Calculated Alliances, Global DTC Expansion, And Innovative Comfort Tech Fuel Brand's Ascension

Key Takeaways

• Strategic partnerships and expanded product lines through innovation are poised to boost consumer demand and revenue growth.
  
• Initiatives in global direct-to-consumer expansion and supply chain optimization aim to improve net margins, operational efficiency, and cash flows.
  
• Skechers U.S.A faces challenges from macroeconomic downturns, regulatory issues, supply chain disruptions, high SG&A expenses, and exchange rate volatility.

Catalysts

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

• Strategic partnerships and brand collaborations (e.g., with Goodyear and John Deere) are enhancing product offerings and expanding market reach, expected to positively impact revenue growth.
  
• Investment in innovative comfort technologies and product development, as well as launching new product categories (e.g., Skechers Football and Basketball), are set to increase consumer appeal and demand, potentially boosting revenue and earnings.
  
• Global direct-to-consumer (DTC) expansion, including significant growth in international DTC sales and continued investments in DTC infrastructure and technology, aims to strengthen consumer connection and increase sales efficiency, likely improving net margins and revenue.
  
• Improved supply chain strategies, including local production and distribution center expansions (e.g., in Mumbai, Panama, and Colombia), are designed to mitigate operational challenges and enhance inventory management, expected to positively influence cash flows and operating margins.
  
• A $1 billion share repurchase plan signals strong financial health and management's confidence in future growth, which could potentially enhance earnings per share (EPS) and shareholder value.

Assumptions

• Analysts are assuming Skechers U.S.A's revenue will grow by 10.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 6.9% today to 0.1% in 3 years time.
• Analysts expect earnings to reach $948.6 million (and earnings per share of $6.51) by about August 2027, up from $579.5 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $1.1 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.4x on those 2027 earnings, down from 18.3x today. This future PE is lower than the current PE for the US Luxury industry at 18.3x.
• Analysts expect the number of shares outstanding to decline by 1.56% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.33%, as per the Simply Wall St company report.

Risks

• A persistent macroeconomic downturn in China could weaken consumer demand further, affecting revenue growth in this key market.
  
• Regulatory challenges and import restrictions in India might continue to constrain inventory, potentially limiting sales growth in an important emerging market, impacting overall revenue.
  
• Supply chain disruptions, exemplified by the Suez Canal closures and shipping delays to Europe, could persist or intensify, affecting the timely delivery of products and negatively impacting sales and operational efficiency.
  
• The company's significant investment in marketing and new technology launches, while beneficial for brand building, puts pressure on selling, general, and administrative expenses (SG&A), affecting net margins if growth expectations are not met.
  
• Exchange rate volatility, particularly detrimental in the second quarter, could continue to impact earnings negatively if the U.S. dollar remains strong against other currencies, affecting net earnings when converted back to USD.

Valuation

• The analysts have a consensus price target of $81.41 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 $92.0, and the most bearish reporting a price target of just $72.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $11.2 billion, earnings will come to $948.6 million, and it would be trading on a PE ratio of 15.4x, assuming you use a discount rate of 7.3%.
  
• Given the current share price of $69.8, the analyst's price target of $81.41 is 14.3% 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.