Skechers Is So Uncool It’s Cool
Like the people who wear its shoes, Skechers SKX 2.21% investors were very comfortable. This spring, investors got pinched.
The decidedly uncool footwear company’s shares produced a total return of 836% from 2012 to 2017. That was 3½, 4½ and 14 times the performance of Adidas , Nike and Under Armour , respectively.
Skechers won a devoted following by focusing more on comfort and less on style and glitz. In the U.S., it is the top brand for walking, work shoes and women’s casual lifestyle shoes. It also traditionally has done well with children, though not teens, and its shoes are thought of as offering good value for money.
“Our core demographic isn’t the teenage fashionista,” says Chief Financial Officer John Vandemore.
One side benefit is that Skechers doesn’t need to pay top dollar for endorsement deals with the world’s most famous teams and athletes. The stars who appear in Skechers ads often impress an older generation—Joe Montana, Howie Long and David Ortiz. It does have some modern-day athletes who aren’t quite household names and its biggest endorsement coup, signing marathon runner Meb Keflezighi, came after he had been dropped by Nike. Soon after, Mr. Keflezighi became the first American male to win the Boston Marathon in 31 years.
Endorsement deals aren’t the only thing that is cheap at Skechers: Its shares are too—especially after two giant postearnings selloffs this year. As of Tuesday the stock was down 21% for the year while its athletic-wear rivals all were up sharply.
The latest uncomfortable day for Skechers came when it reported second-quarter earnings last month. Sales rose 10% but the company gave guidance for third-quarter profits that was well below what analysts had been projecting. The culprit appears to be too much inventory in the foreign wholesale market, particularly China, which spooked analysts.
While Mr. Vandemore is more positive about the “back half of the year,” it sounds like there are a lot of shoes to soak up abroad. Investors should look past the misstep and focus on Skechers’s successful international business. The company already has 775 overseas stores and international wholesale and retail now combine for over half of revenue.
Investors have plenty of cushion by betting on Skechers today. The stock trades at a 60% discount to its average peers’ enterprise value to earnings before interest, tax, depreciation and amortization and a 65% discount on prospective earnings. None of its three close peers has sported a price/earnings ratio as low as Skechers’s 14.7 multiple in the past five years.
This isn’t the first time Skechers has stumbled: Before the stock’s epic 2012-2017 run it settled a class-action suit and lost customers on allegations that it misled people about the benefits of Shape-Up shoes. The share price probably won’t bounce like it did following that setback, but it still could be substantial.