By Sam Boughedda
Skechers USA (NYSE:SKX) shares plunged in early Tuesday trading before regaining losses after Spruce Point Management released a short report on the company.
Spruce Point said the rot at the company extends further than investors realize after they claimed to uncover “undisclosed lawsuits, related party transactions and numerous highly concerning red flags related to inventory.”
“Skechers is a 'fast follower' known for offering comfortable shoes at a reasonable price. Massive growth in China has been a key part of the Skechers growth story since 2015. We believe Skechers has long embodied many of the stereotypical attributes of a family-run company: nepotism, self-enrichment, rampant related party transactions, and remarkably poor corporate governance. We imagine few are surprised by that observation,” stated Spruce Point. “However, we believe the rot at Skechers extends much deeper than investors realize.”
The firm claimed they have found ”several indications that Skechers’ business is deteriorating and that financial pressures are mounting.”
They added that on-the-ground checks show revenue trends are materially worse than implied by Street consensus, and “China sales are pacing at YTD growth down ‑20% to ‑30% YoY, while discounting activity remains high.”
As a result, they believe Skechers will disappoint investors in the coming quarters.
“We also see signs that Skechers will likely suffer another inventory episode, which in the recent past has twice crushed the stock between 30% - 50%. Even before the 1H downturn in China and a weakening consumer, inventory days were at a 10-year high of 169 at year end 2021, 24% above pre-COVID averages, and we see signs of a potential inventory aging problem,” wrote Spruce.
The investment research firm believes Skechers “deserves to trade a substantial discount to comparable apparel companies, particularly in light of its deteriorating financial performance and governance issues,” and they see 30% to 50% downside risk.
Skechers shares are currently trading 1.4% above Monday's close.