Making a Fashion Statement

06/09/2008 12:00 am EST

Focus: STOCKS

Vahan Janjigian

Editor, Bottom Line's Money Masters Stock Report

Vahan Janjigian, editor of Forbes Growth Investor, says designer and retailer Skechers USA has its finger on the pulse of teenagers and other trendsetters.

Skechers USA (NYSE: SKX) designs and sells footwear for men, women, and children in over a hundred countries. Its core demographic consists of 12- to 24-year-old fashion-conscious consumers. Marketing efforts include endorsements by pop culture figures Ashlee Simpson, JoJo, Ashley Tisdale, and Vanessa Hudgens.

In addition to its namesake lines, SKX offers a number of licensed brands. Unltd., Rhino Red, and Red by Marc Ecko address urban fashion trends. Zoo York targets skateboarders. Mark Nason and Siren by Mark Nason market Italian-style footwear designed for dress casual outfits. SoHo Lab offers contemporary designs for 18- to 34-year-old men and women.

Domestic wholesale is the company’s largest distribution channel, accounting for 60% of 2007 revenues, including sales to department stores, specialty stores, athletic shoe stores, and other retailers.

The retail channel, which produced 20% of revenues, consists of SKX’s own concept, factory outlet, and warehouse outlet stores. SKX operates 179 retail stores in the US, nine in Europe, and four in Asia. The international wholesale channel generated 19% of sales, 54% of which went directly to retailers and [the remaining] 46% to distributors.

SKX’s shoes are not cheap, but are attractively priced [versus] those made by competitors. The company is generating growth by entering new footwear categories and expanding its geographic footprint. 

Domestic and international wholesale revenues grew 7.5% and 45.7% in 2007. First-quarter net sales rose 11.6% year-over-year to $384.9 million. International wholesale surged 39% to $99.5 million. Growth was particularly strong in Europe, Canada, and Brazil.

The gross profit margin expanded 152 basis points to 44.73%. Lower marketing expenses helped boost the operating profit margin by 169 basis points to 12.54%. Net income jumped 37.4% to $32.8 million or 70 cents per share.

[Skecher faces] aggressive competitors, inherently unpredictable fashion trends, and prolonged weakness in the US economy. Yet we believe the company’s prospects are excellent. One industry report claims that SKX and Nike are the only US brands worth at least $1 billion that are still growing market share. Based on early second-quarter results, management expects sales and earnings per share to grow 4% and 19%, respectively, year over year.

In addition, customers are tolerating price increases. SKX should also get a boost from the launch of Bebe Sport footwear, which targets 21- to 35-year-old women. SKX also plans to open 20 to 25 stores worldwide by year-end. An aggressive push into China should generate $10 million to $15 million in annual sales by year-end. As SKX expands abroad, the international wholesale channel should eventually account for about a third of the company’s overall revenues.

(The stock closed above $22 Friday—Editor.)

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