Skechers U.S.A Inc. (SKX, Financial) is a high-growth, quality company that looks attractive at current prices. The footwear manufacturer has managed to grow its revenue at an impressive compound annual rate of 15.8% over 10 years and its earnings per share by 25%. Over the same period, share prices have increased by over 500%, significantly outperforming the S&P 500. Growth has not come at the cost of gross margins or efficiency.
Weaker short-term guidance has some investors worried and rethinking their long-term commitment, however. As such, now may be a good time to look at Skechers and its medium to long-term potential.
Recent financial performance
The company's full-year 2023 results were announced on Feb. 1. Even though revenue and earnings were within the company's guidance, they fell slightly below consensus estimates. Revenue of $8 billion missed consensus estimates by just under 1%, while earnings of $3.39 per share missed estimates by approximately 2.50%.
2024 revenue guidance was also a little disappointing. Skechers expects it to be in the range of $8.60 billion to $8.80 billion, a growth of only 7.50% to 10%. This is significantly slower than historical long-term averages. With the company estimating earnings per share growth to be between 7.70% and 13.50%, margins are expected to improve.
Skechers has two reportable segments. The direct-to-customers segment sells through company-owned stores and e-commerce sites, as well as third-party digital portals. The wholesale segment involves selling through a network of partners, including third-party franchisees, family shoe stores and other distributors.
Direct-to-customers enjoys a considerably higher margin and as of the fourth quarter, accounted for 51% of revenue. The three-month period saw DTC revenue grow 20.30% to $998.30 million, whereas wholesale was down 8.30% to $962.6 million. Total revenue growth slowed to 4.40%. Gross margins improved for both segments, with DTC increasing from 64.40% to 64.90% and the wholesale segment improving more significantly from 35.80% to 40.90%.
International and domestic sales are roughly evenly split, but with higher growth in Asia Pacific, we will see international sales contributing more.
Historical financial analysis
If we look at the financial report summary below, we can see the company has enjoyed a sustained long-term compound annual growth rate in revenue and earnings per share.
Looking at the historical revenue per share graph, we see growth has been more impressive since 2013.
As mentioned earlier, growth has not come by compromising on gross margins. We can see below the gross margin has been continuously improving every year.
However, it is worth noting the more recent operating and net income margins are slightly lower than the previous highs. Higher operating expenses are to blame.
Given the high growth the company has experienced over the past 10 years, Sketchers has significantly outperformed the S&P 500.
Outlook
With high historical growth and margins, the company has been a value compounder. If not at historic levels, we believe Skechers will be able to maintain strong growth and high margins going forward.
After selling to the wholesale market and managing to build a brand that signifies comfort and reliability, Skechers has turned its attention to growing its direct-to-consumer revenue stream. Looking at the past five years, the compound annual growth rate for total revenue was 11.50%. In 2018, DTC sales were $1.33 billion, 29% of total sales, and in 2023 DTC revenue increased to $3.50 billion, about 44% of total revenue, an impressive CAGR of 21.50%. Margins are significantly higher when sold directly to customers as it eliminates the middleman. Skechers will take advantage of this opportunity by opening more stores and selling more through online platforms. We can expect to see higher gross margins. However, higher direct sales result in higher operating expenses and reduced net income margins. It is something we would like to watch closely.
Skechers is continually designing and developing new styles that concentrate on comfort technologies. With its marketing campaigns including celebrities such as Snoop Dogg, the company is targeting a wider range of customers. The investment in design, development and marketing is driving top-line growth with control on cost of goods sold, but the additional costs are keeping a check on net income margins.
The company has become a dominant player in a fiercely competitive footwear segment. When compared to Nike Inc. (NKE, Financial), margins are lower, but top- and bottom-line growth are significantly higher. Further, shares of Nike are trading with a price-earnings ratio of 24, which is higher than Skechers' multiple of 15.
The biggest driving factor for Skechers is growth and a slowdown could be the biggest risk. If we see growth slowing further, share prices will adjust again. We should have more clarity when the company announces its first-quarter results later this month.
Valuation and conclusion
Using the company's 2024 guidance midpoints for earnings per share gives us a forward price-earnings ratio of 15.50. This is significantly lower than the company's 10-year average of 23.30, but in line with the sector average forward price-earnigns ratio of 15.60. However, sector revenue growth is expected to be around 4%, so Skechers' growth could be more than double that at approximately 9%. Based on higher growth and margins, Skechers deserves a higher price-earnings ratio and looks attractive.
