Company Overview: Skechers U.S.A., Inc. (NYSE: SKX) creates and sells Skechers-branded lifestyle and performance footwear, apparel, and accessories for men, women, and children. Its operating segments are as follows: 1) Domestic Wholesale, which sells items through domestic wholesale distribution channels. 2) International Wholesale, which markets products to department shops and speciality retail outlets via joint ventures and subsidiaries. 3) Direct-to-Consumer, which sells products via e-commerce, concept stores, factory stores, and warehouse outlet stores.

SKX Details

Key Takeaways from Q3FY21 (ended September 30, 2021)

• Growth in Revenue: In Q3FY21, the company's sales amounted to USD 1.55 billion, representing a 19.22% YoY increase from USD 1.30 billion in Q3FY20.
• Rise in Bottomline: In Q3FY21, the firm reported net earnings of USD 116.70 million, up from USD 82.11 million in Q3FY20, with diluted earnings per share (EPS) of USD 0.66.
• Opening New Stores: As of Q3FY21, the company established 279 net company-owned and third-party Skechers stores worldwide, including the Dominican Republic and Slovakia, for the first time.

Revenues & Gross Profit Key Highlights; Analysis by Kalkine Group

Recent Developments:

• On December 20, 2021, SKX stated that its operations in the Philippines had been transferred from a third-party distributor to its subsidiary, Skechers USA Philippines, Inc., to maximise the brand's growth prospects in the region.
• On December 16, 2021, SKX reported that it had increased the size of its senior, unsecured credit facility to USD 750 million, with a USD 250 million expansion feature that allows for total liquidity of up to USD 1 billion. The adjustment pushes the credit facility's maturity date to December 2026.
• On November 30, 2021, SKX announced a multi-year partnership with global environmental non-profit "The Nature Conservancy," with a minimum contribution of USD 800,000 to help the organisation fulfil its purpose of protecting the world's lands and seas.

Segment Wise Results Q3FY21

• International Wholesale – This segment accounted for 45.90% of the revenues in Q3FY21, reported YoY growth of 10.65% to USD 711.89 million, attributable to a 4.0% rise in volumes complemented by a 6.4% increase in average selling price (ASP) per unit.
• Direct-to-Consumer – This segment accounted for 31.49% of sales in Q3FY21, up 44.05% YoY to USD 488.40 million due to a 16.8% increase in volume and a 23.2% increase in ASP per unit.
• Domestic Wholesale – This segment accounted for 22.61% of the revenues in Q3FY21 witnessed an uptick of 10.12% YoY to USD 350.67 million, due to a 10.6% increase in the number of units sold.

Segment Revenues Key Highlights; Analysis by Kalkine Group

Balance Sheet & Liquidity Position

• Strong Cash Position: The company exited Q3FY21 with a cash balance (including short-term investments) of USD 1.04 billion, 29.15% less than USD 1.47 billion at the end of FY20.
• Boost in Cashflow from Operations: Operating cash inflows grew to USD 253.24 million in 9MFY21 from USD 57.00 million in 9MFY20.
• Debt Reduction: SKX's reported total outstanding debt of USD 326.82 million as of Q3FY21 end, significantly lower than the total debt of USD 734.96 million as of December 31, 2020.

Key Metrics: In Q3FY21, SKX's Gross and Operating margins were 49.6% and 9.4%, higher than 48.1% and 7.1%, respectively, reported in Q3FY20. Its Debt/Equity ratio has been improved to 0.12x in Q3FY21, from 0.34x in Q3FY20.

Leverage Profile; Analysis by Kalkine Group  

Top 10 Shareholders: The top 10 shareholders together form around 56.25% of the total shareholding, while the top 4 constitute the maximum holding. Fidelity Management & Research Company LLC and The Vanguard Group, Inc. hold the maximum stake in the company at 14.86% and 9.17%, respectively, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group 

Risk Analysis

• Competition Risk: The company operates in the highly competitive footwear industry, where it faces direct rivalry from more prominent players with greater financial, technological, manufacturing, and marketing resources. If this trend continues, the company may face pricing pressure and a loss of market share, both of which might harm its operating results.
• Supplier Concentration Risk: SKX relies on a few contract manufacturers for its products. In Q3FY21, its top five manufacturers accounted for 37.4% of total production, with the most prominent manufacturer accounting for 16.3% of total procurement. Any breach of contract by these vendors could jeopardise the company's operations.
• Operational Restrictions: Many of SKX's large wholesale customers have shuttered most of their outlets, reducing its revenue from such customers. As a result, store closures and operational restrictions have had and will continue to have a materially adverse impact on the company operations and cash flows.
• Delay in Supply Chain: Product transported from third-party manufacturers to the company's domestic distribution centre arrives by cargo ship at the ports of Los Angeles and Long Beach, where operations have been halted. Any further protracted or subsequent disruptions or shipment delays might result in other negative impacts on its product pricing, which could materially harm its operations.

Outlook

• Looking ahead, SKX forecasts Q4FY21 sales to be in between USD 1.51 – 1.56 billion and diluted EPS ranging between USD 0.28 – 0.33.
• For FY21, the company expects to generate revenues in the range of USD 6.15 – 6.20 billion, with diluted EPS of USD 2.45 – 2.50.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company's NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: SKX's share price has corrected 19.94% over the past six months. The stock is currently trading close to mid-band of its 52-week range of USD 33.80 to USD 55.87. We have valued the stock using the EV/Sales multiple-based illustrative relative valuation method and arrived at a target price with an upside of low twenties (in percentage terms). We believe that the company can trade at a slight discount compared to its peer's average, considering the competition from large peers, supply chain issues, and higher average inventory days. We have taken peers like Crocs, Inc. (NASDAQ: CROX) and PVH Corp. (NYSE: PVH). Considering the strong top and bottom-line performance, growth in a number of stores, expansion plans, encouraging outlook, and current valuation, we give a "Buy" recommendation on the stock on the closing price of USD 42.28, down 2.22% as of January 25, 2022.

SKX Technical Chart, Data Source: REFINITIV 

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors' appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined 

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and the uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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