Is Skechers a Buy Now, BB&T?

After BB&T Capital Markets downgraded Skechers from "Buy" to "Hold," shares fell more than 7.5%. But now, with shares trading that much lower, is the company ready to skyrocket, or will it be outperformed by Deckers Outdoor and Crocs?

Jan 28, 2014 at 2:58PM

Tuesday, Jan. 21, 2014 wasn't a great day to own shares of Skechers USA (NYSE:SKX). After receiving a downgrade from "Buy" to "Hold" from BB&T Capital Markets, the company's shares slid 7.42%. According to the analysts, the company's results last quarter fell below what they expected. While this is true, is it possible that markets are overreacting to the news and that, instead, now might be an opportune moment to jump into the fray?

Skechers has had sketchy revenue recently, but things are looking up!
For the past few years, Skechers has experienced poor operating results, especially in comparison with Deckers Outdoor Corporation (NYSE:DECK) and Crocs (NASDAQ:CROX). Between 2010 and 2012, Skechers saw its revenue fall 22.1% from $2.01 billion to $1.57 billion. According to the company's most recent annual report, the primary driver behind the lower sales was a 39.2% decline in its domestic wholesale segment between 2010 and 2011.

Fortunately, the company's situation appears to be improving, as evidenced by the sales it reported for the first three quarters of last year. Over this time horizon, revenue rose a whopping 19.8% from $1.16 billion to $1.4 billion. In its most recent quarterly report, management attributed the reversal of fortune to a 25.3% rise in its domestic wholesale segment.

Over this time-frame, Deckers Outdoor and Crocs significantly outperformed Skechers in terms of top-line growth. As opposed to seeing revenue contract, Deckers Outdoor's revenue rose 41.3% from $1 billion to $1.41 billion between 2010 and 2012. During its first three quarters in 2013, Deckers Outdoor has seen its revenue continue to grow. Over this time-frame, the company's top line has grown 2.9% year-over-year to $820.6 million from $797.1 million.

Results have been even stronger at Crocs. Between 2010 and 2012, revenue at the shoe company grew 42.2% from $789.7 million to $1.12 billion. While this growth rate is impressive, investors should remain cautious. In the first three quarters of 2013, Crocs' revenue rose 7.3% from $898.3 million to $964 million. Though this was much stronger than the growth experienced by Deckers Outdoor, Crocs reported that its third quarter sales declined 2.4% from the same period a year earlier. This drop may have been a one-time event, but it could also mean the business is losing consumer appeal.

Revenue isn't the whole story
In terms of net income, the story has been even worse for Skechers. Between 2010 and 2012, the company saw its bottom line fall 93% from $136.1 million to $9.5 million. This primarily occurred because costs rose in relation to sales. Over this time-frame, the company saw its cost of goods sold rise from 54.4% of sales to 56%. Meanwhile, its selling, general, and administrative expenses rose even more, from 35.8% of sales to 42.6%.

Despite all of the gloom and doom about the company in these past few years, the rise in revenue that Skechers saw throughout 2013 converted into higher profits. During the first three quarters of last year, the company's bottom line rose an impressive 631.2% from $5.6 million to $40.6 million.

Although these results look bad (and they are), Skechers isn't alone in the low-profit camp. Deckers Outdoor, despite its strong revenue growth, has had a challenging time converting that revenue to profits. The company has seen an 18.5% falloff in sales between 2010 and 2012 as net income fell from $158.2 million to $128.9 million. This, too, has been driven by a rise in costs, with the company's cost of goods sold rising from 49.8% of sales to 55.3%. Similarly, the company saw its selling, general, and administrative costs jump from 25.4% of sales to 31.5%.

Throughout the first three quarters of 2013, Deckers Outdoor's results have continued to deteriorate. Net income has fallen an additional 83.1% from $32.4 million to $5.5 million, which shows that management either needs to cut costs or raise prices on its products. Otherwise, the downturn in profit could transform into a net loss, which would put into question the company's viability as a long-term operation.

Over the past three fiscal years, Crocs has taken the cake not only in revenue growth but in net income growth as well. Between 2010 and 2012, the company's bottom line rose an impressive 93.9% from $67.7 million to $131.3 million. Unlike its peers, management reduced the company's cost of goods sold from 46.3% of sales to 45.9% and reduced its selling, general, and administrative expenses from 43.4% of sales to 41%.

Although these results are far stronger than anything that Skechers or Deckers Outdoor posted, Crocs has seen its fortunes reverse in 2013 just like Deckers Outdoor. During the first three quarters of the year, the company's net income fell 42.7% from $135 million to $77.4 million, driven primarily by soaring selling, general, and administrative expenses.

Foolish takeaway
While the past three years for Skechers have been terrible, the company's results throughout 2013 were encouraging. Management has been able to improve sales significantly while increasing the company's profitability. Moving forward, the real test for management will be whether the business can maintain this improvement or if it is nothing more than a short-term blip on the radar.

For this reason alone, investors should only consider investing in Skechers if they believe the long-term outlook for the company is favorable. If you aren't in this pool of shareholders or prospective shareholders, then now may be a good time to reconsider your commitment to the position because the ride to potentially higher returns will likely be a bumpy one.

Can Skechers help you retire rich?
It's no secret that investors tend to be impatient with the market, but the best investment strategy is to buy shares in solid businesses and keep them for the long term. While Skechers might be one of a handful of stocks that could be an excellent long-term pick, The Motley Fool believes it has found three other opportunities to aid you on your path to prosperity.  In the special free report, "3 Stocks That Will Help You Retire Rich," The Motley Fool shares investment ideas and strategies that could help you build wealth for years to come. Click here to grab your free copy today.

Daniel Jones has no position in any stocks mentioned. The Motley Fool owns shares of Crocs. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers