Skechers Sees Second Half Shape Up

After turning in a surprising first-quarter profit, Skechers USA Inc. continued to impress investors with a narrower second-quarter loss than most expected, and the Manhattan Beach, Calif.-based company reiterated plans to end the year on a high note.

Analysts praised the firm’s improved inventory, which was down 18 percent at the end of the second quarter, as well as its decreased backlog and lower margins.

Susquehanna Financial Group raised its rating on the stock to “positive” from “neutral,” following the earnings release late July 22, and increased its full-year earnings per share estimate by 5 cents, to 46 cents.

“They’ve cleared the decks in the first half of the year, given inventory overhang, and we believe [Skechers] hit bottom in terms of margins,” said Susquehanna analyst Christopher Svezia. “We feel good about margin trends in the third quarter, and in the fourth quarter, they’re facing easy comparisons.”

Investors, too, weighed in positively, as Skechers’ stock jumped 18 percent to close at $13.95 last Thursday.

David Weinberg, the company’s COO, pointed to strength in women’s and active product, as well as Skechers’ kids’ business. The company’s new Shape-Ups collection, he continued, “has gotten a good reception and is testing very well, [but] it’s too early in its formative years to say that it [has] had major-league impact.”  

Skechers’ executives had little to offer in the way of back-to-school expectations, though. “We think we’re inventoried either right or too low, because this is obviously brand-new inventory,” said Weinberg. The new b-t-s styles, he added, “have tested very well. A lot of it is spoken for, and we [have already seen] some — not an exorbitant amount — of reorder business as [we head to] back-to-school. But back-to-school doesn’t start for a couple of weeks.”

Scott Krasik, an analyst for CL King & Associates, noted that although margin and inventory have improved, the company’s top-line growth remains weak. “Back-to-school will be huge, and I don’t think it looks great,” he said. “Sales trends are still very weak, and based on our checks, they don’t seem to be showing any signs of life.”

Skechers executives reiterated their expectations for profitability in the back half of the year, a goal that most analysts believe is realistic. “The majority of the profitability will happen in the third quarter, and the fourth quarter will be tough,” said Sam Poser, a senior research analyst at Sterne Agee & Leach. “If they get the top line turned around, they could see profit in the fourth quarter, but either way, it will still be an increase on the year.”

Skechers last week posted a $5.9 million net loss for the three months ended June 30, or 13 cents a diluted share, compared with earnings of $14.6 million, or 31 cents, in the year-ago period. The results beat analyst expectations on Yahoo Finance for an average earnings decline of 18 cents a share.

Sales at the company decreased by 16 percent to $299 million, versus $354.6 million in the second quarter of last year.

For the first half of the year, Skechers’ profits totaled $2.3 million, or 5 cents a diluted share, a 95 percent drop from the first six months of 2008. Revenues were down 13 percent to $642.4 million.

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