Skechers: Ignoring Obvious Value

Old news now, but Skechers (SKX) second quarter was less than stellar. It was sort of a replay of the December '07 quarter, weak top line and a miss on the bottom line. Gross margin looked great, but G&A expenses deleveraged the sales line. A positive swing in interest expense and other income boosted the eps comp by 2 cents, while a lower tax rate also modestly detracted from earnings quality. Inventories rose 31%, so shoppers better show up in Q3 or that may become a burden.

The midpoints of management guidance for the September quarter are revenues, up 9.5%, and earnings per share, up 15%. That suggests positive operating leverage, which was exceptionally good in the March quarter, will return. To be fair, the Street does not seem to do a great job of modeling earnings for the company, with the Sept '07 quarter 21% ahead of the Street, December 10% below, March 17% ahead, and then June '08 9% below consensus. Such a pattern suggests simply ignoring expectations and focusing on the trend of growth and quality of earnings. SKX has an easy comparison for the full year 2008 and coupled with compelling valuation, makes it a stock worth examining.