What to Expect From Skechers Thursday Morning

Footwear company Skechers (SKX 0.60%) is set to report its first-quarter results before the market opens on Thursday, April 18. The company's guidance isn't very optimistic; there are multiple factors that will work against both revenue and earnings, including the timing of Easter and a one-time tax benefit last year.

Skechers stock has rallied this year, up more than 50% year-to-date. Decent results and solid guidance will likely be necessary to keep the rally going.

Image source: Skechers.

What happened last time

While Skechers' growth in the fourth quarter was driven primarily by its international business, its domestic wholesale business also registered an increase in sales. That helped push total sales up by a double-digit percentage.

Data source: Skechers. .

The international wholesale business grew by 18.4% year over year in the fourth quarter, while the domestic wholesale business produced a 4.8% sales increase. The company-owned global retail business grew sales by 7.5%, driven by new store openings and a 1.1% rise in comparable sales.

The international wholesale segment is the biggest part of Skechers' business, accounting for about 44% of total revenue in 2018. Domestic wholesale accounted for 27% of total revenue, and retail accounted for 29% of total revenue.

Skechers has had little problem growing sales at a robust rate over the past few years, but rising costs have caused problems for the bottom line. The company has been investing in its international and direct-to-consumer businesses, and the growth of those investments has sometimes outpaced revenue growth.

Skechers was able to rein in its cost growth in the fourth quarter. Operating expenses rose by just 7.9% year over year, compared to a nearly 15% increase in 2018 compared to 2017. That slower cost growth, along with an increase in gross margin and some share buybacks, drove the big increase in per-share earnings.

What analysts are expecting

Skechers expects a growth slowdown in the first quarter, due in part to foreign currency headwinds and a shift in sales from the first quarter to the second quarter related to the timing of Easter. Easter falls on April 21 this year, nearly three weeks later than last year.

Data source: Yahoo! Finance. YOY = year over year..

Skechers' first-quarter guidance calls for revenue between $1.275 billion and $1.300 billion, and earnings per share (EPS) between $0.70 and $0.75. Skechers produced EPS of $0.75 in the prior-year period, so the company will have a small earnings decline if its results fall short of the top end of its guidance range.

However, that earnings guidance comes with a few caveats. First, guidance includes the expected impact of investments in India, but not the expected benefit related to a pending joint venture in Mexico. Second, the prior-year period included a $0.07 discrete tax benefit related to the Tax Cuts and Jobs Act, which won't recur this year.

Skechers has a history of beating earnings estimates, so the company could still produce earnings growth in the first quarter. Analysts at Susquehanna are optimistic about the company's prospects, having upgraded the stock in March. Susquehanna now has a positive rating on the stock and a $37 price target, up from a previous price target of $32. Based on channel checks and results from wholesale partners, Susquehanna believes Skechers is gaining momentum.

Skechers' second-quarter guidance will clarify whether placing the blame for its sluggish first-quarter revenue guidance on the timing of Easter holds water. Investors will be looking for a much stronger outlook. If Skechers comes up short, the stock's recent rally could start to unravel.