The Sell-Off in Skechers USA Inc Stock Is an Opportunity

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SKX - The Sell-Off in Skechers USA Inc Stock Is an Opportunity

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Last Friday was a forgettable one for athletic footwear company Skechers USA Inc (NASDAQ:SKX). SKX stock fell roughly 30% after the company reported what the Street viewed as disappointing first quarter numbers.

But the report wasn’t that bad. Across the board, the numbers were very strong.

And there is still a lot to like about the global, mid-priced-market growth trajectory of Skechers. The company continues to dominate the value-first athletic sneaker market.

SKX stock is also incredibly cheap relative to peers Nike Inc (NYSE:NKE) and Under Armour Inc (NYSE:UAA).

As such, I think this sell-off is overdone. Indeed, I see an opportunity to buy shares at a discounted price.

Here’s why:

The Q1 Report Was Very Good

If you look at SKX stock, you would expect the first quarter numbers and commentary to be absolutely horrendous.

But if you look at the earnings press release, you won’t find any of that. It looks nothing like a typical “down 30%” earnings report. Sales were up 16.5%. Comparable same store sales were up 9.5%. International wholesale sales were up 17.9%. Domestic wholesale sales were up 8.5%. Gross margins were up 230 basis points. Operating margins expanded 30 basis points. Operating profits rose 19.6% year-over-year. Earnings per share rose 25.2%.

Meanwhile, management sounded positive in the press release and on the conference call.

Overall, management’s commentary, plus the strong numbers, support the idea that SKX is finding great success in selling to price-oriented consumers who care more about value than flash.

Near-Term Headwinds Are Exaggerated

Given the strong numbers and bullish qualitative growth trajectory outlined by management, it is a wonder why SKX stock dropped so much after the report. There are two major reasons behind the sell-off.

Firstly, investors are concerned about the revenue guide. Revenues are expected to be between $1.120 and $1.145 billion next quarter, which represents year-over-year growth of roughly 10%. That represents a big slow-down from this quarter’s near-17% revenue growth rate.

But that big slowdown can be attributed to a product timing issue, as some product is being pushed from the second quarter to the second half of the year. Thus, management said that while Q2 will be weaker than normal, Q3 will be very strong. As such, concerns related to the Q2 revenue guide seem unnecessarily short-sighted.

Secondly, investors are worried about margins again. The SG&A rate rose by 200 basis points year-over-year in Q1 and management said on the call that they are willing to make big investments over the next several years in order to fuel long-term sustainable growth. In financial terms, this means margins will be on watch.

But management also reiterated on the call their goal to get SKX’s operating margins to 12-13% by 2019 (from 9.2% last year). Also, gross margins are running higher, so any margin compression is coming solely from bigger investments, which should fuel bigger revenue growth. Long-term profitability is not a concern.

Overall, the two reasons SKX stock dropped so big (weak Q2 revenue guide and potential operating margin headwinds in the near future) are unnecessarily short-sighted and should be ignored by long-term investors.

Aside from those concerns, the rest of the SKX growth narrative remains strong. Domestic sales are up. The international business is red-hot. Global comparable sales growth is near 10%. Gross margins are up. Earnings are up. In other words, all the numbers continue to support the idea that SKX is dominating the lower-price, value-first global athletic sneaker market.

Skechers Stock Is Worth $45

I make the case that Skechers stock is worth $45 today.

SKX has consistently grown revenues at a double-digit pace over the past several quarters and the “weak” revenue guide next quarter still calls for 10% revenue growth. Plus, SKX is relatively small (trailing revenues of ~$4 billion versus ~$35 billion for NKE) and has big international growth drivers. Thus, it seems very likely that SKX grows revenues around 7.5% per year over the next 5 years. That would put revenues at nearly $6 billion in 5 years, versus just over $4 billion last year.

Operating margins should be able to trend to at least 13% by then, regardless of near-term investments. That implies operating profits of roughly $780 million in 5 years. Taking out 15% for taxes and dividing by 160 million shares, that equates to around $4.15 in earnings per share in 5 years. A market-average 16 forward multiple on those earnings implies a four-year forward price target of about $66.

Discounted back by 10% per year, that equates to a present value of $45.

Bottom Line on SKX Stock

Overall, I think this sell-off in SKX stock is an opportunity.

This is a cheaply valued stock supported by a still-strong growth narrative that has longevity. As such, SKX stock will rebound and buyers here will be rewarded handsomely in a long-term window.

As of this writing, Luke Lango was long SKX.


Article printed from InvestorPlace Media, https://investorplace.com/2018/04/sell-off-skechers-usa-skx-stock-opportunity/.

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