Skechers Sprints Ahead, Eyes the Long Run

The global shoe wholesaler and retailer is enjoying industry tailwinds and firm footing in a competitive market. With a comfortable valuation, this is an attractive, premium business.

Apr 30, 2014 at 3:49PM

Footwear giant Skechers (NYSE:SKX) is walking over the competition with recent earnings results that were beyond both internal and external expectations. Its latest guidance calls for even better times ahead, as the company noted acceleration in nearly all categories since the already-strong beginning of the year. This is a business with a great understanding of current trends and a diversified portfolio that embraces a wide range of consumer taste profiles. Between the shoe brands and the stores themselves, Skechers is a global powerhouse, growing quickly despite its two-decade history. The icing on the cake is a relatively cheap valuation to drive the deal home.

Kickin' it
In the first quarter, Skechers' sales grew by an impressive 21% on their way to a record first-quarter sales high for the company. During a time of continued economic tepidity and challenging weather across much of the country, this is particularly impressive. Everything about the company's results looked great, from double-digit sales increases at the wholesale business to a 5.6% jump in same-store sales at the physical locations. So many retailers have been clawing to maintain steady comparable-store sales figures, let alone trek higher, and have leaned heavily on the "bad weather" excuse as a reason for poor performance in recent months. Clearly, if the right products are being sold, shoppers will venture out of the house.

The bottom line skyrocketed from $6.7 million in net earnings in 2013's first quarter to $31 million in the recently ended period. Some of that jump in the bottom line was due to timing, such as the shift of marketing expense from the first quarter to the second quarter due to the Easter holiday. Nonetheless, the results are incredible.

The rest of the year looks bright, too. Skechers plans to add 60 to 70 stores around the world, and it has noticed an uptick in backlogs and order rates since the beginning of 2014.

Why it's a buy
Skechers is growing at least as good if not better than many of its peers. Look at peer Wolverine World Wide for comparison. The company, which does not operate stores but has an extremely valuable catalog of brands, saw first-quarter sales decline nearly 3%, though it is still on track for a record year in 2014.

Wolverine World Wide trades at 15.2 times forward earnings and holds an EV/EBITDA of 12.15 times. Skechers trades at 15.6 times forward earnings with an EV/EBITDA of 11.13 times, reflecting the strength of its balance sheet. The company's current assets handily outweigh total liabilities.

The shoe business is resilient in the difficult retailing world, and many of the players are posting impressive growth. Skechers is one of the best in the business, and luckily doesn't trade at a premium.

Looking ahead, investors should keep an eye on areas such as marketing spending compared to sales growth. Skechers spends on celebrity endorsements, which has clearly been working well, but is a pricey way to market. As long as sales trends continue, though, this shouldn't be a problem. All in all, this a top performer with the wind at its back -- growth investors, take notice.

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