Shares of Skechers USA sunk $1.26, or 4.5 percent, to $26.58 Thursday after Cowen & Co. lowered the company’s rating on the stock to “market perform” from “outperform” due to concerns over high inventories and foreign currency headwinds.

Cowen’s earnings target for the year on Skechers was trimmed to $1.71 from $1.90.

In a note to investors, John Kernan, the lead analyst at Cowen in the space, noted that Skechers’ inventory levels were up 23 percent in the second quarter, “which give us concern, particularly as FX headwinds in key emerging markets build.”

Cowen said consensus estimates are forecasting operating margin expansion of 23 basis points in FY19, “which looks optimistic.”

For the current year, Cowen trimmed the company’s estimate to $1.67 from $1.71 previously, up against $1.70 Cowen’s new FY19 EPS estimate of $1.71 is well below consensus of $2.02.

Wrote Kernan, “Our concerns include: 1) gross margin is at risk given a moderating U.S. wholesale business; 2) a less robust product cycle; 3) potential for FX transactional headwinds, recall that SKX does not hedge its exposure and 4) elevated inventory levels.”

Kernan noted that Skechers has “potentially more emerging market FX exposure than any company we cover given the distributor, subsidiary and JV structure of its international business.” Skechers’ international wholesale and retail combined represented 51.6 percent of revenues for the second quarter and 52.8 percent for the first six months.

“We estimate that at current rates, FX exposure could create a 3.3 percent to 4.3 percent sales headwind and could have a $0.13 to $0.18 per share negative impact on EPS,” wrote Kernan. “We estimate that consensus is embedding an acceleration in constant currency sales into FY19 which appears aggressive.”

Other concerns on Skechers include ComScore data showing that Skechers mobile traffic and desktop traffic are both down double-digits, North America same-store sales seeing a declining trend early in the third quarter and channel checks indicating Fila is gaining significant space at Kohl’s and family footwear channels.

Finally, despite Skechers’ “cheap” valuation versus the company’s peers, Kernan sees no catalyst to drive the stock up given investor concerns over the company’s heavy focus on top-line growth and complex international distribution. Wrote Kernan, “At the current valuation there is clearly concern that G&A growth is being done to sell units into new distribution rather than build the brand, and that sales will moderate significantly if management slows spending. Management will need to overcome this aspect to see valuation expand.”

Cowen reduced the company’s price target to $28 from $32. Skechers shares fell sharply after reporting second-quarter earnings that fell well short of guidance while providing a soft outlook for the third quarter. Skechers closed 2017 at $37.84.

Photo courtesy Skechers