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What Drove Skechers’ Better-than-Expected Profits in 3Q17?

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Oct. 23 2017, Updated 4:36 p.m. ET

Better-than-expected 3Q17 profit

In 3Q17, which ended in late September, Skechers (SKX) recorded earnings per share growth of 40% YoY (year-over-year). Earnings stood at 59 cents as compared to average analyst expectations of 43 cents.

The bottom-line beat was driven by better-than-expected top-line growth and a lower tax rate. The company recorded an effective tax rate of 9.4% in 3Q17 as compared to 24.2% in 3Q16. Earnings returned to growth after five consecutive quarters of YoY declines.

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Skechers posts a decline in operating margin for the sixth straight quarter

Skechers’ operating margin, however, continued to fall. The company recorded a margin of 10.6% of sales as compared to 11% in the year-ago period. As in the past several quarters, most of the decline was driven by rising costs associated with the company’s international investments as well as higher advertisement expenses overseas.

Skechers has lower margins than most sportswear players

While Skechers’ overseas investments have driven its international sales, the company’s margins have taken a hit. It recorded a trailing-12-month operating margin of 8.6%, which is lower than the margins of Lululemon Athletica (LULU) at 15.6%, Nike (NKE) at 13.5%, and Columbia Sportswear (COLM) at 8.8%. Under Armour (UAA), however, posted a TTM operating margin of 6.6%.

Looking forward

Skechers’ management expects earnings to lie in the $0.09 to $0.12 range during the fourth quarter of 2017 as compared to $0.04 in the year-ago period. Total sales are expected to range between $860 million to $885 million, a ~12% increase at the midpoint.

ETF investors seeking to add exposure to SKX can consider the iShares Morningstar Small-Cap ETF (JKJ), which invests ~0.7% of its portfolio in the company.

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