1 Footwear Stock Even Buffett Might Like

Skechers is that rare company which has a market capitalization rivaling its sales. We almost squinted to confirm we weren’t confusing the two when we read that the company reported fiscal year 2022 sales of $7.44 billion and trades with a market cap of $7.5 billion.

A shoe company trading at 1x sales is worth a deeper dive, and what we uncovered got more interesting the further we dug.

10 Year Track Record Of Success

The last decade has been nothing short of a resounding success for Skechers (NYSE:SKX) with revenues rising from $1.8 billion in 2013 to $7.4 billion in the most recent full fiscal year.

The consistency with which the company has grown its top line has been truly spectacular. The only decline in annual sales came during 2020, when they slid by 12.0%. Otherwise, the annual growth rate has ranged from a low of 11.5% in 2018 to a high of 36.8% in 2021.

Perhaps more impressive than the steady climb in sales year after year has been the perfect track record of EBIT, or operating income, staying in the black. Even when the top line struggled in 2020, Skechers reported positive EBIT. Indeed, that figure has, for the most part, trended higher with each passing year.

The past decade has also seen the company’s balance sheet improve with cash virtually doubling from $372 million in 2013 to $615.7 million in the past year.

It must be noted, though, that this has come at a cost of higher debt, which has risen from $128 million to $1.6 billion. Given how sales have risen by almost 5x, the debt level is very manageable, though.

With such an impressive financial track record, what does the future hold for Skechers?

Is Skechers Stock Undervalued?

Among 12 analysts covering Skechers, the consensus view is that Skechers is undervalued, and has upside to $62 per share. A discounted cash flow forecast analysis confirms that assessment with intrinsic value sitting at $60 per share.

Depending on which figure you choose, the upside for Skechers sits between 24-25%, meaning buyers today have the potential to get in at really attractive prices.

The company is trading at a price/earnings ratio of 15.8x, further confirming that the valuation is attractive. As an aside, Warren Buffett famously likes to scan S&P 500 stocks for PE ratios of 15 because that’s the threshold, below which, a company appears attractive from a valuation perspective.

Furthering the argument that Skechers is a bargain is the low price-to-sales ratio of just 1.0x. It must be said that this in line with the company’s peer average and slightly above the sector average of 0.9x.

A Shoe Company with a Moat?

The shoe business is a tough one to eek out a sustainable competitive advantage. Look no further than Allbirds (NASDAQ:BIRD) to see how perilous the journey can be.

It once traded at $26 per share on enthusiasm for sustainably sourced fabrics for comfortable sneakers, only to fall by 70% this year and 98% from its all-time highs, now trading below $1 per share.

Skechers, on the other hand, has built a moat that can be spotted by paying attention to one key figure, its return on invested capital. Currently, Skechers ROIC sits at 10.1%, a very respectable figure that dwarfs the sector average of just 3.8%. 

As a reminder, a company’s ROIC is the figure an investor can expect to earn over the long-term, all else being equal. Naturally, earnings, macroeconomic events, supply chain disruptions, and other factors can modify that theoretical forecast, but it’s a good line in the sand regardless of what an investor can expect.

So what makes Skechers special?

Is Skechers A Good Investment?

There is a whole lot about Skechers that makes it a good company and likely good investment that most ordinary investors are probably not keenly aware of.

For example, Skechers has done a remarkably good job at targeting a broad audience. It doesn’t simply manufacture and sell sneakers but rather it attracts a broad swath of demographics from seniors to children. The latter segment has been growing rapidly in recent years and is evidence of how Skechers is anything but a one-trick pony with a narrow market focus.

The company has also made a concerted effort to broaden its geographic reach with sales outside the US making up a majority of the firm’s top line. That global footprint, especially with a significant market presence in China, has bolstered the diversification of the company’s sales.

Not only is Skechers not reliant on a single geography or demographic but it’s also not fully dependent on brick-and-mortar sales either, having invested heavily in its e-commerce sales, which grew to $397 million last year.

Operationally, Skechers eclipses many of its rivals on a key metric, inventory turnover ratio, which is a signal of how efficiently a company is selling inventory, and thereby reducing its costs of holding it. Skechers inventory turnover ratio has fallen from 3.35 at the turn of the decade to just 2.58 now.

Another interesting tidbit that investors may not be fully cognizant of is how Skechers manages its own in-house ad agency, allowing the company to more quickly develop personalized marketing strategies. By managing advertising, executives can better control Skechers brand messaging and save on costs too.

One other string to the Skechers bow is its collaboration with celebrities and partners that drives consumers interest and often create a sense of urgency to purchase shoes, which in turn has a marginal benefit on sales. An example of the type of partnership model Skechers is employs can be seen with its collaboration with K-Pop bands in Asian markets.

Wrap-Up

Skechers is a rare footwear apparel company that has transitioned from selling a commodity in brick-and-mortar stores to establishing a global footprint with multiple channels of distribution, a broad audience, and a proven track record of growth in good and bad economic environments.

So to the question, is Skechers stock undervalued? According to analysts, Skechers is undervalued by about 25% and fair value sits at around $62 per share. 

For investors aiming to find a top tier firm with a PE ratio that even Warren Buffett may find attractive, Skechers falls squarely into the bullseye.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.