Skechers recently posted a monster beat of Wall Street expectations for revenue and earnings per share, yet the traded lower by 6.5% in the session following the release. In reaction to the solid beat, analysts have raised estimates for the remainder of 2014 and 2015. Those increases in earnings estimates have pushed the stock to a Zacks Rank #1 (Strong Buy) and today it is the Bull of the Day.
Skechers makes and sells footwear for men, women and children. As of February 15, 2014, the company operated 122 concept stores, 131 factory outlet stores, and 71 warehouse outlet stores in the US; and 44 concept stores and 26 factory outlets internationally. Skechers was founded in 1992 and is headquartered in Manhattan Beach, California.
On October 22, SKX posted EPS of $1.07, topping the Zacks Consensus Estimate of $0.91 by $0.16 for a 17% positive earnings surprise. This is down from the past two positive surprises of 84% and 65%, but up significantly from a 13% negative earnings surprise in the year ago quarter. The company posted sales of $674M, $56M ahead of the Zacks Consensus Estimate.
Despite these solid numbers the stock tumbled in the session following the release. There has been some concern that an unseasonably warm September and October have hurt some retail sales, but at the same time the lower oil prices have been a tailwind for the same stocks.
The price of oil has moved lower by more than 20% over the last few weeks and that is a good thing for just about every retailer. The benefit is felt by the consumer in the form of lower gasoline prices. That directly puts more disposable income in their pockets and with the holiday season right around the corner that is a good thing for retailers. The other benefit comes in the form of lower transportation costs for the retailers, as they pay less to get the goods to market.
Estimates Move Higher
Following the most recent earnings release, analysts have re-worked their models and SKX has seen some very positive moves in earnings estimates. This is not something new, as estimates have been rising all year.
The 2014 Zacks Consensus Estimate stood at $2.06 in June and jumped higher to $2.41 in July, then to $2.60 in August. Analysts ticked the number higher by a penny in September and then pushed it up to $2.72 in October following the most recent release. The Zacks Consensus Estimate for 2014 for SKX has not moved in November.
The 2015 Zacks Consensus Estimate stood at $2.69 in June and jumped higher to $2.99 in July, then to $3.25 in August. The Zacks Consensus Estimate is currently at $3.52 for 2015.
Price is what you pay and value is what you get. The valuation for SKX is compelling on most metrics that investors tend to lean on. The trailing PE of SKX of 21x is below the 26x industry average, while the forward PE of 20.8x is also below the 22x industry average. The price to book multiple of 2.6x is just about half of the 4.9x industry average and the price to sales multiple of 1.3x is well below the 2x industry average. Add it all up and you have a stock that is trading at a discount to the industry on all the major metrics.
Analysts are projecting 13% revenue growth and 29% earnings growth in 2015, well above the 9% and 14% growth rates that the rest of the industry is projected to see, respectively. So what gives?
According to Zacks Research System (ZRS), I see a net margin 5.8% for SKX while the industry average is sitting at 9.9%. That difference is significant, and requires SKX to post double the earnings growth just to keep up with the industry. A tick higher in the net margin line could help push this stock back over the 52 week highs the stock was hitting back in mid-September.
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Brian Bolan is a Stock Strategist for Zacks.com. He is the Editor in charge of the Zacks Home Run Investor service, a Buy and Hold service where he recommends the stocks in the portfolio.