Cobbler actions Skechers (SKX -0.13%) had a wild ride. The company grew rapidly in the first half of the 2010s, but over the past five years the stock has become volatile and has only risen 38% at the time of this writing. This compares to an 81% total return (including dividends) for the S&P 500.
Since the company released its Q2 2022 earnings report, I’ve put Skechers on a leash and may sell the entire position later this year. Here’s why, and what I’ll be looking for to replace it instead.
1. Growth slows down
Skechers had a big rebound in 2021 as the effects of the pandemic subsided. In fact, the company reported record sales of $6.29 billion, a 37% increase from depressed 2020 results. The company’s direct-to-consumer segment (sales of its website and its retail stores) increased by 38%.
But as its post-pandemic recovery fades, growth becomes much more pedestrian. Q2 2022 sales were up just 12% year-over-year, and direct-to-consumer activity was up just 4.3%. On the latter front, Skechers said the number of shoes it sold directly to customers was flat from a year ago, with the small gain in direct-to-consumer revenue due to price increases. He seems to be losing momentum.
2. Profitability is unpredictable
Skechers is a growing company, especially internationally where it is trying to expand its presence in emerging markets. Therefore, profits can be unpredictable as the business spends to support its expansion.
However, inflation appears to be hurting the bottom line this year. The company implemented some price increases, but the gross margin on products sold fell to 46.7% in the first half of 2022 (from 49.7% last year). Earnings per share are down nearly 11%. And over the past five years, free cash flow is actually down overall for Skechers. I would like to see this metric increase over time, not decline.
3. The competition is fierce
The footwear industry has always been and always will be incredibly competitive. Consumer tastes and fashion trends are changing, creating new opportunities for new brands to gain ground over old incumbents. In recent years, this is what has happened.
In the running shoe department alone (a high-end market for Skechers), new brands like Pending (ONON 0.93%) gained traction with consumers. Established sports companies like Nike (NKE -0.53%) have also retained their market share and are building relationships with customers online (more on that in a moment). With Skechers showing signs of slowing down in this race, I think other shoe brands could be better buys for the next few years.
3 stocks I will buy instead
Speaking of competition, the three replacements I have in mind are Crocodile (CROX 6.56%), Lululemon Athletica (LULU 0.44%)and Nike.
Consumer trends continue to be influenced by the past two years of managing COVID-19. Exercise-inspired clothing is still all the rage, but everyday comfort and casual wear have also taken center stage. That’s where Crocs clunky foam clogs (at least according to some opinions) come in. Crocs sales have skyrocketed for the past two years, and the company is keeping all those gains.
Its recent acquisition of hot casual shoe company Hey Dude will take some time to pay off (the company went into debt to acquire it), but I think it was a good long-term move. Crocs sales were up 14% year over year in the second quarter of 2022, and Hey Dude sales nearly doubled. Adjusted earnings are also up. I already own Crocs stock and will continue to add more.
After years of being on the sidelines, I recently bought my first batch of Lululemon stock. That’s another one I would add now. Its high-end sportswear and everyday wear are gaining traction with younger generations, and it has a blue-chip online store and retail business that accounts for nearly half of all sales.
Average annual revenue has been growing more than 20% for years, and the company’s operating margins above 20% are fantastic for an apparel and retail operation.
Lululemon has also just rolled out its footwear line, starting with women’s running shoes. If Lululemon footwear takes off like its other apparel categories, it will be another win for shareholders.
And then there’s Nike, one of the most powerful and recognizable brands in the world. Despite his age and a myriad of other companies nipping at his heels, Nike remains as strong as ever.
Although impacted by inflation and exchange rate issues, revenue grew 5% in the recently completed fiscal year 2022. Its direct-to-consumer business also continues to gain momentum and is growing at a double-digit rate.
After the 2022 bear market, the stock is as cheap as it has been in years, currently trading at 24 times one-year forward earnings. It’s a premium price tag, but for good reason.
To be fair, I’m giving Skechers a little slack. I’ll see how things go in the next few months and how the company handles some of the issues with supply chains and commodity inflation. But as the current bear market gives way to the next bull market, I think Crocs, Lululemon, and Nike might be better buys.