Skechers (SKX, Financial), a sneaker company, fell 31.5% last Friday, to $31.64 per share after announcing Q3 results. Q3’15 sales increased 27% year over year to $856.2 million. Analysts were expecting $877 million in revenue according to Thomson Reuters. Net earnings of $66.6 million resulted in 43 cents EPS. Per The Wall Street Journal, Q3 EPS estimates were 54 cents per share.
After Friday’s fall, I was curious if Skechers was an attractive investment opportunity. I went through my normal routine which was to check the company’s financial history on GuruFocus. Long story short, the financials were OK. If you’re curious, you can see them here. I then went to the GuruFocus “Insider” tab and saw the chart below with a lot of red bars.
Looking at the detail, two transactions stood out. On Aug. 19, CEO Robert Greenberg sold 300,000 shares for approximately $46 million at $153.15 per share. On Sept. 25, he sold 200,000 shares for $28 million at $141.43 per share. As a frame of reference, both these sales were near Skechers' all-time highs. Also note that Skechers had a 3-for-1 split in October or $95 per share if we adjusted Friday’s closing share price to presplit share count.
To summarize, the CEO sold out of his shares midway through Q3 before the company announced results that underperformed expectations. At this point, I haven’t completely ruled Skechers out, but I’m now more curious about the CEO than I am about the financials.
I found out that Robert Greenberg was the founder of LA Gear in the 1980s. When that company went through tough times, he was forced out and subsequently founded Skechers in 1992. I then found a 2014 letter from CtW Investment Group to the Skecher’s Board of Directors. Here’s most of the opening paragraph.
The CtW Investment Group urges a complete and immediate overhaul of Skechers U.S.A., Inc.’s board of directors in light of several serious governance risks. Several directors have potential conflicts of interest that raise serious questions as to whether they are truly independent in spirit or only in resume. The poor track record of one director, in particular, raises doubts about the merits of his board membership.
Further down, the document, the letter says, “The recent Shape-Up debacle and current bribery investigation amplify the need for strong independent oversight.” That made me ask, “What debacle?” so I did a Google search. When I saw the results, it started coming back to me. Do you remember these goofy-looking shoes?
If you do, then you might remember how Skechers marketed these shoes and claimed that people wearing them would lose weight and get Kim Kardashian curves. She officially endorsed the shoes. You may also recall that Skechers eventually had to pay $40 million to settle charges by the FTC that the company deceived customers.
There’s also more damaging content in the CtW letter:
Moreover, the FBI’s ongoing investigation into the alleged bribery of San Moreno’s Mayor and four city council members by Highland Fairview Developers to sweeten the land deal for Skechers’ distribution center is worrisome. The fact that the California Fair Political Practices Commission just levied a fine on Skechers for late disclosures of political contributions to these same council members only heightens our concerns of a possible lax attitude towards compliance.
By this time, I’m reminded of Charlie Munger (Trades, Portfolio)’s criteria for choosing a stock:
1. Do you understand the company?
2. Does the company have a durable competitive advantage?
3. Do you trust management?
4. Are you buying at a good price?
Skechers does not pass rule #3. The CEO selling most of his shares near all-time highs and prior to an earnings call that underpeformed expectations looks bad. The fact that the company had to settle charges with the FTC for misleading marketing and also had to pay a fine related to a bribery investigation supports a narrative that raises doubts about the management team's integrity. Furthermore, the CtW Investment Group letter points out corporate governance issues and potential conflicts of interests. For me, that’s enough evidence that this management team does not have shareholder interests at heart. The company also does not have a durable competitive advantage. I’ll gladly pass on Skechers.
