Business Description
Skechers USA sells reasonably priced casual athletic footwear for men, women, and children. Business breakdown is roughly 56% domestic wholesale, 23% international wholesale, 20% retail, 1% e-commerce. Gross margins run in the high 30% range for wholesale, 60% for retail, and 50% for e-commerce. Sales channels are as follows: roughly 40% department stores, 30% specialty retail, 18% independent stores, and the rest athletic specialty stores.

Thesis
Skechers USA is a decent company that has been consistently profitable historically, has a business that I believe is not fad-based and should do okay even in this severe downturn, has a large cash cushion, and is selling for a cheap price.

 

Baileyb906 wrote up Skechers a year ago and I point you to that for further detail. Aside from the macro outlook not much has fundamentally changed with the business since then, and the EV is half of what it was at that point.

 

Stock price is $11.29, market cap is $529m, net cash is $223m ($4.77/share), EV is $305m ($6.52/share). There should be another $60m or so in cash ($1.33/share) by FYE 2008, but this will be offset by roughly $80m going out in 2009 for a new distribution center in California. I expect net cash at FYE 2009 to be flat to slightly down year-over-year.

 

The company’s EBIT margins have averaged 7.2% since 1995, negative only one year, in 2003 at -0.2% EBIT margin. I do not think that using this average as a general yardstick for the business’s normalized earnings power is significantly flawed. 2008 sales should be in the range of $1.45b. If you assume 5% normalized EBIT on call it $1.3b sales going ahead (both figures haircut), then you get $65m EBIT. Using a 27% tax rate (company guidance), you get $47m normalized net income and $1.00 EPS/share, or 6.5x current EV or 11x current market cap. Street estimates for 2009 are $1.5b revenue, $100m EBIT, and $1.60/share EPS, which are clearly high.

 

Macro, the picture is ugly in terms of both the general retail environment and the economic health of some of Skecher’s department store customers. Big picture, I think there will continue to be demand for the products and that the company will emerge on the other side of the recession in a strong position.

Ownership
The CEO, Robert Greenberg, has been in place since 1993, owns 23% of the company and controls voting power with Class B supervoting shares.

 

Risks
Aside from its business never recovering, the big risk here is that Skecher’s blows the cash. The company has consistently stated over time that it is going to use its cash pile to grow the company, and historically they have been good at that. Skechers tried to buy Heely’s in August 2008 for $49, net of cash, but was rebuffed. This appeared to me to be a sensible acquisition attempt.