Wedbush Likes Skechers, Morgan Stanley Needs More Confidence

Skechers USA Inc SKX reported third-quarter results, which reinforced the case for being bullish for one Street analyst while another remains sidelined.

The Analysts

Wedbush analyst Christopher Svezia maintains an Outperform rating on Skechers with a $38 price target.

Morgan Stanley analyst Kimberly Greenberger maintains at Equal-Weight, price target lifted from $34 to $35.

Wedbush: Growth Outweighs Earnings

Skechers' report showed direct-to-consumer sales accelerated, international wholesale beat expectations and the U.S. wholesale business reported a gross margins beat despite tariff and foreign exchange woes, Svezia wrote in a note. These factors take precedence over the EPS miss.

Svezia said management also guided fourth-quarter sales growth at 13% to 16% versus the Street's estimate of 13% while U.S. wholesale growth is expected to accelerate in the fourth quarter, and momentum in China can continue.

Morgan Stanley: No Confidence In Margins

Skechers deserves credit for expanding revenue from $1.85 billion in 2013 to $4.64 billion in 2018 and Tuesday's report is "no exception" to an impressive track record, Greenberger said. However, margins performance tells a different story as operating margins peaked at 11.1% in 2015 and has since fallen to 9.4% in 2018.

Granted, EBIT margins expanded year-over-year in the past four quarters but SG&A fluctuating "rather unpredictably" as of late. As such, investors will continue debating the margins outlook as "consistent year-to-year performance is what the market seeks most."

"Without a clear understanding of the operating margin path going forward, investors may struggle to underweight a specific EPS growth algorithm, a necessary precursor for the stock to trade at a stable multiple," Greenberger wrote in a note.

Price Action

Shares of Skechers traded around $37.60 at time of publication.

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