One of the best stocks in our Large Cap Screener, which you can register for here, is Skechers USA Inc (NYSE:SKX).
Skechers designs and sells lifestyle footwear for men, women and children, and performance footwear for men and women under the Skechers GO brand name.
Its brands are sold through department and specialty stores, athletic and independent retailers, boutiques and internet retailers.
As of February 15, 2016, Skechers owned and operated 119 concept stores, 155 factory outlet stores and 117 warehouse outlet stores in the United States, and 82 concept stores, 41 factory outlet stores, and five warehouse outlet stores internationally.
Skechers share price is currently $20.72, but as can see from the chart below the share price has fallen 33.59% in the past 12 months.
(Source: Google Finance)
Today I’ll show you some quick analysis on the company using its latest financial statements to demonstrate why the stock is great value.
Summary
While no-one would disagree that the global footwear market is highly competitive, Skechers has done a great job of marketing its products at affordable prices.
The company believes that its styles resonate with consumers worldwide, translating into a brand that is in demand globally.
It has a growing team of brand ambassadors—including legends Sugar Ray Leonard and Ringo Starr for men; pop superstars Demi Lovato and Meghan Trainor for young women; and elite athletes Meb, Kara Goucher and Matt Kuchar for its Skechers Performance division.
The company is continuing to broaden the targeted demographic profile of its consumer base, increasing its shelf space and opening 55 to 65 company-owned retail locations, predominantly in the United States.
In addition, Skechers will complete the last phase of expansion of its European Distribution Center in 2016, which will increase the capacity to one million square feet, thereby increasing its product distribution efficiencies and provide support for expected future growth.
The company continues to focus on improving its international operations. It has expanded its direct distribution base with the transition of the business of several distributors to a wholly-owned Central Eastern European subsidiary that encompasses 14 countries, including Hungary, the Czech Republic, Croatia and Serbia.
Skechers also transitioned its distributor’s business in Panama to a wholly-owned subsidiary in Latin America that will oversee 30 countries in the region, including the key markets of Peru, Colombia, Costa Rica and Panama.
With strong growth across numerous international markets, Skechers is focused on some key growth countries, including China, who achieved triple-digit sales growth in 2015.
In terms of its international retail distribution channel, the company has expanded by opening 41 additional company-owned international stores, which included taking over the operations of 15 international concept stores and two international outlet stores from its distributor in Panama.
Growing Revenues & Profits
Let’s start by taking a quick look at the company’s income statement for the six months ending June 30, 2015.
The first thing that you notice is a 18% increase in net sales from $1.57 Billion for the six months ending June 2015 to $1.86 Billion for the six months ending June 30, 2016. Also noticeable is the 20% increase in gross profits from $707 Million to $848 Million and, the 30% increase in net earnings from $148 Million to $193 Million for the same period.
This is a company that has continued to maintain its gross margins around 45% and grow its operating margins from 1% back in 2012 to the 13% that we see today.
| Six Months Ending June 30, 2016 | ||||
| (Amounts in Thousands) | 2016 | 2015 | ||
| Net sales | $ | 1,856,604 | $ | 1,568,461 |
| Cost of sales | 1,008,198 | 861,313 | ||
| Gross profit | 848,406 | 707,148 | ||
| Royalty income | 5,932 | 5,512 | ||
| 854,338 | 712,660 | |||
| Operating expenses: | ||||
| Selling | 129,844 | 113,967 | ||
| General and administrative | 485,589 | 398,162 | ||
| 615,433 | 512,129 | |||
| Earnings from operations | 238,905 | 200,531 | ||
| Other income (expense): | ||||
| Interest income | 585 | 344 | ||
| Interest expense | (3,249) | (5,878) | ||
| Other, net | 175 | (1,771) | ||
| Total other income (expense) | (2,489) | (7,305) | ||
| Earnings before income tax expense | 236,416 | 193,226 | ||
| Income tax expense | 42,768 | 44,503 | ||
| Net earnings | 193,648 | 148,723 | ||
| Less: Net earnings attributable to non-controlling interests | 21,929 | 12,861 | ||
| Net earnings attributable to Skechers U.S.A., Inc. | $ | 171,719 | $ | 135,862 |
Strong Cashflows
A quick look at the statement of cashflows shows that the company started the period with $507 Million in the bank. The company generated operating cashflows of $182 Million, spent $57 Million on its investing activities and $6.4 Million on financing, leaving Skechers with a whopping $120 Million to stick in the bank after exchange rate effects.
With capital expenditure of $55 Million, the company generated $127 Million in free cash flow that left Skechers with $628 Million in cash for a rainy day.
| Six Months Ended June 30, | ||
| (Amounts in Thousands) | 2016 | |
| Net earnings | $ | 193,648 |
| Net cash provided by operating activities | 182,282 | |
| Net cash used in investing activities | (57,097) | |
| Net cash used in financing activities | (6,433) | |
| Net increase in cash and cash equivalents | 118,752 | |
| Effect of exchange rates on cash and cash equivalents | 2,084 | |
| Cash and cash equivalents at beginning of the period | 507,991 | |
| Cash and cash equivalents at end of the period | $ | 628,827 |
Strong Balance Sheet
A quick look at the company’s balance sheet shows that Skechers had $628 Million in cash at June 30, 2016 and just $73 Million in total debt. The company’s debt is just 10% of its total liabilities and it has a negative net debt (cash minus debt) to equity ratio of (34%).
| June 30, 2016 | ||
| (All Amounts in Thousands) | ||
| ASSETS | ||
| Current assets: | ||
| Cash and cash equivalents | $ | 628,827 |
| Trade accounts receivable, less allowances of $26,602 in 2016 and $24,260 in 2015 | 468,572 | |
| Other receivables | 20,545 | |
| Total receivables | 489,117 | |
| Inventories | 590,711 | |
| Prepaid expenses and other current assets | 57,283 | |
| Total current assets | 1,765,938 | |
| Property, plant and equipment, net | 464,403 | |
| Deferred tax assets | 17,680 | |
| Other assets | 43,411 | |
| Total non-current assets | 525,494 | |
| TOTAL ASSETS | $ | 2,291,432 |
| LIABILITIES AND EQUITY | ||
| Current liabilities: | ||
| Current installments of long-term borrowings | $ | 1,775 |
| Short-term borrowings | 3,274 | |
| Accounts payable | 534,180 | |
| Accrued expenses | 71,661 | |
| Total current liabilities | 610,890 | |
| Long-term borrowings, excluding current installments | 68,053 | |
| Deferred tax liabilities | 9,058 | |
| Other long-term liabilities | 11,740 | |
| Total non-current liabilities | 88,851 | |
| Total liabilities | 699,741 | |
Valuation
Skechers is clearly undervalued. The company currently has a market cap of $3.15 Billion. When you subtract its net debt (cash minus debt) of $555 million that means the company has an enterprise value of $2.6 Billion or 6.86 times operating earnings (TTM) and it’s trading on a P/E of just 12. The company is successfully expanding internationally, it has solid revenues and net profits, growing operating margins, loads of free cash and little debt.
For me, there’s plenty of upside for this footwear giant.
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