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Skechers (SKX) Q1 Earnings & Sales Beat; Stock Surges

After reporting in-line earnings in the final quarter of 2015, Skechers USA Inc. SKX commenced 2016 on a high note on the back of a sturdy performance at its international wholesale business. The company delivered first-quarter earnings of 63 cents a share that comfortably beat the Zacks Consensus Estimate of 53 cents. Quarterly earnings of this Manhattan Beach, CA-based footwear retailer also increased from 37 cents earned in the year-ago quarter.

Despite a soft domestic retail environment and foreign currency headwinds, the top line witnessed solid growth in the reported quarter. Moreover, management hinted that sales would remain strong, going forward. The upbeat performance and positive commentary were enough to provide impetus to the stock that gained roughly 7.5% in the after-market trading hours yesterday.

Net sales of $978.8 million beat the Zacks Consensus Estimate of $890 million and surged 27.4%, driven by aggressive marketing initiatives, product innovation across multiple categories, and healthy performance across all revenue channels. Management now projects second-quarter 2016 net sales in the band of $875–$900 million.

Nevertheless, Skechers has been steadily gaining ground by offering stylish and casual shoes at a more compelling price than conventional athletic brands. Management highlighted that strength witnessed across men's, women's and kids’ lines of products was backed by the worldwide acceptance of Skechers Sport, Relaxed Fit and sporty styles for children. With increased focus on the new line of products, cost containment, inventory management, a global distribution platform and sturdy backlogs, the company remains confident of sustaining the growth momentum in 2016.

Gross profit for the reported quarter surged 30% to $432.2 million, whereas gross margin expanded 90 basis points to 44.2%. Operating income came in at $138.6 million, up 57.1% from the prior-year quarter, while as a percentage of net sales, it increased 270 basis points to 14.2%, buoyed by improved gross margin and SG&A leverage.

Segmental Sales Synopsis

The domestic wholesale business recorded revenue growth of 12.1%, reflecting a jump of 12.1% in pairs shipped.

Skechers’ international wholesale business revenues, which constituted 42.9% of sales, soared 47.1% on the back of a 46.1% rise in wholly-owned subsidiary sales as well as an improvement of 8.5% in distributor sales.

On a combined basis, retail business sales grew 23.2%, whereas comparable-store sales advanced 9.8%. Domestic retail sales rose 15.3%, while comparable-store sales increased 8.2%. International retail sales soared 59%, whereas comparable-store sales improved 17.7%.

Store Update

Skechers operated 872 branded stores internationally, owned and operated by joint ventures (JVs), franchisees and distributors at the end of the reported quarter. Of the total, 451 are distributor-owned or franchised retail stores; 327 are JV stores, and 94 are company-franchised stores in countries where Skechers directly distributes its products.

During the first quarter of 2016, 78 third-party stores were opened and 1 store was closed. So far in the second quarter, Skechers has opened 15 third-party stores. The company plans to open 160–165 more stores in 2016.

Skechers operated 525 company-owned retail outlets globally, comprising 130 international locations at the end of the quarter. During the quarter, the company opened 9 stores, and has opened 2 stores so far in the second quarter. The company expects to open approximately 55 to 65 more outlets during the year, including 20 to 25 outlets during the second quarter.

Management aims at a total Skechers store base of over 1,600 by the end of 2016.

Strategic Initiatives

Management is focused on product innovation, additional Skechers store openings and increasing distribution channels by entering into international distribution agreements to boost sales and profitability. Moreover, Skechers’ international business remains a major sales growth driver for the company with Europe being a significant market outside the U.S. The company is also enhancing its European Distribution Center. Moreover, Skechers is poised to enhance its global reach in the footwear market through its distribution networks, subsidiaries and JVs.

Other Financial Aspects

This Zacks Rank #3 (Hold) company ended the quarter with cash and cash equivalents of $443.8 million, long-term borrowings (net of current installments) of $68.5 million, and shareholders’ equity of $1,438.8 million, excluding non-controlling interest of $60.1 million. Capital expenditures incurred during the quarter were $35.2 million. Management now envisions capital expenditures of about $45–$50 million for the remainder of 2016.

Stocks to Consider

Some better-ranked stocks in the retail sector include Express Inc. EXPR and American Eagle Outfitters, Inc. AEO, both sporting a Zacks Rank #1 (Strong Buy), and Columbia Sportswear Company COLM, carrying a Zacks Rank #2 (Buy).

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