Wells Fargo On Footwear: Buy Skechers, Wait On Steve Madden

Ahead of their Q4 updates, Wells Fargo’s Tom Nikic initiated coverage of Skechers USA Inc SKX with an Outperform rating and Steven Madden, Ltd. SHOO with a Market-Perform rating. The valuation ranges for the stocks are $30–$32 and $38–$40, respectively.

Skechers

Shares of the company have declined about 50 percent from their highs achieved nearly 18 months ago, versus a 5 percent gain in the SPX during the same time. Terming Skechers as a “compelling 2017 turnaround story,” Nikic noted that the business had “multiple drivers of re-acceleration” next year.

Nikic enumerated the key drivers of top-line growth in 2017 as:

1. Improved product.
2. International growth.
3. Double-digit retail store growth.
4. Easy comps in the U.S. wholesale and retail divisions.

Referring to the Q4 expectations, the analyst stated that the quarter had been mostly “de-risked” with guidance reflecting U.S. wholesale declines in the mid-to-high single digits and the company’s commentary for the next quarter may exceed expectations.

Steve Madden

Nikic mentioned a number of reasons to be positive, including:

• The core Steve Madden brand being strong.
• The wholesale business appearing poised to accelerate.
• The supply chain being a key competitive advantage.
• Favorable gross margin trends.
• A strong management.

“On the other hand, the company's rapidly decelerating retail comps may be a sign of decelerating demand trends for the brand (and potential channel conflict as wholesale improves). Plus, the company's gross margin tailwinds are largely being offset by SG&A deleverage (due to sluggish sales trends and retail expansion), so we do not envision meaningful operating margin expansion in the near to medium term,” the Wells Fargo report said.

Commenting on the Q4 sales, the analyst pointed out that management's guidance had been “relatively conservative.” He added, however, that the stock had gained 19 percent since late-October, versus a 3 percent gain in the SPX during the same period.