It was a difficult week for Skechers (NYSE:SKX) as investors fled the stock following worse than expected second quarter results. SKX stock was down 26% in premarket trading on Friday as negative press regarding the results hurt investor confidence.

However, with a dip like that it’s worth taking a deeper look at SKX stock to determine whether or not now could be a good time to pick up a bargain. 

Disappointing Results

Skechers reported second quarter EPS of 29 cents per share on sales of $1.13 billion compared to analysts expectations for earnings of 41 cents per share on sales of $1.13 billion. The earnings miss wasn’t the only thing weighing on investors’ minds either — the company’s Q3 guidance was also a disappointment. SKX management guided for EPS between 50 and 55 cents and sales between $1.20 billion and $1.23 billion, a step down from expectations of 67 cents per share on sales of $1.26 billion.

Another weak point for SKX was its domestic wholesale business, which saw a 7% decline, and its international distributor business lost 6.1%. 

Bright Spots for SKX Stock

It wasn’t all doom and gloom for Skechers, though. The firm’s gross margins came in at a record 49.4% and revenue was up 10.6% compared to the year-ago quarter. SKX’s international wholesale business grew by 24.9% and international wholesale and retail sales made up more than half of the firm’s total sales. 

Comps were also strong for SKX with US same store sales up 2.2% and international same store sales rising 11.3%.  

Was the Drop in SKX Justified?

So, with all of those figures laid out on the table, was it really as bad as Mr. Market would have you believe? Looking at just the second quarter, the results are mixed. And there are quite a few bright spots that investors are overlooking.

Comps, for one, are a huge indicator of retailers’ success and Skechers hit that metric out of the park. The firm’s international growth is also worth celebrating as global expansion has been a major initiative for SKX management this year. The firm’s largest overseas markets — China, South Korea, Germany, India and the UK — all saw double-digit sales growth during Q2 — a sign that Skecher’s international growth strategy is a solid one.

Earlier this year, SKX management did warn that the firm was likely to see some turbulence as the firm works to grow its business — something that will take both time and money. If the company’s growth plans pan out, management seems to be expecting a major rebound in 2019, which would make the stock an absolute bargain right now. 

However, the Q2 results on their own don’t tell the whole story. The company spent the majority of 2017 working to right the ship and improve its domestic wholesale business, which had long been a drag on the firm’s results. Unfortunately, this quarter’s figures show that problem hasn’t been solved and many worry it could be a sign of more trouble to come.

Not only that, but during Q1, SKX warned that its Q2 figures wouldn’t live up to the kind of growth investors have come to expect. And Thursday’s results were even worse than the firm had initially warned. That’s worrying and doesn’t bode well for the back half of the year, which is likely to similarly disappoint.

The Bottom Line for Skechers Stock

There’s no doubt that SKX stock is extremely inexpensive right now considering it’s more than 20% drop, but a lot of the reason for its ultra-low valuation is the almost certain volatility SKX will continue to experience for the rest of the year.

I believe Skechers has the potential to deliver an impressive 2019, but I wouldn’t be surprised to see the stock languish for the remainder of 2018. Don’t forget that following the company’s Q1 results we saw a similar plunge, which the share price never fully recovered from.

With that in mind, I wouldn’t rush to buy SKX stock until the firm is able to show some tangible forward momentum.

As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities. 

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