Is Skechers Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Skechers (NYSE: SKX  ) fit the bill? Let's take a look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell Skechers's story, and we'll be grading the quality of that story in several ways:

  • Growth: Are profits, margins, and free cash flow all increasing?
  • Valuation: Is share price growing in line with earnings per share?
  • Opportunities: Is return on equity increasing while debt to equity declines?
  • Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's take a look at Skechers's key statistics:

SKX Total Return Price Chart

SKX Total Return Price data by YCharts

Passing Criteria

3-Year* Change

Grade

Revenue growth > 30%

(4.5%)

Fail

Improving profit margin

(79.8%)

Fail

Free cash flow growth > Net income growth

(3,830.2%) vs. (80.7%)

Fail

Improving EPS

(81.5%)

Fail

Stock growth (+ 15%) < EPS growth

(22.8%) vs. (81.5%)

Fail

Source: YCharts. * Period begins at end of Q2 2010.

SKX Return on Equity Chart

SKX Return on Equity data by YCharts

Passing Criteria

3-Year* Change

Grade

Improving return on equity

(82.9%)

Fail

Declining debt to equity

303.4%

Fail

Source: YCharts. * Period begins at end of Q2 2010.

How we got here and where we're going
This is perhaps the worst performance ever recorded by any company on this analysis. We've seen several companies squeak through with a lone pass, but this is the first time in memory that one has failed every single test. Moreover, Skechers puts together a ridiculous percentage decline in free cash flow, which started from very close to zero, and has ended up pretty far away from it. In theory, things can't possibly get worse; but reality can be a harsh mistress. Will Skechers' fundamental weaknesses catch up to it in the end?

Skechers isn't on an uncontrolled downward spiral just yet -- the company's net sales rose 12% year over year in its latest quarter. Skechers has been recovering rather well from the toning-shoes disaster of 2011, but the damage of that poorly conceived fad continues to linger in the company's rear-view mirror. Skechers' management expects the upward trend to continue in the second half, as well, due to the apparent success of worldwide marketing campaigns.

Skechers also posted impressive growth in its e-commerce business, as sales soared by 37% in the recent quarter. International sales also spiked by double-digit percentages, with majority of new demand coming from China, Chile, and Canada. However, the European market has remained a drag on overall sales growth due to its ongoing economic woes. The company is aggressively expanding its geographical reach into new international markets, which will enable it to compete with global leaders such as Nike (NYSE: NKE  ) and Adidas (NASDAQOTH: ADDYY  ) -- this expansion includes plans to open up to 50 new stores by the end of the year. Deckers Outdoor is also pushing hard into international markets. It expects to add 30 more stores by the end of 2013, two-thirds of which will be located in Asia.

Both Nike and Adidas are also keeping an eye on the Chinese market to boost their international sales. Last year, Nike opened its first running and basketball store in China. The sports-apparel leader has very high expectations for the upcoming World Cup in Brazil, which ought to expand its soccer-related sales. Adidas, which is second to Nike, currently holds an 11% market share in China. It has sponsored top soccer teams such as Germany, Spain, and Argentina in the World Cup, which will drive its revenue growth in the near future.

Putting the pieces together
Today, Skechers has few of the qualities that make up a great stock; but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.

With the American markets reaching new highs, investors and pundits alike are skeptical about future growth. They shouldn't be. Many global regions are still stuck in neutral, and their resurgence could result in windfall profits for select companies. A recent Motley Fool report, "3 Strong Buys for a Global Economic Recovery," outlines three companies that could take off when the global economy gains steam. Click here to read the full report!


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