Footwear maker Skechers USA, Inc. (NYSE: SKX) lost considerable market value in recent weeks and under-performed the industry, amid growing fears that a recession is imminent. The crisis has left shareholders speculating about the prospects of the company surviving the coronavirus-induced market turmoil.
All the three business segments registered double-digit growth in the most recent quarter, which encouraged the company to issue positive outlook for fiscal 2020 despite the slowdown. However, the deterioration of market conditions will be a challenge to the firm, which sources a major portion of its raw materials from China.
In Growth Mode
The ongoing efforts to innovate and expand the direct-to-customer channel helped Skechers achieve strong sales last year, which is unlikely to be repeated this year. The company has the potential to shift to the positive territory when global markets stabilize, supported by its growing presence in the overseas markets, especially in Asia, the Middle East and Europe.
In the past, the rapidly expanding distribution business and joint ventures contributed to growth. Several capital-intensive projects are currently underway to expand the distribution network and open more company-owned outlets globally. In the past, Skectches managed to achieve stable margin growth, aided by improved pricing despite tariff-related cost pressures. With several factors playing in its favor, the company should be able to beat the odds going forward.
The question is should investors take inspiration from the positive outlook and buy the stock? Well, the general perception is that the stock is undervalued and the recent decline makes it more attractive. Taking a cue from the stock’s growth potential, the majority of analysts recommend buying it.
The next few months are going to be tough the company, with store closures and supply chain disruptions taking a toll on sales. At $0.39 per share, fourth-quarter earnings were above last year’s levels and matched analysts’ estimates. The bottom-line benefited from a 23% growth in revenues to $1.33 billion, which also exceeded the forecast.
Rough Road Ahead
Skechers is a relatively small player in the footwear industry, and the brand has always remained in the shadow of industry leaders like Nike (NKE). In response to the coronavirus-related disruptions, last week the company temporarily closed its stores in North America and select areas in Europe. It also withdrew the first-quarter guidance in view of the emerging uncertainty in the retail sector.
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