Is Skechers an under the radar investment opportunity?
Opdateret: 3. maj
When I attended the Phil Town workshop, I made an analysis of Skechers as an investment opportunity. A year has gone by since then, and I believe it was time to update my analysis.
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.
Personally, I really like the shoes from Skechers. I believe their shoes are great, as they are some of the most comfortable shoes out there due to their memory foam. 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. I decided to analyze the company when I did the Phil Town workshop, and it has been on my watch list ever since. However, I don't currently own any shares in Skechers.
Skechers is a company that was founded in California in 1992 and is now the third biggest athletic footwear company in the United States with a market cap just above $7 billion. Their products are sold in more than 170 countries around the world. Over the years they have developed a strong brand moat throughout the world. Later I will go through the big five numbers to see how strong the moat is but let us go through the management first.
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 have determined that Skechers has a brand moat. I really do like the management as well. Now let us investigate the big five numbers in order to see if Skechers does live up to our requirements for a strong moat. In case you want an explanation about what the big five numbers are, you can have a look at "MY STRATEGY" on the website.
The first number we will look into 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 the benchmarks. In general, Skechers has some solid numbers. The oldest benchmark is a bit below the requirements but by no means alarming. I don't want to put any importance to the latest benchmark, as a company such as Skechers has been significantly hurt by the pandemic.
The next numbers we will investigate are the Sales Growth Rates. The numbers are a bit of a mixed bag. While the latest benchmark is bad due to the pandemic, we also see some underwhelming numbers in most of the other benchmarks. Once again, they are by no means alarming but you don't want to see too many years with only a 3,4 % sales growth rate.
The next numbers are the EPS Growth Rates. Ouch, this is certainly not what you want to see. The numbers are very bad in almost all the benchmarks, and it is a bit concerning that you have a tendency of negative numbers in all the latest benchmarks. The EPS growth rate is just one out of four growth rates, and it is the combination of the numbers together that should make you decide if the company is worth investing in, so let's go through the next two growth rates before taking a decision.
Phil Town says that the Equity Growth Rate is the most important of the four growth rates, as they tell us that the business can accumulate surplus. The numbers for Skechers certainly look good, all the benchmarks, excluding the last one, are well above 10 %. I find it reassuring that Skechers actually perform well in the latest benchmark as well, despite being hurt by the pandemic.
Finally, we investigate the Cash Growth Rates. Overall, the numbers look good despite the last benchmark, which is understandable an outlier. There is one benchmark that doesn't quite meet the requirements but combined with all the other numbers, I believe that there is no reason for concern.
To shortly summarize the five numbers from Skechers. The numbers are a bit of a mixed bag. The ROIC is solid, which is eventually the most important. The equity growth rate is the most important of all the growth rates, and it shows solid numbers as well. The cash growth rate is good if you ignore the last year. However, the sales growth rate and the EPS growth rate are a bit concerning, and if you decide to invest in Skechers, it is something that is worth monitoring. Overall, though, I would feel comfortable to open a smaller position in Skechers based on the numbers.
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 current cash flow. Once I have done the calculations on Skechers we see that they can pay off their debt in 6,89 years, which is higher than you would like to see. However, it is due to Skechers taken on additional debt lately, due to the management's recent expansion plans on both retail and distribution fronts. For instance, they have opened new distribution centers in Colombia and the United Kingdom. Their 1,5 million square foot China distribution center is also expected to be implemented in 2021.
Like with all other companies, there are some risks when investing in Skechers as well. We do see some challenges with Skechers in the near future. One is the pandemic that is not quite over yet. We saw in the numbers how the pandemic hurt Skechers last year, and if we see more lockdowns around the world, it could hurt Skechers short-term. Another risk is if the brand goes out of fashion. Fashion changes all the time, and it could happen to Skechers as well. However, it is where the brand moat comes into play and as Skechers has gone from nothing in 1992 to one of the biggest brands in athletic footwear in the United States in 2021, I believe they have solidified themselves as a brand with a future. Finally, the debt is a bit higher than I would like and if the management's expansion plans don't go as planned, it could be a concern.
There are also plenty of potential for Skechers. During the pandemic they experienced a triple digit growth in e-commerce in 2020, and they plan on growing this further in the future. According to the company they want to invest in long-term growth by further enhancing their digital capabilities with a planned rollout of e-commerce platform around the world. Furthermore, it seems like Skechers is on the right path after the bad year last year. In the latest quarter earnings, they had record quarterly sales and revenues. The sales saw an increase of 127 % compared to the same quarter in 2020 and 32 % increase compared to 2019, while the revenue increased more than 100 % compares to the same quarter last year, and more than 30 % compared to 2019.
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 from 2019, in order to make the calculations more conservative, as it was a bit lower than the current one, in 2019 it was 2.22, Estimated future EPS growth rate of 13 The growth estimates from Finbox put it to be 13,7 %), Estimated future PE 26 (in this case we multiply our predicted growth rate with two, as this is lower than the historical highest P/E) 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 $48,43, 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 $24,22 (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". To do so, we need some numbers from their financials, keep in mind that all numbers are in millions. The operating Cash Flow last year 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 1.52 and a growth rate of 13 %, if you want your purchase back in 8 years, the PAYBACK TIME price is $21,91.
All in all, I do feel comfortable in opening a position in Skechers if I can get it at a 50 % discount to intrinsic value. I like their moat, I like their management and they have shown consistent growth throughout the last decade. I do expect short term challenges for Skechers, but I feel comfortable they will get through them. Personally, I will open a position once it hits my Margin of Safety price at $24,22.
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