The shoe business may not always seem like a hot topic but it is actually a very interesting sector. It is surprisingly prone to one-shot wonders (remember when Heelies was a public company?) and comeback stories like Deckers Outdoor (DECK), and Wolverine World Wide (WWW). This year we have been watching a shoe company that is doing a lot to rebrand and grow: Skechers USA Inc (SKX).
Marketing in the athletic clothing and shoe business often centers on big-name sports stars. For example, David Beckham’s annual $12mm payment to wear Adidas, or Lebron James’ seven-year, $90 million deal with Nike. However, there is another way to approach the sponsorship marketing strategy.
Skechers were recently worn by Meb Keflezighi to win the Boston Marathon. He was a long-shot at best and SKX’s shoes aren’t usually the first brand you think of for elite distance runners. Until last year, I, John, will confess to associating the brand with those big, clunky sneakers that look like a cross between hiking boots and football cleats. Keflezighi’s win was a surprise and he isn’t the only athlete who has been dropped by NKE for sponsorship and then picked up by SKX.
Kara Goucher (aka the Running Mom) is also sponsored. In fact, much of the growth that SKX has experienced over the last year or so has been in women’s lines. This underserved category and their sponsorship/marketing strategies with celebrities like Demi Lovato, Kelly Brook, Brooke Burke-Charvet and Danielle Bradberry sets SKX apart.
Of course, Skechers does have some big-names out there in the sports world, but they are not trying to compete with the big brands in the same way that they compete with each other. The focus on women’s brands and products has driven margins, revenue, and profits significantly over the last year. Net sales were up almost 40% over the last quarter compared to the same quarter last year. Profits were up 400% over last year while net margins tripled.
We aren’t the only analysts to notice Skechers’ shift in strategy and how well it has been executed. SKX is up 90% over the last 12 months and its valuation ratios have increased accordingly. However, that trend was interrupted in September following a weak back-to-school season and their earnings report on Oct. 23, 2014. Ironically, the company beat expectations on the top and bottom line, but investors may have been a little shaken from market volatility that week.
The stock has pulled back off its highs and has been hovering just under resistance formed by the gap that opened on Sept. 24 created by a negative consumer data report. We think the pullback has given investors time to cool off a little while weaker hands took profits off the table. A break through resistance and above the gap at $58.50 looks like an excellent entry opportunity for new long positions.
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Skechers (SKX): Chart courtesy of eSignal
Apparel stocks in general have lagged the market to a certain extent over the last few months. This could mean that these stocks are undervalued compared to materials, technology and healthcare that have been ahead in the rally. However, there are some concerns that the current bullishness is fragile and based on expectations for additional easing from the big central banks.
If consumers are not as strong as recent economic data would indicate, then Skechers could be at risk. This is one of the big reasons we would recommend waiting for confirmation of a rally with a break above resistance. Even then, the stock isn’t quite in the clear. The all-time-highs from September at $64 per share could initiate another round of selling as well.
As an alternative, a trader may want to use an in-the-money credit spread to take advantage of the trade. For example, the SKX December 55/60 short put spread (selling to open, or shorting, the SKX Dec 60 puts and buying to open, or going long, the SKX Dec 55 puts) can be currently sold for $3.20 which would be better than a 150% return on risk if the stock closes above 60 at expiration. While not perfect, this could adjust the risk/reward a little more in a trader’s favor to account for the potential for the stock to channel at $64 per share and limit gains.
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