Heading into Skechers USA Inc's (NYSE:SKX) first-quarter earnings report last month, I was confident that one of my largest positions would report solid numbers. Over the trailing 12 months, the shoemaker's stock had soared, advancing more than 62%, more than quadrupling the S&P 500 index's return. When the company reported its quarterly earnings, I was satisfied -- for the most part.
Sales for the quarter rose to $1.25 billion, a 16.5% increase year over year, and earnings per share (EPS) grew to $0.75, an even more robust 25% YOY increase. If that wasn't good enough, margins also increased: Gross margin increased 2.3 percentage points to 46.7%, and operating margin increased 0.3 percentage points to 11.9%.
How did investors react the next day? Did shares rise on the good news? No, they were slashed! In one trading day, the company lost a quarter of its market cap. As of this writing, shares are down almost 29% since that report. What was the stock's cardinal sin? Nothing less than the company's second-quarter guidance, the low end of which would represent no year-over-year earnings growth.
It is yet to be seen if the company is guiding conservatively, or if serious problems lurk. Regardless, I believe shareholders will be rewarded for holding on to their shares. Here are three reasons I am hopeful that the company's stock will turn around.
One of the biggest reasons to be bullish on Skechers is the phenomenal success the company is seeing in its overseas markets. International wholesale is now the company's largest distribution channel and increased 17.9% in the most recent quarter, representing 46.2% of total sales. In the conference call with analysts, COO David Weinberg said all of Skechers' European subsidiaries achieved double-digit sales growth, with Germany, Italy, Spain, and the U.K. realizing the most dollar gains.
But it wasn't just Europe where Skechers realized big gains: India, Singapore, and South Korea also all showed considerable percentage sales gains in the first quarter. Still, Weinberg added, Skechers' gains in China might have been most impressive of all. He said, "China remains a dominant force in our Asia business with approximately 4.4 million pairs shipped in the quarter, a retail base of approximately 800 Skechers freestanding stores and 2,400 points of sales and a strong e-commerce business, which grew by high double digits in the first quarter."
Skechers' global success is due to its growing brand recognition. In the company's 2017 fourth-quarter conference call, Weinberg stated:
So I would tell you that the brand is perceived as quality. It's not considered as mid, but it's considered as upper, although not the most expensive. So it's quality, designed well, fashion-forward at a price probably on average ... than we see here in the United States ... [T]here are some third-world countries where the price is more significant than it is here in the United States.
Investing for growth
Beyond Skechers' weak second-quarter guidance, another perceived problem was the company's rising expenses. General and administrative costs rose to $355.4 million, a 25.8% increase year over year, and selling expenses increased to $84.4 million, a 14.3% increase. Management acknowledged the company had experienced more than a few problems resulting from "growing pains." One problem cited, for example, was "executing distribution at peak efficiency."
But this spending is directed toward growing operations. Every year, the company sells a lot more shoes than it did the year before. A shoe company having a hard time selling its product would be one thing; that stock probably would not make a good investment. But that's not Skechers' problem. Skechers is just struggling to keep up with huge international demand in a cost-efficient manner.
In other words, a little patience might be justified as the company goes through its growing pains. Can you imagine the stock market punishing Amazon.com for spending money to expand and grow its presence in new regions? Neither can I.
A good bargain
The best reason to like Skechers is that it seems to be a nice bargain, especially for a company growing sales. Over the trailing 12 months, Skechers' earnings per share is $1.93, giving the company a P/E ratio of 15.0, far below the S&P 500's average valuation multiple of 24.8. But, for value investors, it gets better. The company is also holding $4.44 in cash per share. If that were to be subtracted out of the stock price, the company would be trading at a P/E ratio of just 12.7!
Investors can never predict the volatile swings stocks will take on a day-to-day basis. Fortunately, I am not so much worried about short-term price fluctuations as I am about holding good companies over long periods of time, letting my gains compound.
Skechers is quickly gaining market share in foreign markets, winning new customers around the globe. This growth requires investment upfront, but should reward shareholders for years to come. That the company is selling at such a discount to the market makes for -- what I believe -- is a decent opportunity for investors to buy a growing company at a good price.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Matthew Cochrane owns shares of Amazon and Skechers. The Motley Fool owns shares of and recommends Amazon and Skechers. The Motley Fool has a disclosure policy.