Skechers' Spending Growth Will Be in the Spotlight on Thursday

Earnings growth depends on the company's keeping costs in check while maintaining its solid growth rate.

Timothy Green
Timothy Green
Feb 6, 2019 at 5:04PM
Consumer Goods

Footwear company Skechers (NYSE:SKX) is set to report its fourth-quarter results after the market closes on Feb. 7. The company has been spending heavily to lay the foundations for future growth, particularly in China, and that spending has knocked down the bottom line. But Skechers' cost growth is starting to moderate, and that could mean significant earnings growth is on its way.

What happened last time

Skechers grew revenue by a bit less than expected in the third quarter, but its bottom line largely held up. Profits plunged in the second quarter due to higher costs, so nearly flat per-share earnings in the third quarter were a welcome surprise.

Metric

Q3 2018

Change (YOY)

Compared to Average Analyst Estimate 

Revenue

$1.18 billion

7.5%

Missed by $40 million

Earnings per share

$0.58

(1.7%)

Beat by $0.06

Data source: Skechers. YOY = year over year..

The star of the show during the third quarter was the international business, which now accounts for more than half of Skechers' revenue. International wholesale revenue rose 11.8% year over year, while global company-owned retail sales jumped 10.6%. Offsetting that growth was a 3% sales decline for the domestic wholesale business.

Selling, general, and administrative expenses increased by just 9.5% year over year in the third quarter, compared to nearly 20% growth in the second quarter. Skechers is building out its international brand presence and direct-to-consumer channels, and it's investing in China to fuel expansion in that country. Investing today to drive growth tomorrow is the strategy, and it's been hurting the bottom line.

Check out the latest earnings call transcript for Skechers.

Skechers shoes.

Image source: Skechers.

What analysts are expecting

Analysts expect Skechers' revenue growth to accelerate in the fourth quarter, and for earnings growth to turn positive.

Metric

Average Analyst Estimate

Change (YOY)

Revenue

$1.1 billion

13.5%

Earnings per share

$0.23

9.5%

Data source: Yahoo! Finance..

These analyst estimates are in line with Skechers' own guidance, which calls for revenue of between $1.1 billion and $1.125 billion, and earnings per share of between $0.20 and $0.25.

Skechers management may comment during the conference call on speculation that the company is an acquisition target. Rumors emerged last month that VF was interested in buying the company, although VF's management made a point of throwing some cold water on that idea when the apparel and shoe company reported its own quarterly results.


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Growth in China

China is one of Skechers' key international growth markets, and the company is boosting spending in China to position itself for long-term growth. Revenue in China grew by 21.9% in the third quarter, with the company shipping 5.6 million pairs of shoes. There are now nearly 800 freestanding Skechers stores in China, and nearly 2,400 points of sale.

Some companies have been suffering from weakening demand in China, most notably Apple. The Chinese economy is growing at its slowest rate in decades, hitting certain China-dependent companies hard. But other U.S. companies aren't running into any problems. Ralph Lauren, for example, is happily growing sales in China and not seeing any slowdown at all.

Skechers is aiming for China to be a $1 billion business, and China could eventually become a bigger source of revenue than the United States. Skechers market share in China is still small, so growing that market share could swamp any impact from a slowing Chinese economy. Skechers management will surely have something to say about China during the fourth-quarter earnings call.

The market has not liked Skechers' recent spending surge -- the stock is down about 30% over the past year. A return to solid earnings growth would go a long way toward quelling the market's concerns over rising costs.