Skechers USA Inc. (SKX, Financial) which is a host to negative publicity surrounding its once-popular “Shape-Ups” toner shoes, is having a hard time dealing with bloated inventory and slowing sales. However, at current prices the company, which has been operating for 19 years and has a history of 14 out of 16 profitable years as a public company, looks too cheap to pass up. Furthermore, Skechers is the second-largest footwear brand in the U.S. after Nike (NKE, Financial).
A snapshot of relevant data about the company.
In the last nine months of 2011, the company has made a loss of $0.2 per share compared to a profit of $2.81 in the comparable period of 2010. The company is suffering from bloated inventory issues and offers the following as an explanation:
The gross margin has not gone down much (since 2001), which means Skechers has good pricing power. In the meantime the sales have doubled and the shares outstanding have increased by 26%. Dilution is something an investor should keep his eyes on.
Balance sheet
The balance sheet is in a very good shape. Skechers has enough cash to pay all of the current liabilities. The long term debt is only $73 million. In the last five years, Skechers had its worst year in cash flow in 2008 when it lost $85 million. With this rate it has enough money to survive for at least four to five years. As management had promised in the 2010 annual report, they are taking care of the inventory issue.
Management
From third quarter 2011 compensation section:
For stock-based awards we have recognized compensation expense based on the grant date fair value. Share-based compensation expense was $3.6 million and $3.5 million for the three months ended September 30, 2011 and 2010, respectively. Share-based compensation expense was $10.8 million and $10.1 million for the nine months ended September 30, 2011 and 2010, respectively.
In November 2011, insiders have sold $1.5 million worth of shares. They did not buy any shares in 2011. But given the substantial stake they have, this is not unreasonable..
Valuation
The company is selling for less than its working capital (at the price of $12 a share).
If the company liquidates its inventory at 50% discount, the current assets will be around %700 million — total liability of $305 million gives us $400 million in cash. With the current cap of $600 million you are buying a well-known brand, 320 million in tangible long-term assets and its distribution network for only $200 million.
The sales of Skechers are still strong. It sells for a 0.3 P/S at the moment, compared to Footlocker (FL, Financial) that sells for 0.6, Nike (NKE) selling for 2, Deckers (DECK) at 3.3 and Crocs (CROX, Financial) at 1.4. From the gross margin we see that Skechers still has not lost its pricing power.
The FCF has not been very predictable for Skechers. If we add up the FCF in the last decade, it has generated a total of 63 million (ignoring inflation). The worst FCF (-130 million) has been in 2010 because of its inventory issues with the shape up shoes. On this metric it does not appear cheap.
Conclusion
Skechers seems like a good company which is going through a bad year (or maybe two). It still has good sales, and a large part of the company is owned by the insiders. The balance sheet is very strong and gives it enough leverage to stage a turnaround. Meanwhile, investors should use the buy-and-wait approach while the management takes care of the issues.
A snapshot of relevant data about the company.
- The majority of the company's products are produced in China.
- No customer accounted for more than 10% of our net sales during the nine months ended Sept.ember 30, 2011 and 2010, respectively.
- 65% of the companies sales are in the U.S.; the other 35% comes from Switzerland, United Kingdom, Germany, Austria, France, Spain, Portugal, Italy, Netherlands, China, Hong Kong, Malaysia, Singapore, Thailand, Brazil, Chile, Vietnam and Japan.
In the last nine months of 2011, the company has made a loss of $0.2 per share compared to a profit of $2.81 in the comparable period of 2010. The company is suffering from bloated inventory issues and offers the following as an explanation:
Our net loss and gross margins for the first nine months of 2011 were negatively impacted by several factors, including (i) an excess supply of footwear in the toning market from all manufacturers, including our competitors, which led to (ii) sales of lower margin toning product through our domestic wholesale channel and (iii) lower retail margins due to sales price markdowns in order to reduce excess inventory levels of toning product. We anticipate our domestic revenues and margins will be lower for 2011 compared to 2010 as a result of the reduced demand and lower pricing of product in the toning category. We continue to closely monitor our inventory position of toning product, which we expect to continue to decline through the end of 2011 and into 2012. We believe that new styles and lines of footwear that we will be launching later this year will have an offsetting positive impact on our results of operations in 2012.History
The gross margin has not gone down much (since 2001), which means Skechers has good pricing power. In the meantime the sales have doubled and the shares outstanding have increased by 26%. Dilution is something an investor should keep his eyes on.
| Item | 2001 | ttm |
| Shares | 38 million | 48.3 million |
| Revenue | 960 million | 1783 million |
| Gross margin | 42.3% | 39.3% |
Balance sheet
The balance sheet is in a very good shape. Skechers has enough cash to pay all of the current liabilities. The long term debt is only $73 million. In the last five years, Skechers had its worst year in cash flow in 2008 when it lost $85 million. With this rate it has enough money to survive for at least four to five years. As management had promised in the 2010 annual report, they are taking care of the inventory issue.
| Item | September 30, 2011 |
| Cash | 248 million |
| Inventory | 238 million (down from 398 million in Dec 2010) |
| Current assets | 828 million |
| Current liability | 226 million |
| LT borrowing | 73 million |
| Total liability | 305 million |
| Total equity | 943 million |
Management
From third quarter 2011 compensation section:
For stock-based awards we have recognized compensation expense based on the grant date fair value. Share-based compensation expense was $3.6 million and $3.5 million for the three months ended September 30, 2011 and 2010, respectively. Share-based compensation expense was $10.8 million and $10.1 million for the nine months ended September 30, 2011 and 2010, respectively.
- 15 million in total compensation, 2.3 million RSU and 7.7 million non-equity compensation.
- A large number of shares (7.6 million) are reserved for equity compensations, which can result in significant dilution of the shares. This is 15% of the current shares outstanding.
| Person | Ownership |
| Gil Schwartzberg | 53.9% |
| Robert Greenberg (CEO) | 29.8% |
| Michael Greenberg (President and director) | 4.8% |
| Jeffrey Greenberg | 3.6% |
| All current directors and executives (12 people) | 38.1% |
In November 2011, insiders have sold $1.5 million worth of shares. They did not buy any shares in 2011. But given the substantial stake they have, this is not unreasonable..
Valuation
The company is selling for less than its working capital (at the price of $12 a share).
If the company liquidates its inventory at 50% discount, the current assets will be around %700 million — total liability of $305 million gives us $400 million in cash. With the current cap of $600 million you are buying a well-known brand, 320 million in tangible long-term assets and its distribution network for only $200 million.
The sales of Skechers are still strong. It sells for a 0.3 P/S at the moment, compared to Footlocker (FL, Financial) that sells for 0.6, Nike (NKE) selling for 2, Deckers (DECK) at 3.3 and Crocs (CROX, Financial) at 1.4. From the gross margin we see that Skechers still has not lost its pricing power.
The FCF has not been very predictable for Skechers. If we add up the FCF in the last decade, it has generated a total of 63 million (ignoring inflation). The worst FCF (-130 million) has been in 2010 because of its inventory issues with the shape up shoes. On this metric it does not appear cheap.
Conclusion
Skechers seems like a good company which is going through a bad year (or maybe two). It still has good sales, and a large part of the company is owned by the insiders. The balance sheet is very strong and gives it enough leverage to stage a turnaround. Meanwhile, investors should use the buy-and-wait approach while the management takes care of the issues.
