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Skechers Stock Pops on Encouraging Earnings: What You Need to Know

By Pearl Wang – Feb 10, 2020 at 1:18PM

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The fashionable shoe retailer had a fourth-quarter earnings beat, but are there any risks to the next quarter?

Skechers (SKX 1.74%) stock traded up almost 14% in after-hours trading last Thursday before settling up about 4% by the end of the day Friday after a strong fourth-quarter earnings report that beat consensus projections.

The footwear company cited strength from the chunky-shoe trend and international growth. Skechers reported fourth-quarter earnings of $0.39 a share, in line with the consensus estimate, which represented a 26% increase year over year. Revenue for the quarter was $1.3 billion, above the consensus estimate of $1.2 billion. Comparable store sales (in company stores and e-commerce) showed a nice uptick, increasing 9.9% in the quarter, up from 7.7% in the third quarter and 1.1% in the fourth quarter of 2018. 

Here are three takeaways from the earnings report that investors might benefit from knowing.

Skechers shoe collection

Image source: Skechers

1. International markets stay strong and drive growth

Skechers' international business posted an impressive 31.2% sales increase in the fourth quarter, comprising 59.3% of total revenue. The lifestyle footwear company cited efforts in China, India, the United Kingdom, the United Arab Emirates, and Mexico as the top growth drivers in the international segment. Skechers sees continued strong expansion in these markets, supported by store openings and strategic marketing. International store expansion is happening at a fast clip, with a net increase of 231 stores just in the fourth quarter, bringing the total to 3,050. 

Chief Operating Officer David Weinberg commented on the international marketing campaigns to drive foot traffic, saying those efforts "included underground campaigns in the U.K. and France; perimeter boards at sporting events in Canada and Central, Eastern Europe; kiosks across Turkey; massive billboards in Spain and Chile; fashion weeks in the UAE and Greece; events that engaged consumers in India and Mexico; and windows in key avenues and malls across Europe and Asia."

While Skechers' investments in marketing are paying off, it contributed to some margin contraction. Due to higher advertising expenses of $26.8 million in both international and domestic, Skecher's operating expenses rose to 41.2% of sales, up from 40.4% a year ago. Operating margin was 7.1% in the quarter, down from 7.7%.

2. Products and marketing are making a difference

Strength in sales of the retailer's chunky sneakers helped drive the revenue beat in the quarter. CEO Rob Greenberg said, "2019 was also the year we saw the resurgence of chunky sneakers -- and as an originator in this category, we became a go-to source around the world."High fashion designer Stella McCartney had her models walk in her 2019 fashion shows wearing chunky "dad sneakers."According to Stylecaster, 2020 will bring even more of the chunky sneaker trend, after its popularity in 2019.

The consumer discretionary company also won recognition for its products -- receiving more than 25 awards for innovation and design. YouGov named Skechers its top buzz brand for 2019. Footwear Plus magazine gave the company the Kids Design Excellence and Company of the Year awards. The kids division returned to growth this quarter, following challenging comps from Skechers' lighted product and general "malaise in kids across all brands," according to CFO John Vandemore. U.S. wholesale revenue in kids' shoes saw mid-single-digit increases in the fourth quarter. 

Investing in marketing and increasing brand equity are important for Skechers. In the fourth quarter, the company signed Dodgers pitcher Clayton Kershaw as a new men's ambassador. Skechers' current ambassador, golfer Colin Montgomerie, won at the Invesco QQQ Championship in California. Internationally, the company opened a store at Disneytown in Shanghai, the first Skechers store on a Disney property.

3. Guidance and risk from the coronavirus may impact Q1 2020

Skechers guided first-quarter 2020 earnings to be $0.70 to $0.75 a share, compared with the consensus estimate of $0.74. The company projects revenue to be $1.4 billion to $1.425 billion, in line with the consensus estimate of $1.4 billion. Chief Financial Officer John Vandemore elaborated that "guidance is our best estimate of the influence of these factors on the first quarter of 2020. But if the severity of the [coronavirus] situation in China worsens and impacts our businesses outside of China and/or our global supply chain, this guidance may change."

There is risk to the company's guidance from weakened international sales due to a potentially larger impact from the coronavirus that originated in Wuhan, China. Many Skechers stores are now closed in China, with the remaining open stores seeing "significantly below average traffic." China is an important piece of international growth, as it accounts for most of the company's new store openings. There is also the risk of inventory buildup if stores stay closed longer or foot traffic is weaker than expected. Supply chain disruption is another potential concern.

Overall, Skechers' fourth-quarter results showed solid execution, boosted by strong international growth. The company's products continue to resonate with consumers, particularly the sport and work lines for men and women, which saw large increases in the quarter. However, there's risk that first-quarter results may be lower than expected due to the coronavirus impact, as international and China make up a large percentage of Skechers' revenue and expansion plans. The number of cases of coronavirus is still increasing, as transportation remains disrupted in parts of the country. The total effects of the virus are not yet known.

Pearl Wang has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Skechers and Walt Disney and recommends the following options: long January 2021 $60 calls on Walt Disney and short April 2020 $135 calls on Walt Disney. The Motley Fool has a disclosure policy.

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