Growth stocks have lofty expectations to live up to, and investors can quickly turn on companies when they show any signs of slowing down. Once considered a hot growth stock, Skechers (NYSE:SKX) fell over 22% on July 22, the day after it posted second quarter earnings with its lowest sales growth in over four years. Several months later, the stock is still down over 30% from pre-report levels.
In some circumstances, big price drops like this can present a great buying opportunity. Is this one of those instances, or is it time for investors to rush for the exits? Let's take a closer look.
What happened last quarter?
Revenue in the second quarter increased 9.6% year-over-year to $877.8 million, thanks to a 34.6% increase in its international subsidiary and joint-venture businesses and a 40.5% increase at its international, company-owned Skechers retail stores. However, that wasn't enough to offset slowing sales growth in its U.S. company-owned stores and a 5.4% decrease in its U.S. wholesale business that resulted from shipments being pulled from April into March.
Despite a $77.3 million increase in revenue, net income in the second quarter decreased 7.1% year-over-year to $74.1 million. The company did benefit from a decrease in its effective tax rate to 12.7%, thanks to having a greater portion of its income coming from overseas. However, increased operating expenses and negative currency exchange rates also took a toll.
Skechers' future sales and strategy
The company issued revenue guidance for the third quarter between $950 million and $975 million, and CEO Robert Greenberg believes there is "upside opportunity" as its international business continues to grow at a rapid pace. The company is investing heavily for the future as it increased its capital expenditures 66% over last year for the first half of 2016.
Skechers also recently completed the fourth expansion of the company's European distribution center, adding a substantial 248,000 square feet. In addition to the expansion, it is working on automating more of its European distribution center processes to increase efficiency and lower costs, and management expects the automation to be fully implemented by November.
For marketing, Skechers has increased its focus on building brand awareness by utilizing endorsements, much like its bigger competitors Nike and Under Armour. Instead of spending astronomical amounts on endorsement deals with the biggest names in sports, however, Skechers has focused on building a well-known, diverse group of athletes and musicians. At the Rio Olympics, for example, Skechers ambassador Matt Kuchar won the bronze medal in the men's individual golf event. The company also recently extended its contract with marathon-running legend Meb Keflezighi, who has competed in several Olympics and won both the Boston and New York City marathons. Commercials starring award-winning musicians Demi Lovato and Meghan Trainor could also increase sales among younger customers in the upcoming quarters.
And the company continues to focus on building high-performance athletic shoes. Nike, Under Armour, and other brands have traditionally beaten Skechers in terms of performance, but this has changed in recent years. This summer, Skechers' GOrun 4 running shoes won the Editor's Choice award in Runner's World magazine -- a pretty big deal.
So buying opportunity or time for investors to cash out?
At its current price, the company still looks attractive. Despite a challenging retail environment for its domestic business, analysts are expecting 22% sales growth this year and 20% growth annually for the next five years. While this is lower than its phenomenal 32.4% revenue growth in 2015, most investors would be happy with 20% top line growth for a company with over $3 billion in revenue.
Skechers' five-year PEG ratio, a measure of the company's price relative to its expected earnings growth, is 0.63. A PEG ratio of less than 1.0 is typically considered a good value. This ratio makes the stock look even more attractive when compared with Nike's PEG of 1.63 and Under Armour's 2.40. Skechers also happens to have a strong balance sheet with $628 million in cash and cash equivalents and just over $71 million in debt.
As companies grow larger, sales growth will usually decelerate. If the second quarter report had shown near-stagnant growth , I might be a bit more worried if I owned shares. However, at its current price and with double digit gains expected over the next five years, shares look like a good deal to me.