Company Overview: Skechers U.S.A., Inc. (NYSE: SKX) is a designer and marketer of lifestyle footwear for men, women, and children and Skechers Performance footwear for men and women. Its operating segments are 1) Domestic Wholesale, which distributes products through domestic wholesale distribution channels, 2) International Wholesale segment, which sells products to department stores and speciality retail stores through its joint ventures and subsidiaries and 3) Direct-to-Consumer, which offers products through e-commerce, concept stores, factory, and warehouse outlet stores.

SKX Details

Key Takeaways from FY21 (ended December 31, 2021)

• Surge in Revenue: In FY21, the company's sales amounted to USD 6.29 billion, representing a 36.71% YoY increase from USD 4.60 billion in FY20.
• Improvement in Operating Margin: SKX reported an operating profit of USD 598.19 million for FY21 compared to USD 133.68 million in FY20, representing a higher operating margin of 9.5% vs. 2.9% for FY20, attributable to 661 bps reduction in Total operating expense ratio.
• Sharp-Uptick in Bottomline: In FY21, the firm reported net earnings of USD 741.50 million, up from USD 98.56 million in FY20, with diluted earnings per share (EPS) of USD 4.73.

Revenues & Operating Profit Key Highlights; Analysis by Kalkine Group

Other Key Takeaways from FY21 results  

• SKX increased its store count by 415 stores from 3,891 stores on December 31, 2020 to 4,306 stores as of December 31, 2021.
• On February 03, 2022, RNR board approved a three-year share repurchase program to buy back common shares worth up to USD 500.0 million, effective January 31, 2022.
  

Recent Developments:

• On February 24, 2022, SKX was named the official footwear sponsor of the US Open Pickleball Championship. At the event, which begins April 23, 2022, in Naples, FL, the performance SKX will debut a line of Skechers Pickleball footwear for men and women.
• On January 13, 2022, SKX announced that Amanda Kloots, a television personality, dancer, and fitness entrepreneur, has joined the Company's team of famous ambassadors. Kloots will be featured in a multi-platform campaign in North America to promote the global lifestyle and performance brand's footwear and apparel offerings.
• On December 20, 2021, SKX announced that its operations had been transferred from a third-party distributor to its subsidiary to maximise the brand's growth possibilities in the Philippines Skechers USA Philippines, Inc.

Segment Wise Results FY21

• International Wholesale – This segment accounted for 14% of the revenue in FY21, reported a YoY revenue growth of 34.00% to USD 3.03 billion, attributable to a 27.9% rise in a volume complemented by 4.8% increase in average selling price (ASP) per unit.
• Direct-to-Consumer - This segment accounted for 98% of the revenuesin FY21, with sales rising by 50.17% YoY to USD 1.82 billion, owing to a 26.0% rise in volume and a 19.1% increase in ASP per unit.
• Domestic Wholesale - This segment accounted for 88% of the revenues in FY21 witnessed a revenue uptick of 27.65% YoY to USD 1.44 billion, due to a 26.3% increase in the number of units sold and favourable ASP per unit.

Balance Sheet & Liquidity Position

• Decline in Cash Position: The company exited FY21 with a cash balance (including short-term investments) of USD 894.86 million, 39.19% less than USD 1.47 billion at the end of FY20.
• Decrease in Cashflow from Operations: Operating cash inflows reduced to USD 212.15 million in FY21 from USD 331.45 million in FY20.
• Significant Reduction in Debt: SKX's reported total outstanding debt of USD 341.61 million as of FY21 end, significantly lower than the total debt of USD 734.96 million as of December 31, 2020.

Key Metrics: In FY21, SKX's Gross and Net margins were 49.3% and 13.0%, higher than 47.6% and 2.8%, respectively, reported in FY20. Its Debt/Equity ratio has been improved to 0.10x in FY21, from 0.30x in FY20.

Leverage Profile; Analysis by Kalkine Group  

Top 10 Shareholders: The top 10 shareholders together form around 57.08% of the total shareholding, while the top 4 constitute the maximum holding. Fidelity Management & Research Company LLC and The Vanguard Group, Inc. hold the maximum stake in the company at 14.85% and 9.11%, respectively, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group 

Risk Analysis

• Competition Risk: The company competes in the highly competitive footwear industry, where it faces direct competition from more significant, more well-funded, technologically advanced manufacturing and marketing players. If this pattern continues, the company may experience pricing pressure and market share loss, both of which might hurt its bottom line.
• Supplier Concentration Risk: SKX relies on a small number of contract manufacturers for its products. In FY21, its top five manufacturers accounted for 37.1% of total production, with the most prominent manufacturer accounting for 18.0% of total procurement. Any breach of contract by these vendors could jeopardise the company's operations.
• Operational Restrictions: Many of SKX's large wholesale customers have closed most of their locations, lowering their revenue. As a result, store closures and operational constraints have had and will continue to have a materially adverse effect on the company's operations and cash flows.
• Delay in Supply Chain: Product from third-party manufacturers is delivered by cargo ship to the company's domestic distribution centre in Los Angeles and Long Beach, where activities have been halted. Any further protracted or subsequent disruptions or shipment delays might result in other negative impacts on its product pricing, which could materially harm its operations.

Outlook

• Looking ahead, SKX forecasts Q1FY22 sales to be in between USD 1.675 – 1.725 billion and diluted EPS ranging between USD 0.70 – 0.75.
• For FY22, the company expects to generate revenues in the range of USD 7.0 – 7.2 billion, with diluted EPS of USD 2.70 – 2.90.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company's FY1 trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: SKX's share price has corrected 23.72% over the last nine months. The stock is currently trading close to lower-band of its 52-week range of USD 33.50 to USD 55.87. We have valued the stock using the EV/Sales multiple-based illustrative relative valuation method and arrived at a target price with an upside of low twenties (in percentage terms). We believe that the company can trade at a slight premium compared to its peer's average, considering the robust financial performance, significant reduction in debt and growth in number of stores. We have taken peers like Under Armour, Inc. (NYSE: UAA) and PVH Corp. (NYSE: PVH). Considering the strong top and bottom-line performance, solid balance sheet, increase in number of stores, strong margin profile, encouraging outlook, and current valuation, we give a "Buy" recommendation on the stock at the closing price of USD 37.04, up 8.11% as of March 08, 2022.

SKX Technical Chart, Data Source: REFINITIV, Analysis by Kalkine Group

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors' appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined

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Resistance: A level where-in the stock prices tend to find resistance when they are rising, and the uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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