Skechers USA Inc. (SKX) posted sluggish fourth-quarter 2011 results. The company delivered a quarterly loss of 54 cents a share compared with earnings of 7 cents a share in the prior-year period, dragged by weak top-line performance. The analysts polled by Zacks had estimated a loss of 23 cents a share.
On a reported basis, including one time items, Skechers delivered a loss of $1.18 per share.
Let’s Dig Deep
Skechers, which competes with Deckers Outdoor Corporation (DECK) and Nike Inc. (NKE), stated that total net sales for the quarter dropped 37.7% to $283.2 million from the prior-year quarter, reflecting lower sales of high-priced toning shoes and sluggish performances across other footwear lines principally in domestic wholesale business. The reported revenue also substantially fell short of the Zacks Consensus Estimate of $322 million.
The domestic wholesale business tumbled 57.5%, reflecting a difficult comparison due to robust sales witnessed in the last couple of years. The sluggishness was registered across fitness, lifestyle and kids divisions.
International wholesale business experienced a decline of 28% due to sluggish sales in the toning category on account of transition to lower-priced products. Challenging economic climate in Europe and the transition phase in Japan (from distributor-operated business to a company-owned subsidiary) also adversely impacted the business.
On a combined basis, retail business sales declined 6%. Domestic retail sales decreased approximately 7%, whereas comparable-store sales fell 15.5%. International retail sales remained flat, whereas comparable-store sales dropped 10.8%.
The company’s licensing division has been another source of revenue, whereby the company licenses its name and images. The company generated $3 million in revenue during the quarter from its licensing affiliates, which includes eyewear, kids apparel, backpacks, watches, luggage, and socks. Management hinted that Li & Fung, one of the leading attire and accessories manufacturers, will launch fitness apparel for both men and women under the Skechers’ brand in 2012. This opens another important source for revenue.
Gross profit plunged 38.9% to $112.6 million, whereas the gross profit margin contracted 70 basis points to 39.8%. The decline reflected sluggish sales coupled with lower average selling price.
Stores Update
During the quarter, Skechers opened 9 domestic and 2 international retail stores, and closed 1 store bringing the total store count to 329. So far in 2012, the company has opened 2 warehouse stores and closed 1 warehouse outlet, and plans to open additional 18 to 20 locations in the remaining year.
The company also opened 23 distributor-owned or licensed Skechers retail stores and closed 1 during the quarter bringing the total to 207. The company’s international distribution affiliates targets to open 10 stores in the first quarter of 2012 and 50 more outlets in the year, which includes opening of first Skechers Kids international outlet in Indonesia.
Strategic Initiatives
Management remains committed to focus on new lines of products such as ‘Skechers GOrun’, opening of additional Skechers stores and increasing distribution channels with the development of international distribution agreements to improve its sales and profitability.
Moreover, international business remains a significant growth driver for the company’s sales. International wholesale business jumped 12% to $487.3 million during fiscal 2011. However, management now forecasts international wholesale sales to be lower in the first quarter of 2012 against record sales in the prior-year quarter with a pick up expected in the back half of the year. Further, International retail sales surged 22% during fiscal 2011.
Skechers, through its distribution networks, subsidiaries and joint ventures, is poised to enhance its global reach in the footwear market. Skechers’ joint ventures in Asia are portraying improvement with growing operations in China, Hong Kong, Singapore, and Malaysia.
The company is trying every means to reposition itself for 2012. These include lowering of selling and marketing expenses, consolidating of North American distribution facilities under one roof, streamlining inventory, and new product offerings. The company also intends to lower its operating expenses relative to total revenue in the back half of 2012.
Further, Skechers expects to increase its company-owned subsidiary business in Japan, which is under a transition process, to two folds in the next 3 to 5 years.
Other Financial Aspects
During the quarter, Skechers maintained its aggressive inventory offloading stance in order to right-size its inventory. Consequently, total inventories at the end of the quarter under review were $226.4 million, reflecting a decrease of 43.2% from December 31, 2010.
Skechers portrays a healthy balance sheet with cash and cash equivalents of $351.1 million, total long-term debt of $86.6 million and shareholders’ equity of $852.6 million, excluding non-controlling interest of $40 million at the end of the quarter. Capital expenditures for the quarter were $7.9 million.
Currently, we maintain a long-term “Neutral” recommendation on the stock. Moreover, Skechers holds a Zacks #3 Rank that translates into a short-term “Hold” rating.
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