All in all, it's been a good year for Skechers U.S.A. (SKX 11.20%) with its shares up almost 17% so far in 2023. Yet, management isn't standing still. Rather, they have a plan to both grow the business and become more profitable. And if the company hits its targets, it could reach $1 billion in annual operating profit in the not-so-distant future. Here's what this could all mean for investors.
The billion-dollar profit plan
In the second quarter of 2023, Skechers generated record quarterly sales of $2.01 billion. And for the year, management is guiding for sales of $7.95 billion to $8.10 billion, which would be a new annual record. But to reach $1 billion in annual operating profit by 2026, it will need to first reach more top-line records.
SKX Revenue (TTM) data by YCharts.
Its current goal is to hit annual sales of $10 billion, and Skechers' plan isn't outrageous. Assuming it generates $8 billion in sales this year, it only needs to grow its top line at an 8% compound annual rate to hit $10 billion in 2026, which certainly looks attainable.
Growth plans for Skechers are pretty straightforward. The company is still expanding internationally, so new markets could unlock new revenue potential. And management is also investing in its direct-to-consumer business and in new products, which can both help growth in existing markets.
Turning from the top line to the bottom line, Skechers' management anticipates reaching a "low-teens" operating margin by 2026, which it defines as between 11% and 13%.
Again, this part of the plan doesn't appear overly ambitious for Skechers. For evidence, consider the chart below. The company has hit this margin target in the past.
SKX Operating Margin (TTM) data by YCharts.
Circling back, direct-to-consumer sales are higher margin for Skechers than sales through traditional channels. So part of management's rosy profit outlook relates to the expectation of growth in its direct-to-consumer business. Expecting growth in this area is reasonable because it's a secular trend in the shoe business -- consumers are increasingly buying online straight from the source.
Summing it up, if Skechers can hit $10 billion in sales and surpass a 10% operating margin by 2026, it's looking at over $1 billion in annual operating income.
What shareholders can expect
But what does that mean for investors today? Skechers has a market capitalization of $7.3 billion as of this writing. And the stock would appear inexpensive at just 15 times its trailing net earnings and at about 11 times its trailing operating income. However, I don't think that investors should expect its valuation to meaningfully go up between now and 2026.
For well over 10 years now, Skechers has consistently turned a profit, and it's poised to continue the trend. But it hasn't rewarded shareholders in the typical ways. Many similar companies pay a dividend and reduce their outstanding share count to increase shareholder value. However, Skechers doesn't pay a dividend, and its share count is within 1% of its all-time high.
My point here is this: Skechers stock is cheap, but it's unlikely to garner overwhelming attention from the market right now. Growth investors are likely to pass it up due to modest growth projections. And value investors are likewise likely to look past it since it's not making the typical shareholder-friendly moves, at least to this point.
In short, Skechers has done a good job of growing a profitable business. But expect its stock to stay cheap.
That's totally ok, though. Let's assume that Skechers hits $1 billion in operating income in 2026. After all, we've seen that this is a reasonable goal. Let's also assume that it trades at 10 times its operating income in the future, which is slightly cheaper than where it trades now.
In this scenario, Skechers would have a market capitalization of $10 billion, which would be about 37% higher in only about 3 years. Considering the stock market goes up in value about 10% per year, on average, the upside for Skechers stock is potentially market beating, even if just by a hair.
Therefore, Skechers is a good stock to consider for those looking for a lower-risk, market-beating opportunity. But it's important for investors to keep expectations grounded and reasonable since this stock appears to have more modest upside ahead than some other higher-growth companies.
