Skechers Finishes a Bumpy 2018 on a High Note

Shares of quirky shoe brand Skechers (SKX -1.52%) are down over 20% since the start of 2018, but the stock has been rebounding since the start of the new year. The stock could continue to rally as investors digest Sketchers' recently-reported strong fourth quarter of 2018, with profits coming in better than expected and the international segment booming. Nevertheless, vague guidance for 2019 indicated that high expenses could provide another wild ride for investors.

New sales + higher expenses = unhappy shareholders

Even though Skechers reported a double-digit increase in sales last year -- including an 11.4% year-over-year increase during the fourth quarter -- the stock tanked because investors fretted over high expenses as the company pushed to maximize growth outside of the U.S. As a result, full-year earnings per share grew at a slower rate than the top line did.

Wall Street analysts expressed frustration at various times with the ups and downs, especially in profits and the uncertain returns for Skechers' increased level of investing. Management never wavered, though, and continuously redirected attention to its longer-term goal of $6 billion in sales in the 2020 calendar year. Though it was a bumpy ride, Skechers made good progress toward that milestone.

Data source: Skechers. YOY=year over year. Ppts.=percentage points. 

While no one likes seeing bottom-line profit margins slip, it's worth noting the progress Skechers made on the year as a result of its spend-happy ways. Gross margin on the shoes it sold actually went up as the company strengthened its distribution model overseas. Total international sales went up 19.2% and made up just over half of total sales -- driven by new store openings and a 9.2% increase in comparable sales at Skechers-owned and -operated retail locations.

Image source: Getty Images.

Another spending spree ahead?

With overseas propelling results higher, Skechers' strategy won't change much in 2019. Chief Operating Officer David Weinberg reiterated the importance of the international business:

To maximize on that opportunity in two key areas, we recently completed the transition of our India joint venture to a wholly owned subsidiary and reached an agreement in principle to establish a joint venture in Mexico with our current distribution partner. We expect these strategic investments to be accretive to our diluted earnings per share in 2019. Additionally, we continue to invest in infrastructure -- we broke ground on our new distribution center in China in the fourth quarter as well as on the expansion of our global headquarters in Manhattan Beach [in California] in January. We remain focused on efficiently and profitably growing our business for the future. 

What does that mean? In short, more spending, although it looks like general operating expenses will begin to moderate from here on out. That's especially the case in China, where management said it expects general costs to rise in tandem with sales volumes. Last year, costs in China outpaced sales volumes as Skechers built out its selling capabilities in the densely populated country.

However, that doesn't mean the days of fast expense growth are going away completely. Capital expenditures (the purchase of equipment and property) was $143 million in 2018, including $45.6 million in the fourth quarter alone. That figure should be between $275 million and $300 million in 2019, a big annual increase that includes the new corporate headquarters addition in California and a new distribution center in China.

Will it be worth the money? We'll have to see. On the bright side, management added that the India and Mexico business transitions should add to the bottom line in 2019. That could be a great move longer term, as India has been one of the shoemaker's fastest-growing markets the last two years and continues to show momentum. Nevertheless, it could be another jarring ride this year as Skechers keeps its foot on the gas, opting for more sales now and profits later.

Check out the latest earnings call transcript for Skechers.

The first quarter should get things off to a decent start, though. Sales were forecast to be between $1.275 billion and $1.3 billion, a 2% to 4% year-over-year rise that factors for the busy Easter holiday moving back to the second quarter this year (compared with the first quarter in 2018) and a strong U.S. dollar weighing down international sales proceeds. As a result, earnings per share should be $0.70 to $0.75, compared with $0.75 a year ago.

To put it simply, Skechers will remain a highly volatile stock to own -- especially when comparing quarter-to-quarter results. For long-term shareholders, focus on the trend. If international sales keep running higher, the stock will eventually follow suit.