Skechers U.S.A., Inc.

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 4/5

Skechers designs, develops, markets, and distributes lifestyle and performance footwear, apparel, and accessories for men, women, and children across the globe through multiple channels, including wholesale and direct-to-consumer.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Skechers’ moat is narrow, underpinned primarily by its brand recognition and distribution network, but it lacks significant pricing power, strong customer loyalty, or intellectual property advantages.

Business Overview

Skechers U.S.A., Inc. (“Skechers” or “the Company”) is a global footwear company that operates through two primary segments: wholesale and direct-to-consumer. They design, develop, and market various footwear styles for men, women, and children across a wide range of categories, including lifestyle and performance products. Besides footwear, Skechers also designs and sells apparel, bags, and accessories.

  • Wholesale: This segment involves selling to third-party retailers, such as department stores, shoe stores, and other retail chains. This channel accounts for the majority of Skechers’ revenue.

  • Direct-to-Consumer (DTC): This segment encompasses sales through Skechers-owned stores (both physical and online) and e-commerce platforms. The DTC channel allows Skechers to control the brand experience and generate higher margins.

  • International presence is strong with a diverse network throughout the Americas, Asia, and Europe and includes the company’s international wholesale operations which are primarily generated through joint ventures and licensing arrangements with distributors.
  • Athleisure and Casualization: The shift towards more casual lifestyles has fueled the growth of athleisure footwear. Sneaker sales are growing at a fast clip and it seems like it will continue this trend for the foreseeable future.
  • E-commerce: Online channels are rapidly increasing in sales and influence in the current decade. It provides ease of access to buyers, and companies such as Skechers need to maintain a strong online presence to leverage this trend.
  • Emphasis on Comfort: Consumers are increasingly prioritizing comfort, functionality, and sustainability in footwear, which have become a core requirement.
  • Increased Competition: Competition has also increased due to new brands and greater demand for athletic and casual footwear. This is an area for concern as companies are having trouble maintaining market share in the extremely crowded market.
  • Supply Chain Disruptions: The global supply chain for retail is struggling and has caused some companies, like Skechers, to have inventory issues and difficulties fulfilling orders.

Competitive Landscape

Skechers operates in a highly competitive market that includes global athletic brands, specialty retailers, and mass retailers. They compete against established global giants such as Nike and Adidas, and as well as against smaller regional companies.

  • Nike: Leader in athletic footwear and apparel. A pioneer in sports apparel and has a very strong brand loyalty with a loyal customer base.
  • Adidas: Has a diversified portfolio of products with focus on European Markets. A key competitor for global market dominance.
  • Smaller Brands: Also in competition are other players like HOKA, On Running, New Balance, etc. which have a great hold in niche markets. The rise of these smaller companies is a large factor for concern as they are actively snatching market share.

What Sets Skechers Apart?

  • Product diversity: Skechers boasts a massive catalog with a vast amount of styles and variations, including styles such as athletic, lifestyle, kids’ shoes, work shoes, and many more. This diversity allows them to cater to a broader range of customers.
  • Pricing: As a company that is a middle tier player between the premium brands like Nike/Adidas and low cost brands, Skechers offers value at reasonable prices for their products.
  • Distribution Network: Skechers is a globally recognized company with operations in hundreds of countries. They utilize both wholesale and DTC sales channels to reach all kinds of demographics. They have distribution centers in nearly every continent with the purpose of minimizing transportation costs.

Financial Analysis

  • Revenues: Skechers has historically had great sales, and are currently doing so. They have been able to grow revenue at double digit percentages, however, that growth has stagnated a bit. Their strategy to focus on both direct-to-consumer and wholesale sales channels has served them well.
    • Latest Q3 2023 results include sales that increased 20.3% year-over-year with wholesale sales having increased 13.4% and direct-to-consumer sales up 36.9%

  • Margins: The company’s gross and operating margins are a key point to understand in the company, since they affect earnings and the overall efficiency of the company. Gross profit margins has steadily increased, sitting at 51.4% for the three months ended September 30th, 2023, compared with 50.8% last year. This increase has been driven by higher average selling prices and a higher proportion of direct-to-consumer sales. Operating margin for the same period has remained roughly similar at 10.7% vs 10.8% last year, as a result of higher costs being offset by increased revenues.

    • Strong international growth has been a driver for profitability. Higher sales prices in international markets, where there is relatively less competition, and better logistics management can lead to higher margins and better cash flow for the business. In the latest earning’s call, management commented on the continued strength in their international operations.

    -Debt: Skechers has a very stable debt to equity ratio that has not exceeded 1.00 the last 3 years. Skechers does not depend on debt for growth and as a result it has relatively lower interest expenses which in turn lead to higher profit margins.

  • Liquidity: Skechers has $1.1 Billion of liquidity in cash and cash equivalents. They have a large amount of assets as well including inventories and receivables which could be converted to cash if needed to quickly reduce debt or shore up profitability.

Overall, the company’s revenues have increased a lot, however, profitability has not followed that increase and is a bit low. Skechers has made a lot of positive progress with improving efficiencies of its financial structure. Their strong balance sheet means that they can support current growth levels.

A recent development that is relevant is Skechers’ termination of its share repurchase program. This signals that the company is not focused on returning cash to shareholders and rather will allocate cash flow towards investing back into the business or new potential M&A.

Moat Rating: 2 / 5

Skechers has a narrow moat. This means that they have some distinct competitive advantages, but that these advantages are not as strong or enduring as companies with wide moats.

  • Intangible Assets: Skechers has strong brand recognition and name identification across a variety of geographies. It has a large and diverse product catalog which helps it to appeal to different segments of customers. They also have endorsements from celebrities and famous athletes such as sports stars, which help strengthen the brand’s marketing potential. However, there is not a strong consumer brand loyalty. A large consumer brand loyalty is an important factor when valuing moats, which Skechers currently lacks.
  • Distribution Network: Skechers has a massive distribution network with hundreds of stores globally. This is a source of an advantage as it allows for the production of more product and is harder for new entrants to compete with. There are, however, still multiple large retailers such as Amazon, or even large sporting goods retailers like Foot Locker, which are competitors with similar distribution networks, but less operating costs.
  • Switching Costs, Network Effects and Cost Advantages: There is a clear lack of these moats for Skechers. Switching costs, network effects and cost advantages do not factor in when customers make purchase decisions within the athleisure and footwear industry. Therefore, Skechers loses out on this area of a moat.

Risks and Business Resilience

  • Fashion Trends: Footwear is a fashion industry and subject to quick shifts in consumer preferences. If Skechers fails to keep up with new trends or consumer styles, it is extremely vulnerable to loss of profitability. They rely on marketing to entice consumers and therefore they have to be very vigilant.
  • Competitive Pressure: This industry is subject to intense competition from global footwear leaders and more niche retailers. Strong competitor actions, such as new product launches, could lower profitability and result in loss of market share.
  • Supply Chain: The global supply chain is currently volatile, with multiple unforeseen events, such as the pandemic, or the war in Ukraine, which has led to supply chain problems. This can directly affect inventory levels and operations, if left unaddressed.
  • Pricing: Since the industry is so competitive, any increase in prices for Skechers products will result in a decrease in demand if competitors are not affected by similar price increases. The industry is still highly price-sensitive.
  • Economic Slowdown: The current environment of slow macroeconomic growth could hurt sales as consumer spending decreases. Also, high inflation can affect raw materials and manufacturing costs, which can also lower margins.
  • China Concentration Risks: While they are a global company, they are especially exposed to disruptions in China, which is their main producer. Any instability or issue in China would significantly harm their operations.
  • Overreliance on wholesale partnerships: Skechers’ heavy reliance on their wholesale partners comes with risks such as loss of sales or unfavorable pricing terms, if those relationships sour.

Skechers’ business resilience is moderate. The brand’s popularity gives it a small advantage and a somewhat loyal consumer base. However, because they have a huge variety of SKUs, a change in preference from consumers can severely damage sales figures. They need to be continuously updating to stay relevant which comes with considerable investment into design and R&D. The company has the scale and brand to endure a few blows and have adequate liquidity for flexibility in tough times.

Understandability Rating: 2 / 5

The business model for Skechers is relatively simple to comprehend, due to the vast scale of their operations. However, factors such as the different geographical markets and complex supply chains, plus their reliance on constantly changing trends makes it harder to predict and understand. While the business itself is straightforward, their accounting practices, with many moving parts and adjustments, make it a bit more complicated.

Balance Sheet Health: 4 / 5

The company has a fairly strong balance sheet, with over $1B in cash, and not too much reliance on debt. The company has a good liquidity position and a debt-to-equity ratio that has historically been below 1, which gives them ample opportunities to expand their operations if they want to. Overall, the company’s financial health is good, as they have limited debt obligations and a fair amount of cash to handle headwinds. This balance sheet also gives them the possibility for further acquisitions, which can be good.

Overall, Skechers has a narrow moat, relatively well understood operations, and a strong balance sheet. They are a resilient company but are subject to market fluctuations and industry changes, which are reasons why it is not a 5/5 company. It is a well-managed company in a very competitive space. If they maintain and widen their cost and brand advantages, then they would be a great investment.