Is Skechers a Buy Now, BB&T?

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 (NASDAQ: 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.

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