A Powerful Case for Skechers

 | Jun 05, 2014 | 8:03 AM EDT
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It's tough to come in and buy a stock that's up 40% for the year, especially one that's in the boom-bust business of apparel. It's doubly difficult to think about it today: One of the most consistent players in the apparel business, PVH (PVH), is set to blow up again, having cited competitive pressures in last night's guidance cut.

But I think you have to take a hard look at Skechers (SKX). This company is not only back from purgatory -- purgatory caused by a real tough Federal Trade Commission investigation involving health claims for one of its sneaker designs -- but it has the most momentum in the footwear business.

When you have a company that's growing by leaps and bounds and can't keep the inventory on the shelves, and doesn't have any promotional pressures, you know it is going to be difficult to value that company. How do you put a price on the stock of the only company in the industry that is systematically raising prices of its product?

Yet that's precisely what Skechers is doing with its multiple lines of shoes. This is particularly so for its children's shoes, known for their wild colors and lights, and the fashion-accessory shoes -- the ones worn by women to work out. Consider these the logical extension of Lululemon (LULU) products.

Plus, you have a performance-shoe business embedded in the company, courtesy of its brilliant tie-up with Meb, the winner of the 2014 Boston Marathon. You have to like Skechers' advertising tie-ins with Mark Cuban, Joe Montana and, in the fall, Joe Namath, because they are red-hot for the baby boomer cohort with the relaxed-fit line.

Now, here's the issue. Sneakers have been boom-bust for ages, with only one exception: Nike (NKE). Skechers had its own boom and bust with the FTC Shape-ups dust-up. How do you know it won't happen again? I think the answer, after my visit to their showrooms in Manhattan, is that this company has so many different divisions and so many different kinds of shoes that it is finally insulated from the ups and downs of this business.

I also think there are enough larger companies out there that might need to buy Skechers in order to grow, and here I am thinking about the pathetic way that Adidas ran Reebok into the ground after it paid $3.8 billion for the company in 2005. At that point, Reebok had owned 8% of the sneaker market. Now it owns half that ratio. You combine Skechers with Reebok, and you go back to the old glory days. Given that Skechers is only a $2.5 billion company, I think that's certainly a possibility

Yep, I think you can win two ways with this one.

It has the most momentum in the group. It has exploding earnings. And it has the best franchise you can buy, for $2.5 billion, in the apparel industry today.

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