Shares of Skechers U.S.A., Inc. SKX declined 5.5% during the after-market trading session on Oct 29 despite reporting better-than-expected results for third-quarter 2020. Further, the company’s results reflected a sequential increase from second-quarter 2020 as many countries began to recover from the crisis. Although the company’s top line declined year over year in the third quarter, it improved 78.3% sequentially on many markets returning to growth and witnessing a positive sequential trend. Moreover, the company noted that September was the strongest sales month in the quarter.
However, the coronavirus pandemic did affect the Manhattan Beach, CA-based company’s performance, with both top and bottom lines declining year over year. It continued to witness soft domestic and international sales despite various efforts, which hurt the top line in the third quarter. Sales decline along with higher costs marred margins and the bottom line.
Shares of this Zacks Rank #3 (Hold) company have gained 19.2% in the past three months compared with the industry's growth of 24%.
Let’s Analyze the Results
This designer, developer, marketer and distributor of footwear reported quarterly earnings of 53 cents a share, beating the Zacks Consensus Estimate of 35 cents. However, the bottom line declined 20.9% from earnings of 67 cents in the year-ago period.
Skechers generated sales of $1,300.9 million that surpassed the Zacks Consensus Estimate of $1,206.5 million. Notably, this marks the sixth straight quarter of revenue beat. However, the company’s top line decreased 3.9% from the year-ago period, driven by 4.1% and 3.7% declines across international and domestic businesses, respectively.
Skechers U.S.A., Inc. Price, Consensus and EPS Surprise
Skechers U.S.A., Inc. price-consensus-eps-surprise-chart | Skechers U.S.A., Inc. Quote
The decline in the international business’s sales was attributed to lower distribution and retail sales. This was partly negated by higher joint venture and subsidiary sales, including 23.9% and 18.1% in China and Europe, respectively. Soft domestic business sales mainly resulted from lower retail sales, which were considerably offset by a 172.1% rise in e-commerce sales and growth in the domestic wholesale business.
Notably, the company’s domestic wholesale business returned to mid-single-digit growth in the third quarter, owing to replenished product assortments that were in line with demand. Consequently, sales for the domestic wholesale business improved 6.3%. Meanwhile, the company witnessed strong double-digit growth in its key international wholesale markets, including China, Germany and Australia. However, this growth did not fully offset the ongoing soft trends, resulting in international wholesale sales declining 0.5% in the third quarter.
Additionally, the company experienced strong demand in the e-commerce channels along with strength in the recently re-opened stores. In the third quarter, it enhanced consumers’ shopping experience with the launch of the “buy product online and pick up in store” or curbside pick-up facility across Skechers stores in the United States. However, sales for the company’s direct-to-consumer business dropped 16.9%. Comparable same-store sales for the direct-to-consumer business plunged 22.1%, hurt by a decline of 20.4% in the United States and 26.1% internationally.
Gross profit fell 4.3% year over year to $625.1 million on account of lower sales. However, gross margin remained flat at 48.1% as a favorable mix of online and international sales were almost fully offset by increased promotional activity in the international business.
Moreover, SG&A expenses were $536.2 million, up 4.7% year over year. As a percentage of sales, SG&A expenses expanded 340 basis points (bps) to 41.2%. The higher SG&A expenses can be attributed to an increase in warehouse and distribution expenses, owing to higher volume in both international and domestic businesses, offset by lower marketing expenses worldwide.
The company reported operating income of $92.1 million, down 37.5% from the prior-year period. Operating margin declined 380 bps to 7.1% on lower gross margin as well as higher SG&A expenses.
Skechers opened 24 company-owned stores planned prior to the pandemic, including 12 domestic and 12 international. These stores included flagship stores in Rue de Rivoli in Paris, Oxford Circus in London, Shinjuku in Tokyo and two stores in Colombia. Additionally, it closed one company-owned international store in the quarter. This resulted in a total of 522 company-owned domestic stores and 319 company-owned international locations as of Sep 30.
Additionally, 35 joint venture stores were opened and four closed in the third quarter, taking the total count to 421. The company also inaugurated 154 distributor, licensee and franchise stores in the quarter, and closed 53 such outlets, taking the count of these stores to 2,508 at the quarter-end. Consequently, the company operated 3,770 stores as of Sep 30.
Other Financial Aspects
As of Sep 30, 2020, cash, cash equivalents and investments totaled $1.5 billion. This reflects an increase of $468.2 million and $478.1 million from Dec 31, 2019, and Sep 30, 2019, respectively. The rise primarily reflects the drawdown of $490 million from senior unsecured credit facility in the first quarter.
The company ended the quarter with long-term borrowings (excluding current installments) of $683.6 million, and shareholders’ equity of $2,402.4 million, excluding non-controlling interests of $238.7 million. Further, total inventory was $1,053.4 million, up 1.5% sequentially and 18.3% from the year-ago period. The year-over-year increase reflects growth in international markets, mainly in China, owing to the upcoming Single’s Day holiday.
Management incurred capital expenditure of $63.6 million during the third quarter. Given the prevailing retail backdrop, the company prioritized necessary and strategic projects, and now expects capital expenditure of $100-$125 million for the rest of the year.
Stocks to Consider
Deckers Outdoor Corporation DECK has a long-term earnings growth rate of 17.7%. It currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
NIKE Inc. NKE, also a Zacks Rank #1 stock, has a long-term earnings growth rate of 16.7%.
Columbia Sportswear Company COLM has a long-term earnings growth rate of 2.9% and a Zacks Rank #2 (Buy).
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