Despite the extremely crowded footwear and apparel markets, Skechers USA (NYSE:SKX) has competed remarkably well against sector giants such as Nike (NYSE:NKE) and adidas (OTCMKTS:ADDYY). Just as importantly, Skechers’ popularity has translated into strong market gains. In 2019, SKX stock skyrocketed, nearly doubling from its January opener. Still, some questions linger ahead of the company’s fourth quarter 2019 earnings results.
Skechers is scheduled to release its report after the closing bell on Feb. 6. With so much enthusiasm from last year’s market haul, you’d expect similar positive vibes heading into Q4. However, SKX stock of late has given off strangely poor signals. Since the opening volley of this year, shares are down nearly 11%. Adding to investor concerns, Nike and Adidas have also underwhelmed in January.
Another factor to consider is that Skechers typically produces solid earnings performances. But in calendar 2019, things have looked shaky. For instance, in both Q1 and Q3, the company missed earnings expectations.
Nevertheless, SKX stock enjoyed an upward trajectory because of an unexpected headwind: the prolonged and increasingly bitter U.S.-China trade war, which has only recently cooled. But because of Skechers’ strength in the international retail markets, investors gave the company the benefit of the doubt.
Now, the question is, will they extend the same courtesy to SKX stock over the coronavirus epidemic? In the latest news, the World Health Organization declared a global health emergency over the outbreak. Moreover, economists who predicted that China would see growth this year are now changing their tune.
Clearly, this is a very serious situation, and it has killed the appetite for retail brands levered to international sales.
In Isolation, SKX Stock Looks Good
To determine the best approach to SKX stock, I think it’s helpful to first analyze Skechers in isolation; that is, without considering the obvious headwind that the coronavirus imposes.
First, covering analysts expect earnings per share to come in at 39 cents. This is smack in the middle of individual estimates, which range between 37 cents and 41 cents. In the year-ago quarter, Skechers delivered EPS of 31 cents against a consensus target of 23 cents.
On the revenue front, analysts have a consensus estimate of $1.2 billion. This is essentially at the bottom of the forecast pile, which ranges from $1.2 billion to $1.3 billion. In Q4 2018, Skechers rang up $1.1 billion.
On paper, I’d expect Skechers to produce a solid earnings beat. Aside from a notable rough outing in 2016, the company generally performs well in Q4. For an organization that enjoys robust international demand, particularly in China, the last three months of 2019 couldn’t have been better. Relations between the U.S. and China noticeably thawed, setting the stage for the Phase one trade deal.
And it’s not just China. According to Skechers 10-K report in 2018, the footwear and apparel firm expanded in 2016 through 2018 all categories of their physical footprint: concept stores, factory outlets, and warehouse outlets. Obviously, there’s no need to do this if the overall demand didn’t justify the expansion.
As confirming evidence, in 2018, net sales from international wholesale numbered over $2 billion. This exceeded the domestic haul of $1.26 billion.
However, what makes SKX stock appealing is that the underlying company is no slouch here either. In 2018, Skechers was the fourth-most popular brand, behind only Nike, Adidas and New Balance.
Not Isolated from Global Events
Put another way, if we didn’t have the coronavirus, most analysts would probably peg SKX stock a “buy.” Skechers is a little dynamo that’s taking it to the big boys of Nike and Adidas. And it’s also more popular than apparel heavyweights like Puma (OTCMKTS:PUMSY) and Under Armour (NYSE:UA, NYSE:UAA).
Of course, the problem is that we do have the coronavirus. And this nasty bug is wreaking havoc in China and neighboring countries. Plus, with extensive modern transportation networks, the coronavirus has the potential to spread anywhere.
In fact, I’ve seen creepy images of major Chinese cities like Shanghai appear as if they were ghost towns. I know how dense Asian metropolises can be. Again, the situation is so bad that it will likely negatively impact China’s economic trajectory this year.
And if an entire country is going to feel the pain, you best believe that SKX stock risks volatility. Stay on the sidelines with the powder keg dry. Once health officials get a hold of this epidemic, then consider the bullish position.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.