Don't Kick Skechers Off Too Quickly

Signs of a sales slowdown mask progress for a new business model.

After dumping Skechers on Friday, investors had a whole weekend to reconsider ... and then they kept dumping Skechers.

The sneaker maker's shares fell another 2 percent Monday after a 23-percent plunge on Friday, sparked by the company's second-quarter earnings report, which revealed a sales slowdown.  The company warned the pain would last through the next quarter, raising fears among investors that a long hot streak is fast cooling

More likely, though, Wall Street's over-exuberance about the company is coming to grips with reality. 

Coming Untied

Skechers stock plunged 23 percent on Friday; it had already been down 22 percent for the year

Source: Bloomberg

Intraday times are displayed in ET.

Skechers shares rose 750 percent from July 2011 to July 2015, boosting its market value from roughly $600 million in 2011 to $4.6 billion last year. Annual revenue nearly doubled, from $1.6 billion in 2011 to $3.1 billion in 2015. 

Its lower-priced sneakers, along with a global embrace of athletic wear, helped it unseat Adidas as the second-largest U.S. seller of athletic shoes in 2015, according to retail tracker NPD Group. (Nike is the leader, with 62 percent of the market, according to NPD.)

Down To Earth

Skechers shares dropped 40% in the last year; Its stock rose 360% from July 2013 to July 2015

Source: Bloomberg

Note: Skechers enacted a 3 for 1 stock split in October 2015

But lately, Adidas has been mounting a comeback. Under Armour is fast expanding its running shoes business. Even Nike and Asics, leaders in performance wear, have released  more lower-priced sneakers to rival Skechers, which has brought its own selling prices down in response. 

Recent lawsuits accusing Skechers of infringing on competitors' brands certainly don't help. Neither do the negative impacts of a stronger dollar on overseas sales. Nor do the recent bankruptcy at key retail partner Sports Authority. 

Spooking Wall Street the most, however, were Skechers' remarks that wholesale customers -- retailers such as Dick's Sporting Goods and Modell's -- have reduced orders for the all-important back-to-school season. And that's on top of a 5.4 percent decrease in second-quarter wholesale sales from a year ago. 

Skechers' declining wholesale sales come as others in the industry shift away from the department stores and specialty retailers that have historically sold their wares, but are struggling to attract customers. Brands like Coach, Ralph Lauren, and Nike are trying to control their own destiny by focusing on their own stores and e-commerce sales. 

Scuffed Up

Skechers' wholesale sales are declining as a percentage of its total business

Source: Bloomberg Intelligence

There are signs this strategy is working. 

Skechers said it expects to open 200 new stores by the end of 2016. It's expanding internationally, with second-quarter sales at its stores abroad rising by 40 percent from the year before. And while domestic wholesale sales fell by 5.4 percent in the quarter from a year ago, company-owned retail-store sales grew by 15 percent. The shift away from wholesale also helped Skechers boost its gross profit to 47.4 percent of net sales in the second quarter, compared to 46.8 percent the year before.

But changing a long-time business model can be difficult, especially when Wall Street is looking for any signs a consumer slowdown could trip up what had been a high-flying stock.

Skechers shares are now trading at around 12 times forward earnings, compared to multiples of 23 at Nike and 60 at Under Armour. The company's multiple has fallen below those of plastic clog maker Crocs and UGG boots manufacturer Deckers.

Investors might have kicked Skechers a bit too far. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Shelly Banjo in New York at

    To contact the editor responsible for this story:
    Mark Gongloff at

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