Skechers: Jumping Forward With Top- And Bottom-Line Growth (NYSE:SKX)

Robert Way Consumer Discretionary-sector stocks have struggled against the S&P 500 in the past year. The Consumer Discretionary Select Sector SPDR Fund (XLY) is up 11% in total return over the last 12 months, which is solid, but when compared to the SPX, the consumer ETF sports negative alpha of more than 12 percentage points. It’s been a tough go of it for many makers of goods as consumers focus on travel and other services. And we’ve seen volatility in shares such as Nike (NKE) and Lululemon (LULU). I have a buy rating, though, on Skechers (NYSE:SKX). The earnings growth profile is very strong while its technical situation is robust. And with a reasonable valuation situation, it’s worth considering from a GARP perspective. Consumer Discretionary Stocks Continue to Lose Ground vs the S&P 500 BofA Global Research According to Bank of America Global Research, Skechers is the third-largest global athletic footwear company and was founded in 1992. Roughly half of the business comes from the wholesale channel, and the company is nearly evenly split between US/international revenues. Back in April, Skechers reported a very strong set of quarterly results. Q1 GAAP EPS of $1.33 topped the Wall Street consensus estimate of $1.10 while revenue of $2.25 billion, up 12.5% from year-ago levels, was a significant $50 million beat. Wholesale revenue rose close to 10% annually while its DTC segment soared with a 17.3% yoy increase. The company also repurchased shares during the quarter, so while there is no dividend with SKX, there still are shareholder-friendly activities ongoing. Driving the strong quarter were impressive gross margins, more than offsetting an increase in operating expenses. Across regions, US sales rose 8%, EMEA posted a 17% jump, and its APAC area enjoyed a big 16% revenue increase. Along with the earnings beat, the management team raised its full-year 2024 EPS guidance – it will be interesting to hear from the company in July regarding expansion initiatives and how the firm plans to handle rising costs. Shares bounced 11.2% following the earnings release and the options market has priced in a 5.9% earnings-related stock price swing when analyzing the at-the-money straddle expiring soonest after the July Q2 report, according to data from Option Research & Technology Services (ORATS). Key risks include a global macro slowdown and reduced consumer spending, which would hurt the industry’s sales. Also, rising labor and input costs could result in a reversion to long-term margin trends for SKX. On earnings, analysts at BofA see operating EPS rising close to 20% this year with continued double-digit profit jumps in the out year through 2026. The current Seeking Alpha consensus estimates are even more bullish. It shows $4.10 of current year non-GAAP EPS, rising to $4.84 in the out year and $5.96 by 2026. Skechers’ top line is forecast to increase at a high rate between 10% and 11.1% over the next two-plus years. While the company does not pay dividends, the current free cash flow yield is 5.8% on a trailing basis, which is impressive for a high-growth firm. Skechers: Earnings, Valuation, Free Cash Flow Yield Forecasts BofA Global Research Given the high EPS growth rate, I’d like to take a PEG ratio valuation approach with SKX. If we assume a long-term EPS growth rate of 14% and a PEG of 1.5, near the sector median, then a P/E of 21 is appropriate. Assuming $4.50 of non-GAAP per-share profits over the coming 12 months, then the fair value is near $95, making shares solidly undervalued today. Skechers: Impressive Free Cash Flow, Reasonable PEG Valuation Seeking Alpha Compared to its peers, Skechers features a mixed valuation rating while its growth trajectory is quite strong. Profitability metrics are healthy and so too is the review of recent sell-side EPS revisions following the big top and bottom line beat back in April. Finally, share-price momentum is very robust today – among the best charts you will find in the consumer space ahead of bullish seasonal trends through July for the stock. Competitor Analysis Seeking Alpha Looking ahead, corporate event data provided Wall Street Horizon shows a Q2 2024 earnings date of Thursday, July 25 AMC with no other volatility catalysts seen on the calendar. Corporate Event Risk Calendar Wall Street Horizon The Technical Take With a sanguine EPS path forward and a reasonable valuation given the growth situation, SKX’s chart is attractive for momentum investors. Notice in the graph below that shares broke above key long-term resistance in the $55 to $57 range late last year and then successfully defended that zone on a pullback from mid-Q1 through April. Then, following the EPS beat, a large gap higher took place, helping to send the stock to new all-time highs. SKX touched above $75 earlier this month as the RSI momentum gauge at the top of the chart hovers in a bullish zone. With a rising long-term 200-day moving average, the bulls control the primary trend. Moreover, the $24 range from late 2021 through Q4 last year suggests that the stock could take a pause here at the target zone in the mid-$70s, but longer-term trends are conducive for further upside. Overall, SKX is a high-momentum growth stock in a sagging sector. Support is near the 50dma at $67. Skechers: Bullish Upside Breakout, Strong Momentum Trends Stockcharts.com The Bottom Line I have a buy rating on Skechers. This consumer growth stock shows solid EPS trends ahead with strong international and DTC sales, resulting in a GARP opportunity.

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