Morgan Stanley On Skechers: 'Three Stripes, You're Out'

Morgan Stanley’s Jay Sole pointed out that the shift in consumer preference to pure fashion footwear is pushing Skechers USA Inc SKX to adjust its assortment, leading to slower-than-anticipated sales growth and SG&A deleverage.

Sole downgraded the rating on the company from Overweight to Equal Weight, while lowering the price target from $41 to $25.

The analyst believes the year-to-date slowdown in Skechers’ stock has been driver to a greater expect by long-lasting issues rather than temporary macro factors.

Shift In Consumer Preference

“The shift toward adidas AG (ADR) ADDYY-like fashion athletic styles and away from Nike Inc NKE-like running SKUs is causing SKX to migrate its product offering faster than expected. This is causing a delay in orders until SKX adjusts,” Sole mentioned.

Related Link: Skechers A Top Opportunity, Says Citi

In addition, the analyst noted that the company’s global infrastructure plans to cater to its rapid international growth are higher than previously expected.

Increased Investment

Skechers needs to spend more than earlier expected to add distribution capacity in Europe, South America, China and the United States. An additional $75–$100 million is required for corporate office space improvement.

“We see no positive fashion catalysts until 1H17 and expect Street EPS estimates to fall over that time frame. However, with the stock trading at just 12.5x our new FY17 EPS estimate, we think some of this bad news is priced in,” Sole explained.

The FY17 EPS estimate has been lowered from $2.25 to $1.85 to reflect order delay and increased SG&A.

At time of writing in Wednesday's pre-market session, Skechers had dropped 3.79 percent at $22.35.

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