Skechers May Be Turning a Corner

 | Apr 27, 2012 | 2:00 PM EDT
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Some things never get old. The two Krispy Kreme (KKD) doughnuts that I inhaled late yesterday in Penn Station after a day in New York are a great example. Unfortunately, or perhaps fortunately, they are not as easy to find in my area as they used to be. Limiting my Krispy Kreme indulgences to New York can only benefit the waistline.

Speaking of Krispy Kreme, another thing that never gets old is seeing a somewhat troubled company you've patiently owned showing signs of turning around. As a value investor, you often take positions in names that few others want to own, names that are unpopular and constantly maligned. It comes with the territory.

Changing course from doughnuts to sneakers, Skechers (SKX), since staging an amazing run between April 2009 and June 2010 that saw shares run up from about $6 to $44, has been a huge disappointment to the markets at seemingly every turn. Caught in the market turmoil of early 2009, this company was actually in net/net territory at one point. But after this amazing recovery, the company's missteps brought shares crashing back to earth.

In a nutshell, Skechers' "Shape-Ups" line was an unmitigated disaster that led to lawsuits and growing inventories. Product demand fell, and the company was left with a whole bunch of unwanted sneakers; shareholders were left with a whole bunch of unwanted shares. Skechers dumped its inventory, while investors dumped their shares.

As each quarter has passed, the skepticism has remained. But we are now getting a glimpse that the market is again warming up to Skechers, and the company may be turning a corner.

Late Wednesday, Skechers released what on the surface appeared to be ugly numbers for the first quarter. Revenue dropped 26%, and the company flipped from net income of $11.8 million ($0.24 per share) a year ago to a loss of $3.7 million ($0.07). But both numbers were above analyst expectations. Revenue of $351.3 million was slightly better than the $336.4 million consensus. And the net loss of $0.07 a share was well ahead of the consensus of a loss of $0.27.

Digging into the data, one could find more promising signs, as gross margins grew 388 basis points to 44.32%, and the company actually showed some pricing power, with the average price per pair of shoes rising 5.8%. In a strange way, this was a "blowout" quarter for Skechers. Shares were up nearly 14% yesterday and are now up 40% for the year.

One reason I have owned the name is the strength of its balance sheet, which got even better. Skechers ended the quarter with $391.6 million in cash, or $7.95 per share, and $128 million in debt. The company now trades at just 1.84x net current asset value, and just under tangible book value per share. Inventories also fell for the quarter, from $226 million to $215 million.

Skechers must now demonstrate that improvements in its business are real and not just a one-quarter phenomenon. A positive bottom line would be nice, too.


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