Without Accelerated Revenue Growth, Skechers Faces Earnings And Operating Leverage Challenges

Wedbush Securities said unless Skechers USA Inc SKX shows accelerated revenue growth in the United States, earnings improvement and operating leverage would be tough to achieve.

Despite generating sales growth internationally, the brokerage said Skechers top-line expansion in the United States has stalled after a four-year growth run. Thus, it launched coverage on the stock with a Neutral rating and $23 price target.

“If history is a guide, investors are rewarded in the early stages of a growth cycle before investments build. SKX is between cycles and thus we view it as NEUTRAL rated,” analyst Christopher Svezia wrote in a note.

The analyst attributed the slower U.S. growth to conservative ordering from key accounts and sluggishness in some key categories for the brand.

However, the company’s international operations are strong, especially in China where sales more than doubled in FY15 and are estimated to rise 60 percent in FY16. Svezia sees 25 percent growth in FY17.

Expectations

On the balance sheet front, the analyst expects the company to end FY16 with $700 million in net cash, increasing to about $1 billion in FY17.

Svezia expects EPS/revenue of $1.61/$3.522 billion for 2016 and $1.73/$3.833 billion for 2017. The consensus estimate calls for EPS of $1.64 and $1.78 for 2016 and 2017, respectively, on revenue of $3.527 billion/$3.801 billion.

That said, Svezia is skeptical as to whether his estimated 9 percent sales growth in FY17 is enough to generate meaningful leverage, as the company continues to invest in new markets, expand its retail store base and support its global marketing efforts.

“As we look forward, our conversations with retailers about SKX remains mixed for FY17. Thus, we take a wait-and-see approach for firmer signs of an inflection,” Svezia added.

Recently, Citi downgraded Skechers, citing lack of visibility into its top line over the next 12 months.

Shares of Skechers closed Tuesday’s trading at $20.72 and were up 0.92 percent at $20.93 at last check Wednesday.