Skechers USA Inc (NYSE: SKX) is already down nearly 30% versus its year-to-date high but Spruce Point Capital Management warns the stock could continue to plunge moving forward.
Skechers stock could plummet to $18.60 a share
The footwear company is currently struggling with “excess inventory” that resulted in a 30% – 50% hit to its stock price, mostly recently in 2018 and before that in 2015. Based on this historical cue, therefore, the short-seller sees downside to $18.60 a share in Skechers.
The “investment opinion” dubbed China a major headwind as well. An estimated 25% annualised decline in second-quarter revenue from that market, Spruce Point noted, could also weigh on “SKX”.
The stock is trading at a trailing 12-month price-to-earnings multiple of 7.70, which Spruce Point suggests will contract further as growth continues to moderate.
In recent years, Skechers has focused on expanding its reach outside the U.S., generating 20% of its 2021 revenues in China. Absent the China story, we believe Skechers is only a moderate growth company.
Skechers should trade at a discount to peers
Skechers is a bit too weak to meaningfully rival the likes of Nike, Puma, and Adidas, the short-seller added. It, therefore, expects the NYSE-listed firm to trade at a discount to its industry peers.
Other reasons cited for the “strong sell” opinion include waning strength in Asia-Pacific on “limited brand appeal” and poor investor disclosure. The report reads:
Skechers has long embodied many of stereotypical attributes of a founder-led company, including nepotism, self-enrichment, rampant related-party transactions and a reluctance to adopt best practices in corporate governance.
Spruce Point expects the company’s free cash flow to remain below average as well. Skechers will likely report its Q2 financial results on July 26th.
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