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Skechers: Is it an overlooked company?

Opdateret: 27. jan.

Skechers is a company I first became interested in when I attended the Phil Town workshop years ago. It has been on my watchlist ever since. I believe it is often an overlooked company because they have consistently delivered higher gross profit margins compared to a company like Nike. I decided that now was the time to take a fresh 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 at the time of this writing, I do not own any shares in Skechers. If you want to see the shares I own or want to copy my portfolio, you can find instructions on how to do so here. While I don't own any shares in Skechers, I do own several pairs of Skechers shoes because I find them to be very comfortable. I also really like their values as they make significant efforts to reduce their use of plastic. Additionally, 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 always be unbiased. If you want to purchase shares or fractional shares in Skechers, you can do so through eToro. eToro is a highly user-friendly platform that allows you to start your investment journey with as little as $50.

Skechers is a company that was founded in California in 1992 and has since become the third largest athletic shoe brand in the United States. They are known for combining comfort and performance in their shoes, particularly renowned for their memory foam technology originally developed by NASA. Their products are sold in over 170 countries worldwide. They sell their products through wholesale (62% of revenue in 2022), such as department stores and sporting goods retailers, and through direct-to-consumer channels (38% of revenue in 2022), which include e-commerce, concept stores, and factory outlet stores. By the end of 2022, the total number of Skechers stores was 4.537. Their biggest market is the United States, where Skechers generated 41% of their revenue in 2022. The global brand rating at Comparably ranks Skechers at 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 strong brand moat over the course of their 30 years in existence.

Their CEO is Robert Greenberg, who is also the founder of Skechers. He had previously founded L.A. Gear in 1978 and served as its CEO until he stepped down to establish Skechers. Meaning that he has more than 40 years of experience in the industry and also received the Lifetime Achievement Award from Footwear News in 2015. Under his leadership, Skechers was named Company of the Year twice in 2022 (by both Footwear News and Footwear Plus). He has achieved remarkable results during his time at Skechers, transforming it from a small company in 1992 to an $8 billion global enterprise in 2023, selling their products worldwide. He believes in a very aggressive marketing philosophy called "Unseen, Untold, Unsold." This philosophy emphasizes the use of marketing strategies to drive traffic, build brand recognition, and effectively position their diverse product lines within the marketplace. According to Comparably, he has an employee rating of 73/100, which places him in the top 25% of companies with a similar size. He certainly has the credentials and experience to drive Skechers forward. However, another aspect that I really appreciate is that he is the founder of the company. In general, founders are usually more interested in growing the company than in filling their wallets.

I believe that Skechers has a strong brand moat. I really like the management too. Now, let us examine the numbers to determine if Skechers meets our criteria for having 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 invested capital, also known as ROIC. We want to see a 10-year history, with all the numbers being above 10% in each year. There have been some underwhelming years over the past decade. 2020 was heavily impacted by the pandemic, and 2022 has proven to be a challenging year for most companies due to surging inflation. If we exclude those years, Skechers has delivered an acceptable ROIC since 2014. However, I would like to see Skechers delivering a return on invested capital (ROIC) above 10% more consistently moving forward.

The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most important of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actual numbers and the percentage growth year over year. While the ROIC was somewhat inconsistent, these numbers are a textbook example of what you would like to see. Skechers has consistently increased their book value + dividend year over year for the past 10 years. I don't have much to say other than I really enjoy seeing numbers like these.

Finally, we will investigate the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. Levered free cash flow is the amount of money a company has remaining after paying all of its financial obligations. I use margins to enhance clarity and improve understanding. Free cash flow yield refers to the amount of free cash flow per share that a company is projected to generate in relation to its market value per share. The free cash flow has been somewhat inconsistent over the past 10 years, but one notable trend is that Skechers reported a negative free cash flow in both 2021 and 2022. Luckily, there is an explanation for that. Operating cash flow was lower in 2021 than usual due to an increase in inventory and merchandise in transit. At the same time, capital expenditures were much higher in 2021 than usual, as they used funds for a distribution center and new corporate offices. In 2022, Skechers invested heavily in their worldwide distribution capabilities, which resulted in another year of negative free cash flow. Hence, although I am not fond of observing a negative free cash flow, there is a justification for it in both 2021 and 2022. Skechers usually generates a positive free cash flow, which is why I am still willing to invest in the company despite occasional years of low or negative free cash flow. Investing in distribution for future growth does not deter me from investing in Skechers. Levered free cash flow margin has been underwhelming over the past 10 years, and it is hoped that their investments will drive it higher as well. It is definitely something worth monitoring if investing in Skechers.

Another important aspect to consider is the level of debt, and it is crucial to determine whether a business has a manageable debt that can be repaid within a period of 3 years. We do this by dividing the total long-term debt by earnings. Once I have done the calculations on Skechers, they can pay off their debt in 0,58 years, which is a positive outcome.

Like with all other investments, there are some risks if investing in Skechers. One of the risks is competition. The footwear industry is highly competitive, with companies like Nike and Adidas boasting stronger brands and significantly larger marketing budgets than Skechers. It means that Skechers compete for shelf space in wholesale, which still generates most of the revenue for Skechers. Furthermore, global trends in footwear change rapidly, and Skechers will need to adapt quickly to keep up with competition. Relying on manufacturers. In their annual report, Skechers mentioned that their top five manufacturers produced approximately 39% of their products, while their largest manufacturer produced approximately 16,5% of their products. Skechers does not have any long-term contracts with any of the manufacturers. This means that any of their manufacturers can terminate their relationship with Skechers at any time. Considering that footwear companies compete for production facilities, this poses a significant risk for Skechers. Macroeconomics. The global economy is currently in an uncertain state, with high inflation impacting the levels of consumers' discretionary spending. In the annual report, Skechers mentions that if the current economic situation does not improve or weakens, they may face challenges in maintaining or increasing their sales to existing customers, acquiring new customers, opening and operating new retail stores, sustaining levels at their existing stores, expanding their international operations profitably, and improving their earnings from operations as a percentage of sales. Thus, if we experience a global recession, it could have a negative impact on Skechers' business.

There is also plenty of potential for Skechers. One is direct-to-consumer sales. Skechers is ramping up its direct-to-consumer sales. It can be done through their company-owned stores, digital commerce, or hosted direct-to-consumer sales via marketplaces like Alibaba's Tmall. In 2022, the gross profit margin of direct-to-consumer sales was 52,7 % compared to a gross profit margin of 36,0% on wholesale. If Skechers successfully increases their direct-to-consumer sales compared to wholesale, it will improve margins, leading to higher profitability. The athleisure market is expected to grow rapidly. Athleisure sneakers are defined as footwear that is designed to be worn outside of 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 something other than a sports shoe, like Nike or Adidas. It is important to note that the global sport shoe market is projected to grow at a compound annual growth rate (CAGR) of 6,25% until 2027, while the global athleisure market is expected to grow at a CAGR of 25% until 2025. Thus, Skechers could experience higher growth than their competitors. Gaining market share and expanding internationally. Skechers' share of U.S. clothing and footwear expenditures has increased from 0,08% in 2012 to 0,14% in 2022. Skechers is also experiencing international growth, with international sales increasing at a compound annual growth rate (CAGR) of 18% since 2016. It means that Skechers is now a strong global brand, as international sales accounted for 59% 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 of 3,25, which is the lower guidance for 2023. I will use an estimated future EPS growth rate of 10% (Finbox expects EPS to grow by 15,2% over the next five years, but I prefer to be more conservative). The estimated future PE is 20 (twice the growth rate, as the historical PE for Skechers has been higher). Additionally, we already have the minimum acceptable return rate at 15%. Doing the calculations, we come up with the sticker price (some call it fair value or intrinsic value) of $41,67. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Skechers at a price of $20,84 (or lower, of course) 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 2022 numbers, it is as following: The operating cash flow was 659. The capital expenditures were 343 I tried to look through their annual report to see how much of the capital expenditures were allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect 70% of the capital expenditures to be used for maintenance. This means that we will use 240 in our further calculations. The tax provision was 113. We have 154,733 outstanding shares. Hence, the calculation will be as follows: (659 - 240 + 113) / 154,733 x 10 = $34,38, in Ten Cap price.

The last calculation is the Payback Time. I also described in "MY STRATEGY". However, since Skechers has a negative free cash flow in 2022, it is not possible to make this calculation.

I believe that Skechers is a great company. I really like the management too. I particularly like that Skechers is focusing on direct-to-consumer sales, as this strategy should improve profit margins in the future. There are some risks associated with investing in Skechers. A short-term risk is the current condition of the global economy, which could result in consumers reducing discretionary spending. The more long-term risks are competition and reliance on manufacturers. These risks need to be monitored when investing in Skechers. I would also like to see Skechers delivering higher ROIC (Return on Invested Capital) and free cash flow in the future. However, there are also some intriguing prospects for Skechers moving forward. I believe that Skechers is the epitome of an athleisure brand, and I anticipate significant growth in the athleisure market in the future. Furthermore, Skechers is also gaining market share, which is always nice to see. Nevertheless, we are mindful of the uncertain global economy, and I would require a minimum of a 50% discount on the intrinsic value before considering opening a position in Skechers. Hence, Skechers will be interesting if it trades at the Ten Cap price of $34,38.

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