Company Overview:

Skechers U.S.A, Inc. (NYSE: SKX) designs and markets lifestyle and performance footwear, apparel and accessories for men, women, and children under the Skechers brand. Its operating segments are 1) Domestic Wholesale, which distributes products via domestic wholesale distribution channels. 2) International Wholesale segment, which markets products to department stores and speciality retail stores through its joint ventures and subsidiaries. 3) Direct-to-Consumer, which offers products through e-commerce, concept stores, factory, and warehouse outlet stores.

SKX Details

Key Takeaways from Q2FY21 (ended June 30, 2021)

• Triple-Digit Growth in Revenue: In Q2FY21, the company's total revenue amounted to USD 1.66 billion, representing a 127.26% increase year-over-year from USD 729.47 million.
• Improvement in Operating Margin: SKX reported an operating profit of USD 201.21 million for the current quarter, representing a higher operating margin of 12.1% vs. -8.4% for Q2FY20, attributable to 1,988 bps reduction in selling, general and administrative expense ratio.
• Surge in Net Income: The company reported a net income of USD 137.37 million for Q2FY21 vs. a net loss of USD 68.10 million in Q2FY20, representing diluted earnings per share (EPS) of USD 0.88 in Q2FY21.

Revenues & Operating Profit Key Highlights; Analysis by Kalkine Group

Recent Developments:

• On October 19, 2021, SKX launched Pier to Pier Friendship walk, intending to raise USD 2.5 million to help children with special needs to succeed. The event is sponsored by over 100 companies, including Kinecta Federal Credit Union and celebrities such as Brooke Burke, Sugar Ray Leonard and Meb Keflezighi.
• On July 21, 2021, SKX launched a limited-edition collection of sneakers inspired by late Japanese designer Kansai Yamamoto in Japan, North America, and Europe. Similarly, on July 8, 2021, it collaborated with pocket.watch and Sunlight Entertainment to launch its new collection designed in collaboration with kid YouTuber Ryan Kaji.
• On June 29, 2021, SKX was named official footwear supplier of both the European and United States Solheim Cup Teams for the 2021 tournament.

Segment Wise Results Q2FY21

• International Wholesale – This segment accounted for 25% of the total revenue in Q2FY21, reported YoY growth of 94.8% to USD 750.19 million, attributable to 86.5% surge in volume complemented by 4.5% increase in average selling price (ASP) per unit.
• Direct-to-Consumer - This segment accounted for 64% of the total revenue in Q2FY21, expanded by 137.8% YoY to USD 507.93 million, due to YoY growth of 218% by both domestic and international stores partially offset by decline in e-commerce sales to the tune of 25.1%
• Domestic Wholesale - This segment accounted for 11% of the total revenue in Q2FY21, witnessed a sharp uptick of 205.7% YoY to USD 399.65 million, driven by 202.7% increase in volume and favourable pricing.
  

Other Key Findings in Q2FY21

• SKX repaid its outstanding balance of USD 452.5 million on its revolving credit facility.
• SKX increased its store count by 166 stores from 3,891 stores on December 31,2020 to 4,057 stores as of June 30, 2021.

No of Stores Highlights; Analysis by Kalkine Group 

Balance Sheet & Liquidity Position

• Strong Cash Position: The company exited Q2FY21 with a cash balance (including short-term investments) of USD 1.20 billion, 18.52% less than USD 1.47 billion at the end of FY20
• Cashflow from Operations: Operating cash inflow in H1FY21 increased to USD 317.16 million from USD 176.29 million in H1FY20.
• Debt Reduction: SKX’s reported total outstanding debt of USD 312 million at Q2FY21 end, significantly lower than the total debt of USD 735 million as of December 31, 2020.

Key Metrics: In Q2FY21, SKX's operating and net margins were 12.1% and 9.8%, higher than -8.4% and -8.2%, respectively, reported in Q2FY20. ROE stood at 5.2%, 840 bps higher than the Q2FY20 return. Debt/Equity was 0.11x as of June 30, 2021, lower than 0.34x on June 30, 2020.

Leverage Profile; Analysis by Kalkine Group  

Top 10 Shareholders: The top 10 shareholders together form around 55.97% 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 14.78% and 9.10%, respectively, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group 

Risk Analysis

• Competition Risk: The company operates in highly competitive footwear industry and faces direct competition from more prominent players with higher financial, technological, manufacturing and marketing resources at their disposal. If this trend continues, it could cause pricing pressure on the company and loss of market share, which could adversely impact its results of operations.
• Supplier Concentration Risk: SKX is dependent on a limited number of contract manufacturers for its products. In Q2FY21, its top five manufacturers represented 38.7% of its total production, with the largest manufacturer accounting for 17.0% of the total purchases. Any failure on the contractual obligation by these suppliers could harm its operations.
• Dependence on Skechers Brand Name: SKX prospects are dependent on the significant strength of the Skechers brand, which necessitates it to make continuous effort and commitment in developing high-quality, innovative, fashion-forward products and the creation of fresh and relevant marketing and advertising campaigns. Any advanced innovation or superior product development by its peers could hurt SKX’s brand and financial status.
• Customer Concentration Risk: SKX top five customers accounted for 9.0% of its total Q2FY21 revenue. The loss of any of its key customers could hurt its financials.

Outlook

• In Q3FY21, SKX forecasts net revenue of USD 1.60 – 1.65 billion and diluted EPS ranging between USD 0.70 – 0.75.
• For FY21, the company expects to generate net revenue in the range of USD 6.15 – 6.25 billion, with diluted EPS of USD 2.55 – 2.65.

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: Over the last three months, SKX's share price has corrected 12.14%. The stock is currently trading close to middle band of its 52-week range of USD 30.06 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 competition from large peers, dependency on brand name, concentration of customers and suppliers. We have taken peers like G-III Apparel Group Ltd (NASDAQ: GIII) and PVH Corp (NYSE: PVH). Considering the strong top and bottom-line performance, growth in number of stores, recent launches, decent outlook, and current valuation, we give a "Buy" recommendation on the stock at the closing price of USD 44.16, up 1.21% as of October 20, 2021.

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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