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    Friday
    Feb222019

    Buy Skechers (SKX)

    The financial news was bleak on February 7 with the exception of one company: “Skechers stock rocketed 15.2 percent higher on Friday after the shoemaker gave strong profit guidance for the quarter ahead while reporting better-than-expected fourth-quarter earnings Thursday evening.”

     

    I first recommended Skechers (SKX) in this column at $23.51 before Christmas as part of a child’s portfolio of five stocks. I recommended it again in the February 6 column at $27.56 as one of eight companies that I think will continue to grow.

    Surprises can happen with perfect companies. Most of us are better at predicting what can go wrong than right, so we are surprised when a company with excellent attributes suddenly leaps up in value.

    Why is Skechers a “perfect company”?

    The hardest thing to do in business is to grow profitably. Just ask IBM, whose sales peaked at $106 billion in 2011 and sank to $79 billion in 2018. IBM is the model of a professionally managed company: it still gets grand ideas, but fails to exploit them. Instead of growing sales, IBM buys back its own shares so that it can point to higher sales per share while entrepreneurs create trillions of dollars in new value in cloud computing, mobile computing, data base software, e-commerce, communications equipment, and other markets that IBM might have supplied. Apple, which once lived in fear of IBM’s monopolistic power, could now buy IBM for less than Apple’s long-term investments.

    Growing sales is hard because it requires continued risk and investment, but, when a company is in its profitable growth phase, those risks seem to work out. People are energized and creative. I happened to meet a woman last week with an odd but remarkable pair of gray tennis shoes with floppy bows. “People always ask me about these,” she said. “I didn’t make them – they’re Skechers!” In a professionally managed company, managers kill new ideas by asking, “Are customers asking for this new product?” No one asks for shoes with floppy bows, but Skechers made them, and people bought them. Skechers managers signed off on millions of dollars for floppy-bowed tennis shoes and other shoe designs that I cannot comprehend. My cousin says they make a decent golf shoe, too.

    Skechers grew sales by $478 million in 2018 to $4.64 billion for the full year, while increasing earnings from $179 million to $301 million.

    It’s fun to work in a growing, profitable company that takes innovative risks, but there are other attributes of a promising company that are also important for investors.

    In the last four quarters, SKX has earned about 7% on its Enterprise Value. That’s after the recent run-up in price, and before the increases in sales and profits that the company projects for 2019. In other words, if you owned the whole company, you’d be paid for your risk.

    Can Skechers continue to grow? SKX has a market cap of $5 billion; Nike’s market cap is $131 billion. SKX has room to grow, and would make a nice acquisition for a clothing company or even Amazon, which already has a large shoe retailing business in Zappos.

    Skechers managers are buying, too: in the last year, they have bought more shares than they sold, and, in the last three months, 11 Skechers insiders have purchased 512,500 shares and sold none.

    Skechers has $890 million in cash, cash equivalents, and short-term investments, and $71 million in long-term debt. It opened its 1000th store in 2014; today, it has almost 3000 company and third-party owned stores. It owns its products and it controls its distribution, so there is less risk that Skechers will be displaced by a competitive manufacturer or suffer from a bad retailing relationship.

    Finally, Skechers shares an interesting attribute of many successful companies: its founder was forced out of another company that he started. Robert Greenberg founded L.A. Gear in 1983, and sales increased to $900 million by 1990. The company expanded too quickly, sales fell, and shareholder suits followed. Trefoil, an investment fund, took control of the company for $100 million, and forced out Greenberg in 1992. Five years later, Trefoil sold its position for $228,000.

    The poster boy for replaced founders is Steve Jobs who was fired by a CEO from Pepsi. Famously, Jobs later turned around Apple, but founders more typically start new companies. I have studied and worked with founders the second time around, and they share certain traits: they are more circumspect about their public pronouncements; they amass cash because it ensures control; they are adept at handling legal problems; and they want to prove their detractors wrong. Greenberg is Skechers’ CEO and his son, Michael, is President and the public face of the company. The Greenbergs have become billionaires.

    Skechers has been as high as $51 in 2015 before problems with its walking shoes led to suits and missed sales targets.

    Most people reading this will think, “I wish I had bought at a lower price,” which keeps many investors from enjoying a long ride. The first spurt is often an indicator that the company is growing again. On February 12, Skechers announced that Skechers India will become a wholly-owned subsidiary with 200 existing stores and another 80 to 100 planned for 2019. Skechers may be hitting its stride.

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