As a value investor, I'll be the first to tell you that on the surface shares of Skechers (NYSE: SKX) do seem compellingly cheap according to most metrics. For example, its enterprise value/EBITDA of 3.0 is significantly lower than that of just about all of its competitors. Timberland (NYSE: TBL) and Wolverine World Wide (NYSE: WWW) trade at 8.4 and 9.4, respectively. In addition, it's not often you can find a stock touted by many as a growth stock that also fits nicely into the value category. However, I am still having a difficult time getting excited about the company even at these low price levels, and the same type of growth that other investors are clamoring about -- specifically its toning shoes -- I believe is just another fad.
But Kim Kardashian wears Shape-ups
We have witnessed numerous bubbles over the last decade on a macroeconomic level, but shoe industry fads have created some pretty spectacular bubbles as well. First was the collapse of Heelys (Nasdaq: HLYS), as parents realized that buying shoes with wheels on them was probably not the safest purchase for their kids. The stock traded as high as $40 at the beginning of 2007 before collapsing below $6 in the same year.
Even more spectacular was the collapse in the all-rubber shoe bubble that saw shares in Crocs (Nasdaq: CROX) drop from $75 to below $1 in just about a year. Investors in Skechers need not worry about similar declines as the company was never awarded the extreme valuations that these "growth" favorites once were. However, I find it troubling that many are expecting this toning line to be the growth engine of the company's future.
Toning shoes have helped early innovators like Skechers and Reebok take some market share from Nike (NYSE: NKE), which dominates the athletic shoe market. It also helped that Nike has refused to enter this gimmick market that produced sales of just $17 million in 2008, but skyrocketed to $145 million in 2009. Sales in the first four months of this year produced sales $252 million, surpassing the last two years combined.
Reebok advertises research that its toning shoes will tone the gluteus muscles by up to 28% more than regular athletic shoes, while Skechers goes as far as saying that its shoes will help you "get in shape without setting foot in the gym."
It's not as if more independent research is needed to refute these claims, as my colleague Alyce Lomax recently pointed out there are plenty of these reports to go around. Just in case you needed some more evidence that this toning shoe craze is a fad, Skechers even has Kim Kardashian, the hottest fad in Hollywood, endorsing its shoes.
Already discounting?
Another bad sign for Skechers investors is that the company has already begun selling its toning shoes in discount retailers like Ross Stores (Nasdaq: ROST) and Costco (Nasdaq: COST). Distributing product through these channels is something I would expect to see in the late phases of a trend and points to the increasing competition in a fading space.
The big question for investors is whether or not Skechers can continue to grow sales in its toning line. If not, is there another line of growth that will pick up the slack? Analysts at leading athletic shoe researcher SportsOneSource believe that more than half of Skechers retail sales this year have been toning shoes, so if this trend does die, the company has quite a hole to fill.
Skechers is most definitely a value if it can maintain its growth in the toning shoes segment, but to me the evidence suggests it's more of a value trap than a value stock.
