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Skechers’ Q1 Sales Beat Estimates, COVID-19 Drags Earnings

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Skechers (NYSE:SKX) beat analysts’ sales expectations despite the impact of COVID-19. The company had strong momentum in the first two months of 2020. However, the COVID-19 outbreak in China and the rest of the world caused a 2.7% decline in Skecher’s first-quarter sales to $1.24 billion. The company had to close its stores to curb the spread of coronavirus.

Still, Skechers’ sales beat analysts’ expectation of $1.22 billion. Excluding the impact of currency headwinds, the first-quarter sales fell by 1.2%.

The stock has risen 3.4% as of 11:38 AM ET today. The company announced its first-quarter results after the financial markets closed on April 23. During the first-quarter conference call, Skechers mentioned some positive indicators. The positive indicators included its strong e-commerce business, a positive sales trend in China as stores reopened, and reopening of stores in several markets like Germany, Scandinavia, and Austria.

Skechers’ Q1 earnings fell significantly

Skechers’ first-quarter adjusted EPS fell by 45.1% YoY to $0.39, which was in line with analysts’ EPS forecast. The company’s gross margin declined by about 220 basis points YoY to 44.1%. The lower gross margin mainly reflected weak international results.

Moreover, the company’s operating margin fell to 3.6% in the first quarter of 2020 compared to 13% in the first quarter of 2019. Skechers incurred higher selling expenses due to increased domestic digital advertising expenses. The operating margin was also impacted by higher expenses in the direct-to-consumer business due to new company-owned stores.

Lower international sales

Skechers’ first-quarter sales fell due to a 6.8% fall in its overall international business. Lower international sales more than offset the 2.9% rise in the company’s domestic business. Meanwhile, the direct-to-consumer sales fell by 4.2%, which reflected the impact of store closures to curb the COVID-19 pandemic.

The company’s international sales were impacted by lower sales from China and closing most of the international markets by mid-March. Notably, the international wholesale business fell 8.4% to $575 million due to Chinese operations.

Meanwhile, a 9% growth in domestic wholesale sales to about $378 million drove the domestic business’s overall sales growth. The domestic wholesale business benefited from increased sales in the women’s and men’s Go line, men and women’s USA category, and the work and street categories.

Road ahead for Skechers

Skechers has drastically slowed down its plans to open new stores due to uncertainty associated with the pandemic. However, the company will continue to invest in its e-commerce business. Retailers have experienced higher online sales. Customers have been shopping online due to social distancing requirements.

Skechers’ e-commerce sales from company-owned platforms grew over 70% in the first quarter and over 250% in April (month-to-date). Nike (NYSE:NKE) generated a 36% rise (excluding the impact of currency fluctuations) in its digital sales in the third quarter of fiscal 2020.

Skechers didn’t provide any guidance for the second quarter or the fiscal year. Currently, the situation is quite dynamic. The company is optimistic about its growth prospects after things get back to normal.

The stock has fallen by 42.7% year-to-date as of April 23. Currently, 83% or ten out of 12 analysts recommend a “buy,” while two recommend a “hold” for Skechers stock. None of the analysts have a “sell” recommendation. Despite short-term headwinds due to the pandemic, several analysts are optimistic about the company’s long-term growth prospects.

As at the time of writing of this article, Skechers has a 12-month average target price of $32.91. The price estimate reflects a 28% upside.

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