Skechers Is Running on Empty

 | Jun 03, 2014 | 10:00 AM EDT
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It seems like Nike (NKE) has signed an endorsement deal with just about every well-known athlete on the planet -- except one. On Monday, Skechers (SKX) announced it had signed California Chrome. Yes, the horse that will be racing to try to win the Triple Crown this year. Skechers figures it could bring in a huge wave of publicity if he wins the Belmont Stakes this weekend. (I suppose Skechers will have to supply California Chrome with two pairs of shoes, instead of one.)

Skechers is the fifth-largest sneaker manufacturing company in the world. Only Nike, Adidas, Asics and Reebok are larger. The deal with the horse got me thinking about the company and the stock. Year-to-date, the stock is up 35% and last quarter, the company knocked out double-digit revenue growth.

Although the stock has had an incredible run, I think revenue growth is about to slow and this is the time to sell.

Skechers dominates the "walking sneaker" category with a focus on comfort instead of athletic performance. By filling its shoes with memory foam, Skechers attracts an older demographic. Older people are more likely to follow horse racing than younger people, so California Chrome is a great "spokes horse" for the company.

Skechers operates a domestic wholesale business. U.S. wholesale is 75% of revenue. The wholesales business has slowed dramatically. DSW (DSW), one of Skechers largest wholesale partners, reported same-store sales fell 3.7%. DSW also cut fiscal 2104 guidance from $1.90 to a range between $1.45 and $1.60. The company cited weak sales due to unseasonable weather. DSW's woes are sure to impact SKX sometime in the future.

While the company put up an impressive first quarter, growth typically peaks at that time and slows down in each remaining quarter. The fourth quarter is the bottom, since sneakers are not typically given as gifts during the holidays.

So, for example, the second-quarter consensus estimate is for $508 million in revenue, which is up 18.5% over last year. Analysts are looking for just 14.5% revenue growth in the third quarter and 13% in the fourth. To stay in the stock, you have to believe the March quarter of next year is going to be really great. But nobody believes that -- at least not right now.

The estimate for the first quarter of next year is only up 11.3%. For fiscal 2015, Wall Street is expecting the company to have sales of $2.385 billion, up 10.8%. That's quite a come down from fiscal 2013's rate of 18.3% and this year's estimated 16.6% growth.

While there is plenty of time to increase estimates for next year, sometime in June or July investors will begin to look forward to next year. And if next year's growth rate is much lower than this year's, (16.6% vs. 10.8%) I think investors will sell the stock.

Based on the analyst estimates, seasonality and a slowdown of the three-year growth rate, I think SKX will go lower. Skechers is running on empty.

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