Is Skechers Stock a Buy?

Over the years, Nike (NKE 0.33%) has turned itself into a style icon by signing on big-name athletes to help sell shoes, but Skechers (SKX 2.36%) is an international sensation in its own right. Up until the novel coronavirus outbreak, annual sales had been averaging a low-teens percentage growth rate for years -- led by high demand in emerging markets and the company's brand of chunky sneakers featuring bulky soles. There's even a song called "Skechers" that's nearing 100 million views on YouTube. Nike may have Michael Jordan and LeBron James, but Skechers has DripReport.

Whether it's your jam or not, it's hard to deny that Skechers has gone from quirky shoemaker upstart to legit lifestyle company. But a growth story alone doesn't make a stock a buy. After all, fashion is notoriously fickle. Nevertheless, Skechers has the financial strength to back up its position as it tries to remain an enduring part of global urban culture.

A Skechers store in China. Image source: Skechers.

Great in the states, better overseas

It's too soon to tell, but the COVID-19 crisis could bring Skechers' long-term growth run to an end -- at least temporarily. First quarter 2020 revenue fell 3% from a year ago. No outlook was provided as the vast majority of physical retail outlets closed down worldwide to help halt the spread of the pandemic. The global economy is beginning to open up, but it remains to be seen how quickly Skechers will rebound and how big an impact its e-commerce efforts had during the shutdown (although online sales were trending toward a $500 million annual run-rate in April, or about 10% of full-year 2019 sales).

Data source: Skechers. YOY = year over year.

Still, Skechers' growth in the recent past is notable. Competition runs high in its home market here in the states, but the company has grown into the second-largest shoe brand behind Nike. Its success is especially noteworthy in emerging markets, including China and India. The shoe company has turned into an internationally focused manufacturer and footwear distributor -- a perfectly OK place to be, considering that consumer spending in emerging markets is growing at a far faster rate than in the U.S. International revenue was 59% of the total at the end of 2019, compared with just 40% for Skechers in 2015.

The second quarter 2020 report (due out in late July or early August) will be telling, but Skechers' recent momentum indicates it should be just fine once the world gets back to spending money again. 

Valuation isn't helpful, but net cash is

Skechers' growth has never been a complaint, but the expansion overseas has made the bottom line inconsistent. Building out distribution channels and supporting infrastructure in new countries both cost money, and resulting free cash flow (revenue less cash operating and capital expenses) has been all over the board in the last few years. Not exactly what many investors want to see in a value stock, although I'd argue this isn't a value stock at all, but rather a growth company that is in heavy spending mode to promote expansion.

With the global recession in focus, bottom-line valuation metrics aren't going to be particularly helpful for the foreseeable future. The company trades for 19.5 times trailing 12-month earnings per share. This figure suffered from the poor showing in Q1 2020 as the coronavirus crisis started and will deteriorate further for at least a few more quarters.  

Calling Skechers a good deal or not is close to impossible at the moment given the lack of near-term sales visibility. However, even should the going remain tough for a while, Skechers has a solid balance sheet. Cash and short-term investments totaled $1.29 billion at the end of March 2020, and total debt was $683 million, mostly from drawing down its short-term credit line to create flexibility while navigating the crisis. That compares with $508 million in cash and $69 million in debt at the end of 2015.

While consumer discretionary spending is up in the air at the moment and is subject to changes in taste and style in the years ahead, Skechers is in good shape to weather the current storm and to continue growing once the dust settles. Expect this to be a very volatile stock as the global economy attempts to get back on track. Still, it's time to stop thinking of Skechers as an underdog shoe company. I think this lifestyle stock is a solid buy.