We hold a Neutral recommendation on Skechers USA, Inc. (SKX) designer, marketer and distributor of footwear, with a target price of $24.00. Moreover, the Zacks #3 Rank, which translates into a short-term ‘Hold’ recommendation, correlates with our long-term view.
Skechers’ sustained focus on a new line of products, opening of new retail stores and distribution channels, and the development of new international distribution agreements (in India and Mexico), should facilitate the increase in sales and profitability. With growing operations in China, Hong Kong and Chile, the company remains on track to continue its growth momentum in fiscal year 2010.
The company is also seeking opportunities, both domestic and international, to expand its brand name to composite product segments by entering into licensing deals. Most recently, Skechers entered into a licensing deal with the luggage maker, Olivet International. The company has also signed deals with other licensees to produce children’s apparel, bags, sunglasses, legwear, medical scrubs and leather accessories.
This multi-brand strategy enables the company to roll out new products without cannibalizing its existing brands and helps to expand the targeted demographic profile of customers.
The company’s international business provides an enormous second leg of growth, in our opinion. Skechers through its distribution networks, subsidiaries and joint ventures is poised to enhance its global reach in the footwear market. Management believes that its international wholesale business will climb from 25% to 30% of total sales in the long run.
Skechers portrays a healthy balance sheet with cash and cash equivalents of $273.3 million at the end of second-quarter 2010, and a debt-level of $30.4 million. The blend of ample liquidity, in-demand inventory and innovative products, positions it to capitalize on future growth opportunities.
However, the company faces intense competition in the footwear industry from big guns like Nike Inc. (NKE), The Timberland Company, Kenneth Cole Productions Inc. (KCP), Adidas, and Puma on several attributes such as style, price, quality, comfort and brand name.
Moreover, we remain cautious about the economic environment and a sluggish job market. The company’s customers remain sensitive to macroeconomic factors including interest rate hikes, increase in fuel and energy costs, credit availability, unemployment levels, and high household debt levels, which may negatively impact their discretionary spending, and in turn, the company’s growth and profitability.