Tickers in this Article: SKX, PG, GE, DECK, NKE
In a little over 24 months, Skechers (NYSE:SKX) stock has gone on quite the rollercoaster ride, - hitting a low of $5.20 in Mar 2009, then a high of $44.90 in June 2010, and finally closing at $17.70 on May 26, 2011. For anyone who's counting, that's a 764% gain on the way up and a 61% loss on the way down.

While I don't feel sorry for the Greenberg family, who control almost 70% of the votes, it must make for difficult financial planning owning so much stock of something so volatile. Their predicament, however, presents opportunity. You see, the last time the Greenberg's sold big chunks of stock was the spring and early summer last year when it was trading in the 30s and 40s. Stock sales by insiders are no big deal, but their timing is a pure giveaway about the perceived value of those shares. Given its stock is at a 52-week low, I doubt the Greenberg's are selling too many shares these days, and probably won't be for some time. Skechers, it's time to shape up.

TUTORIAL: Fundamental Analysis: Qualitative Factors- The Company

What's Wrong?
The biggest concern is a major one, albeit temporary, and that's gross margins. They've fallen off a cliff. In the first quarter, gross margins for Skechers dropped by 780 basis points to 40.8%. Much of the stock's rise in 2010 is attributable to the above-average gross profits it was making from its Shape Up shoes. In 2011, as cheaper products flooded the U.S. market, inventories piled up and prices tumbled downward. It's a problem that won't be solved until the second half of the year, so expect another dud in Q2 and perhaps Q3 as well.

This no doubt leaves analysts and management perplexed about where the EPS number will be by the end of December. Currently, the consensus analyst estimate for Q2 EPS is a loss of 24 cents compared to a gain of 82 cents a year earlier. For 2011 in its entirety, analysts expect earnings of $1.06 a share versus $2.78 in 2010. That's some haircut, hence the current price. Lack of earnings visibility always equals pain and suffering for shareholders. But as I said, these pains are most likely temporary. (For related reading, see Analyzing Retail Stocks.)

What's Right?
First, let me address the gross margin issue. While it's true the gross margin dropped 740 basis points in the first quarter, it's equally true that its average first quarter gross margin over the past eight years is 42.3% - just 150 basis points higher than this year's so-called margin disappointment. Historically, it's about average.

Now consider what's happening with the business. Things are going extremely well internationally, and soon these sales will become more important than its domestic sales. I suppose you could focus on the negative at this point - including an 11% same-store sales decline for its domestic retail stores in Q1 and the 23% drop in domestic wholesale revenues - but that completely misses the point. Successful American companies become successful global companies by doing business beyond their borders. Would Procter & Gamble (NYSE:PG) or General Electric (NYSE:GE) be nearly as big today if they didn't venture overseas? Not by a long shot.

In the first quarter, international wholesale and retail revenues at Skechers grew by 37% and 52% respectively. It added 16 international stores in the first quarter to the 28 already open, and yet they represent just 15% of the 291 stores worldwide. Opportunities abound. (For more, see A Look At Corporate Profit Margins.)

Long or Short?
Given that markets don't like uncertainty, you could see the stock dropping below $10 by mid-June. Approximately 16% of its float or 6.2 million shares are currently short and it's easy to see why. However, I'm no short. While I don't see the shares dropping back to the five-dollar range where they were at the beginning of the latest bull market, I do see some short-term pain that could take it close to $10.

Putting the Shape Up inventory mess aside, there is one thing I'd like to see Skechers improve upon and that's e-commerce. In the first quarter, its online revenues actually decreased by $2.7 million and were just 1.1% of its $476 million in overall sales. This needs to be much higher. It's not a must-have at this point, but I would like to see progress in the coming quarters. (For more, see When To Short A Stock.)

Bottom Line
Compared to Deckers Outdoor (Nasdaq:DECK) or Nike (NYSE:NKE), Skechers is dirt-cheap. However, conservative investors will want to wait until at least until the announcement of the second quarter in July before pulling the trigger. If you do buy today, leave some cash in reserve just in case.

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