Sketchers Growth Comes With Real Risks (NYSE:SKX)

Via SeekingAlpha.com

Introduction

Sketchers (SKX) is a brand widely known in the United States for a basic but reliable shoe. Many people have a worn a pair of Sketchers either to prevent slips at work or for comfort during a jog. This brand has also become very popular abroad which has powered the growth trajectory for the business over the past decade. With international sales becoming the main growth driver for the business does Sketcher’s have what it takes to be a comfortable investment?

The Power of Growth

Source: SEC 10-K’s

The main thing an investor would see when taking a glance at Sketchers’ financial filings is the company’s very solid growth trajectory over the past decade. As can be seen in the graph above revenue has increased almost every year with a CAGR of 10.03% over ten years. Along with this growth in revenue, net income has seen a CAGR of 9.79% a year with only one year of losses. Another thing to note is the business’ return on assets averaged over the decade is 6.939%; rather solid for a consumer goods company.

The reason behind this stellar growth pattern is primarily due to the international wholesale segment which has increased to make up 47.2% of total revenue in 2019 as opposed to 21.8% in 2010. This segment has been out pacing domestic wholesale and retail for a while. The international wholesale segment derives revenue from selling products to foreign subsidiaries who then sell those products retail overseas. Below is a graph of the growth of each segment where you can see just how well international wholesale is doing compared to other segments.

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Source: SEC 10-K’s

Fortified Balance Sheet

With very solid growth in revenues and net income over the past decade Sketchers also has a really incredible balance sheet for a consumer products company. In the most recent quarter Sketchers has a current ratio of 3.10x. This means the company can pays its current obligations three times over! Along with this the company has a quick ratio of 2.06x, which is also very solid. As for capitalization, Sketchers has a debt to equity ratio of 1.08x showing that the business is funded mostly by shareholder equity and not debt. Now I also like to look at another ratio used by Ben Graham which is the working capital to long term debt ratio. I have only seen a handful of companies that are over 1x and Sketchers has 1.41x working capital to long term debt ratio which really shows just how well capitalized the business is. As can be seen above this company is incredibly well capitalized and has great financial standing, which is truly a real bonus during this period of pandemic.

Risks

Sketchers does have some serious risk to watch out for with the current COVID-19 closures and years long economic tensions with China. For the domestic wholesale and retail the pandemic will slow sales for the for see-able future while the international wholesale and retail will also see downside due to the virus, the US-China relations may also provide a significant risk. This being said the balance sheet helps to mitigate these risks as it is incredibly strong but because international sales are now the growth driver this is very concerning.

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Valuation

The valuation always makes or breaks an investment for me so lets look into Sketchers value. The book value per share using the most recent 10-Q in 2020 comes out to $16.41 per share. At a share price of $31 the price to book value is 1.89x. The price to earnings ratio using 2019 earnings of $2.25 comes in at 13.78x and using an average 10 year EPS of $1.38 the P/E is 22.46x. Neither the price to book or earnings ratios show this company is necessarily overvalued.

Conclusion

Overall Sketchers has grown at an impressive clip and easily has one of the best balance sheets I’ve ever seen for a consumer goods company. With this being said I do feel as if the risks are rather higher for the business over the next year due to US-China relations and COVID-19. I am not making an initial investment yet as I want more of a margin of safety due to the risks outlined above. My biggest concern about this company is the growth falls off quickly and the catalyst may be the pandemic therefore I will be looking again if the price comes back down to the $20-22 range.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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