FRAN Francescas Holdings Corporation

Skechers USA Inc.’s (SKX) fourth-quarter 2012 earnings came in at 8 cents a share that fared far better than a loss of 54 cents delivered in the prior-year quarter and the Zacks Consensus Estimate of a loss of 11 cents on the back of growth witnessed across domestic wholesale, international, and company-operated retail businesses.

With more emphasis on the new line of products, increase in backlog by 20% for domestic and international wholesale operations, cost containment efforts, inventory management and margin improvement, the company anticipates sustaining the growth momentum in 2013.

Let’s Unveil the Picture

Skechers, which competes with Deckers Outdoor Corporation (DECK), stated that total net sales for the quarter surged 39.7% to $395.6 million from the prior-year quarter, reflecting healthy performance across all revenue channels. Moreover, total revenue outpaced the Zacks Consensus Estimate of $342 million.

The domestic wholesale business marked an elevation of 72%, reflecting an increase of 9.8% in price per pair and a jump of 56.8% in pairs shipped coupled with strong performance across men’s, women’s and kids’ divisions.

Skechers’ international business surged 30% on the back of 17% growth in international distributor business and a 40.5% rise in international subsidiary and joint venture sales. The tough macroeconomic conditions weighed upon the company’s performance in Spain and Italy. However, Italy is now witnessing soft recovery. Europe, Pan-Asia region (including Japan), Philippines, South Korea, Taiwan, Australia/New Zealand, Middle East and Africa all showed growth momentum.

On a combined basis, retail business sales grew 16.2%, whereas comparable-store sales advanced 10.3%. Domestic retail sales rose 16.6% due to the addition of 5 new stores, while comparable-store sales increased 9.9%. International retail sales jumped 14%, reflecting the healthy performance of 3 new stores, whereas comparable-store sales climbed 12.6%.

The company’s licensing division has been another source of revenue, whereby the company licenses its name and images. The company generated $2.6 million in revenue during the quarter from its licensing affiliates, which includes apparel, eyewear, backpacks, and socks.

Another highlight of the quarter was 39.4% rise in sales from the company’s e-Commerce division. Though the company uses it as a marketing tool, the division remains successful in driving incremental sales during the quarter. The company operates 3 e-Commerce websites, in the U.S., UK and Germany.

The quarter exhibited a marked improvement in gross profit, which soared 50% to $168.5 million, whereas gross margin expanded 280 basis points to 42.6%. The increase was due to higher sales volume, enhanced inventory and contemporary products.

Stores Update

Skechers had 354 retail stores under operation at the end of the fourth quarter. The company during the quarter opened 1 store each in Puerto Rico, Texas, Utah, and Ariz., and 2 outlets in Calif. The company also opened 3 locations in Chile, taking the total count to 21, and shuttered 1 outlet in Ariz. So far, in the first quarter of 2013, the company has shuttered 6 stores, and plans to open 4 new stores and close 2 more outlets. The company’s 2013 target includes opening of 30 to 35 company-operated locations.

At the end of the quarter, the company operated 106 outlets under joint ventures in Asia, including stores operated by licensees, 257 distributor-owned or licensed Skechers retail stores globally, and 21 company-licensed locations in Canada, Spain, Portugal, Ireland, and the Netherlands.

During the quarter, Skechers’ under its joint ventures and through its franchisees and distributors, opened 32 outlets, which included 1 each in Australia, U.A.E., Oman, Aruba, Estonia, South Africa, Ukraine, Serbia, Malaysia, Singapore, Thailand and Canada; 2 each in Mexico, Taiwan, Colombia and South Korea; 3 in Hong Kong; and 4 in Saudi Arabia. The company shuttered 5 outlets in the quarter, one each in the U.A.E., Estonia and Venezuela, and the remaining 2 in Spain.

Strategic Initiatives

Management remains committed to focus on new lines of products, opening of additional Skechers stores and increasing distribution channels with the development of international distribution agreements to boost its sales and profitability. Moreover, international business remains a significant growth driver for the company’s sales. Skechers, through its distribution networks, subsidiaries and joint ventures, is poised to enhance its global reach in the footwear market.

The company also increased its product offerings under the Performance Division from a single style, Skechers GOrun to Skechers GOwalk, Skechers GOrun Ride, and Skechers GOrun2. The company has also introduced Daddy's Money for Juniors and SKCH+3 product lines.

Other Financial Aspects

Skechers ended the quarter with cash and cash equivalents of $325.8 million, total long-term debt of $140.2 million and shareholders’ equity of $919.1 million, including non-controlling interest of $43.1 million. Capital expenditures for the quarter were approximately $24.3 million.

Zacks Rank for Skechers

Currently, Skechers carries a Zacks Rank #3 (Hold). However, there are certain other stocks in the consumer discretionary sector that warrant a look, such as Nike Inc. (NKE) and Francesca's Holdings Corporation (FRAN), both of which hold a Zacks Rank #2 (Buy) and are expected to continue with their upbeat performances.

 
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