Skechers USA Inc. expects to be found liable by the Federal Trade Commission for false and deceptive advertising in connection with its toning products, it said in its 10-Q filing with the Securities & Exchange Commission last Thursday.
After beating expectations on the bottom line for the third quarter, but missing top-line estimates, Skechers said it is currently “responding to requests for information regarding its claims and advertising from regulatory and quasi-regulatory agencies in the U.S. and several other countries and is fully cooperating with those requests.”
While regulatory inquiries may conclude in a variety of outcomes, including the closing of the inquiry with no further regulatory action, Skechers said it does not believe this best-case scenario will apply to the firm.
“Based on discussions with the FTC staff, the company does not believe that the FTC’s pending inquiry into the company’s toning products will likely end in a closure letter assuring no further regulatory action,” the statement said.
Noting that Reebok recently reached a $25 million settlement with the FTC after a similar dispute, Skechers said, “It is reasonably possible that [we] could be subject to a comparable, or higher, exposure as a result of these proceedings … [and while] the company has not accrued a loss in connection with these matters … it is possible that costs associated with them could have a material adverse impact on the company’s consolidated earnings, financial position, or cash flows.”
In its defense, Skechers said, “While [we have] been successful in defending its claims and advertising in several different countries, [we have] discontinued using certain test results and periodically review and update [our] claims and advertising.”
The firm added it intends to defend this matter vigorously and “will be meeting with each commissioner in the fourth quarter to present evidence and arguments against filing a complaint.”
Analysts expect a settlement to occur soon.
“Given Reebok’s settlement, and the nine or so civil lawsuits pending against Skechers regarding the toning products, we would be quite surprised if Skechers came out of its current predicament unscathed,” said Sterne Agee analyst Sam Poser, adding that a settlement range of between $50 million and $75 million is likely since “Skechers’ toning business in 2009 and 2010 was likely two to three times larger than that of Reebok.”
Susquehanna Financial analyst Christopher Svezia said, “The fourth quarter is not looking very good at all, but if they get it all done then, next year will be clean and fresh. It’s a cash settlement, so there’s going to be impact on the balance sheet and cash flow.”
“Skechers is going down a road of competing pretty heavily against some formidable competitors. Toning is a tough category to be in. Anyone who quantified benefits of toning product is going to be [fair game for the FTC]. Skechers and Reebok were certainly the first and foremost,” added Svezia.
Jeff Van Sinderen, analyst at B. Riley & Co., said Skechers “clearly believes they’re right, but it doesn’t matter. At the end of the day, it’s a business decision to settle rather than to draw it out with litigation.”