Skechers USA Inc. shares took a 23% nosedive in Friday trading after the shoe brand reported an earnings miss and was downgraded at least twice by analysts concerned about the company’s spending.
SkechersSKX, -22.02%late Thursday reported earnings per share of 29 cents, down from 38 cents a year ago and below the 41-cents-a-share FactSet consensus. Global same-store-sales growth of 4.5% was just below the 4.7% FactSet guidance.
Sales rose to $1.135 billion, above the $1.130 billion FactSet consensus.
“We no longer have confidence in the earnings trajectory of Skechers,” wrote Wells Fargo analyst led by Tom Nikic, who downgraded Skechers shares to market perform from outperform. They also cut their price target to $24 from $40.
“Basically, there are question marks up and down the P&L that we simply can’t get comfortable with,” analysts wrote.
Analysts highlight a number of issues, including SG&A (sales, general and administrative) expense growth, which shows no signs of moderating, and third-quarter revenue guidance that doesn’t reflect the strong quarter that executives promised three months ago.
Skechers SG&A totaled $484.9 million for the second quarter.
“Simply put, with top line no longer beating plan, margins/EPS heading in the wrong direction (we now forecast EPS down 6% this year), a remarkably difficult compare ahead for Q4 (net sales +27%) and significant uncertainty regarding FY19 earnings power, we don’t view Skechers shares as an outperformer over the near-term,” Wells Fargo said.
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Susquehanna Financial Group also downgraded Skechers, to neutral from positive, and cut their price target to $26 from $40. Analysts led by Sam Poser called the after-hours share plunge of more than 20% “unfortunately deserved.”
Analysts say Skechers should curb its expenses, which could hurt sales growth.
“While we are confident that management continues to work to improve the Skechers brand, we believe it would be prudent to better align shareholders’ and management’s interest,” Susquehanna wrote.
Wedbush analysts say the results show that the company is focused on growth over profit.
“In the medium term, we don’t see too much changing with solid revenue growth funded by unpredictable operating costs,” analysts led by Christopher Svezia wrote in a note. “With estimates continuing to go lower and little investor comfort beyond the current quarter, it is difficult for us to get constructive despite significant downward moves in the stock.”
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Wedbush maintained its neutral stock rating but cut its price target by $5 to $28.
Cowen pinpoints the growth in China, which required a $29.4 million incremental expense, 45% of the total expense growth.
“Management’s focus on sales growth (with inventory well above sales) and distribution growth over profits and free cash flow are the biggest points of contention with investors we interact with,” wrote analysts led by John Kernan.
Among the suggestions to improve valuation, “communicate to investors that the G&A spending is building the brand globally and that a 12% to 13% operating margin, which could produce $4-to-$5-plus in EPS, is a long-term goal that can be achieved with near-term investments,” Cowen said.
Cowen rates Skechers share at outperform, and cut their price target to $32 from $41.
Skechers shares are down 34.4% for the year to date while the S&P 500 index SPX, +0.08% is up nearly 5% for the period.
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