Skechers' (SKX) Positive Earnings Surprise In Q3 Lifts Stock

After witnessing a negative earnings surprise of 13.6% in the second quarter of 2017, Skechers USA Inc. (NYSE:SKX) made a sharp come back in the third quarter with the bottom line outperforming the Zacks Consensus Estimate by 37.2%. This Manhattan Beach, CA-based company delivered quarterly earnings of 59 cents a share that beat the consensus mark of 43 cents, and increased 40.5% year over year buoyed by improved top-line performance and lower effective tax rate.

The company reported net sales of $1,094.8 million that increased 16.2% from the year-ago quarter and also came ahead of the Zacks Consensus Estimate of $1,065 million, marking the fourth straight quarter of revenues beat.

We also note that both the top and bottom lines comfortably surpassed management’s guidance of $1.05-$1.075 billion and 42-47 cents a share, respectively. Following the company’s sturdy performance shares of this designer, marketer and distributor of footwear rallied 23.2% during aftermarket trading hours on Oct 19. However, the stock has plunged 15.7% in the past three months worse than the industry’s decline of 10.7%.

Sales for the quarter mainly gained from healthy performances at the international wholesale business, company-owned global retail business and domestic wholesale business. Skechers informed that the back-to-school business gained from double-digit sales increases in Kids footwear. The company concluded the quarter under review with low-double digit jump in backlog on a global basis.

Skechers’ domestic e-commerce business contributed to sales growth in the quarter, registering an increase of 8%. The company currently operates e-commerce sites in Chile, Germany and UK, and has launched additional sites in Spain and Canada.

Gross profit for the reported quarter grew 20.9% to $520 million, while gross margin expanded 190 basis points (bps) to 47.5%. Operating income came in at $116.5 million, up 12.7% from the prior-year quarter, however, as a percentage of net sales it decreased 40 bps to 10.6%.

Management now projects fourth-quarter 2017 net sales in the band of $860-$885 million compared with $764.3 million reported in the prior-year quarter. The current Zacks Consensus Estimate for revenue is pegged at $870.7 million. Additionally, the company anticipates earnings per share in the range of 9-14 cents compared with 4 cents delivered in the year-ago period. The current Zacks Consensus Estimate for the quarter stands at 12 cents.

Segmental Sales Synopsis

The domestic wholesale revenues rose 1.4% year over year. The company shipped 2.7% more pairs compared with the prior-year period. However, average price per pair declined 1.3%.

Skechers’ international wholesale business revenues, which constituted 43.4% of total sales, advanced 25.7% on the back of a 31.4% rise in wholly-owned subsidiary and joint venture (JV) businesses and 5.4% growth in distributor business. The company’s JV business registered growth of 51.5% for the quarter buoyed by double-digit growth in China and India, and sales from South Korea. Further, it envisions double-digit growth at international wholesale business.

On a combined basis, global company-owned retail business sales grew 18.6% driven by higher store count and comps growth of 4.4%. Domestic retail sales rose 9.5%, while International retail sales surged 43.8%. Comps increased 3.1% at domestic retail stores and 8.4% at international retail stores. Despite temporary shutdown of 55 outlets in Texas and Florida, and continued closure of nine stores in Puerto Rico on account of recent hurricanes, Skechers retail business continues to register growth.

Store Update

Skechers operated 623 company-owned retail outlets globally, comprising 187 international locations at the end of the quarter. During the quarter, the company opened 13 stores and shuttered four outlets. Looking ahead, the company anticipates opening 12-15 Skechers stores in the fourth quarter.

At the end of the quarter, Skechers also operated 805 branded stores internationally, owned and operated by JVs, franchisees and distributors.

During the quarter, 140 third-party owned stores were opened, including 78 in China and 18 in India, as well as six in Indonesia, four in Saudi Arabia, three each in Australia, Italy and Turkey, two each in Denmark, Hong Kong, Macau, Mexico and Vietnam, and one each in Algeria, Israel, Jordan, Latvia, Malaysia, Myanmar, New Zealand, Norway, Romania, Singapore, Sweden, Switzerland, Thailand, Ukraine and UAE. Additionally, the company closed nine third-party owned stores.

So far in the fourth quarter, the company has opened nine third-party owned stores with plans to open a total of 120-140 stores.

Other Financial Aspects

Skechers ended the quarter with cash and cash equivalents of $802.9 million (up $137.6 million from the year-ago quarter), long-term borrowings (net of current installments) of $71.4 million, and shareholders’ equity of $1,882.8 million, excluding non-controlling interest of $116.9 million.

Capital expenditures incurred during the quarter were $25.7 million on store openings, remodels along with corporate office and showroom upgrades. Management now envisions capital expenditures of about $20-$25 million for the final quarter, reflecting planned opening of an additional 12-15 company-owned retail outlets, corporate upgrades and store remodeling projects.

Although Skechers currently carries a Zacks Rank #4 (Sell), it is subject to revision given the third-quarter performance.

Looking for High Performance Stocks

If you are interested in the retail space you can consider stocks such as G-III Apparel Group, Ltd. (NASDAQ:GIII) flaunting a Zacks Rank #1 (Strong Buy), and The Gap, Inc. (NYSE:GPS) and The Children's Place, Inc. (NASDAQ:PLCE) both carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

G-III Apparel delivered an average positive earnings surprise of 3.5% in the trailing four quarters and has a long-term earnings growth rate of 15%.

Gap delivered an average positive earnings surprise of 9.3% in the trailing four quarters and has a long-term earnings growth rate of 8%.

Children's Place delivered an average positive earnings surprise of 16.3% in the trailing four quarters and has a long-term earnings growth rate of 9%.

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