Skechers' (SKX) Q2 Earnings Miss Estimates; Stock Down

After commencing fiscal 2016 on a high note, Skechers USA Inc. (NYSE:SKX) failed to carry the momentum into the second quarter amid the economic upheaval in both the U.S. and abroad, and a tough domestic retail environment. This Manhattan Beach, CA-based footwear retailer succumbed to a negative earnings surprise of 5.9% in the quarter under review, after registering an earnings beat of 18.9% in the first quarter. As a result, shares of this Zacks Rank #4 (Sell) company plunged 15.3% during after-market trading hours yesterday.

Skechers delivered quarterly earnings of 48 cents a share that missed the Zacks Consensus Estimate of 51 cents and fell 7.7% from 52 cents posted in the year-ago quarter. Management pointed out that foreign currency headwinds and higher general and administrative expenses hurt the bottom line. Even higher net sales failed to act as a savior.

The company reported net sales of $877.8 million that increased 9.7% from the year-ago quarter but were marginally short of the Zacks Consensus Estimate of $878 million, after surpassing the same in the previous two quarters. We also observe that the rate of sales growth in the second quarter has drastically diminished from 27.4% experienced in the first quarter.

Undoubtedly strategic marketing initiatives, product innovation across multiple categories and growth witnessed across international subsidiary and joint venture businesses as well as international company-owned Skechers retail stores provided cushion to the top line. However, shipments pulled from the second quarter into the first quarter played spoilsport. Management now projects third-quarter 2016 net sales in the band of $950–$975 million, as it believes international operations will gain more traction.

Skechers recorded its biggest shipping month from the North American Distribution Center in Jun 2016, and also stated that the European Distribution Center surpassed its planned shipping in the said month. Given its June shipments and sturdy commencement in July, management expects the momentum to sustain in the third quarter. Skechers has been steadily gaining ground by offering stylish and casual shoes at a more compelling price than conventional athletic brands. The company is focusing on the new line of products, cost containment and a global distribution platform.

Gross profit for the reported quarter grew 11.1% to $416.3 million, whereas gross margin expanded 60 basis points to 47.4%. Operating income came in at $100.4 million, down 10.7% from the prior-year quarter, while as a percentage of net sales, it decreased 260 basis points to 11.4%.

Segmental Sales Synopsis

The domestic wholesale business recorded net sales decline of 5.4%.

Skechers’ international wholesale business revenues, which constituted 34.6% of sales, soared 25.5% on the back of a 34.6% rise in wholly-owned subsidiary sales as well as an improvement of 3.2% in distributor sales.

On a combined basis, retail business sales grew 15.4%, whereas comparable-store sales advanced 1.5%. Domestic retail sales rose 8.8%, while comparable-store sales remained flat. International retail sales soared 40.5%, whereas comparable-store sales improved 9%.

Store Update

Skechers operated 1,002 branded stores internationally, owned and operated by JVs, franchisees and distributors at the end of the reported quarter. Of the total, 484 are distributor-owned or franchised retail stores; 409 are JV stores, and 109 are company-franchised stores in countries where Skechers directly distributes its products.

During the second quarter of 2016, 120 third-party stores were opened – including the first stores in Norway, Finland and Belgium – and 10 stores were closed. In China, the company opened 42 freestanding Skechers retail outlets, bringing the count to 233. In India, the company opened 7 Skechers outlets, resulting in a total store count of 44. So far in the third quarter, Skechers has opened 4 third-party stores. The company plans to open 70–80 more stores in the remainder of 2016.

Skechers operated 546 company-owned retail outlets globally, comprising 142 international locations at the end of the second quarter. During the quarter, the company opened 23 stores, and has opened 2 stores so far in the third quarter. The company closed 2 domestic outlets in the quarter under review. It expects to open approximately 30 to 35 more outlets during the year.

Management aims at a total Skechers store base of over 1,600 by the end of 2016, including first retail outlets in Uruguay, Paraguay, Botswana and Sri Lanka.

Strategic Initiatives

Management is focused on product innovation, additional Skechers store openings and increasing distribution channels by entering into international distribution agreements to boost sales and profitability. Moreover, Skechers’ international business remains a significant sales growth driver for the company with Europe being the significant market outside the U.S. The company is also enhancing its European Distribution Center. Moreover, Skechers is poised to enhance its global reach in the footwear market through its distribution networks, subsidiaries and JVs.

Other Financial Aspects

Skechers ended the quarter with cash and cash equivalents of $628.8 million, long-term borrowings (net of current installments) of $68.1 million, and shareholders’ equity of $1,524.5 million, excluding non-controlling interest of $67.2 million.

Capital expenditures incurred during the quarter were $22.3 million. Management now envisions capital expenditures of about $25–$30 million for the remainder of 2016, reflecting planned opening of an additional 30−35 retail outlets and the completion of the European Distribution Center automation system in the back half of the year.

SKECHERS USA-A Price, Consensus and EPS Surprise

SKECHERS USA-A Price, Consensus and EPS Surprise | SKECHERS USA-A Quote

Stocks to Consider

Some better-ranked stocks in the retail sector include American Eagle Outfitters, Inc. (NYSE:AEO) , sporting a Zacks Rank #1 (Strong Buy), and Hanesbrands Inc. (NYSE:HBI) and PVH Corp. (NYSE:PVH) , both carrying a Zacks Rank #2 (Buy).