Heading into Thanksgiving Skechers (NYSE:SKX) was very thankful Nov. 21 due to an analyst upgrade from "Neutral" to "Positive" that sent its stock up 10% on heavy trading. It seems retailers are pleased with its new shoe styles and the company has found a renewed focus on controlling expenses. Its stock is up 54% year-to-date, yet it's still trading 58% below its five-year high of $44.90. With business getting stronger, is it time to buy?
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Five Good Things Happening at Skechers
1. Gross margins are generally increasing. In the third-quarter Skechers' gross margin increased by 120 basis points to 43.7% on revenues of $187.8 million. Most importantly, its biggest segment, domestic wholesale, increased gross margins by 210 basis points to 37.2% on revenues of $64.7 million. The biggest improvement, however, in terms of gross margins came from its retail stores, which managed to improve by 230 basis points to 58%.
2. Same-store sales at its domestic retail stores increased 6.2% in Q3 while its international retail stores increased sales by 0.6% for an overall increase of 5.5%. With 346 company-owned retail stores, the fourth quarter looks very favorable.
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3. Using Skechers GOrun (retails for $80) footwear in the London Olympic marathon Aug. 12, American runner Meb Keflezighi finished fourth, the best performance from the U.S. team. Just as promising, the U.K. version of Runner's World magazine recently awarded Skechers GObionic shoes with an "Editor's Choice" selection. After the toning shoe debacle, who knew Skechers could actually make good shoes.
4. Increasing gross margins combined with a reduction in selling, general and administrative expenses, managed to improve the operating margin in Q3 by 420 basis points to 4.7%. In the first nine months of the year it managed to deliver an operating profit of $14.4 million compared to a loss of $30.7 million in the previous year. Profitability is improving to the extent that Tom Haggerty, the Susquehanna analyst mentioned earlier, estimates Skechers will earn 88 cents per share in 2013.
5. Lastly, its capital expenditures for the first nine months of 2012 were $28.2 million, $86.1 million less than in the previous year. For all of 2012, Skechers anticipates capital expenditures that are $89 million less year-over- year. It's possible that it will generate positive free cash flow in 2012 although if it does it won't be very much. That will have to wait for 2013.
Given the 10% jump in its stock, I'd be hesitant to buy if you're not planning to hold beyond 2013. If you've got a three-year holding period or longer, however, I wouldn't hesitate buying, because many shoe companies exhibiting weakness in their businesses over the last couple of years are starting to come around. For instance, K-Swiss (Nasdaq:KSWS) announced on Nov. 1 that its third quarter net loss was $1.9 million, which beats analysts' estimate by a wide margin. The news sent its stock up 36% in one day and although its chart over the past year doesn't seem to support a resurgence in its stock price, its business is on the mend. The same holds true for Brown Shoe (NYSE:BWS), which crushed its third quarter adjusted earnings, prompting it to raise its 2012 adjusted earnings per share from 92 cents to at least $1.06. It's no wonder its stock is trading at a 52-week high and 13% from a five-year high. The downtrodden in the shoe industry are making a comeback and Skechers is leading the charge.
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The Bottom Line
It's important to remember that the markets see 6-12 months in advance. You might not be completely convinced that Skechers has extricated itself from the toning shoe disaster it found itself in, but by the time you are, I assure you it will be above $22, the price target set by Susquhanna's Tom Haggerty. But as I said, if you're not prepared to own it beyond 2013, you're probably better elsewhere.
At the time of writing, Will Ashworth did not own any shares in any company mentioned in this article.