Shares of shoe maker Skechers (SKX 2.76%) have been rallying this year as the company rebounds from a sales slump in 2015 and 2016. With expectations running high, the company delivered on its sales promises but missed on profitability. While that may sound like a mixed bag of results, investors can find much to be thankful for.
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Reading the fine print
Sales for the second quarter rang in at $1.025 billion, a 16.9% increase over last year. That was well above management's forecast of $950 to $975 million. Combined with first quarter sales of $1.077 billion, Skechers breached the $2 billion-in-two-quarters mark for the first time in its history. After slumping the last couple of years, sales are back in double digit growth mode.
Chart by author. Data source: Skechers Quarterly Earnings.
As was the case at the beginning of 2017, though, higher expenses from overseas expansion kept profits trending lower. Earnings per share were $0.38, missing internal predictions of $0.42 to $0.47. That may not please all investors, but the reasons that happened have been explained thoroughly by management.
The goal at Skechers has been to derive at least 50% of sales from overseas. To that end, the company has been investing heavily in opening new stores around the world and has been working to get the new joint venture businesses in Asia get off the ground.
Additional international advertising expense of $6.4 million was incurred, and a $4.2 million selling commission went to the new joint venture in South Korea. General and admin expenses went up $26.2 million to support its international expansion, primarily to assist its double digit growth in China and including $3.6 million for the transfer of its old South Korean distributor business to the joint venture. Those items alone had a $0.24 negative impact on earnings per share.
However, due to efforts over the last couple of years, Skechers has hit its 50% of sales overseas goal the last few quarters and is on track to hit that number for full-year 2017.
Domestic business not to be forgotten
Another positive in the report was strong sales growth in stateside business. Domestic wholesale increased 6.4%, benefiting from an 11.4% increase in shoes shipped offset by a 4.5% decrease in pricing.
Image source: Skechers.
Those numbers are impressive given the cutthroat U.S. retail environment. Headlines this year have been swirling with news of traditional stores shuttering due to internet disruption, and clothing retail, in general, has been hit especially hard. According to the U.S. Census Bureau, clothing and apparel sales are at 0% growth this year compared with an overall retail sales rise of 4% through June.
Skechers strategy of competitive pricing and new products like the GOwalk lineup -- aiming for the young and active demographic, yet still casual in design -- have been helping the company stand out from the rest.
What investors should focus on
The bottom line for Skechers shareholders right now isn't the bottom line. The company is sacrificing profitability in the short-term to drive growth in the long-term, and it's working.
The company expects more record sales numbers to continue through the rest of the year, forecasting at least $1.05 billion in the third quarter. Earnings are again expected to be between $0.42 and $0.47 per share, numbers perhaps it will hit this time with the higher outlook in the top line. In the end, though, it doesn't matter. Skechers is starting to look like a growth story again.
