The Street Debates Skechers Q4: Sustainable Momentum Or One-Off Quarter?

Skechers USA Inc SKX reported Thursday afternoon with a strong fourth-quarter earnings report and encouraging first-quarter guidance. Here's how the Street reacted to the footwear company's print and outlook. 

The Analysts

• Cowen's John Kernan maintains a Market Perform rating on Skechers with a price target lifted from $28 to $34.
• Wedbush's Christopher Svezia maintains at Neutral, price target lifted from $29 to $31.
• CFRA Research's Camilla Yanushevsky downgraded from Hold to Sell unchanged $26 price target.
• Morgan Stanley's Lauren Cassel maintains at Equal-weight, price target lifted from $27 to $29.

Cowen: 5 Key Metrics

Skechers' earnings report shows the company's "story is improving" and was highlighted by five key metrics, Kernan said in a research report. They are:

An EPS beat of 31 cents versus 24 cents was mostly driven by higher gross margins and lower SG&A expense despite a sales miss of $1.08 billion versus $1.1 billion.

Q1 EPS and revenue guidance of 70 to 75 cents on sales of $1.275-$1.3 billion versus 65 cents and $1.336 billion.

SG&A levered 128 basis points, selling expense levered 86 basis points and G&A levered 42 basis points.

Gross margin improved by 93 basis points as inventory declined year-over-year for the first time since 2012,.

Same-store sales were flat in North America but up 3 percent internationally.

Wedbush: Difficult 2019 Ahead 

Despite a "better than feared" earnings report, Skechers will see difficulty in 2019 and beyond from store closures by retail partners and expectations for rival Nike Inc NKE to show a return to growth, Svezia said in a research report.

Other rivals like Puma, Vans and adidas are looking to take market share at the expense of Skechers, the analyst said. 

Direct-to-consumer comps were also "sluggish" in Q4, which makes any visibility toward growth over the medium term difficult, Svezia said. Skechers' "sustainability remains in question," with several obstacles to overcome in the near-term, he said. 

Related Link: Skechers Shares Jump After Q3 Earnings Beat, Analysts Lift Price Targets

CFRA: Brand Losing Relevance?

Skechers' recent gains are likely a result of its expanding footprint, as the company opened 195 third party-owned stores, Yanushevsky said in a research report. But same-store sales showed a notable deceleration from 1.9 percent in the prior quarter, 4.5 percent in Q2 and 9.5 percent in Q1 to just 1.1 percent in the most recent quarter, she said. 

This may suggest the company's footwear products are "losing relevance with consumers" at a time when rival VF Corp VFC showed organic revenue growth of 7 percent in its December-ending quarter, the analyst said. 

Morgan Stanley: 'Intriguing Valuation'

Heading into Skechers' earnings report, one of the biggest concerns was the inability of revenue growth to flow to the bottom line, Cassel said in a research report.

This narrative is now improving in the company's favor after an incremental $110 million of revenue in Q4 resulted in $28 million more operating profit year-over-year, or a 25-percent flow-through rate, the analyst said. An EBIT margin expansion of 200 basis points was also the best seen since early 2016.

Skechers' stock's valuation looks "intriguing" if Q4 marks the start of sustainable profit growth at just 13 times 2019 earnings (excluding cash), according to Morgan Stanley. 

Price Action

Skechers shares were up more than 15 percent at $31.86 at the time of publication Friday. 

Related Link: 2 Reasons Why Skechers Is No Longer A Buy At Citi

Photo courtesy of Skechers.