Shares of shoemaker Skechers USA (NYSE:SKX), which have fought their way up over the last 12 months on the back of improving operating results in recent quarters, lost a good bit of ground yesterday: The stock fell more than 11% on heavy trading volume following the release of Q3 financial results that started strong but left investors feeling somewhat trod upon.
It doesn't take a long look at the press release to figure out why investors were unhappy with yesterday's news. Third-quarter sales growth of more than 16% (to nearly $258 million) was encouraging, particularly as it came in well past the high end of the guidance the company gave along with Q2 numbers back in July. Back then, management told investors that $245 million was the best-case scenario.
But if revenue was as hot as all that, then why did earnings per share (EPS) (at $0.15) come in at the low end of management's predicted $0.15-to-$0.20 range? There are a number of small reasons, but the main one appears to be an extraordinarily high tax rate -- simply put, Skechers can't write off U.S. losses against overseas gains for tax purposes, which can create lumpy results -- that ate up about 60% of the company's operating income.
Unfortunately, that poorly communicated issue -- Skechers didn't issue any kind of intraquarter update bearing good news or bad -- was enough of a surprise to overshadow a very impressive top-line quarter. (If there's one thing investors don't like, it's an unpleasant surprise.) Still, investors can't be terribly displeased with the company's overall figures: With a "normal" tax rate, Skechers' EPS would have looked more like the market's estimate.
What investors have to do now, however, is leave this behind and look forward -- the holiday quarter isn't a key one for the company -- to the spring. Management is optimistic about next year's business, and if the company can improve its tax structure and sustain its strong revenue growth, yesterday's drop will seem a distant memory.
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Fool contributor Dave Marino-Nachison doesn't own pairs or shares of Skechers.
