks like a good time to buy the stock.
