Overheard On Wall Street: Inside Skechers’ Tough Q2

After multiple quarters of exceptional sales and earnings growth, Wall Street beats may have become the expectation for Skechers USA Inc.

The Manhattan Beach, Calif.-based company continues to feel the heat following an earnings miss that sent shock waves through the brand’s shares after market close on Thursday.

The company’s stock sank more than 22 percent to a 52-week low of $24.16 on Friday and has continued to hover in that range.

Market watchers warned investors ahead of the report that Skechers was up against tough compares, but beat-and-raise-minded investors have been quick to sell off the stock.

Skechers reported that Q2 net income decreased 7 percent, to $74.1 million, or 48 cents per diluted share. Market watchers had expected Skechers to post flat year-over-year earnings-per-share growth, at 52 cents per share. Although the brand’s revenues fared better — advancing 10 percent, to $877.8 million — they also missed analysts’ expectation for revenues of $888.9 million.

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During the firm’s conference call, Skechers COO and CFO David Weinberg said the pull forward of shipment from the firm’s domestic wholesale business from April into March resulted in a sales decrease of 5.4 percent in the second quarter.

Adding to the list of explanations for the softer-than-expected quarter, Cowen & Co. analyst John Kernan also noted that liquidation sales at Sports Authority on Nike and Under Armour product are likely exerting short-term sales pressure on the brand. Since Thursday’s release, Kernan lowered his FY ’16 and FY ’17 EPS estimates and price target to $28 for the brand. In his note titled “The Street Needs to ‘Go’ Cut Estimates Through 2017,” Kernan suggests that the rest of Wall Street should follow suit.

Citi Research analyst Corinna Van der Ghinst did just that — moderating her FY ’16 EPS estimate to $1.93, from $2.12, “to incorporate Q2 results and a more cautious outlook on the U.S. retail environment for 2H ’16, partly offset by slightly stronger growth in international wholesale revenues and gross margins on international mix shift.”

Van der Ghinst also lowered her target price to $38 from $42, but remains optimistic on the company looking ahead.

“Though we moderated our estimates, we remain encouraged by U.S. trends improving sequentially; increased confidence in [second half] international momentum; and a strong balance sheet,” Van der Ghinst wrote Friday. “Skechers has also maintained clean inventories and pricing integrity at U.S. wholesale, despite the industry’s broader inventory problems.”

She adds, “With easier [second-half] compares, a post-Q2 pullback could provide a more attractive entry point despite continued U.S. retail challenges.”