Skechers So Hot That It May Be Worth a Look for Nike: Real M&A

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In case you missed it, Skechers U.S.A. Inc. is on fire.

Shares of the sneaker maker have doubled in just six months, giving it an almost $6 billion market value. Its revenue gains -- led by women’s sporty, slip-on shoes -- have been beating every competitor. The company is now headed for record profit in the third quarter.

“I sure like the way the stock’s gone up,” said Gary Bradshaw, a Dallas-based fund manager for Hodges Capital Management Inc., which owns Skechers shares among the $3 billion it oversees. “They’ve kind of caught this fashion trend just right.”

Just last month, Skechers surpassed sportswear giant Nike Inc.’s valuation relative to earnings before interest, taxes, depreciation and amortization. Before Skechers gets any more expensive, it might make sense for a competitor such as Nike to make an offer. The $91 billion industry leader still dwarfs Skechers in size and has almost enough cash on its balance sheet to cover a takeover.

Adidas AG, the $17 billion German athletic footwear maker that owns Reebok, is under pressure to take back market share from Nike. Skechers would give either company a way to get in on the growing market for fashionable walking shoes and reach different customers at a lower price point.

Skechers “is well run and could be on someone’s radar,” said Barry James, chief executive officer at James Investment Research in Xenia, Ohio.

Insider Ownership

The biggest question is whether Skechers’ founder Robert Greenberg, who was 75 as of April, would be open to selling his company. Greenberg, who also developed the L.A. Gear brand, is chairman and chief executive officer of Skechers. His son Michael, 52, is president, and his other son Jeffrey, 47, is in charge of active electronic media. They all serve on the board and, with the family estate trustee, control more than 70 percent of the voting power.

“It might be a little early to think that they would necessarily be wanting to sell the company,” said Jeffrey Van Sinderen, an analyst at B. Riley & Co. “But it could be attractive to private equity or a strategic buyer. They have a brand and have established it even more so over the past several years. They have a nice niche.”

Jennifer Clay, a spokeswoman for Skechers, declined to comment on whether the company has received takeover interest or has considered a sale. Representatives for Nike and Adidas didn’t respond to requests for comment.

Stock Surge

While the stock has been rising since 2012, its biggest gains have come this year. The share price has already doubled in 2015, adding to last year’s 67 percent surge.

Analysts forecast an additional 10 percent upside to the current stock price over the next 12 months. That means it may continue to outperform Nike and Adidas, as well as Under Armour Inc., Steven Madden Ltd. and Foot Locker Inc., according to share-price estimates compiled by Bloomberg.

Apparel companies rarely do mergers. One of the few cases was last month, when Ascena Retail Group Inc. agreed to acquire Ann Inc., bringing together the Lane Bryant and Ann Taylor brands.

Nike also hasn’t traditionally done deals this large and doesn’t need Skechers. Its biggest purchase, the 2007 deal for Umbro Plc, was only $619 million. It later sold the English maker of soccer cleats.

But Nike’s motivation behind its 2003 purchase of Converse Inc. may be most similar to what its rationale could be for buying Skechers: the desire to capture a growing market. At the time of the $332 million Converse acquisition, Nike’s U.S. shoe sales were declining. Converse was a way for it to grab hold of classic footwear such as Chuck Taylors, which were gaining in popularity.

Comfort Shoes

Skechers recently introduced a line of running shoes that are catching on. Olympic runner Meb Keflezighi wore them when he won the 2014 Boston Marathon and finished eighth in 2015. Like its other products, Skechers running shoes are cheaper than most other brands.

It’s also added memory foam to certain comfort shoes, helping it target older customers that competitors such as Nike don’t typically focus on.

While Nike’s sales are still expanding, the company has gotten so large that the pace of gains could start to slow. Analysts project an average annual growth rate of about 7 percent for the next five years, down from an average of 10 percent during the last decade.

Estimates for Skechers only go out as far as 2017. During that time, its sales may climb an average of 18 percent per year.

With borrowing costs still so low, a deal would be accretive. An all-cash offer even at a 35 percent premium -- about $151 a share -- would immediately boost Nike’s earnings per share, data compiled by Bloomberg show. And that’s without estimating any cost cuts it could make.

Now, let’s see if these sneakers are made for dealmaking.

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