Entering Pickleball And Expanding In India Will Strengthen Future Prospects

Key Takeaways

• Strategic expansion into sports categories and international markets will likely drive revenue growth and broaden audience reach.
  
• Investments in direct-to-consumer, operational efficiencies, and brand-building efforts are expected to enhance margins and boost future earnings.
  
• Macro pressures and high inventory levels, especially in China, coupled with regulatory challenges in India, pose risks to Skechers' profitability and growth.

Catalysts

Designs, develops, markets, and distributes footwear for men, women, and children worldwide.

• Skechers' strategic expansion into new sports and performance categories, including team sports, technical running, and pickleball, is expected to attract a broader audience and fuel future revenue growth.
  
• The company's strong growth in international markets, especially EMEA and India, indicates significant revenue expansion potential, despite challenges in the Chinese market.
  
• Continued investment in Skechers' direct-to-consumer capabilities, including e-commerce and global retail footprint expansion, is anticipated to drive revenue increases and improve net margins through higher-margin sales channels.
  
• Efforts to enhance operational efficiencies and local sourcing strategies, particularly in India, are expected to optimize cost structures and positively impact net margins moving forward.
  
• Skechers' focus on brand-building through high-profile marketing campaigns and collaborations with celebrities and athletes is likely to bolster brand awareness and drive consumer demand, contributing to future earnings growth.

Skechers U.S.A Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Skechers U.S.A's revenue will grow by 9.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.2% today to 7.9% in 3 years time.
• Analysts expect earnings to reach $905.8 million (and earnings per share of $6.29) by about December 2027, up from $627.3 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $736.2 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.1x on those 2027 earnings, down from 16.4x today. This future PE is lower than the current PE for the US Luxury industry at 18.8x.
• Analysts expect the number of shares outstanding to decline by 1.57% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.63%, as per the Simply Wall St company report.

Skechers U.S.A Future Earnings Per Share Growth

Risks

• Skechers faced a decline in sales in China, a significant market for the company, due to macroeconomic pressures and reduced consumer discretionary spending, which could impact revenue and growth expectations.
  
• The company's gross margin was slightly down compared to the previous year, primarily due to promotional activities and lower average selling prices in certain markets, which could impact net margins and profitability.
  
• High inventory levels, particularly in China and in-transit inventory for EMEA, suggest potential inefficiencies or reduced demand, which could affect net margins and operational costs.
  
• Despite strong sales growth, the operating margin slightly decreased from the previous year, indicating potential challenges in maintaining cost efficiencies amidst expanding revenues.
  
• Skechers' expansion and local production efforts in India face regulatory and supply chain challenges, which present risks to achieving projected revenue growth and margins if not managed effectively.

Valuation

• The analysts have a consensus price target of $81.92 for Skechers U.S.A based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $100.0, and the most bearish reporting a price target of just $65.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $11.5 billion, earnings will come to $905.8 million, and it would be trading on a PE ratio of 16.1x, assuming you use a discount rate of 7.6%.
• Given the current share price of $68.29, the analyst's price target of $81.92 is 16.6% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.