Shares of Skechers USA have fallen 20% since June 18, apparently over fears of discounts, slower sales, and the evolution of toning product. But in a note entitled “Negative Chatter Unwarranted,” Chris Svezia, an analyst at Susquehanna International Group, wrote that the entire footwear sector takes a breather in June and early July ahead of BTS and the concerns over Skechers were overdone.
The stock closed Wednesday at $34.77 versus $43.85 as of the close of June 18.
He wrote that as Skechers' management indicated, the planned 20% discount of G1 Shape-Ups was designed to allow retailers to clear inventory ahead of the next generation of toning footwear. Since its launch, retailers have not been allowed to discount Shape Ups below $100 (typically $10 off MSRP of $110), including BOGO programs. He said that despite the toning item's continued strong demand, the discounting is necessary to make space for the next generation is that much better in styling and function.
“While the G1 has sold several million pairs, the styling has not been overly positive compared to what is hitting the market now. The discount window is expected to last three weeks.”
In one case, Macy's was running an “Event Price” on Skechers Shape-Ups for $79.99, down from $100 regular price, in a campaign that runs until August 4. An extra 15% is taken off (bringing it down to $67.99) if acquired by July 20.
Svezia, who has a “positiive” or buy rating on the stock, also said consumer's preferences will likely evolve away from the rocker bottom style (mainly SKX) to lower profile looks. But he said SKX's product offerings for the balance of 2010 all embody a lower profile, more athletic outsole and that company shouldn't be hurt in any shift.
“Ultimately, we still believe there will be a customer that will continue to buy the G1 shoe, but we never expected (nor did SKX's management) that the G1 Shape Ups would be the growth driver beyond this year,'
wrote Svezia.
He also said SportsScanInfo data shows that new product is testing very well, and the kids business remains strong.
Svezia concluded, “We are reiterating our target EV/EBITDA multiple of 8x and $49 price target. We expect continued backlog acceleration during 2Q as orders increase for the key back-to-school season. In addition, we feel the fact that the core business (outside of toning) has gained meaningful momentum should increase investor confidence that this is not just a one product brand.”
