Skechers: An overlooked company.
Opdateret: 9. jul. 2022
Skechers is a company I first investigated when I attended the Phil Town workshop years ago. It has been on my watch list since I believe it is often an overlooked company as they have delivered higher gross profit margins than a company like Nike. I decided it was time to have a new look at Skechers.
This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.
Since I have attended the workshop with Phil Town, I have decided to change the layout of my analyses a bit. I will do some more calculations and also briefly go through why the company has meaning to me. If you want to read more about how I evaluate a company, please go to "MY STRATEGY" on my website.
For full disclosure, I should mention that I at the time of this writing don't own any shares in Skechers. If you want to see what shares I own or wants to copy my portfolio, you can read how to do so here. While I don't own shares in Skechers, I own several pairs of Skechers shoes as I find them very comfortable. I also really like their values as they do much to reduce their use of plastic and their "Bobs for dogs" campaign has saved the lives of more than 588.000 animals. Nonetheless, even though I like the company, the analysis will be unbiased as always.
Skechers is a company that was founded in California in 1992 and is now the third largest shoe brand in the United States. They are known for combining comfort and performance in their shoes, where they are particularly known for their memory foam that was originally developed by NASA. Their products are sold in more than 170 countries around the world. The global brand rating at Comparably ranks Skechers at a 194th place, which is higher than competitors such as Converse and New Balance. Hence, I believe it is safe to say that Skechers has developed a brand moat through their 30 years of existence.
Their CEO is Robert Greenberg who is also the founder of Skechers. He had previously founded L.A. Gear in 1978 and was a CEO there until he stepped down to found Skechers. Meaning that he has more than 40 years of experience in the industry and has also received the Lifetime Achievement Award from Footwear News in 2015. He has shown great results in his time in Skechers taking it from nothing in 1992 to a $ 7 billion company in 2021 that sell their products all around the globe. He believes in a very aggressive marketing philosophy called "Unseen, Untold, Unsold", meaning they use marketing to drive traffic, build brand recognition and properly position their diverse lines within the marketplace. According to Comparably, he has an employee rating at 79/100, which place him in top 5 % of companies with the similar size. He certainly has the credentials and experience to drive Skechers forward but another thing I also really like is that he is the founder of the company. In general founders are usually more interested in growing the company than their wallet.
I believe that Skechers has a brand moat. I really like the management as well. Now let us investigate the numbers to see if Skechers lives up to our requirements for a strong moat. In case you want an explanation about what the numbers are, you can have a look at "MY STRATEGY" on the website.
The first number we will investigate is the return on investment capital, also known as ROIC. We want to see 10 years of history and we want the numbers to be above 10 % in all years. There are some underwhelming years throughout the last 10 years. I'm not too worried about the oldest years, as it looks like Skechers has reversed the trends. 2017 and 2019 are both below the requirement but the numbers are in no way alarming. 2020 was during a pandemic and lockdowns. Hence, I don't want to give any importance to the 2020 numbers. Overall, I'm satisfied with the numbers that Skechers has delivered.
The next numbers are the book value + dividend. In my old format this was known as the equity growth rate. It was the most important of the four growth rates I used to use in my analyses, which is why I will continue to use it moving forward. As you are used to see the numbers in percentage, I have decided to share both the numbers and the percentage growth year over year. This is a textbook example of what you would like to see. Skechers has increased their book value + dividend year over year the last 10 years. Not much to say other than I really like to see numbers like these.
Finally, we investigate the free cash flow. In short, free cash flow is the cash a company generates after it has paid for operating expenses and capital expenditures. The free cash flow is a bit mixed throughout the last 10 years but one thing that stands out is that Skechers delivered a negative free cash flow in 2021. Luckily, there is an explanation for that. Operating cash flow was lower in 2021 than usually because of increased inventory and merchandise in transit. At the same time, capital expenditures were much higher 2021 than usually, as they used funds on a distribution center and on new corporate offices. We might also see a negative or low free cash flow in 2022, as Skechers is committed to invest in their worldwide distribution capabilities. Hence, while I don't like to see a negative free cash flow, there is a reason for it in 2021. Skechers usually delivers a positive free cash flow, so investing in distribution for future growth doesn't keep me from investing in Skechers despite some years with low or negative free cash flow.
Another important thing to investigate is debt, and we want to see if a business has a reasonable debt that can be paid off within 3 years. We do so by dividing the total long-term debt by earnings. Once I have done the calculations on Skechers, they can pay off their debt in 0,36 years, which is nice to see. Skechers has paid off a lot of debt during 2021, which I believe is a good thing and, in my opinion, it is a sign of a great management.
Like with all other companies, there are some risks when investing in Skechers as well. One risk is high freight prices. High freight prices have resulted in lower margins for Skechers. In the first quarter earnings call in 2022, management mentioned that gross profit margin is down by 250 basis point, which is primarily due to higher freight prices. If freight prices continue to be elevated like they are now, it will result in lower margins for Skechers, and lower margins means less profitability. Competition. The footwear industry is very competitive and companies like Nike and Adidas have even stronger brands than Skechers and much higher marketing budgets. Global trends in footwear changes fast as well, and Skechers will need to adapt fast to keep up with competition. Macroeconomic and political factors. Lower consumer spending could hurt Skechers moving forward. Management mentioned that they haven't felt an impact in sales so far, but it could very well change if we see recession. China lockdowns hurt Skechers as well. Their shoes are made in China (and Vietnam), and if we see lockdowns in areas where their shoes are made, it could cause a risk. Besides that, China is Skechers second largest market, and when there are lockdowns in major cities, people are not buying shoes or anything else. In the earnings call in the first quarter of 2022 management mentioned that lockdowns had an impact on sales.
There are also plenty of potential for Skechers. One is direct to consumer sales. Skechers is ramping up their direct to consumer sales. It can be through their company owned stores, digital commerce, or hosted direct-to-consumer sales through marketplaces like Alibaba's Tmall. In 2021 the gross profit margin of direct-to-consumer sales was 66,1 % compared to a gross profit margin on wholesale at 38,2 %. If Skechers successfully increase their direct-to-consumer sales compared to wholesale, it will improve margins, which will result in higher profitability. The Athleisure market is expected to grow fast. Athleisure sneakers are defined as footwear that is designed to be worn in the office. as well as for working out in the gym. It is like the definition of a Skechers shoe. Hence, I believe that Skechers could be defined as rather than a sports shoe like Nike or Adidas. It is important, as the global sport shoe market is expected to grow by a 6,25 % CAGR to 2027, while the global athleisure market is expected to grow by a 25 % CAGR to 2025. Thus, Skechers could see higher growth than their competitors. Gaining market shares and international expansion. Skechers share of U.S. clothing and footwear expenditures has gone from 0,08 % in 2012 to 0,14 % in 2021. Skechers is also growing internationally, as international sales have increased by a 18 % CAGR since 2016. It means that Skechers is now a strong global brand, as international sales accounted for 57 % of all sales in the first quarter in 2022.
Now we have most of the numbers to calculate a margin of safety price for Skechers. To calculate price, we will need numbers that I have explained in the "MY STRATEGY" section of the website. I do not want to go through the whole calculation here. I have decided to use the EPS as it was in 2021 at 4,73. I will use an estimated future EPS growth rate of 9 (I believe it will grow faster than the global sports shoe sector, despite a drop in 2022), Estimated future PE 18 (which the double of the growth rate, as the historically PE for Skechers has been higher) and we already have the minimum acceptable return rate on 15 %. Doing the calculations by using the formula I described in "MY STRATEGY" we come up with the sticker price (some call it fair value or intrinsic value) of $49,82, and we want to have a margin of safety on 50 % , so we will divide it by 2 meaning that we want to buy Skechers at price of $24,91 (or lower obviously), if we use the Margin of Safety price.
Our second way to calculate a buy price is the TEN CAP price, which is also explained at "MY STRATEGY". Unfortunately, we cannot make the calculation based on the 2021, as capital expenditures were higher than operating income, as explained earlier. If you want to calculation based on the 2020 numbers, it is as following: The Operating Cash Flow in 2020 was 331,45. The Capital Expenditures was 309,92, I tried to look through their annual report to see, how much of the capital expenditures were used on maintenance. I couldn't find it though, so as a rule of thumb, you expect 70 % of the capital expenditures to be used on maintenance, meaning we will use 216,94 in our further calculations. The Tax Provision was 8,5. We have 134,45 outstanding shares. Hence, the calculation will be like this: (331,45 - 216,94 + 8,5) / 134,45 x 10 = $9,12, in TEN CAP price.
The last calculation is the PAYBACK TIME. I also described in "MY STRATEGY". With the Free Cash Flow Per Share at 1.42 and a growth rate of 9 %, if you want your purchase back in 8 years, the PAYBACK TIME price is $11,35.
I believe that Skechers is a great company. I really like the management as well. I particularly like that Skechers is focusing on direct-to-consumer sales, which should improve margins moving forward. There are some risks when investing in Skechers and especially short-term risks such as higher freight prices could hurt Skechers in the near future. However, I think that Skechers will grow faster than their competitors as Skechers, in my opinion, is the definition of an athleisure brand, and I believe that it is a sector that will have high growth in the coming years. Nevertheless, we cannot forget that we might see a recession, which is why I want a 50 % discount if I should invest in Skechers. It means that I will buy Skechers, if it reaches the Margin of Safety Price of $24,91.
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