Shares of Skechers (NYSE:SKX) recently soared after the company posted its fourth-quarter earnings report. Its revenue rose 11% annually to $1.08 billion but missed analysts' estimates by $20 million. However, its adjusted EPS grew 48% to $0.31 per share, beating expectations by $0.09.

Skechers stock has rallied more than 40% so far this year, but it could have more room to run for five simple reasons.

A person holds three Skechers shoes at the beach.

Image source: Skechers.

1. Robust revenue growth and gross margins

Skechers' 11% sales growth during the fourth quarter (14% on a constant-currency basis) marked its strongest sales growth in three quarters. Its gross margin dipped sequentially, but marked a 90-basis-point improvement from a year earlier.

Metric

Q4 2017

Q1 2018

Q2 2018

Q3 2018

Q4 2018

Revenue (YOY growth) 

27%

16.5%

10.6%

7.5%

11.4%

Gross margin

46.8%

46.7%

49.4%

47.9%

47.7%

Source: Skechers quarterly reports. YOY = year-over-year.

For comparison, Nike's (NYSE:NKE) gross margin rose 80 basis points annually to just 43.8% last quarter. Skechers' ability to generate strong sales while expanding its margins indicates that it isn't struggling with competitive headwinds.

2. A defensible market with low marketing expenses

Skechers doesn't directly compete against Nike and other athletic footwear makers. Instead, it offers a wide range of walking, work, casual lifestyle, casual dress, and athletic shoes for "everyday" consumers.

Skechers' emphasis on casual comfort is reflected in its ad campaigns, which feature Sugar Ray Leonard, Kelly Brook, and Big Papi instead of high-profile NBA stars. That strategy keeps Skechers' selling general, and administrative (SG&A) expenses, which rose just 8% annually last quarter, under control. That's why its operating margin rose from 5.7% to 7.7% between the fourth quarters of 2017 and 2018. For comparison, Nike's sales and administrative expenses jumped 14% annually last quarter.

3. Promising moves into overseas markets

Over the past few years, Skechers expanded overseas to reduce its dependence on the saturated US market. Skechers' international sales rose 18% annually during the quarter and accounted for 55.6% of Skechers' top line, up from 52.6% a year earlier. Its domestic sales rose 4%.

During the conference call, Skechers COO David Weinberg attributed that growth to "record shipments" from its distribution centers in North America, South America, Europe, and Japan. Weinberg also noted that Skechers sees "great opportunities" in Latin America, Eastern Europe, China, Mexico, and India, where it recently launched its e-commerce platform.

A person holds a smartphone on which is displayed Skechers' mobile app. Another person sits next to them.

Image source: Skechers.

4. Decent guidance and growth forecasts

For the first quarter, Skechers expects its revenue to rise 2% to 4% annually, and for a 7% decline to flat growth in its adjusted earnings. That seems like a major slowdown from previous quarters, but it's the result of three major factors.

First, the timing of Easter will cause some of Skechers' sales to shift to the second quarter. Second, its growth in the prior-year quarter was boosted by a one-time tax benefit that increased its EPS by $0.07 per share. Lastly, Skechers is aggressively investing in the Indian market, which will throttle its near-term earnings growth but potentially boost its long-term revenue growth.

5. Attractive valuation and smart buybacks

Skechers' growth is decelerating, but analysts still expect it to grow its earnings at an average rate of 18% over the next five years. This gives it a 5-year PEG ratio of 0.8. A PEG ratio under 1 is considered "undervalued", so Skechers' stock still looks cheap relative to its earnings growth potential. Nike, for comparison, has a 5-year PEG ratio of 2.2.

Skechers also repurchased about $100 million in shares (equivalent to about 2% of its current enterprise value) after launching its buyback program last year. It bought 3.7 million shares at an average price of $27.34 -- a 16% discount to its price as of this writing. It has $50 million left in that authorization.

Is Skechers a buy today?

Skechers is well-insulated from the ongoing battles between Nike and its athletic footwear rivals. It's growing its revenue and expanding its margins, its stock is cheap, and it's wisely repurchasing its stock at low prices. Therefore, I think investors who buy Skechers today could be well-rewarded this year as the shoemaker continues to rally.

Leo Sun has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Skechers. The Motley Fool recommends Nike. The Motley Fool has a disclosure policy.