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Will Expenses Kill Skechers Stock in 2019?

By Nicholas Rossolillo – Updated Apr 14, 2019 at 9:36AM

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Bottom-line growth slowed to a crawl last year.

From one standpoint, eclectic shoe designer Skechers USA (SKX 2.49%) had a great 2018. Through the first three quarters of the year, sales rose by double digits, led by expansion overseas and strong U.S. consumer spending. At the same time, the company's bottom line has gone stale, eaten up by rising costs.

Expenses could remain elevated in 2019. However, investors shouldn't lose sight of the fact that higher expenses are the name of the game when a company is growing.

2018 (so far) in review

During the third quarter, Skechers reported that international wholesale sales increased 11.8% compared with the prior-year period, while global retail (stores in the U.S. and abroad that the company owns and operates itself) grew 10.8%. International wholesale and retail combined made up 55.5% of the company's total revenue.

That continued the positive trend the shoe brand enjoyed all year. However, investors were more concerned with the bottom line, which barely increased in the first nine months of 2018. The result? Skechers stock has fallen more than 30% over the last 12 months.

Metric

Nine Months Ended Sept. 30, 2018

Nine Months Ended Sept. 30, 2017

YOY Increase

Revenue

$3.56 billion

$3.19 billion

12%

Gross profit margin

48%

46.5%

1.5 p.p.

General and administrative expenses

$1.08 billion

$905 million

19%

Selling expenses

$289 million

$263 million

10%

Earnings per share

$1.62

$1.57

3.2%

Data source: Skechers. Chart by author. YOY = year over year; p.p. = percentage point.

In spite of the big top-line increase and stronger gross margin, a big increase in general and administrative expense severely limited Skechers' profit growth. Skechers has been ramping up spending on advertising and infrastructure in international markets -- particularly China -- including a new distribution center to handle increased demand there related to the country's November 11 Singles' Day shopping holiday (akin to Black Friday here).

The interior of a Skechers retail store.

Image source: Skechers.

More bills on the way?

Fortunately, spending in China is reaching an inflection point and could start to ease up, according to management -- although Skechers may make additional investments there depending on need. The company continues to grow its number of retail stores, too. On the third quarter conference call, Skechers CFO John Vandemore stated: "For the [fourth quarter] of 2018, we expect our ongoing capital expenditures to be approximately $20 million to $25 million, which includes an additional 10 to 15 company-owned retail store openings, 10 to 15 store remodels, expansions, or relocation, as well as office renovation. This estimate excludes capital expenditures related to our distribution centers worldwide, including China, as well as office expansion at our corporate headquarters."

Check out the latest earnings call transcript for Skechers.

In short, investors should expect Skechers to continue making substantial investments to support its growth. Specific to the home office expansion, the company broke ground in January 2019 on a multiyear project that will more than double its office space and include a new showroom and design center. Skechers hasn't disclosed the total cost of this project yet, but it's something to keep an eye on in the quarters ahead.

However, if Skechers can continue its strong sales growth, investors shouldn't fear an increase in expenses in 2019. The stock's plunge over the past year reduces the pressure on the company to post strong earnings growth this year. Yet profit growth will inevitably come sooner or later once management is content with its ambitions overseas. Thus, expense growth should be a secondary consideration at Skechers -- as long as costs don't get too out of hand -- with sales growth once again taking center stage.

Nicholas Rossolillo and his clients owns shares of Skechers. The Motley Fool owns shares of and recommends Skechers. The Motley Fool has a disclosure policy.

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