While Skechers USA Inc. (NYSE:SKX) continues to generate solid overall revenue growth the main concerns about U.S. wholesale and model deleverage keep us on the sidelines. Last night the company reported generally in line sales and a $0.05 beat on EPS ($0.06 favorable tax as EBIT missed Wedbush’s estimate by ~$5 million). While international sales remain strong (+16.8%) US wholesale remains sluggish with generally flat sales in the 1H17 despite the positive mid-single digit backlog. Wedbush’s view remains unchanged in that it needs to see broader signs that the US segment can inflect which should generate stronger leverage in the model and EPS inflection. Retailers are planning cautiously and have more brand choice while new product from the company is still in its infancy. The firm’s revised EPS estimates reflect a lower tax rate (18% vs 22%) and its price target remains unchanged at $25. Next key data point will be FFaNY May 31-June 2.
Skechers reported sales growth of 9.6% and EPS of $0.60. Sales were broadly in line while EPS beat ($0.05) was driven by a lower tax rate (14% vs. 22% or $0.06). Gross margin increased 20 bps, below Wedbush’s expectations for an 80 bps increase potentially driven by mix (higher distributor sales). SG&A deleveraged 290 bps due to various expenses needed to drive growth. Inventory increased 16.7% while net cash stood at ~$3 a share.
Management guided to $950-975 million in sales and EPS of $0.42-0.47 (down 12-2%). This compares with Street at $962 million and $0.47 and WB at $976 million and $0.44. Wedbush’s FY17 and FY18 EPS estimates increase due to a lower annual tax rate (18% vs 22%) while its EBIT falls $20 million.
Backlogs increased MSD, but were down from HSD growth on the 4Q16 call. The positive growth is encouraging, but not generating sales growth (flattish sales expected in 2Q17). "You by Skechers" just hit company-owned stores and skechers.com. Wedbush has seen a few stock-outs on its website but nothing unusual for a product test with very limited availability. While April DTC comps are encouraging as well (+HSD), they are benefiting from the Easter shift and international growth.
Skechers continues to generate some of the strongest topline growth of any footwear company in the US. However, that growth is coming at a cost of higher expenses (SG&A +20% on a 9.6% sales increase) and driven largely by gains outside the country (which has been slowing of late). Even in the US, costs are increasing (+$8.6 million on flat sales during 1Q17) pushing the leverage point for US wholesale to M-HSD sales growth. Overall, leverage remains elusive making 2H17 consensus potentially at risk (59% EPS growth on ~11% sales growth).
Wedbush is maintaining its NEUTRAL rating and $25 price target or 14x P/E, a 10% discount to historical averages until it sees visibility toward an inflection in earnings growth.