Skechers is a shoemaker that manufactures both lifestyle shoes and sports shoes. In 2010, the company developed shape-up shoes that promises of toning legs while walking. Those shoes were hot sellers back then until lawsuits broke out suing the company for injuries and false advertising.In recent years, its running shoes have enjoyed tremendous growth since Meb Keflezighi, the Skechers endorsed U.S. marathon runner, became the first American runner to win the Boston Marathon in 31 years.
Considered a big growth company in the hot athleisure space, Skechers was a darling on Wall Street during 2014-15 when its share price enjoyed a more than 400% run. However, as the company could not exceed the overly hyped expectation, its share fell precipitously, currently trading around 50% of its 2015 all-time high. With a 14 times P/E, is the stock a fallen angel to buy or a value trap to avoid?
Qualitative Analysis on Skechers
Strength: Skechers presents a unique value proposition different than most of its better-known competitors: unbeatable comfort at an attractive price point.
Skechers shoes are probably the most comfortable in the sports/athleisure category. As a person who exercises regularly, I owned quite a few pairs of sports shoes. Skechers shoes, with their memory foam cushion, are very soft to the feet. After getting used to the comfort of Skechers, when I switched back to a pair of my Nike, my feet were screaming at how hard my Nike shoes feel. Skechers’ athleisure shoes also offer superior support and comfort, making them very popular items among professionals, such as nurses, who walk a lot during the day and people who prioritize foot comfort over styles.
Skechers shoes have a different price range that its main competitors including Nike, Adidas, Under Armour and New Balance. Except the golf shoes and the GoMeb running shoes targeted at hardcore runners, most of Skechers shoes sell between $65 and $75 dollars. Although its competitors do have a selection of shoes priced in the similar range as Skechers, the majority of other brands’ shoes command a selling price between $100-130.
Challenges: current shoe designs do not impress and brand awareness is relatively low
Compared to the sleek and modern looks of its competitors’ shoes, Skechers shoes in general seem casual, laid-back and sometimes even a bit funky. Admittedly, there are customers that like the current Skechers design. However, to expand its customer base further and attract people who love the modern looks of other brands Skechers need to further improve its designs.
Another challenge Skechers facing is brand awareness. For the athleisure line, although celebrities such as Demi Lovato and Meghan Trainor have boosted the brand, internationally the brand still lacks recognition. For the sports shoes, the brand is still behind bigger shoemakers in terms of endorsements. This survey shows Skechers’ brand lags most of its competitors’ and ranks eight in 2014 among US males. To be fair, the company recognizes this challenge and is trying to further boost its image by expanding its line of sponsored athletes such as runner Kara Goucher, , golfer Matt Kuchar .
Skechers’ Growth Catalysts:
The athleisure trend is not going away and Skechers will continue riding the wave. First, the 21st century workplace dress code will keep leaning more and more towards being casual. Tech start-ups are the early adopter of such relaxed dress code. More companies, wishing to be viewed as promising and energetic like a start-up to its current and prospect employees, have also relaxed its dress code. Even JP Morgan in June this year has expanded business casual dress code to its bankers who before were only allowed to wear suits(Athleisure is still prohibitied in the firm) In addition, with the rise of Lululemon yoga pants people started to wear athletic wear outside of gym or yoga studios. To gym-goers, it is convenient to go in and out of gym without changing clothes. As people desire a healthier lifestyle, the athleisure wear, which is associated with being sporty and energetic, will increasingly become even more popular. Another simple reason that athleisure trend will be sticky is because of these clothes and shoes are much more comfortable than their more formal brethren are. If sneakers are acceptable who want to wear dress shoes every day?
Skechers should also benefit from the fast fashion trend. Fast fashion retailers such as H&M and Uniqlo are taking shares from the traditional clothing brands by offering customers superior quality and affordable price. The concept of fast fashion should not stop just at apparel. Once people get used to buying 10-20 dollar t-shirts they will naturally start exploring alternatives to 100 dollar plus shoes. A shift from premium shoes to value shoes will greatly benefit Skechers.
Skechers’ international operations can expand further. Compared to its competitors, Skechers is still in the early stage of international expansion. According to Nike’s and Adidas’ annual reports, Nike currently owns 683 international stores and Adidas has a total of over 2700 stores worldwide. On the other hand ,Skechers in its 2015 annual report showed that it owns only 259 international stores and 649 stores in total. Particularly, Nike and Adidas both view China’s sports wear market still in the infancy stage and are still investing heavily in the country. As of end of 2015, Skechers in China only has 52 stores in the mainland(another 29 in HongKong). In the fast growing Southeast Asia region and India, Skechers only has 21 stores and 30 stores respectively. There is still ample room for Skechers to expand in all of these promising international markets.
Affordable price allows Skechers to penetrate developing countries’ markets better. Compared to in developed countries, in developed countries the advantage from price difference between Skechers and its premium brand competitors should become even more pronounced. Chinese on average earns less than $10,000 and the average Indian’s purchasing power is a quarter of Chinese’s. So the 30-50 dollar difference between Skechers and its competitors is not pocket change to the average consumer in developing countries. Skechers will be able to capture international consumers who cannot afford Nike or Adidas but desires quality shoes from a foreign shoemaker and who want to trade down from higher priced shoes but had no alternatives in the past.
Running shoes sales may have peaked. Struggling with obesity and other health problems, Americans have increasingly adopted healthier lifestyles. As an integral part of healthy living, exercising is incorporated into more and more people’s routines and running is the most popular exercise. This in turn fueled a surge in running shoes sales in recent years and Skechers benefited tremendously from this trend. However, based on a WSJ article, the growth in running participation may have peaked and millennials have picked up other exercises such as indoor cycling, cross fit classes, and interval training as alternatives. Therefore, the big tailwind behind Skechers’ running shoes sales may have stopped and it is imperative for the brand to expand its line of offering and compete effectively.
The low price segment of athleisure might become more crowded. Adidas recently entered the same market segment Skechers currently occupies with Addids NEO. Adidas’ NEO shoes, priced at around $60, is an athleisure brand that maintains the looks and feels of more expensive and popular line Adidas Originals. It will not be surprising to see other established premium brands to adopt a similar strategy and enter this segment in the future.
Management Stock Ownership
One concern about Skecher’ stocks is the consistent insider selling. However, the selling mainly stems from options granted to management as bonuses and management still holds significant ownership of the company. Founder and CEO Robert Greenberg owns over 29 million shares of Skechers stock according to the latest proxy statement, making him the biggest shareholder. Combining his ownership and another roughly 5 million shares held by other Greenberg family members who are also officers of the company, the founding family currently owns over 20% of the company.
Sales Growth trend for Skechers,Nike,Adidas,Under Armour(in millions)
|2013||2014||2015||TTM||3.5 yrs CAGR|
NI(Net Income),Margin,ROE Comparison
|2013 NI||Margin||2014 NI||Margin||2015 NI||Margin||TTM NI||Margin||TTM ROE|
P/E and Ebitda Comparison
|TTM P/E||Forward P/E||P/E net Cash||EV/EBITDA|
(All comp data from GuruFocus.com as of 08/22/2016)
From the tables above we can see, for the last three and half years, Skechers has enjoyed a high growth rate almost on par with Under Armour, improved net margin and ROE that already passed Adidas and UA. Yet the stock is trading at a huge discount compared to sports brands’ stocks and the S&P 500. Although it may be hard to assign Skechers stock with similar multiples to premium sports brands, even a 50% increase in stock price would still put the forward P/E net cash at 16 times and EV/EBITDA at 11 times.
The stock suffered a big drop after Q2 earning partly because of an order pull forward into Q1 and sales pressure caused by some sporting goods stores’ bankruptcy liquidation clearance. The management stated June is the largest domestic shipping month in history and early July sales have exceeded their model.Given the current depressed price trading near 52 weeks low and the lowered expectation going into Q3, investors should accumulate a sizable position before Q3 earning comes out.