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This Is Why Skechers Stock Isn't Rallying More After a Great Q4 2019 Report

By Nicholas Rossolillo – Feb 11, 2020 at 11:30AM

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The holiday shopping period capped off a great year, but the start of 2020 carries new risks.

As forecast, Skechers (SKX -6.98%) ended 2019 with a bang. The shoemaker topped its own guidance for the holiday quarter and eclipsed $5 billion in annual sales for the first time. Shares popped as much as 17% but closed just 4% higher the day after the report.  

Year-over-year sales growth is set to slow during the first quarter of 2020, though. It's usually a sleepy period of time for Skechers anyway (the second quarter, which contains the Easter holiday this year, is usually busier), but management said the coronavirus situation in China and how it will inevitably affect revenue is mostly an unknown.

Sales firing on all cylinders

For the fourth quarter, Skechers said revenue grew 23% year over year to $1.33 billion (topping guidance for as much as $1.25 billion), and earnings per share were up 26% (as much as 29% was forecast). International sales were up a sizzling 31% and accounted for 59% of the top line. With overseas business now such a huge piece of the pie, double-digit expansion abroad is fueling impressive results.  

Skechers had a more than respectable showing in the U.S., too. Domestic sales were up 13% year over year, led by 10% growth in both comparable-store sales from Skechers-owned retail stores and e-commerce. Combined with the other three quarters of 2019, the shoemaker had a really good year.  

Metric

12 Months Ended Dec. 31, 2019

12 Months Ended Dec. 31, 2018

Change

Revenue

$5.22 billion

$4.64 billion

12.5%

Gross profit margin

47.7%

47.9%

(0.2 pp)

Operating expenses

$2.00 billion

$1.81 billion

10.5%

Earnings per share

$2.25

$1.92

17.2%

PP = percentage point. Data source: Skechers.

When international exposure is a bad thing

After several years of lumpy operating expense increases due to expanding into new markets, Skechers' cash outflow started to moderate in 2019 and led to a higher bottom line. It would appear that the bulk of the company's international selling infrastructure is now in place, so shareholders should be able to enjoy more consistent earnings expansion if the overseas Skechers machine can keep rolling.

A ground-up shot of three people in exercise clothes running across a bridge.

Image source: Getty Images.

International growth markets are a double-edged sword, though. Operating in multiple countries is a good way to diversify business, but it also opens the door for more things to go wrong and gives investors more reasons to potentially fret. And that's likely what's happening right now. Similar to what other businesses are experiencing, Skechers' top brass said "a meaningful number" of stores in China are closed to help combat the spread of coronavirus. Those still open have had hours cut and are experiencing declines in foot traffic. No specific numbers were given as the situation is dynamic.  

Here's the good news: The world is a big place, and Skechers is still expanding, especially in emerging markets like India, Indonesia, Malaysia, and Mexico. While China is still one of Skechers' top-growing countries in dollar terms, as a percentage of sales it's no longer in the driver's seat. As a result, the forecast for $1.400 billion to $1.425 billion in first-quarter 2020 sales represents at least 9% year-over-year growth, and earnings per share of $0.70 to $0.75 would be down 1% to up 6%. Clearly, the bottom-line outlook is factoring in potential disruption but not an excessive amount. 

Put simply, Skechers is still a great growth stock for the long haul. Its significant presence outside of the U.S. is powering healthy returns -- even with the coronavirus scare. Shares trade for just 15 times one-year forward earnings, a real bargain considering the company's potential. Consider giving the quirky shoemaker a look.

Nicholas Rossolillo and his clients own shares of Skechers. The Motley Fool owns shares of and recommends Skechers. The Motley Fool has a disclosure policy.

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