Thursday, September 9, 2010

SKECHERS

In the last few months the stock Skechers has been under tremendous pressure. The stock price has dropped in half despite the fact the company reported strong earnings and sales in the most recent quarter. This afternoon a report was issued by Susquehanna Financial Group and the stock was put under even more pressure based on a very serious reduction in next year’s earnings estimates.

Understanding the concern for legal liability we particularly noted the choice of words in the report. It was almost as if they were writing a legal document and absconding any responsibility for their choice of words and opinions. Here are some of the vague comments we noted:
  • “Based on conversations with retailers and SportScan POS data, we have concerns over sluggish volume trends” (We would like to know the name of the retailers they spoke to and which people at these retailers they spoke to. We would like to know what they mean about “we have concerns” as everyone has concerns; and what they mean by sluggish volume trends when almost all retail sales are sluggish these days).
  • “That event may not have been as strong” (In any forecast there is always the chance something “may not have been”. Where is the concrete numbers to make this assumption?)
  • We suspect there is some risk to 4Q and FY11 sales and earnings” (What in the world do they mean by “we suspect and some risk” – there is always some risk and we can always suspect something).
  • “Valuations may assume the worst” (Where is the data for this assumption?)
  • Leading us to believe that sales during the event may have come in below original expectations” (Did the management of the company indicate that sales have come in below expectations, if so, where? Why then was their third quarter revenue and earnings estimate maintained?)
  • “Given increasing promotions we believe early fall sell-through was not meeting original expectations” (Is there any concrete proof to this assumption?)
  • “We expect margin pressure” (Looking at their own calculations they really have no decline in the gross margin – they seem to be approximately the same. The entire earnings estimate decline is based upon increased SGA – where did that assumption come from?)
  • “We would expect cancellations to affect SKX in 4Q.” (What factual data are you basing your conclusion upon – actual cancellations that have occurred?)
  • We believe it will be very difficult to anniversary this growth spike and expect both divisions to see declines at least through 2Q.”(We notice in their report there is no quarterly breakdown for 2011 and obviously after such rapid growth last year despite a recession it is obvious the rate of growth would slow down.)
  • “The toning trend still has life. While we expect growth to slow, we believe the toning category remains very viable moving forward. “(Oxymoron…this statement has no depth to it and allows the analysts to protect themselves from any upside…Obviously if they mean by viable that it will continue to grow are they forecasting that Skechers share of market will be declining?)

At the conclusion of the report the analyst cites the risks to the upside as “1) a significant rebound in the toning category in fall and holiday leading to less promotions and cancellations; 2) better than expected 1H11 toning sales, particularly internationally where growth is expected to continue; 3) a swift pullback in marketing and other SG&A expenses; and 4) an unexpected share repurchase authorization or special dividend. Downside risks to our thesis include: 1)a worse than expected fall off in the toning category; 2)increased competition leading to market share losses; 3)a greater than expected increase in marketing expenditures; and 4)worse than expected international growth.”

We could go on about this report but we are very suspicious about the overall intention of these analysts in announcing this downgrade, late in the trading day, and certainly and most importantly considering the price of the stock and its recent volatility and downward trend. We have to wonder what the analyst’s true motives were with a stock selling at 8 times earnings on their lowered estimate, a company with literally no debt, and a company that seems to have created a brand name.

For the benefit of public shareholders who may not be privy to as much information as is supplied to, for example, hedge funds, we think it would appropriate, under the circumstances for this research firm to answer the following questions about their Skechers report.

  • Have any of the clients of the firm been either shorting this stock or buying puts on this stock?
  • Have the analysts had any contact with clients that are shorting this stock?
  • Does the parent company or these analysts, through its subsidiaries, have any relationship with Skecher’s competitors?
  • Has there been any financial dealing by the parent firm and/or its subsidiaries with a competitive firm to Skechers?
  • Does the firm expect to do business with any competitor to Skechers?
  • What is the record of the analysts who have written this report and gone to such extremes to write with such legalese and have come out with this report after the stock price has already gone in half?

We also noticed the appendix to this “timely” report which stated in part at the top of what if refers to as “IMPORTANT DISCLOSURES”:

“SFG and/or its affiliates beneficially own 1% or more of the securities of the subject company.
SIG, its affiliates and/or its principals may have been long or short positions in securities or related issues mentioned here. SIG, its capacity as specialist and/or market maker, may execute orders on a principal basis in the subject securities. Information presented is from sources believed to be reliable, but is not guaranteed to be accurate or complete. The research analyst primarily responsible for this report attests that the views expressed accurately reflect his or her personal views and that no part of his or her compensation was, is, or will be related to any specific views in any research report.”

Yes we own this stock. We have no way of knowing if anything we have said in the above blog is of any relevance whatsover. It is meant to represent our own personal feelings and questions and should be evaluated by anyone with the use of their own intelligence and analytical ability. Isn't it about time that analysts have to do with their own money exactly what they may be implying that other investors should do. Stay tuned…

1 comment:

  1. Put their money where their opinion is. What if I bought this stock on their prior recommendation? A little too much speculation a little too late.

    ReplyDelete

 

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