FOOTWEAR—Investor Worries Dim Skechers’ Time in the Limelight

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The week of July 23 was a hectic one for Manhattan Beach footwear company Skechers USA Inc. On the newsstand cover of its Aug. 6 issue, Forbes was calling Skechers “The Hottest Act in Shoe Biz.” Also on the cover: an arresting photo of bare-bellied pop star Britney Spears decked out in a pair of Skechers’ hot-selling sneakers. Best of all, the photograph Forbes wound up using on its cover was a promotional shot provided by Skechers one already being used as part of an overseas ad campaign.

For the publicity savvy company, it doesn’t get much better than that. “I think everyone understands what we do with advertising and imaging,” said Chief Financial Officer David Weinberg. “We do that quite well.”

But instead of celebrating as the magazine hit newsstands around the country, Skechers executives were scrambling to stave off a collapse in its stock price. Rumors were smoldering that Skechers would miss the ambitious earnings expectations for the second quarter. Analysts were lowering their earnings estimates due to rising expenses and concerns about the weak retail environment.

Those concerns were partly borne out.

Sales held up, but on Monday, July 23, Skechers pre-announced lower-than-expected earnings, as the costs of expansion took a toll on the bottom line.

“Our announcement was sort of to tell the world that whatever they may be hearing out there, our business is fine. That our sales volume is there, that our (gross) margins are there, that our (order) backlog is there,” Weinberg said.

Investors weren’t convinced. By July 26, when Skechers issued its official second-quarter results, the stock had fallen by 24 percent over six trading days, to $20.30. Last week, it was still under $21.

By most measures, Skechers’ results were impressive. Earnings for the quarter grew by 40 percent, to $16.8 million (44 cents a diluted share), compared with $12 million (33 cents) for the like period a year ago. Revenues were $230.9 million vs. $163.9 million.


Worries about expansion

But at least one analyst worries about Skechers’ ability to keep expanding in a precarious economy. While competitors are looking to hold down expenses, Skechers spent heavily on expansion in the second quarter. Operating expenses surged 46 percent year-over-year to $69.7 million, or 30.2 percent of sales versus 29 percent.

Advertising costs rose 50 basis points to 8.2 percent of sales, or $18.9 million, according to Salomon Smith Barney apparel, footwear and textiles analyst Carole Pope Murray. In addition to the formidable advertising commitment which Weinberg says hasn’t slowed Skechers added to its sales and distribution capacity in Europe, leased a former eToys distribution warehouse in Ontario, Calif., and hired more staff to launch its newest product line, “Skechers by Michelle K.”

“We continue to have concerns that a slowdown in sales will impact Skechers’ earnings disproportionately, as expenses are on the rise to support the high growth of the brand,” Pope Murray wrote in a July 26 note.

Another worry: Skechers’ inventories rose by 67.5 percent in the second quarter, outpacing a 50 percent growth in order backlog. “We believe these levels are high, and could pose problems given the tough retail climate,” Murray wrote.

But the reported inventory numbers don’t give a full picture, said Weinberg, as the bulk of the buildup is new merchandise for fall that’s in transit from overseas not stale items sitting on warehouse shelves.”Our commitment to purchasing product and backlog are pretty much in lockstep,” he said.

Unlike competitors such as Nike Inc., Kenneth Cole Productions Inc. and Timberland, Skechers has been able to maintain strong sales growth during the economic slowdown. A main component of its success is derivative styling (some call their shoes knock-offs) and lower prices.

Weinberg said the goal is to create a lifestyle brand comparable to Gap Inc. and Nike. But others see another parallel to L.A. Gear, the footwear company that collapsed in 1992, shortly after Skechers Chairman and Chief Executive Robert Greenberg and his son, President Michael Greenberg, were forced out. There, the elder Greenberg’s zealous promotion was considered a big factor in undermining the brand’s value. (Robert and Michael Greenberg declined to comment for this story.)

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