Skechers: Undervalued stocks to consider in your portfolio (NYSE: SKX)

ANVIPS

Thesis

Skechers United States (NYSE: SKX) is a title that we think is worth considering. The company’s recent financial performance and guidance has been strong and exceeds its equally strong historical growth rates. We believe that the brand of the company and product offerings should provide a strong moat for the business, and based on our analysis, we believe the stock is priced attractively based on historical metrics.

Company presentation

Skechers USA, Inc. is an American multinational footwear company based in Manhattan Beach, California. The brand primarily sells footwear such as athletic shoes and is now the third largest athletic shoe brand in the United States. In 2021, the company said it shipped over 200 million pairs of shoes. The performance of the company’s shares was in line with overall market returns. Skechers has returned -16.27% since the start of the year, compared to a return of -16.92% for the S&P 500 over the same period.

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SKX Year to Date Price Returns (Daily) data by YCharts

Financial performance

Strong revenue growth

The company’s financial results for the second quarter of 2022 included many bright spots for investors. Management reported quarterly revenue of $1.87 billion in the second quarter, representing a 12.4% year-over-year increase. Given the supply chain disruptions, COVID-19 lockdowns in China, and the pandemic, the company’s ability to grow revenue is significant and shows the resilience of the business. In the Americas alone, the company saw even higher quarterly revenue growth of 21% year-over-year. Such performance is similar to the company’s historical financial performance, as the company has been able to steadily increase its revenue over the past decades. From 2010 to 2021, Skechers recorded a CAGR of around 10% in revenue, which is remarkable for a standalone footwear brand.

Presentation of Q2 2022 results

Presentation of Q2 2022 results

Share buyback program

In the second quarter of 2022, Skechers purchased approximately $24.2 million of its shares under its $500 million share buyback program. Management reports that approximately $450.8 million remained in the share buyback program, which should add to investor confidence and share price support. The company has already conducted additional share buyback programs over its long history, and we believe these programs will likely continue to increase shareholder returns.

Optimistic orientation

Guidance for fiscal 2022 remains optimistic, with management reporting a sales forecast of between $7.2 billion and $7.4 billion for the year. Using the midpoint of this guidance range, this presents revenue growth of 16% year-over-year. Such revenue growth is extremely strong given the ideal macroeconomic environment, and we believe the forecast shows management’s confidence in its business prospects and its ability to achieve strategic objectives.

Strong brands and product offerings

Skechers is well known among consumers, especially for offering shoes that are comfortable and stylish to wear. We believe that brand popularity provides a wide moat for the business, as brand value and consumer loyalty are difficult to replicate. Although the brand is not as well known and/or global as Nike (NKE) or adidas (OTCQX:ADDYY), we still believe it enjoys better brand recognition than smaller boutique brands, and that should provide enough competitive advantages to rival any new entrant in the market. Additionally, the company’s recent product line called “GOrun MaxRoad” has proven to be very popular with consumers, with many reviewers calling the product one of the best running shoes in its class for a range of affordable price.

Evaluation

We like to look at historical valuation PE levels as a quick measure to make sure we are buying at the lower ranges of historical valuation. At present, the company is trading at ~7.95x the P/E ratio and this valuation multiple is at historically low levels, as can be seen below. With an implied earnings yield of 12.5%, we think investors will get good value for a company with strong fundamentals, brand value and strong growth. Moreover, given the remaining share buyback program, we believe that this multiple is simply too low.

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SKX PE Ratio Data by YCharts

Risks

Inflation risks are considerable given the company’s reliance on commodities and the fact that it operates in a consumer discretionary industry. The recent CPI print has dramatically raised expectations of further rate hikes, and such monetary policy could significantly affect consumption in the United States and abroad, which can have a significant impact on financial performance of Skechers. Although Skechers will nonetheless be affected by the persistence of inflation, we believe the company has a strong balance sheet to help it remain flexible in times of economic uncertainty. The company has about $750 million in cash, which is more than 10% of its current market capitalization. Additionally, the company is well-diversified across the globe and there does not appear to be any outsized risk to any particular demographic or region. Finally, the company also operates some stores using a franchise model, which should help provide smoother cash flow.

Conclusion

Skechers is an excellent consumer discretionary stock that we believe is at the lower end of its valuation and should deserve your attention. The company’s financial performance has been strong overall despite minimal catalysts to boost the brand, and we believe the market and the company’s financial condition should help minimize any major issues in the event of a higher-than-expected inflationary environment. forecast and/or recession.

James T. Quintero