Skechers (SKX Stock) Downgraded to Hold From Buy After Poor Earnings

- July 22, 2016

SKX stockSkechers (NYSE:SKX) stock was downgraded from a Buy rating to Hold at BNL Finance after the footwear company posted disappointing second quarter earnings. BNL Finance now rates SKX stock a 77, down from a previous rating of 84.

Why SKX stock was downgraded

Q2 earnings unveil that pricing power for the footwear giant may be weakening. This is a much bigger concern than its decelerated revenue growth, which was expected by most.

Last year in the second quarter Skechers’s operating margin was 14%. That fell to 11.4% in this most recent quarter. After four consecutive years of operating margin gains, a loss like this would not be all that alarming if it was not coupled with such a big decline in revenue growth, from 27% to 10% year-over-year growth sequentially.

Yes, 10% growth is still very impressive, far better than retail as an industry. And yes, much of the weakness is a result of second quarter domestic wholesale shipments pushed forward to the first quarter. However, it is the cost of these declines that concern us. The decline in operating margin implies that Skechers attempted to reduce prices to boost demand. Although, it did not seem to work.

Does this mean that margin weakness is permanent? Will revenue growth decelerate in future quarters if SKX reduces its prices? These questions will cause short-term pressure on SXK stock, a stock that may look cheap at 12.5x forward earnings, but whose fair value to the industry does not look misplaced if in fact margins fall consistently and the street consensus proves to be too high.

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Business growth — 8

Still growing fast, investors must not dismiss Skechers’s strong international growth despite a clear slowdown in the U.S.

Macro outlook — 8

Profitability — 7

SKX is now an international growth story. With such a strong U.S. dollar, one must worry how forex fits into the equation for profits. Furthermore, will Skechers discount products to try and boost domestic sales, thereby reducing margins. We believe so.

Catalyst — 6

The post earnings move in SKX stock may look like an investment opportunity. However, the issues in Q2 are in far meaningful.

Balance sheet — 10

Vision — 9

Valuation — 8

Risks — 7

Short-term outlook — 6

Investors expect domestic growth and margin appreciation from Skechers. These expectations may be unrealistic at this point. If so, SKX stock is pressured short-term, and best case is flat under $30/share for some time to come.

Long-term outlook — 8

The next few quarters may be rough and frustrating for Skechers investors. However, SKX stock is cheap, and long-term it will appreciate after a temporary attack. Investors who use the loss as an opportunity, or are willing to buy and hold through the volatility, will be rewarded.

Total score — 77

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2 Trackbacks

  1. […] months. And in the past five days, it fell 20% after second-quarter earnings unveiled a slew of big, real problems for the footwear […]

  2. […] downgraded SKX stock at its peak from 94 to 84, and then recently in July to 77. Why? Our most recent report noted the same concerns that Morgan Stanley […]

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