Analysts: Skechers’ $45M Toning Settlement Positive Move

Analysts: Skechers' $45M Toning Settlement Positive
A Skechers Shape-up style

Analysts were positive on Skechers USA Inc.’s $45 million settlement with the U.S. Federal Trade Commission on Wednesday.
 
They said the settlement will not impact the brand, which reported better-than-expected first-quarter results last month.
 
Also, the firm has already set aside a cash reserve for the settlement, which means any impact to the income statement in the second quarter will be insignificant, they added.
 
“From a corporate perspective, they’re going to save $1 million a month in legal expenses, so that’s a big deal. In terms of consumer memory, is the fact that they were accused of false advertising going to impact sales of GoRun and GoWalk [product]? No,” said Scott Krasik, analyst at BB&T Capital Markets.
 
Jeff Van Sinderen, analyst at B Riley & Co., agreed: “The bane of Skechers’ existence from the last couple of years is rebounding from toning, but this is not at all a blow to its credibility. This is a formalization that says, ‘All these claims are now behind us and we can focus on our business.’”

Looking ahead, Matt Powell, an analyst at SportsOneSource, said Skechers — and Reebok — will continue to make a play for the toning category.

“The trouble for Skechers is that there’s still inventory out there, still stuff being sold at really cheap prices, so we won’t see them ramping up until it goes away,” Powell said. “But we’ll see both [Skechers and Reebok] come back. My gut is the claims they’ll make won’t be as specific as the claims were the first time around, but it’ll be the same claims in a much more general tone.” 

Skechers is paying $45 million in cash to settle the class-action lawsuit related to false advertising of its toning shoes, brought against it by the FTC in January.
 
The Manhattan Beach, Calif.-based company said in a statement released Wednesday that it denies the allegations and believes its advertising was appropriate, but has decided to settle these claims in order to avoid protracted legal proceedings.

The firm will see a $50 million impact on its cash balance for the current quarter, as it will also pay $5 million in attorneys’ fees to settle the domestic advertising matters and related claims on a global basis.

Still, Skechers believes the settlement will result in substantial net savings compared with the high long-term cost of defending against multiple legal proceedings brought by federal and state regulators and private consumer class-actions lawyers.

Company CEO David Weinberg said, “Skechers could not ignore the exorbitant cost and endless distraction of several years spent defending multiple lawsuits in multiple courts across the country. This settlement will dispose once and for all of the regulatory and class-action proceedings. While we believe we could have prevailed in each of these cases, to do so would have imposed an unreasonable burden on the company regardless of the outcome.” The company did not respond to requests for additional comment.
 
Consumers alleged in the lawsuit that Skechers’ toning shoes — including the Shape-ups, Tone-ups, Skechers Resistance Runner and Shape-ups Toners — were falsely advertised to improve posture, promote weight loss, strengthen the back, improve blood circulation, promote sleep, reduce stress, reduce physical stress on knees, legs and ankle joints, and burn calories.   

Lawyers representing consumers said in a statement that consumers who bought these shoes should submit a claim for a refund of the purchase. If approved by the court, the proposed settlement will result in cash refunds for each pair of shoes purchased for between $20 and $84, since Aug. 1, 2008.

Last year, Reebok paid $25 million as part of an FTC settlement over deceptive toning advertising. Meanwhile, MBT, the Swiss brand that started the rocker-bottom shoe trend, saw its parent company, Masai Marketing & Trading AG, declare bankruptcy on May 9 in Switzerland.

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