Will Skechers Make Investors Proud On Wednesday?

Wednesday, Feb. 12, 2014 is bound to be an interesting day for shareholders of Skechers U.S.A. (NYSE: SKX  ) . After seeing shares decline more than 7% on Jan. 21, when BB&T Capital announced that they were reducing the company's rating from "Buy" to "Hold", investors are likely scratching their heads and thinking about what to do with it. But is it possible that, with the company's shares trading at a 21% discount to their 52-week high, Skechers could be an amazing opportunity moving forward?

Can Skechers step up to Mr. Market's high expectations?
Despite seeing its shares decline, Mr. Market believes that it is capable of producing strong earnings and revenue growth during the quarter. For the quarter, analysts expect that Skechers will see its revenue leap 13% from $395.62 million to $448.58 million. While such a rise in sales may seem extreme for a shoe company, investors shouldn't necessarily count Skechers out. In the first three quarters of 2013, the company's revenue 20% to $1.4 billion compared to the $1.2 billion that management reported the same period a year earlier.

In terms of profitability, management believes that Skechers will do even better. For the quarter, the company is expected to report earnings per share of $0.16, double the $0.08 it saw the same quarter in 2012. This, too, shouldn't be ruled off as impossible because the company did see a substantial rise in profitability during the first three quarters of 2013. Over this timeframe, earnings per share soared from $0.11 to $0.80.

But does the past suggest a shoe-in for the company?
Historically speaking, Skechers performance has been less than ideal. Over the past three fiscal years, revenue at the company fell 22% from $2 billion to $1.6 billion. According to the company's most recent annual report, the decline in revenue came primarily from a falloff in its domestic sales. Between 2010 and 2012, the company's domestic wholesale segment saw revenue decline by 42% from $1.1 billion to $652.7 million.

Unfortunately, Skechers seems to be alone in seeing a drop in sales. Over the same timeframe, both Deckers Outdoor Corporation (NYSE: DECK  ) and Crocs (NASDAQ: CROX  ) saw their revenue rise considerably. Between 2010 and 2012, Deckers Outdoor saw its top line rise an impressive 41% from $1 billion to $1.4 billion. Deckers Outdoor attributed the rise in revenue over this timeframe to an 86% jump in international sales, driven largely by a 35.6% increase in its UGG brand and the addition of its new Sanuk brand.

Crocs performed slightly better than Deckers Outdoor during this timeframe. Over the past three years, the company's revenue rose 42% from $789.7 million to $1.1 billion. Although Crocs saw its revenue rise in its Wholesale, Retail, and Internet channels, the primary driver behind growth was the company's Retail operations. Between 2010 and 2012, this set of operations grew 60% from $234.6 million to $374.8 million.

From a profitability perspective, the picture looks a little different. Over the past three years, Skechers was, once again, the loser. Due to a decline in sales and rising costs relative to those sales, the business saw its earnings per share fall by 93% from $2.78 to $0.19.

Unlike in the case of revenue, Skechers wasn't alone in its plight. Deckers Outdoor also saw its earnings per share decline but to a less extent than its peer. Between 2010 and 2012, the company's earnings fell 14% from $4.03 to $3.45. The disparity between Deckers Outdoor's revenue growth and fall in earnings per share can be chalked up to rising costs relative to sales.

Of the three shoe companies, only Crocs saw an improvement in its earnings per share. Over the three-year time horizon, Crocs reported that its earnings per share rose a whopping 89.5% from $0.76 to $1.44. This was due to a 94% jump in net income stemming from higher revenue and lower costs, but was negatively affected by a slight increase in the number of share outstanding.

Foolish takeaway
Heading into earnings, it's difficult to know what shareholders should expect. Recent performance suggests that Skechers is improving and that it may not be too crazy to expect the company to match or exceed analyst expectations. On the other hand, the business has had a very rocky history leading up to 2013 and there's no telling when (or if) its condition might begin to deteriorate again.

The smart thing to do is to evaluate how strong the business is fundamentally and take a long-term approach to any holding in it. In the event that a true turnaround is in progress, patience will pay off for the Foolish investor but if this isn't the case then buying into the company is like rolling the dice. I'm not sure about you, but that's not my idea of investing.

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