Skechers (SKX) has experienced the classic case of a high-flying name that runs into trouble not once, but twice, in a two year period. The first time was primarily a result of the overall market in early 2009, when many names faced a similar fate. SKX bounced back big from this setback, from net/net territory and the $6 range to more than $40 just 15 months later. It made a remarkable showing, but it was short-lived.
What followed was controversy and lawsuits related to the company's "Shape Ups" line, growing inventories when that line was no longer selling, and some earnings misses. Interestingly, the company was covered by several Real Money contributors around this time, and opinions were both strong and polarized.
I admit being intrigued by the valuation as the company slid to $20 last spring, but continued to hold out while the dust settled. In May, as I went through security at LAX (following the Value Investing Congress) and placed my laptop in a plastic bin, I saw an ad for Skechers "Shape Ups" on the bottom of the bin, featuring Kim Kardashian. Even so, shares fell more than 25% over the following month.
That's when I finally pounced, and started a position as Skechers traded just slightly above net current asset value in late June. While shares rose to $17 during the next few months, they ended 2011 around $12, as skepticism about the company continued.
So, it was great to see this footwear name's Super Bowl ad this past Sunday, which was head and shoulders above the previous one I saw at LAX. While one ad can't turn a company around, as Jim Cramer pointed out in his review of Super Bowl commercials, it was still a positive and well worth the cost. We'll see if it helps to bring consumers back to Skechers in the coming quarters.
Meanwhile, the company's balance sheet still looks good. Skechers ended the third quarter with $248 million, or $5.12 per share in cash, and $138 million in debt. The company is currently trading at 1.44x net current asset value and just 0.75x tangible book value. Of course, the balance sheet has never really been the problem; it's revenue and earnings that have been problematic. Last quarter, Skechers reported a better-than-expected quarter, earning $0.08 per share, well above the $0.01 consensus, but the company has not shown consistency here. We'll get the another set of data next Wednesday, when the company reports its fourth-quarter results. Consensus estimates are calling for revenue of $324.3 million, and a loss of $.23 per share.
In order to shed its "value trap" image, Skechers needs to show something positive to investors. The Super Bowl ad was a nice first step, but the company has to move product off the shelves.